<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1998.

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

For the transition period from                       to                        .

                       Commission file number 333-33601-02

                                  GST USA, INC.

             (Exact Name of Registrant as Specified in its Charter)

            Delaware                                    83-0310464
(State or other jurisdiction of            (IRS Employer Identification Number)
 incorporation or organization)


         4001 Main Street, Vancouver, Washington               98663

         (Address of Principal Executive Offices)            (Zip Code)

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

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

                                      None

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

                                      None

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

                  Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
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         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

         Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: At March 29, 1999,
there were outstanding 20 shares of the Registrant's common stock, no par value
per share.
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ITEM 1.   BUSINESS.

OVERVIEW

         GST USA, Inc. ("GST USA") is a wholly-owned subsidiary of GST
Telecommunications, Inc. ("GST"). Through GST USA and its operating
subsidiaries, 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 integrated
communications provider ("ICP"), GST operates state-of-the-art, digital
telecommunications networks that represent an alternative to incumbent local
exchange carriers. GST's full line of products, which offer a "one-stop"
customer-focused solution to the telecommunications services requirements of its
customers, include local dial tone, long distance, Internet, data transmission
and private line services. With the turn-up of its Virtual Integrated Transport
and Access ("VITA") network in the fiscal year ended December 31, 1998, GST
became one of the first ICPs to develop and deploy a converged network.

ITEM 2.  PROPERTIES.

         GST USA owns a building comprising 60,000 square feet in Vancouver,
Washington. GST USA leases space containing its principal executive offices at
4001 Main Street, Vancouver, Washington 98663.

ITEM 3.  LEGAL PROCEEDINGS.

U S WEST V. THE ACC ET AL.

         On or about February 25, 1997, U S WEST filed a declaratory judgment
action against members of the Arizona Corporation Commission ("ACC"), the ACC,
ACSI, Brooks and GST USA in the United States District Court in Arizona. The
District Court consolidated a number of similar lawsuits filed by U S WEST
against other Competitive Local Exchange Companies ("CLECs"), including MFS,
Sprint, MCI and AT&T. U S WEST alleges that the ACC has approved an
interconnection agreement 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, 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
USA, 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 USA, from taking any action to enforce any of the
order's allegedly unlawful provisions. On September 12, 1998, the District Court
dismissed all counts against GST USA. This lawsuit was consolidated with the
following two United States District Court of Arizona lawsuits described below.
A final order has not been issued.

GST TUCSON LIGHTWAVE, INC. ("GST TUCSON") V. THE ACC ET AL.

         On or about February 26, 1998, GST Tucson, GST Net (AZ), Inc. ("GST Net
(AZ)") and WorldCom filed a declaratory judgment action against the ACC, members
of the ACC, and U S WEST in the United States District Court in Arizona. GST USA
alleges that the ACC's approval of U S WEST unbundled network elements and
wholesale discount rates was inconsistent with federal law, and failed to set
geographically deaveraged unbundled network element rates as required by federal
law. GST USA 


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seeks a declaratory judgment that the ACC's action violates the
Telecommunications Act and an injunction requiring the ACC to adopt compliant
rates. Should GST USA not prevail in its suit, it may be charged unfavorable
rates for U S WEST services. GST USA cannot quantify at this time the potential
effect of an unsuccessful challenge to the ACC's action.

U S WEST V. GST NET (AZ)

         On or about April 10, 1998, U S WEST filed a declaratory judgment
action against GST Net (AZ), GST Telecom Inc. ("GST Telecom"), GST Tucson, the
ACC and its members, and other Arizona CLECs in the United States District Court
of Arizona. U S WEST asserts that the ACC adopted a U S WEST permanent unbundled
network element rate order which denies it full compensation for nonrecurring
charges, loop costs, reciprocal compensation for transport and termination of
local traffic, customer transfer charges, and the costs of implementing its
interconnection obligations with CLECs in violation of the Telecommunications
Act and state law. U S WEST seeks a declaratory judgment stating that the ACC's
action violates federal and state law and an injunction preventing all
defendants from taking action to enforce the ACC's rulings. GST USA cannot
quantify at this time the potential effects of a successful U S WEST challenge
to the ACC's order. If U S WEST prevails in its suit, GST USA and other CLECs
may pay more for U S WEST interconnection and services, which could have an
adverse impact on GST USA's operations in Arizona.

U S WEST V. THE ACC ET AL.

         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), which holds a
Certificate of Convenience and Necessity ("CCN") to provide local exchange
service in Arizona. In its complaint appealing the ACC's February 6, 1997
decision and order granting GST Net (AZ) its CCN, U S WEST alleges that the
ACC's action violates certain requirements of the Arizona Constitution relating
to rate of return regulation, carrier of last resort obligations, and equal
protection. The appeal seeks to subject GST Net (AZ) and U S WEST to identical
forms of regulation, treating both carriers as either traditional monopoly
carriers or as co-equal competitive companies. The state court consolidated the
case with a number of substantially similar lawsuits filed against other CLECs,
including MFS, Sprint, MCI and AT&T. On September 21, 1998, the court dismissed
the case as against all parties. U S WEST has appealed the dismissal to the
Arizona Court of Appeals. Should U S WEST successfully reverse the lower court
ruling, GST USA's regulatory status in Arizona may be changed, which could have
a material adverse effect on GST USA's operations in Arizona.

GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.

         On October 20, 1998, GST and GST Telecom filed a Complaint in the
Superior Court of California, County of Santa Clara, No. CV777408, against GST
Global Telecommunications, Inc., now known as Global Light Telecommunications,
Inc. ("Global") and six GST officers and directors, two of whom are present
directors of GST. The Complaint includes claims for fraud, negligent
misrepresentation, unjust enrichment, and unfair competition primarily related
to the alleged misappropriation of a Mexican business opportunity. The Complaint
seeks an accounting, a constructive trust, and restitution of GST's interest in
the opportunity and also seeks unspecified exemplary and punitive damages and
reimbursement of attorneys' fees. In particular, the Complaint alleges that
Global and the individual defendants misappropriated GST's joint venture
interest in Bestel, S.A. de C.V. ("Bestel"), the owner of a 2,270 kilometer
fiber optic telecommunications network in Mexico. The lawsuit alleges that the
individual defendants caused GST's 49% interest in Bestel to be transferred to
Global, then a shell corporation in which the individuals had secretly invested.
No written agreement 


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validated the transfer. GST therefore seeks return of the asset and monetary
compensation to remedy the loss arising from the wrongful transfer.

         On December 23, 1998, Defendants filed a motion to stay or dismiss the
action on grounds of inconvenient forum, and four of the individual defendants
filed a motion to dismiss the action for lack of personal jurisdiction. The
Superior Court granted Defendants' motion to stay the proceedings on February 5,
1999, and GST and GST Telecom filed a notice of appeal on February 9, 1999.

WARTA V. GST, GST USA, AND GST TELECOM AND COUNTERCLAIMS

         On January 25, 1999, Mr. John Warta filed a Complaint in the Superior
Court of Washington, King County, No. 99-2-02287-4SEA, against GST, GST USA, and
GST Telecom. The Complaint, which relates to the circumstances under which Mr.
Warta ceased to serve as an officer and director of GST, includes claims for
breach of employment agreement, breach of the covenant of good faith and fair
dealing, violation of wage statutes, and indemnity.

         On February 23, 1999, GST answered by denying all liability and filed
counterclaims against Mr. Warta, Global and five other current or former
officers and directors for liability with respect to the matters leading to the
termination of Mr. Warta's employment. In particular, GST seeks recovery under
Washington law for matters described in GST and GST Telecom v. Global, et. al,
above, as well as for breaches committed with respect to the wrongful use of GST
funds for the purchase of telecommunications licenses by Mr. Warta through
companies he owns.

GST, GST USA AND GST TELECOM V. IRWIN AND OLSHAN

         On December 16, 1998, GST, GST USA and GST Telecom filed a Complaint in
the United States District Court, Southern District of New York, No. 98 CIV.
8865, against Mr. Stephen Irwin and the law firm of Olshan Grundman Frome &
Rosenzweig LLP ("Olshan"). The Complaint, which relates to Mr. Irwin and
Olshan's representation of GST, GST USA and GST Telecom in various matters,
includes claims for professional negligence, breach of fiduciary duty, and
breach of contract, and seeks compensatory damages and reimbursement of
attorneys' fees.

         On February 12, 1999, Mr. Irwin filed his Answer to the Complaint.
Olshan filed its Answer and Counterclaims to the Complaint on February 17, 1999.
Olshan counterclaimed against GST, GST USA and GST Telecom for breach of
contract, unjust enrichment, quantum meruit, and "account stated," based on
invoices submitted to GST of approximately $250,000. No trial date has been set.

GST V. SANDER

         On February 9, 1999, GST filed a Complaint in the Superior Court for
the State of Washington, Clark County, No. 99-2-00573-6, against Mr. Clifford V.
Sander, the former treasurer and Senior Vice President of GST. The Complaint,
which is based on Mr. Sander's alleged misconduct as an officer of GST, includes
claims for fraud, breach of fiduciary duty, unjust enrichment, and unfair
business practices, and seeks an accounting, imposition of a constructive trust,
compensatory damages, costs of suit, attorneys' fees, and treble damages. In
particular, the Complaint seeks relief based on Mr. Sander's misuse of insider
information in the purchase of Global stock, wrongful disbursements to third
parties, and involvement in a fraudulent release of GST stock from escrow to
three former directors and/or officers of GST. Mr. Sander has not yet responded
to the Complaint.


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GLOBAL AND MEXTEL V. GST AND GST TELECOM

         On January 27, 1999, Global and GST Mextel, Inc. ("Mextel") filed a
Complaint in the Supreme Court of British Columbia, No. C990449, against GST and
GST Telecom. The Complaint, which arises from the same matters for which GST and
GST Telecom brought suit against Global et al. in the Superior Court of
California, includes claims for declaratory and injunctive relief to confirm the
ownership of the Mexican business opportunity by Global, and unspecified general
and special damages. In particular, Global seeks a declaration from the court
that it is entitled to retain the equity interest in Bestel, or at least a
judicial determination of the amount Global owes GST. GST intends to vigorously
dispute the allegations in the Complaint.

IRWIN ET AL. V. GST ET AL.

         On January 28, 1999, Messrs. Stephen Irwin, Robert Hanson, Peter
Legault, Clifford Sander, and John Warta, all current or former GST officers or
directors, filed a Complaint in the Supreme Court of British Columbia, No.
C990488, against GST, GST Telecom, and four current GST directors. The
Complaint, which arises from the same matters for which GST and GST Telecom
brought suit against Global et al. in the Superior Court of California, includes
claims for oppression and declaratory relief, and seeks unspecified actual and
punitive damages, cost, and attorneys' fees. In particular, the plaintiffs have
asked the Court to declare that the plaintiffs may retain the Global stock they
purchased while fiduciaries of GST and seek to have the Canadian court enjoin
GST from pursuing its claims against them. GST and its directors will vigorously
dispute the allegations in the Complaint.

OTHER MATTERS

         GST USA is a party to various other claims and legal actions arising in
the ordinary course of business. GST USA does not anticipate that these items
will materially impact its business. GST USA is a party to various proceedings
before the public utilities commissions of the states in which it provides or
proposes to provide telecommunications services. These proceedings typically
relate to licensure of GST USA or others and to the regulation of the
proposition of telecommunications service.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
         Not required.

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

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

ITEM 6.  SELECTED FINANCIAL DATA.
         Not required.

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

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


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

RECENT DEVELOPMENTS

         In February 1998, GST USA sold its remaining 63% interest in NACT
Telecommunications, Inc. ("NACT") for net proceeds of approximately $85.0
million (the "NACT Sale"). NACT produces advanced telecommunications switching
platforms with integrated applications software and network telemanagement
capabilities.

         In May 1998, GST Network Funding, Inc. ("GST Network"), a wholly owned
subsidiary of GST USA, sold $500.0 million principal amount at maturity of 10.5%
senior secured discount notes due 2008 (the "1998 Notes") in a private placement
(the "1998 Offering"). The net proceeds of the 1998 Offering of approximately
$288.9 million will be used to finance the purchase and installation of acquired
equipment. Until such time as purchases are made, such net proceeds have been
invested in United States government securities in which the holders have been
granted a first priority security interest.

         On June 15, 1998 GST announced that John Warta had retired as Chairman
of the Board and Chief Executive Officer of GST. Effective September 15, 1998,
Mr. Warta resigned as a director of GST. The Board of Directors of GST appointed
Mr. Robert A. Ferchat, a director of GST and the Chairman of the Board and
then-Chief Executive Officer of BCE Mobile Communications, Inc. to the position
of Chairman of the Board of GST on June 15, 1998, and Mr. Joseph A. Basile, Jr.,
the President, Chief Operating Officer and a director of GST, as Chief Executive
Officer on October 20, 1998.

         On October 28, 1998, Magnacom, a company controlled by John Warta,
GST's former Chairman and Chief Executive Officer, filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. As of
December 31, 1998, GST had paid Magnacom approximately $14.6 million as
prepayments for future PCS services and had recorded approximately $1.1 million
in other receivables from Magnacom. In September 1998, GST recorded a loss
reserve of $15.7 million for the full amount of the prepayments and receivables
related to Magnacom.

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


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GST has initiated litigation against Global and others in an effort to cure any
technical covenant violations that may have resulted from the transactions
involving Global. See "Legal Proceedings."

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

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

RESULTS OF OPERATIONS

FISCAL 1998 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31, 1997

         Revenues. Total revenue for Fiscal 1998 increased $40.0 million, or
35.6%, to $152.2 million from $112.2 million for the comparable twelve months
ended December 31, 1997. Telecommunications and other services revenues for
Fiscal 1998 increased $64.5 million, or 73.4%, to $152.2 million from $87.7
million for the twelve months ended December 31, 1997. The increase in
telecommunications and other services revenues resulted primarily from strategic
acquisitions, including the acquisitions of ICON Communications Corp. ("ICON")
in April 1998, and from increased local service revenue generated by GST USA's
networks. To a lesser extent, the increase in telecommunications and other
services revenues resulted from increased long distance, Internet, and data
services. The increase was also attributable to a $2.0 million increase in
revenue from the construction of network and fiber systems. Due to the NACT
Sale, product revenue for Fiscal 1998 was $0 compared to $24.5 million for the
twelve months ended December 31, 1997.

         Operating Expenses. Total operating expenses for Fiscal 1998 increased
$88.4 million, or 46.0%, to $280.6 million from $192.2 million for the twelve
months ended December 31, 1997. Network expenses, which include direct local and
long distance circuit costs, increased $33.1 million, or 48.4%, to $101.4
million, or 66.6% of telecommunications and other services revenues for Fiscal
1998 compared to $68.3 million, or 77.8% for the comparable period in the
previous year. The decrease in network expenses as a percentage of revenue
resulted from the inclusion of strategic acquisitions and an increase in
revenues for traffic carried on GST USA's network as a percentage of total
telecommunications and other services revenues. Facilities administration and
maintenance expenses for Fiscal 1998 increased $2.5 million, or 21.7%, to $13.9
million, or 9.1% of telecommunications and other services revenues compared to
$11.4 million, or 13.0% for the comparable period ended December 31, 1997. The
primary reason for the decrease in these expenses as a percentage of
telecommunications and other services revenues is the inclusion of revenues from
strategic acquisitions, substantially all of which are not generated on GST
USA's networks.

         Cost of product revenues and research and development costs were $0 for
Fiscal 1998 due to the NACT Sale.


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         Selling, general and administrative expenses for Fiscal 1998 increased
$15.4 million, or 20.7%, to $90.1 million from $74.7 million for the twelve
months ended December 31, 1997. The increase is due to the expansion of GST
USA's local and enhanced services operations, which resulted in additional
marketing, management information and sales staff, and to selling, general and
administrative expenses related to strategic acquisitions. As a percentage of
total revenue, selling, general and administrative expenses for Fiscal 1998 were
59.2%, compared to 66.5% for the twelve months ended December 31, 1997.

         Depreciation and amortization for Fiscal 1998 increased $17.1 million,
or 62.1%, to $44.6 million from $27.5 million for the twelve months ended
December 31, 1997. The increase is attributable to newly-constructed networks
and related equipment being placed into service and to the amortization of
intangible assets related to GST USA's acquisitions. GST USA expects that
depreciation will continue to increase as it expands its networks and longhaul
fiber optic facilities and installs additional switches. Depreciation and
amortization expense was 29.3% of total revenue for Fiscal 1998 compared to
24.5% for the comparable period ended December 31, 1997.

         Special charges for Fiscal 1998 consist of (i) a $15.7 million
write-off of amounts paid to Magnacom, (ii) $9.9 million in abandoned assets
related to non-core projects and services, including the write off of submarine
cable projects, equipment rendered obsolete by GST USA's VITA network and fiber
projects outside of GST USA's main service areas, (iii) a $3.9 million
impairment reserve for GST USA's shared tenant services asset and (iv) $1.1
million in costs related to the severance of certain members of former
management.

         Other Expenses/Income. For Fiscal 1998, GST USA recorded net other
income of $5.2 million, compared to net other expense of $31.4 million for the
comparable period ended December 31, 1997. For Fiscal 1998, net other income
includes a $61.3 million gain resulting from the NACT Sale. Excluding such gain,
net other expense would have increased $24.7 million for Fiscal 1998 as compared
to the same period in the previous year. The increase in net other expense
related primarily to increased interest expense resulting from the issuance in
May 1998 of the 1998 Notes.

         Net Loss. Net loss for Fiscal 1998 increased $11.9 million, or 10.7%,
to $123.2 million from $111.3 million for the twelve months ended December 31,
1997. Excluding the $61.3 million gain on the NACT Sale, net loss would have
been $184.5 million for Fiscal 1998, an increase of $73.2 million as compared to
the twelve months ended December 31, 1997. Such increase in net loss resulted
primarily from a $32.4 million increase in interest expense and a $48.5 million
increase in operating loss.

THE THREE MONTHS ENDED DECEMBER 31, 1997 ("1997 THREE MONTH PERIOD") COMPARED TO
THE UNAUDITED THREE MONTHS ENDED DECEMBER 31, 1996 ("1996 THREE MONTH PERIOD")

         Revenues. Total revenue for the 1997 Three Month Period increased $10.0
million, or 43.2%, to $33.2 million from $23.2 million for 1996 Three Month
Period. Telecommunications services revenue for the 1997 Three Month Period
increased $7.5 million, or 40.7%, to $25.9 million from $18.4 million for the
1996 Three Month Period. The increase in telecommunications services revenue
resulted primarily from increased local service revenue generated by GST USA's
networks and from increased long distance service revenue. Additionally, during
the 1997 Three Month Period, GST USA completed a $1.5 million longhaul conduit
sale. To a lesser extent, the increase in revenue resulted from the acquisition
of the Guam operations of Sprint in October 1997. Product revenue for the 1997
Three Month Period increased $2.5 


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<PAGE>   10
million, or 52.7%, to $7.3 million from $4.8 million for the 1996 Three Month
Period. The increase in product revenue resulted primarily from increased unit
sales of NACT's STX switch.

         Operating Expenses. Total operating expenses for the 1997 Three Month
Period increased $13.5 million, or 33.3%, to $54.2 million from $40.7 million
for the 1996 Three Month Period. Network expenses, which include direct local
and long distance circuit costs, increased $3.6 million, or 23.8%, to $18.4
million, or 70.8% of telecommunications services revenue for the 1997 Three
Month Period compared to $14.8 million, or 80.4% of telecommunications services
revenue for the 1996 Three Month Period. The primary reason for the decrease in
network expenses as a percent of revenue is the increase in on-net revenues
generated at GST USA's network as a percent of total revenues. Facilities
administration and maintenance expenses (consisting primarily of costs related
to personnel providing maintenance, monitoring and technical assistance for GST
USA's networks) for the 1997 Three Month Period decreased $.2 million, or 6.7%,
to $2.9 million, or 11.2% of telecommunications services revenue, compared to
$3.1 million, or 16.9% of telecommunications services revenue, for the 1996
Three Month Period.

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

         Selling, general and administrative expenses for the 1997 Three Month
Period increased $5.5 million, or 35.0%, to $21.3 million from $15.8 million for
the 1996 Three Month Period. 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
64.1% of total revenue for the 1997 Three Month Period compared to 68.0% of
total revenue for the 1996 Three Month Period.

         Depreciation and amortization for the 1997 Three Month Period increased
$3.8 million, or 81.8%, to $8.5 million from $4.7 million for the 1996 Three
Month Period. The increase was attributable to newly-constructed networks
becoming operational and to the amortization of intangible assets related to GST
USA's acquisitions. GST USA expects that depreciation will continue to increase
as it expands its networks and longhaul fiber optic facilities and installs
additional switches. Depreciation and amortization was 25.6% of total revenue
for the 1997 Three Month Period compared to 20.2% for the 1996 Three Month
Period.

         Other Expenses/Income. For the 1997 Three Month Period, net other
expenses increased $9.2 million, or 232.5%, to $13.2 million, or 39.8% of total
revenue, from $4.0 million, or 17.1% of total revenue, for the 1996 Three Month
Period. The primary reason for the increase was the inclusion of interest
expense associated with the 13.25% senior secured notes due 2007 of GST Funding
(the "Secured Notes"). The increase in interest expense was partially offset by
interest income earned on the investment of a portion of the proceeds of the
sale of the Secured Notes. To a lesser extent, net other expenses increased due
to NACT's income tax expense as well as minority interest in the income of NACT.

         Net Loss. Net loss for the 1997 Three Month Period increased $12.8
million, or 59.6%, to $34.2 


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<PAGE>   11
million from $21.4 million for the 1996 Three Month Period. The increase in net
loss resulted primarily from a $3.5 million increase in operating loss and a
$11.3 million increase in interest expense.

FISCAL 1997 COMPARED TO FISCAL 1996

         Revenues. Total revenue for Fiscal 1997 increased $60.9 million, or
147.5%, to $102.2 million from $41.3 million for the fiscal year ended September
30, 1996 ("Fiscal 1996"). Telecommunications services revenue for Fiscal 1997
increased $48.5 million, or 152.9%, to $80.2 million from $31.7 million for
Fiscal 1996. The increase in telecommunications services revenue resulted from
the inclusion of a full year of revenue from strategic acquisitions, including
Call America Business Communications Corp. and affiliated companies
(collectively, "GST Call America") and TotalNet Communications, Inc.
("TotalNet"), as well as 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
$97.2 million, or 119.4%, to $178.6 million from $81.4 million for Fiscal 1996.
Network expenses, which include direct local and long distance circuit costs,
increased $38.1 million, or 143.6%, to $64.7 million for Fiscal 1997 compared to
$26.6 million for Fiscal 1996. Facilities administration and maintenance
expenses (consisting primarily of costs related to personnel providing
maintenance, monitoring and technical assistance for GST USA's networks) for
Fiscal 1997 increased $1.3 million, or 12.9%, to $11.6 million, or 14.5% of
telecommunications services revenue, compared to $10.3 million, or 32.5% of
telecommunications services revenue, for Fiscal 1996. The primary reason for the
decrease in facilities administration and maintenance expenses as a percent of
telecommunications services revenue was the inclusion of revenue from 1996
strategic acquisitions, a significant portion of which was generated off-net.

         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
$38.3 million, or 123.8%, to $69.2 million from $30.9 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 67.7% of total
revenue for Fiscal 1997 compared to 74.8% of total revenue for Fiscal 1996.

         Depreciation and amortization for Fiscal 1997 increased $15.4 million,
or 185.5%, to $23.7 million from $8.3 million for Fiscal 1996. The increase was
attributable to newly-constructed networks becoming operational and to the
amortization of intangible assets related to GST USA's acquisitions.
Depreciation and amortization was 23.2% of total revenue for Fiscal 1997
compared to 20.1% for Fiscal 1996.


                                      -9-
<PAGE>   12
         Other Expenses/Income. For Fiscal 1997, net other expenses increased
$6.7 million, or 43.3%, to $22.1 million, or 21.7% of total revenue, from $15.4
million, or 37.4% 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 $14.1 million over Fiscal 1996.
Such increase primarily resulted from increased interest expense due to the
issuance of the 13.875% senior discount notes due 2005 (the "1995 Notes") in
December 1995 and the issuance of the Secured Notes in May 1997. To a lesser
extent, other expenses increased due to income tax expense attributable to
income of NACT, which as of March 1, 1997 was no longer consolidated for tax
purposes.

         Net Loss. Net loss for Fiscal 1997 increased $43.0 million, or 77.4%,
to $98.6 million from $55.6 million for Fiscal 1996. Excluding the $7.4 million
gain on the sale of NACT shares, net loss would have been $106.0 million for
Fiscal 1998, an increase of $50.4 million as compared to the twelve months ended
December 31, 1997. The increase in net loss resulted primarily from a $36.3
million increase in operating loss and a $15.9 million increase in interest
expense.

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 as GST USA emphasizes the development, construction and
expansion of its networks and builds its customer base. Cash provided by GST
USA's operations will not be sufficient to fund the expansion of its networks,
longhaul fiber optic facilities and services.

         At December 31, 1998, GST USA had approximately $956.6 million of
indebtedness outstanding. Although GST USA's liquidity was improved as a result
of proceeds received from the sale of the 1995 Notes, the Secured Notes and the
1998 Notes, GST USA has significant debt service obligations. GST USA will be
required to make principal and interest payments of approximately $66.1 million
(of which $35.1 million will be made from funds securing the Secured Notes),
$66.6 million (of which $17.6 million will be made from funds securing the
Secured Notes), $108.2 million, $106.6 million and $131.1 million in 1999, 2000,
2001, 2002, and 2003, respectively. In addition, GST USA anticipates that cash
flow from operations will be insufficient to pay interest in cash on the 1995
Notes when such interest becomes payable in September 2001 and on the Secured
Notes starting in November 2000 once the amount pledged to fund the first six
scheduled interest payments on the Secured Notes is paid and 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 beyond the
control of GST USA. There can be no assurance that GST USA will be able to
improve its operating results or that GST USA will be able to meet its debt
service obligations.

         At December 31, 1998, GST USA had cash, cash equivalents, and
investments, including restricted investments of approximately $366.8 million.
GST USA believes that such amounts will be sufficient to fund GST USA's
operations through the end of Fiscal 1999. Divestitures and other management
actions may prolong capital availability into the fiscal year 2000 and beyond.
Thereafter, GST USA expects to require additional financing. The extent of
additional financing will depend on, among other things, the rate of GST USA's
expansion and the success of GST USA's businesses. In the event that GST USA's
plans or assumptions change or prove to be inaccurate, GST USA incurs
significant unexpected expenses, or GST USA's cash resources, together with
borrowings under the current financing arrangements prove to be insufficient to
fund GST USA's growth and operations, or if GST USA consummates additional


                                      -10-
<PAGE>   13
acquisitions, GST USA may be required to seek additional sources of capital (or
seek additional capital sooner than currently anticipated). 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 USA or, if available, that it can be concluded on terms
acceptable to GST USA or within the limitations contained within GST USA's
financing arrangements. Failure to obtain such financing could result in the
delay or abandonment of some or all of GST USA's development or expansion plans
and could have a material adverse effect on GST USA's business. Such failure
could also limit the ability of GST to make principal and interest payments on
its outstanding indebtedness. GST USA has no material working capital or other
credit facility under which it may borrow for working capital and other general
corporate purposes. There can be no assurance that such facility will be
available to GST USA in the future or that if such facility were available, that
it would be available on terms and conditions acceptable to GST USA.

         GST USA's net cash used in operating and investing activities was
$425.0 million and $317.6 million for Fiscal 1998 and the twelve months ended
December 31, 1997, respectively. Net cash provided by financing activities from
borrowings and contributions from GST to fund capital expenditures, acquisitions
and operating losses was $313.1 million and $511.9 million for Fiscal 1998 and
the twelve months ended December 31, 1997, respectively.

         Capital expenditures for Fiscal 1998 and the twelve months ended
December 31, 1997 were $247.7 million and $214.4 million, respectively. GST USA
estimates capital expenditures of $250 million and $150 million in Fiscal 1999
and Fiscal 2000, respectively. 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, GST USA has also made
cash expenditures for strategic acquisitions. In March 1998, GST USA acquired
Call America-Phoenix, a Phoenix-based reseller of long distance, for
approximately $3.8 million in cash and the business of Whole Earth Networks,
Inc., a San Francisco-based ISP, for approximately $9.1 million in cash and the
assumption of approximately $1.3 million of liabilities. In April 1998, GST USA
acquired ICON, a switch-based reseller of long distance and local service
located in Seattle, for approximately $23.9 million in cash.

         In May 1998, GST Network completed the offering of $500.0 million
principal amount at maturity of 1998 Notes. The 1998 Notes fully accrete to face
value on May 1, 2003. From and after May 1, 2003, the 1998 Notes bear interest,
which will be payable in cash, at a rate of 10.5% per annum on each May 1 and
November 1, commencing November 1, 2003. The net proceeds from the sale of the
1998 Notes of approximately $288.9 million are restricted for the purchase of
telecommunications equipment and network infrastructure. The indenture relating
to the 1998 Notes includes restrictive covenants which, among other items, limit
or restrict additional indebtedness incurred by GST Network, investment in
certain subsidiaries, the sale of assets and the payment of dividends. GST
Network is a party to a registration rights agreement relating to the 1998 Notes
whereby it has agreed to consummate an exchange offer for the 1998 Notes
pursuant to an effective registration statement or cause the 1998 Notes to be
registered under the Securities Act of 1933, as amended, pursuant to a shelf
registration statement by November 4, 1998. Although GST Network has filed a
registration statement on Form S-4 with respect to an exchange offer for the
1998 Notes, it has not yet been declared effective. Therefore, in accordance
with the terms of the registration 


                                      -11-
<PAGE>   14
rights agreement, interest (in addition to the accrual of original issue
discount and interest otherwise due on the 1998 Notes after such date) on the
1998 Notes will accrue, at an annual rate of 0.5%, from November 4, 1998 and be
payable in cash semiannually in arrears, on each May 1 and November 1,
commencing May 1, 1999 until such exchange offer is consummated or a shelf
registration statement is declared effective.

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

INCOME TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS

         At December 31, 1998 GST USA had a net operating loss carryforward of
approximately $208.9 million available to offset future taxable income of GST
USA. GST USA does not expect to generate sufficient taxable income so as to
utilize all or a substantial portion of such loss carryforwards prior to their
expiration. Further, the utilization of net operating loss carryforwards against
future taxable income is subject to limitation if GST USA experiences an
"ownership change" as defined in Section 382 of the Internal Revenue Code of
1986, as amended.

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are now required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in fair value (i.e., gains and losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. GST USA must adopt SFAS
No. 133 by January 1, 2000. GST USA has not determined the impact that SFAS No.
133 will have on its financial statements and believes that such determination
will not be meaningful until closer to the date of initial adoption.

         In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5). SOP 98-5 requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred and that previously
capitalized costs related to such activities be expensed as a cumulative effect
of a change in accounting principle upon adoption. GST USA will adopt the
provisions of SOP 98-5 at the beginning of 1999 and does not anticipate that
this new standard will have a material impact on future results of operations.

YEAR 2000 PROGRAM

         The year 2000 issue is the result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

         GST USA is currently verifying system readiness for the processing of
date-sensitive information by its information technology ("IT") systems
(applications, hardware, system software and interfaces) and its network
operations. The review of IT systems and network operations is centrally managed
through a year 2000 Program Management Office (PMO).

         GST USA's State of Readiness. In general, GST USA's year 2000 project
is divided into three phases: (1) inventory and assessment ("Phase One"), (2)
strategy and contingency planning ("Phase Two"), and (3) conversion and
remediation ("Phase Three").


                                      -12-
<PAGE>   15
         GST USA completed its Phase One assessment for IT systems in October
1998. Phase One for network operations is expected to be concluded by the end of
first quarter 1999. GST USA has focused its independent testing activities
principally on those systems whose failure would pose the greatest risk to GST
USA. GST USA may not independently test all of its equipment and will rely upon
vendor representations, if received by GST USA, where tests are not conducted.
There can be no assurance of the accuracy or completeness of such
representations. GST USA is continuing to contact all of its significant
suppliers and large customers to determine the extent to which GST USA's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues.

         With respect to IT systems, GST USA completed Phase Two, wherein
remedial actions were planned and a contingency plan was formulated, in December
1998. GST USA expects to complete Phase Three, wherein remedial actions will be
implemented and tested, by third quarter 1999. GST USA anticipates conclusion of
Phase Two and Phase Three activities for network operations by third quarter
1999.

         Costs. The total amount expended on the project through December 31,
1998 was approximately $.5 million. in internal staffing costs. The total cost
of the year 2000 project is estimated to be $3.3 million, including $.3 million
in internal staffing costs, $1.8 million in external staffing costs and $1.2
million in hardware and software upgrade costs. This cost may be reduced if
software and hardware are replaced with compliant systems as a result of other
currently scheduled capital projects. GST USA does not expect remediation costs
to have a material adverse effect on its financial position, results of
operation or cash flows. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of changes
as the program progresses, and failure to implement such changes could have an
adverse effect on future results of operations.

         Risks. The failure to correct a material year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect GST USA's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
GST USA is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on GST USA's results of operations,
liquidity or financial condition. The year 2000 project is expected to
significantly reduce GST USA's level of uncertainty about the year 2000 problem.
GST USA believes that, with the implementation of new business systems and
completion of the project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.


                                      -13-
<PAGE>   16
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

Item 7.  (A)  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     INTEREST RATE MARKET RISK - GST USA has fixed income investments consisting
     of cash equivalents, short-term investments in U.S. government debt
     instruments, and certificates of deposit. See note 1 to the Consolidated
     Financial Statements for information about investments in U.S. government
     debt instruments, and certificates of deposit.

     Interest income earned on GST USA's investment portfolio is affected by
     changes in the general level of U.S. interest rates. GST USA believes that
     it is not exposed to significant changes in fair value because such
     investments are composed of Government debt instruments, certificates of
     deposit and commercial paper and the maturities are predominantly
     short-term. The fair value of each investment approximates its amortized
     cost, and long-term securities
      have maturities of less than two years.

     The following table provides information about GST USA's risk exposure
     associated with changing interest rates. Currently, GST USA does not use
     derivative financial instruments to manage its interest rate risk.



<TABLE>
<CAPTION>
                                                                           EXPECTED MATURITY
                                                                       (In thousands of dollars)
                                        --------------------------------------------------------------------------------------------
                                                                                                                          Market
                                                                                                                         Value at
                                                                                                                        December 31,
                                         1999      2000      2001       2002      2003      Thereafter       Total         1998
                                        ------   -------   --------   -------    -------   -----------   -----------    ------------
<S>                                     <C>      <C>       <C>        <C>        <C>       <C>           <C>            <C>
Long-term Debt:                                                                                                           
    Fixed rate                             140                                              1,077,449      1,077,589      944,241  
          Average interest rate          8.50%                                                  12.36%
    Variable rate                       11,951    17,041     20,216    20,898     21,132       13,487        104,725
          Average interest rate
           (LIBOR plus)                  3.37%     3.26%      3.29%     3.34%      3.34%         3.06%
Capital Leases:
    Fixed rate                           6,476     5,227      2,279     1,974      1,981        7,453         25,390
          Average interest rate         12.36%    12.36%     12.36%    12.36%     12.36%        12.36%
</TABLE>

     (1) Includes $251.1 million of unaccreted discount.

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

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

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE.
         Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
         Not required.

ITEM 11. EXECUTIVE COMPENSATION.
         Not required.


                                      -14-
<PAGE>   17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
         Not required.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
         Not required.

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

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

(2)      Financial Statement Schedules: see page S-1.

(3)      Exhibits:

*3(a)    Certificate of Incorporation of GST USA, as amended.

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

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

***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.

#4(d)    Indenture dated as of May 4, 1998 by and among GST Telecommunications,
         GST USA, Inc., GST Network Funding, Inc. and the United States Trust
         Company of New York, as trustee.

##10(a)  Stock Purchase Agreement dated December 31, 1997 by and among GST
         Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
         incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
         January 6, 1997.

#10(b)   Placement Agreement dated April 29, 1998 by and among GST
         Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc., and
         several Placement Agents named in Schedule I thereto.

#10(c)   Registration Rights Agreement dated May 4, 1998 by and among GST
         Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc. and
         Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., Credit
         Suisse First Boston Corporation and SBC Warburg Dillon Read Inc.

#10(d)   Collateral Pledge and Security Agreement dated as of May 4, 1998 from
         GST Network Funding, Inc. to United States Trust Company of New York,
         as trustee.

#10(e)   Reimbursement and Commitment Fee Agreement dated May 4, 1998 among GST
         Telecommunications, Inc., GST USA, Inc. and GST Network Funding, Inc.

***10(f) Amended and Restated Credit Agreement dated as of April 26, 1995, by
         and between GST Pacific Lightwave, Inc. and Tomen America Inc.

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

&10(h)   Amended and Restated Master Agreement dated as of May 24, 1996, by and
         among Tomen America Inc., the Company, GST Telecom Inc., GST Pacific
         Lightwave, Inc., Pacwest Network L.L.C., Pacwest Network Inc., GST
         Tucson Lightwave, Inc. and GST New Mexico Lightwave, Inc.

&10(i)   Credit Agreement dated as of May 24, 1996, by and between GST New
         Mexico Lightwave, Inc. and TM Communications LLC.

&10(j)   Credit Agreement dated as of May 24, 1996, by and between GST Tucson
         Lightwave, Inc. and TM Communications LLC.

&&10(k)  Employment Agreement dated March 3, 1999, effective as of October 20,
         1998, by and between GST USA, Inc. and Joseph Basile, Jr.

&&&10(l) Employment Agreement dated February 10, 1997, by and between GST USA,
         Inc. and GST Telecom Inc. and Daniel L. Trampush.

&10(m)   Reseller Agreement dated as of October 30, 1996, by and between
         Magnacom Wireless, L.L.C., and GST Telecom Inc.

&10(n)   Equipment Loan and Security Agreement dated December 19, 1996 by and
         between NTFC Capital Corporation and GST Equipco.

%10(o)   Loan and Security Agreement dated as of September 4, 1996 by and
         between Siemens Stromberg-Carlson ("Siemens") and GST Switchco, Inc.
         ("GST Switchco").

%10(p)   Unconditional Continuing Guaranty dated as of September 4, 1996 by and
         between Siemens and GST USA, Inc.

%10(q)   Unconditional Limited Guaranty Agreement dated as of December 19, 1996
         made by GST USA, Inc., in favor of NTFC Capital Corporation.

%%10(r)  Credit Agreement dated as of September 30, 1997 by and between GST
         Telecom Hawaii, Inc. and TM Communications Hawaii LLC.

%%10(s)  Service Agreement dated as of September 30, 1997 by and between Pacwest
         Network, Inc. and GST Telecom Hawaii, Inc.

%%10(t)  Management Agreement dated as of September 30, 1997 by and between
         Pacwest Network, Inc. and GST Telecom Hawaii, Inc.

%%10(u)  Agreement dated as of September 30, 1997 by and among GST Telecom
         Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc.

###27    Financial Data Schedule.


*        Incorporated by reference to GST USA's Registration Statement on Form
         S-4 (No. 333-33601-02).

**       Incorporated by reference to GST's Quarterly Report on Form 10-Q for
         the period ended June 30, 1997.

***      Incorporated by reference to GST's Annual Report on Form 20-F for the
         fiscal year ended September 30, 1995.

#        Incorporated by reference to GST's Form 8-K filed May 19, 1998.

##       Incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
         January 6, 1998.

###      Filed herewith.


&        Incorporated by reference to GST Telecommunications, Inc.'s Annual
         Report on Form 10-K for the fiscal year ended September 30, 1996.


&&       Incorporated by reference to GST Telecommunications, Inc.'s Annual
         Report on Form 10-K for the fiscal year ended December 31, 1998.


&&&      Incorporated by reference to GST Telecommunications, Inc.'s Quarterly
         Report on Form 10-Q for the period ended March 30, 1997.


%        Incorporated by reference to GST Telecommunications, Inc.'s Quarterly
         Report on Form 10-Q for the period ended December 31, 1996.


%%       Incorporated by reference to GST Telecommunications, Inc.'s Form 8-K
         dated September 30, 1997.


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


                                      -15-
<PAGE>   18
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
GST USA, INC.                                                                                                 PAGE
<S>                                                                                                           <C>
Independent Auditors' Report.......................................................................           F-2

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

Consolidated Statements of Operations for the year ended December 31, 1998, the
         three-month period ended December 31, 1997 and the years ended
         September 30, 1997 and 1996...............................................................           F-4

Consolidated Statements of Shareholder's (Deficit) Equity for the year ended
         December 31, 1998, the three-month period ended December 31, 1997 and
         the years ended September 30, 1997 and 1996...............................................           F-5

Consolidated Statements of Cash Flows for the year ended December 31, 1998, the
         three-month period ended December 31, 1997 and the years ended
         September 30, 1997 and 1996...............................................................           F-6

Notes to Consolidated Financial Statements.........................................................           F-8

Independent Auditor's Report on Schedule...........................................................           S-1

Schedule of Valuation and Qualifying Accounts......................................................           S-2
</TABLE>



                                      F-1
<PAGE>   19
                          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 December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholder's (deficit) equity, and cash flows for the
year ended December 31, 1998, the three-month period ended December 31, 1997 and
each of the years in the two-year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GST USA, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of its operations
and cash flows for the year ended December 31, 1998, the three-month period
ended December 31, 1997 and each of the years in the two-year period ended
September 30, 1997, in conformity with generally accepted accounting principles.

                                      /s/ KPMG Peat Marwick LLP







Portland, Oregon
March 1, 1999

                                   F-2
<PAGE>   20
                                  GST USA, INC.
                                and Subsidiaries
                           Consolidated Balance Sheets
                      (In thousands, except share amounts)


<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                 -----------------------------------
                                                                                     1998                    1997
                                                                                 -----------             -----------
<S>                                                                              <C>                     <C>        
                                 ASSETS
Current assets:
  Cash and cash equivalents                                                      $    85,482             $   197,373
  Restricted investments                                                              34,107                  31,731
  Accounts receivable, net                                                            31,946                  26,212
  Receivable from parent                                                                --                       964
  Investments                                                                           --                     7,554
  Prepaid and other current assets                                                    11,661                  15,763
                                                                                 -----------             -----------

                                                                                     163,196                 279,597

Restricted investments                                                               247,257                 112,719
Property and equipment, net                                                          616,686                 406,440
Goodwill, net                                                                         47,627                  29,941
Other assets, net                                                                     45,926                  50,319
                                                                                 -----------             -----------

         Total assets                                                            $ 1,120,692             $   879,016
                                                                                 ===========             ===========

                  LIABILITIES AND SHAREHOLDER'S DEFICIT

Current liabilities:
  Accounts payable                                                               $    25,986             $    14,531
  Accrued expenses                                                                    36,336                  29,851
  Payable to parent                                                                  341,917                 327,138
  Deferred revenue                                                                     6,030                     993
  Current portion of capital lease obligations                                         5,649                   6,286
  Current portion of long-term debt                                                   12,091                   3,212
                                                                                 -----------             -----------

                                                                                     428,009                 382,011
                                                                                 -----------             -----------

Other liabilities                                                                       --                     1,409
Capital lease obligations, less current portion                                       19,741                  13,994
Long-term debt, less current portion                                                 919,075                 591,813
Minority interest                                                                       --                    12,732

Commitments and contingencies

Shareholder's deficit:
  Common shares:
          200 shares authorized, 10 shares issued and outstanding, no                 78,462                  78,462
          par value
  Accumulated deficit                                                               (324,595)               (201,405)
                                                                                 -----------             -----------

                                                                                    (246,133)               (122,943)
                                                                                 -----------             -----------

         Total liabilities and shareholder's deficit                             $ 1,120,692             $   879,016
                                                                                 ===========             ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   21
                                  GST USA, INC.
                                and Subsidiaries
                      Consolidated Statements of Operations
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                             THREE-MONTH
                                                           YEAR ENDED        PERIOD ENDED                    YEARS ENDED
                                                          DECEMBER 31,       DECEMBER 31,                   SEPTEMBER 30,
                                                                                                    -------------------------------
                                                             1998               1997                  1997                  1996
                                                           ---------          ---------             ---------             ---------
<S>                                                       <C>                <C>                    <C>                   <C>      
Revenues:
     Telecommunications and other services                 $ 152,168          $  25,940             $  80,234             $  31,726
     Product                                                    --                7,300                21,982                 9,573
                                                           ---------          ---------             ---------             ---------

         Total revenues                                      152,168             33,240               102,216                41,299
                                                           ---------          ---------             ---------             ---------

Operating costs and expenses:
     Network expenses                                        101,355             18,361                64,743                26,580
     Facilities administration and maintenance                13,919              2,906                11,643                10,317
     Cost of product revenues                                   --                2,328                 7,141                 3,974
     Selling, general and administrative                      90,136             21,322                69,152                30,901
     Research and development                                   --                  746                 2,289                 1,352
     Depreciation and amortization                            44,585              8,507                23,672                 8,291
     Special charges                                          30,580               --                    --                    --
                                                           ---------          ---------             ---------             ---------

         Total operating costs and expenses                  280,575             54,170               178,640                81,415
                                                           ---------          ---------             ---------             ---------

         Loss from operations                               (128,407)           (20,930)              (76,424)              (40,116)
                                                           ---------          ---------             ---------             ---------

Other expenses (income):
    Interest income                                          (24,047)            (4,077)               (6,315)               (4,927)
    Interest expense, net of amounts capitalized              77,809             15,853                34,168                18,334
    Gain on sale of subsidiary shares                        (61,266)              --                  (7,376)                 --
    Other                                                      2,287                139                   139                 2,289
                                                           ---------          ---------             ---------             ---------

                                                              (5,217)            11,915                20,616                15,696
                                                           ---------          ---------             ---------             ---------


         Loss before minority interest
           in (income) loss of subsidiaries                 (123,190)           (32,845)              (97,040)              (55,812)
                                                           ---------          ---------             ---------             ---------

Income tax expense:
    Current                                                     --                  758                 1,802                   157
    Deferred                                                    --                   92                  (899)                 --
                                                           ---------          ---------             ---------             ---------

                                                                --                  850                   903                   157
                                                           ---------          ---------             ---------             ---------

         Loss before minority interest in (income)
            loss of subsidiaries                            (123,190)           (33,695)              (97,943)              (55,969)

Minority interest in (income) loss of subsidiaries              --                 (472)                 (612)                  411
                                                           ---------          ---------             ---------             ---------

         Net loss                                          $(123,190)         $ (34,167)            $ (98,555)            $ (55,558)
                                                           =========          =========             =========             =========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>   22
                                  GST USA, INC.
                                and Subsidiaries
            Consolidated Statements of Shareholder's (Deficit) Equity
                      (In thousands, except share amounts)



<TABLE>
<CAPTION>
                                                                                                               TOTAL
                                                       COMMON SHARES                  ACCUMULATED           SHAREHOLDER'S
                                              SHARES                AMOUNT              DEFICIT           (DEFICIT) EQUITY
                                             ---------            ---------           -----------         ----------------
<S>                                          <C>                  <C>                 <C>                 <C>      
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                                          --                   --                (55,558)              (55,558)
                                             ---------            ---------            ---------             ---------
Balance, September 30, 1996                         10               69,957              (68,683)                1,274

Capital transaction, sale of
    subsidiary shares                             --                  8,416                 --                   8,416
Net loss                                          --                   --                (98,555)              (98,555)
                                             ---------            ---------            ---------             ---------
Balance, September 30, 1997                         10               78,373             (167,238)              (88,865)

Exercise of subsidiary stock
     options                                      --                     89                 --                      89
Net loss                                          --                   --                (34,167)              (34,167)
                                             ---------            ---------            ---------             ---------
Balance, December 31, 1997                          10               78,462             (201,405)             (122,943)

Net loss                                          --                   --               (123,190)             (123,190)
                                             ---------            ---------            ---------             ---------

Balance, December 31, 1998                          10            $  78,462            $(324,595)            $(246,133)
                                             =========            =========            =========             =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>   23
                                  GST USA, INC.
                                and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                     THREE-MONTH          YEARS ENDED
                                                                     YEAR ENDED      PERIOD ENDED        SEPTEMBER 30,
                                                                    DECEMBER 31,     DECEMBER 31,   ------------------------
                                                                       1998             1997          1997           1996
                                                                    -----------      -----------    ---------      ---------
<S>                                                                 <C>              <C>            <C>            <C>       
Operations:
     Net loss                                                        $(123,190)       $ (34,167)    $ (98,555)     $ (55,558)
     Adjustments to reconcile net loss to net cash
       used in operations:
         Minority interest in income (loss) of subsidiary                 --                472           612           (411)
         Depreciation and amortization                                  47,755            9,251        25,769          9,382
         Deferred income taxes                                            --                 92          (899)          --
         Accretion and accrual of interest                              35,627            5,767        17,099         17,758
         Non-cash stock compensation and other expense                    (343)             374         2,521            574
         Loss on disposal of assets                                     10,139             --             679          1,012
         Loss on impairment of assets                                   19,549             --            --             --
         Equity in losses of investments and joint venture                --               --            --            1,495
         Gain on sale of subsidiary shares                             (61,266)            --          (7,376)          --
         Changes in non-cash operating working capital:
              Accounts receivable, net                                 (15,444)          (3,528)      (10,148)        (2,321)
              Inventory                                                   --                (33)         (384)        (2,019)
              Prepaid, other current and other assets, net               1,023           (2,727)       (6,496)        (4,176)
              Accounts payable and accrued liabilities                  (1,000)         (18,292)       25,672          2,315
              Other liabilities                                          5,557              708          (119)           153
                                                                     ---------        ---------     ---------      ---------
                  Cash used in operations                              (81,593)         (42,083)      (51,625)       (31,796)
                                                                     ---------        ---------     ---------      ---------

Investments:
     Acquisition of subsidiaries, net of cash acquired                 (35,471)          (2,105)         (673)        (1,441)
     Purchase of investments                                              --             (4,307)       (3,247)        (9,799)
     Proceeds from sale of investments                                     308             --           5,177          5,493
     Purchase of property and equipment                               (218,027)         (46,489)     (223,921)       (76,126)
     Proceeds from sale of property and equipment                        3,567             --           5,774              8
     Purchase of other assets                                           (3,249)          (1,688)      (11,057)        (7,575)
     Change in investments restricted for the
          purchase of property and equipment                          (170,288)          12,217       (59,776)       (16,000)
     Proceeds from the sale of subsidiary shares, net                   85,048              141        27,105           --
     Cash disposed of in sale of subsidiary                             (5,252)            --            --             --
                                                                     ---------        ---------     ---------      ---------
                  Cash used in investing activities                   (343,364)         (42,231)     (260,618)      (105,440)
                                                                     ---------        ---------     ---------      ---------

Financing:
     Proceeds from long-term debt                                      300,955            7,729       353,258        175,897
     Proceeds of debt payable to parent                                 13,738          214,353        86,828           --
     Principal payments on long-term debt and capital                  (22,380)         (10,087)       (6,709)        (1,544)
       leases
     Contributions from parent                                            --               --            --            9,009
     Deferred debt financing costs                                     (12,621)             (87)      (12,004)        (8,480)
     Change in investments restricted to finance interest
         payments                                                       33,374           15,083       (95,974)          --
                                                                     ---------        ---------     ---------      ---------
                  Cash provided by financing activities                313,066          226,991       325,399        174,882
                                                                     ---------        ---------     ---------      ---------

                  Increase (decrease) in cash and cash
                       equivalents                                    (111,891)         142,677        13,156         37,646

Cash and cash equivalents, beginning of period                         197,373           54,696        41,540          3,894
                                                                     ---------        ---------     ---------      ---------

Cash and cash equivalents, end of period                             $  85,482        $ 197,373     $  54,696      $  41,540
                                                                     =========        =========     =========      =========
</TABLE>

                                                                     (Continued)

                                      F-6
<PAGE>   24
                                  GST USA, INC.
                                and Subsidiaries
                Consolidated Statements of Cash Flows, continued
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                    
                                                                                    THREE-MONTH                YEARS ENDED
                                                                 YEAR ENDED         PERIOD ENDED              SEPTEMBER 30,
                                                                 DECEMBER 31,       DECEMBER 31,      ----------------------------
                                                                    1998                1997            1997                1996
                                                                  --------            --------        --------            --------
<S>                                                               <C>                 <C>             <C>                 <C>     
Supplemental disclosure of cash flow information:
     Cash paid for interest                                       $ 50,190            $ 21,684        $  4,982            $  1,813
     Cash paid for income taxes                                       --                 1,038             638                --

Supplemental schedule of non-cash investing and
     financing activities:
       Recorded in business combinations:
         Assets                                                     45,719               2,605           1,052              45,477
         Liabilities                                                10,248                 500             379              11,665
         Minority interest                                            --                  --              --                (2,686)
         Common shares of parent                                      --                  --              --                35,057
       Disposition of subsidiary:
         Assets                                                     35,480                --              --                  --
         Liabilities                                                 4,218                --              --                  --
         Minority interest                                          12,732                --              --                  --
       Amounts in accounts payable and accrued
         liabilities for the purchase of fixed assets at
         end of period                                              25,945              19,029          19,718              18,291
       Assets acquired through capital leases                       10,079                 480          21,765                --
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>   25

                                  GST USA, INC.
                                and Subsidiaries
                   Notes to Consolidated Financial Statements
                      (In thousands, except share amounts)
                           December 31, 1998 and 1997



(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         DESCRIPTION OF THE COMPANY

         GST USA, Inc. (the Company or GST USA) 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, including long
         distance, Internet and data services, and constructs telecommunication
         networks for other providers. Upon formation of the Company in August
         of 1994, GST transferred all of its operating subsidiaries and equity
         investments to the Company.

         As discussed in note 2, effective January 1, 1998, GST transferred to
         the Company the businesses of Call America Business Communications,
         Corp. (Call America) and TotalNet Communications, Inc. (TotalNet).
         The financial statements included herein have been restated to reflect
         the operations of Call America and TotalNet from the dates such
         subsidiaries were acquired by GST. The financial statements have been
         restated in order to conform with GST's presentation as the entities
         are under common control.

         CHANGE IN FISCAL YEAR-END

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


<TABLE>
<S>                                                                 <C>      
                  Revenues                                          $  23,217
                  Loss from operations                                (17,432)
                  Other expenses, net                                  (4,034)
                  Income tax expense                                     ---
                  Net loss                                            (21,413)
</TABLE>

         BASIS OF CONSOLIDATION

         These 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. At December 31, 1998, the Company held no
         investments accounted for pursuant to the equity method. All
         significant intercompany accounts have been eliminated.


                                      F-8
<PAGE>   26

                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         CASH AND CASH EQUIVALENTS

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

         ACCOUNTS AND NOTES RECEIVABLE AND CONCENTRATION OF RISK

         Gross trade accounts receivable total $37,220 and $26,113 at December
         31, 1998 and 1997, respectively. Notes receivable from customers total
         $208 and $4,055 at December 31, 1998 and 1997, respectively. Management
         provides an allowance for doubtful accounts and notes based on current
         customer information and historical statistics. The allowance for
         doubtful accounts was $5,482 and $3,956 at December 31, 1998 and 1997,
         respectively.

         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 and other
         services customers accounted for approximately 16.4%, 17.8%, 21.4% and
         46.9% of the Company's consolidated telecommunications and other
         services revenue for the year ended December 31, 1998, the three-month
         period ended December 31, 1997 and the years ended September 30, 1997
         and 1996, respectively.

         The Company relies on incumbent local exchange companies for the
         provision of local telephone service. In addition, the Company relies
         on other carriers to provide transmission and termination services for
         a majority of its long distance traffic. The inability of any of these
         companies or carriers to fulfill service delivery requirements could
         impact the Company's future results.

         RESTRICTED AND UNRESTRICTED INVESTMENTS

         Restricted investments classified as available-for-sale consist
         primarily of U.S. Treasury securities maturing between one and eight
         months which are restricted for the purchase and installation of
         network assets. Held-to-maturity investments consist of U.S. Treasury
         securities and certificates of deposit maturing between four months and
         eighteen months which are primarily restricted for interest payments.
         Restricted investments are recorded at amortized cost which
         approximates fair value for all periods presented.

         Unrestricted available-for-sale investments consist U.S. government
         securities and certificates of deposit at December 31, 1997.

                                      F-9
<PAGE>   27
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      


         Under Financial Accounting Standards Board (the FASB) Statement of
         Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
         Investments in Debt and Equity Securities, GST USA classifies its
         investments as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    ----------------------------
                                                      1998               1997
                                                    ----------------------------
<S>                                                 <C>             <C>        
                  Restricted investments:
                       Available-for-sale           $   230,014     $    62,484
                       Held-to-maturity                  51,350          81,966

                  Unrestricted investments:
                       Available-for-sale                   ---           7,554
</TABLE>

         MINORITY INTEREST

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

         In February 1998, the Company sold its remaining interest in NACT for
         net proceeds of $85,048, which resulted in a gain of $61,266.

         PROPERTY AND EQUIPMENT

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

<TABLE>
<S>                                                           <C>     
             Telecommunications networks                         20 years
             Electronic and related equipment                    10 years
             Leasehold improvements                              10 years
             Computer equipment, office equipment and other   3 - 7 years
             Buildings                                           40 years
</TABLE>

                                      F-10
<PAGE>   28
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         Construction, engineering and overhead costs directly related to the
         development of the Company's networks are capitalized. The Company
         capitalizes internal information systems costs in accordance with
         Statement of Position 98-1, Accounting for the Costs of Computer
         Software Developed or Obtained for Internal Use. The Company begins
         depreciating these costs when the assets become operational.
         Depreciation expense totaled $29,771, $6,152, $14,844 and $5,559 for
         the year ended December 31, 1998, the three-month period ended December
         31, 1997 and the years ended September 30, 1997 and 1996, respectively.

         GOODWILL

         Goodwill is amortized using the straight-line method over periods
         ranging from five to ten years. Amortization charged to operations was
         $5,804, $944, $3,894 and $1,690 for the year ended December 31, 1998,
         the three-month period ended December 31, 1997 and the years ended
         September 30, 1997 and 1996, respectively.

         ASSET IMPAIRMENT

         The Company reviews long-lived assets, goodwill and certain
         identifiable intangibles for impairment whenever events or changes in
         circumstances indicate that the carrying amount of an asset may not be
         recoverable.

         During 1998, the Company recorded a non-cash special charge of $3,881
         related to the impairment of certain long-lived assets associated with
         the Company's shared tenant services operations. The impaired assets
         primarily consist of customer lists and electronic and related
         equipment. As the projected future cash flows were less than the
         assets' carrying value, an impairment loss was recognized. The
         impairment loss was measured as the amount by which the carrying amount
         of the assets exceeded the estimated fair value of the assets, which
         was determined based on current market prices for similar assets.

         As discussed in note 11, the Company also recorded a non-cash special
         charge of $15,668 during 1998 related to the impairment of a prepaid
         reseller agreement and advances to Magnacom Wireless LLC.

         REVENUE RECOGNITION

         Telecommunication services revenue is recognized monthly as services
         are provided. Amounts billed in advance of the service month are
         recorded as deferred revenue. Network construction services revenue is
         recognized using the percentage of completion method. Accordingly, the
         Company recognizes revenues and expenses as construction progresses.
         Included in other current assets are costs and income in excess of
         billings relating to certain contracts.

                                      F-11
<PAGE>   29
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         NET LOSS PER SHARE

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

         ISSUANCE OF SUBSIDIARY STOCK

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

         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
         basis 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 year
         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.

         COMPREHENSIVE INCOME

         The Company adopted SFAS No. 130, Reporting Comprehensive Income, on
         January 1, 1998. Comprehensive income is defined as changes in
         stockholders' equity exclusive of transactions with owners such as
         capital contributions and dividends. There are no differences between
         net loss and comprehensive loss for all periods presented.

         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.

                                      F-12
<PAGE>   30
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         ADVERTISING COSTS

         The Company expenses advertising costs as incurred.

         RECLASSIFICATIONS

         Certain reclassifications have been made in the accompanying
         consolidated financial statements for December 31, 1997 and September
         30, 1997 and 1996 to conform with the December 31, 1998 presentation.

(2)      ACQUISITIONS

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

         ICON COMMUNICATIONS CORP. (ICON)

         In April 1998, the Company acquired 100% of the outstanding capital
         stock of ICON, a Washington company which provides long distance and
         ancillary communications services. Consideration paid for this
         acquisition consisted of $23,916 in cash. Goodwill of $15,957 was
         recorded as a result of this acquisition.

         KLP, INC. (D/B/A CALL AMERICA) (CALL AMERICA PHOENIX)

         In March 1998, the Company acquired 100% of the outstanding capital
         stock of Call America Phoenix, an Arizona company which provides long
         distance services. Consideration paid for this acquisition consisted of
         $3,838 in cash. Goodwill of $2,405 was recorded as a result of this
         acquisition.

         WHOLE EARTH NETWORKS, LLC (WHOLE EARTH)

         In March 1998, the Company acquired the business of Whole Earth, a
         California Internet services provider. Consideration paid for this
         acquisition consisted of $9,053 in cash and the assumption of $1,273 in
         liabilities. Goodwill of $3,293 was recorded as a result of this
         acquisition.

                                      F-13
<PAGE>   31
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      
                                        .
         PHOENIX FIBER ACCESS, INC. (PHOENIX FIBER)

         In December 1996, 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.

         CALL AMERICA BUSINESS COMMUNICATIONS, CORP. (CALL AMERICA)

         In September 1996, GST acquired 100% of the outstanding capital stock
         of Call America, a California company that provides long distance and
         ancillary communications services. GST acquired Call America for
         consideration of 1,443,505 common shares of GST valued at $16,311.
         Additionally, $415 in notes receivable due from the former owners of
         Call America will be forgiven if certain operating milestones are met
         over the next 8 years. Goodwill of $11,581 was recorded as a result of
         this acquisition. Effective January 1, 1998, GST transferred the
         ownership of Call America to the Company.

         TOTALNET COMMUNICATIONS, INC. (TOTALNET)

         In September 1996, GST acquired 100% of the outstanding capital stock
         of TotalNet, a long distance service provider. GST acquired TotalNet
         for consideration of 703,229 common shares of GST valued at $8,814.
         Goodwill of $5,717 was recorded as a result of this acquisition.
         Effective January 1, 1998, GST transferred ownership of TotalNet to the
         Company.

         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
         former Chairman and Chief Executive Officer of the Company. Goodwill of
         $15,330 was recorded as a result of this acquisition.

                                      F-14
<PAGE>   32
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         OTHERS

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

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

         During 1996, the Company acquired the assets of Reservations, Inc. dba
         Hawaii OnLine (Hawaii OnLine), the assets of Texas-Ohio Communications,
         Inc. (Texas-Ohio), and 100% of the outstanding capital stock of
         Tri-Star Residential Communications, Inc. (Tri-Star). Hawaii OnLine is
         an Internet service provider; Texas-Ohio is a long distance service
         provider; and Tri-Star provides shared tenant services consisting of
         long distance, cable television and security service to tenants of
         multi-dwelling apartment units. Consideration paid for these
         acquisitions consisted of 266,519 common shares of GST valued at
         $2,463, and $719 of cash. Goodwill of $1,044 was recorded as a result
         of these acquisitions.

         The unaudited pro forma results shown below reflect results of
         operations as if the 1998 and 1997 acquisitions described above
         occurred as of the beginning of each of the periods presented.

<TABLE>
<CAPTION>
                                          THREE-MONTH
                            YEAR ENDED    PERIOD ENDED      YEAR ENDED
                           DECEMBER 31,   DECEMBER 31,    SEPTEMBER 30,
                               1998           1997             1997
                           ------------   ------------    -------------
<S>                        <C>            <C>             <C>
              Revenues      $  156,407     $   37,503       $  120,973
              Net loss        (123,736)       (34,299)        (100,388)
</TABLE>

         The pro forma results are not necessarily indicative of what actually
         would have occurred had the acquisitions been in effect for the entire
         periods presented. In addition, they are not intended to be a
         projection of future results that may be achieved from the combined
         operations.


                                      F-15
<PAGE>   33
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

(3)      PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                          ---------------------
                                                             1998        1997
                                                          ---------   ---------
<S>                                                       <C>         <C>      
         Telecommunications networks                      $ 178,008   $ 132,028
         Electronic and related equipment                   181,769      68,380
         Leasehold improvements                              24,508      21,671
         Computer equipment, office equipment and other      40,361      14,777
         Buildings                                            2,803       3,366
         Construction in progress                           251,353     192,888
                                                          ---------   ---------
                                                            678,802     433,110

         Less accumulated depreciation                      (62,116)    (26,670)
                                                          ---------   ---------

                                                          $ 616,686   $ 406,440
                                                          =========   =========
</TABLE>


         Property and equipment includes $251,353 and $192,888 of assets which
         had not been placed in service at December 31, 1998 and 1997,
         respectively, and accordingly, was not being depreciated. During the
         year ended December 31, 1998, the three-month period ended December 31,
         1997 and the years ended September 30, 1997 and 1996, $25,920, $3,726,
         $15,170 and $2,316 of interest, respectively, was capitalized as part
         of property and equipment.

(4)      ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                        ----------------------
                                                          1998            1997
                                                        -------         -------
<S>                                                     <C>             <C>    
         Fixed asset purchases                          $ 9,552         $12,157
         Carrier costs                                    4,885              98
         Interest payable                                 9,098           7,966
         Payroll and related liabilities                  5,107           2,595
         Other                                            7,694           7,035
                                                        -------         -------

                  Total                                 $36,336         $29,851
</TABLE>


                                      F-16
<PAGE>   34
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

(5)      LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               -------------------
                                                                 1998       1997
                                                               --------   --------

<S>      <C>                                                   <C>        <C>     
         13.25% senior secured notes due May 1, 2007           $265,000   $265,000
         10.5% senior secured discount notes due May 1, 2008    320,997         --
         Note payable to Tomen, LIBOR plus 3.0%
              (8.1% at December 31, 1998)                        45,262     61,793
         Note payable to NTFC, LIBOR plus 3.5%
              (8.6% at December 31, 1998)                        50,000     50,000
         Note payable to Siemens, LIBOR plus 3.5 %
              (8.6% at December 31, 1998)                         9,463      7,889
         13.875% senior discount notes due December 15, 2005    240,304    210,136
         Other                                                      140        207
                                                               --------   --------

                                                                931,166    595,025

         Less current portion of long-term debt                  12,091      3,212
                                                               --------   --------

                                                               $919,075   $591,813
                                                               ========   ========
</TABLE>


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

<TABLE>
<S>                                                                 <C>        
                  Year ending December 31:
                          1999                                      $    12,091
                          2000                                           17,041
                          2001                                           20,216
                          2002                                           20,898
                          2003                                           21,132
                  Thereafter (a)                                      1,090,936
                                                                    -----------

                     Less unaccreted discount                          (251,148)
                                                                    -----------

                                                                    $   931,166
                                                                    ===========
</TABLE>

         (a) Includes $500,000 and $312,448 of 10.5% senior secured discount
         notes and 13.875% senior discount notes, respectively, due at maturity.


                                      F-17

<PAGE>   35
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         SENIOR SECURED NOTES

         In May 1997, the Company issued $265,000 in senior secured notes (the
         Secured Notes) due May 1, 2007. The Secured Notes bear interest at a
         rate of 13.25% with semiannual interest payments due beginning November
         1, 1997. Approximately $93,790 of the proceeds were set aside to fund
         the first six scheduled interest payments. The remainder of the net
         proceeds were restricted to finance the cost of design, development,
         construction, acquisition, installation and integration of
         telecommunications equipment. The Secured Notes are secured by the
         assets financed with the proceeds and are subject to certain debt
         covenants.

         SENIOR SECURED DISCOUNT NOTES

         In May 1998, the Company issued $300,000 in 10.5% senior secured
         discount notes (the Senior Secured Discount Notes) maturing on May 1,
         2008. The Senior Secured Discount Notes were sold at a substantial
         discount and there will be no accrual of cash interest prior to May 1,
         2003, or payment of interest until November 1, 2003. The Senior Secured
         Discount Notes accrete to a total principal amount, due May 1, 2008, of
         approximately $500,000. The net proceeds from the sale of the Senior
         Secured Discount Notes are restricted to finance the cost of design,
         development, construction, acquisition, installation and integration of
         telecommunications equipment. The Senior Secured Discount Notes are
         secured by the assets financed with the proceeds and are subject to
         certain debt covenants.

         The Company is a party to a registration rights agreement relating to
         the Senior Secured Discount Notes whereby it agreed to consummate an
         exchange offer for the Senior Secured Discount Notes pursuant to an
         effective registration statement or cause the Senior Secured Discount
         Notes to be registered under the Securities Act of 1933, as amended,
         pursuant to a shelf registration statement by November 4, 1998.
         Although the Company has filed a registration statement on Form S-4
         with respect to an exchange offer for the Senior Secured Discount
         Notes, it has not yet been declared effective. Therefore, in accordance
         with the terms of the registration rights agreement, interest (in
         addition to the accrual of original issue discount and interest
         otherwise due on the Senior Secured Discount Notes after such date) on
         the Senior Secured Discount Notes accrue at an annual rate of 0.5%,
         beginning November 4, 1998, and are payable in cash semiannually in
         arrears, on each May 1 and November 1, commencing May 1, 1999, until
         such exchange offer is consummated or a shelf registration statement is
         declared effective. At December 31, 1998, the Company had accrued $396
         in additional interest related to the Senior Secured Discount Notes.


                                      F-18

<PAGE>   36
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         TOMEN FACILITY

         In October 1994, the Company entered into a master financing agreement
         with Tomen. Under the agreement, Tomen will loan up to $100,000 to
         subsidiaries of the Company for development and construction of network
         projects. As of December 31, 1998, Tomen had provided a total of
         $69,468 (of which $45,262 was outstanding at December 31, 1998) in debt
         financing to the Company's subsidiaries for construction and operation
         of fiber optic networks in southern California, New Mexico, Arizona and
         Hawaii. The Tomen financing is secured by equipment at the funded
         network locations and is subject to certain debt covenants.

         NTFC CAPITAL  CORPORATION (NTFC) AGREEMENT

         In March 1997, the Company entered into a $50,000 (all of which was
         outstanding at December 31, 1998) loan and security agreement with NTFC
         to finance the purchase of certain equipment from Northern Telecom,
         Inc. Amounts borrowed under the agreement bear interest at LIBOR plus
         3.5% and will be repaid in twenty quarterly installments beginning in
         March 1999. The loan is secured by the equipment purchased with the
         proceeds and subject to certain debt covenants.

         SIEMENS TELECOM NETWORKS (SIEMENS) AGREEMENT

         In September 1996, the Company entered into a loan and security
         agreement with Siemens. Under the terms of the agreement, Siemens will
         loan up to $226,000 to the Company for the purchase and installation of
         telecommunications switching and related equipment. At December 31,
         1998, $116,000 was available to the Company and $9,463 was outstanding.
         Amounts borrowed under the agreement initially bear interest at LIBOR
         plus 4.5% and are secured by the equipment. Such interest decreases to
         LIBOR plus 3.5% at the time each initial loan is converted to a term
         loan, which conversion occurs at the first calendar quarter following
         the initial loan. 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.

         SENIOR DISCOUNT NOTES

         In December 1995, 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 is no
         accrual of cash interest prior to December 15, 2000 or payment of
         interest until June 15, 2001. The Senior Notes accrete to a total
         principal amount, due December 15, 2005, of approximately $312,400 by
         December 15, 2000. The Senior Notes rank in right of payment with all
         unsubordinated indebtedness of the Company. On or after December 15,
         2000, the Senior Notes will be redeemable at the option of the Company.
         The Senior Notes are subject to certain debt covenants and are
         guaranteed by GST.



                                      F-19

<PAGE>   37
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         GUARANTEE OF PARENT'S DEBT

         The Company has guaranteed GST's Convertible Senior Subordinated
         Discount Notes (the Convertible Notes) totaling approximately $29,884
         at December 31, 1998. The Convertible Notes accrete to a total
         principal amount, due December 15, 2005, of approximately $38,856 by
         December 15, 2000. On or after December 15, 2000, the Convertible Notes
         will be redeemable at the option of the Company and GST. The
         Convertible Notes are subject to certain debt covenants.

         DEBT COVENANTS AND CLASSIFICATION OF LONG TERM DEBT

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

 (6)     SHAREHOLDER'S (DEFICIT) EQUITY

         COMMON STOCK

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

         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.

         STOCK-BASED COMPENSATION

         Certain employees of the Company are eligible for stock option and
         stock bonus awards of GST's common stock. Pursuant to performance-based
         awards, compensation cost recognized in the statements of operations
         for the year ended December 31, 1998, the three-month period ended
         December 31, 1997 and the years ended September 30, 1997 and 1996
         totaled $(447), $374, $2,521 and $574, respectively.


                                      F-20


<PAGE>   38
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

(7)      INCOME TAXES

         The provision for income taxes differs from the amount computed by
         applying the statutory income tax rate to net income before taxes for
         the year ended December 31, 1998, the three-month period ended December
         31, 1997 and the years ended September 30, 1997 and 1996 as follows:

<TABLE>
<CAPTION>
                                                  DECEMBER 31,   DECEMBER 31,   SEPTEMBER 30,   SEPTEMBER 30,
                                                     1998           1997            1997            1996
                                                  ------------   ------------   -------------   -------------
<S>                                               <C>            <C>            <C>             <C>
         Computed expected income tax expense
              (benefit) at statutory rate            (34)%          (34)%           (34)%           (34)%
         Expected state income tax
              expense (benefit)                       (4)            (4)             (4)             (4)
         Increase in valuation allowance              38             37              36              20
         Amortization of goodwill                      1              1               1               1
         Equity method accounting
          for joint venture                           --             --              --               1
         Effect of acquisition of new subsidiaries     1             --              --              11
         Non-deductible interest                      --              2               2               2
         Other                                        (2)             1              --               3
                                                     ---            ---             ---             ---

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



                                      F-21
<PAGE>   39
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      


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

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                    ---------------------
                                                       1998         1997
                                                    ----------    -------
<S>                                                 <C>           <C>     
         Deferred tax assets:
            Federal and state net operating
               loss carryforwards                   $   76,201    $ 53,530
            Non-deductible  interest                    39,199      11,998
            Other                                        3,320       4,484
                                                    ----------    -------

                  Total gross deferred tax assets      118,720      70,012

            Less valuation  allowance                 (109,481)    (61,581)
                                                    ----------    -------

                  Total deferred tax assets              9,239       8,431
                                                    ----------    -------

         Deferred tax liabilities:
            Furniture, fixtures and equipment,
               due to differences in depreciation        6,217       5,376
            Capitalized software/intangibles             3,022       3,490
                                                    ----------    -------
                  Total gross deferred tax
                       liabilities                       9,239       8,866
                                                    ----------    -------

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


         The valuation allowance for deferred tax assets as of October 1, 1995
         was $4,201. The net change in total valuation allowance for the year
         ended December 31, 1998, the three-month period ended December 31, 1997
         and for the years ended September 30, 1997 and 1996 was an increase of
         $47,900, $12,133, $34,062 and $11,185, respectively.


                                      F-22
<PAGE>   40
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      


         The Company has net operating losses for income tax purposes of
         approximately $208,864 available to reduce United States taxable income
         of future years, expiring as follows:

<TABLE>
<S>                                                            <C>     
                  2006                                         $    405
                  2007                                              537
                  2008                                            2,800
                  2009                                            5,020
                  2010                                           36,922
                  2011                                           64,283
                  2017                                           36,600
                  2018                                           62,297
                                                               ---------

                                                               $208,864
                                                               =========
</TABLE>

         Approximately 58% of these net operating losses may be utilized for
         state income tax purposes.

         Utilization of net operating losses may be subject to limitation in the
         event of certain substantial stock ownership changes pursuant to IRC
         Section 382 and referred to hereinafter as an ownership change. An
         ownership change would limit the utilization of any net operating
         losses incurred prior to the change in ownership date. The Company has
         completed an analysis under IRC Section 382 and has determined that no
         ownership change has occurred.

(8)      LEASES

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                             -----------------
                                                              1998       1997
                                                            --------   -------
<S>                                                         <C>        <C>    
                  Network facilities and equipment          $ 33,540   $27,003
                  Less accumulated amortization               (9,307)   (6,408)
                                                            --------   -------

                                                            $ 24,233   $20,595
                                                            ========   =======
</TABLE>

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


                                      F-23
<PAGE>   41
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      


         The Company also has noncancelable operating leases, primarily for
         facilities, which expire over the next five years. Rental expense under
         operating leases was $6,159, $1,114, $3,385, and $1,501 for the year
         ended December 31, 1998, the three-month period ended December 31, 1997
         and the years ended September 30, 1997 and 1996, respectively.

         Future minimum lease payments under noncancelable leases (with initial
         or remaining lease terms in excess of one year) and future minimum
         capital lease payments as of December 31, 1998 are:

<TABLE>
<CAPTION>
                                                                             CAPITAL   OPERATING
                                                                              LEASES     LEASES
                                                                             -------   ---------
<S>                                                                          <C>        <C>    
                  Year ending December 31:
                           1999                                              $10,661    $ 5,331
                           2000                                                7,430      4,266
                           2001                                                4,043      3,522
                           2002                                                3,476      3,422
                           2003                                                3,229      3,217
                      Thereafter                                              12,578      9,417
                                                                             -------    -------

                           Total minimum lease payments                       41,417    $29,175
                                                                             -------    =======

                  Less amounts representing interest (at rates
                       ranging from 9% to 17%)                                16,027
                                                                             -------

                                Net minimum lease payments                    25,390

                  Less current portion of obligations under capital leases     5,649
                                                                             -------

                  Obligations under capital leases, excluding current
                       portion                                               $19,741
                                                                             =======
</TABLE>


                                      F-24

<PAGE>   42
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

(9)      COMMITMENTS AND CONTINGENCIES

         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.

         EMPLOYMENT AGREEMENTS

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

         CONSTRUCTION CONTRACTS

         The Company has entered into an agreement to jointly construct a
         longhaul fiber and conduit network system. Pursuant to the agreement,
         the Company is committed to pay approximately $50,000 in construction
         costs during 1999. The Company is party to various other construction
         contracts arising in the ordinary course of business

(10)     LEGAL PROCEEDINGS

         (a)  GLOBAL AND CURRENT AND FORMER OFFICERS AND DIRECTORS

         On October 20, 1998, GST and GST Telecom, filed a Complaint in the
         Superior Court of California, County of Santa Clara, against Global and
         six current and former GST officers and directors (the Defendants). The
         Complaint includes claims for fraud, negligent misrepresentation,
         unjust enrichment, and unfair competition primarily related to the
         alleged misappropriation of a Mexican business opportunity. The
         complaint seeks an accounting, a constructive trust, and restitution of
         GST's interest in the opportunity and also seeks unspecified exemplary
         and punitive damages and attorneys' fees.

         On December 23, 1998, Defendants filed a motion to stay or dismiss the
         action on grounds of inconvenient forum, and four of the individual
         defendants filed a motion to dismiss the action for lack of personal
         jurisdiction. The Superior Court granted Defendants' motion to stay the
         proceedings on February 5, 1999, and GST and GST Telecom filed a notice
         of appeal on February 9, 1999.


                                      F-25
<PAGE>   43
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      


         On January 27, 1999, Global and GST Mextel, Inc. ("Mextel") filed a
         Complaint in the Supreme Court of British Columbia, against GST and GST
         Telecom. The Complaint, which arises from the same matters for which
         GST and GST Telecom brought such against Global et al. in the Superior
         Court of California, includes claims for declaratory and injunctive
         relief and unspecified general and special damages. GST denies
         liability, and will vigorously dispute the allegations in the
         Complaint.

         On January 28, 1999, five current or former GST officers or directors
         filed a Complaint in the Supreme Court of British Columbia against GST,
         GST Telecom and four current GST directors. The Complaint, which arises
         from the same matters for which GST and GST Telecom brought such
         against Global, et al, in the Superior Court of California, includes
         claims for oppression and declaratory relief, and seeks unspecified
         actual and punitive damages, cost, and attorneys' fees. GST and its
         directors deny liability, and will vigorously dispute the allegations
         in the Complaint.

         (b) DIRECTOR AND FORMER COUNSEL

         On December 16, 1998, GST, GST USA and GST Telecom filed a Complaint in
         the United States District Court, Southern District of New York,
         against a current director and a law firm which previously represented
         the Company as general counsel. The Complaint includes claims for
         professional negligence, breach of fiduciary duty, and breach of
         contract, and seeks compensatory damages and attorneys' fees.

         On February 12, 1999, the current director filed his Answer to the
         Complaint. The law firm filed its Answer and Counterclaims to the
         Complaint on February 17, 1999. The law firm counterclaimed against
         GST, GST USA and GST Telecom for breach of contract, unjust enrichment,
         quantum meruit, and "account stated," based on invoices submitted to
         GST of approximately $250. No trial date has been set.

         (c)  FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER

         On January 25, 1999, GST's former Chairman and Chief Executive Officer,
         filed a Complaint in the Superior Court of Washington, King County,
         against GST, GST USA and GST Telecom. The Complaint, which relates to
         the circumstances under which the former Chairman and Chief Executive
         Officer ceased to serve as an officer and director of GST, includes
         claims for breach of employment agreement, breach of the covenant of
         good faith and fair dealing, violation of wage statutes, and indemnity.


                                      F-26
<PAGE>   44
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         On February 23, 1999, GST answered by denying all liability and filed
         counterclaims against the former Chairman and Chief Executive Officer,
         Global and five other current or former officers and directors for
         liability with respect to the matters leading to the termination of the
         former Chairman and Chief Executive Officer's employment. In
         particular, GST seeks recovery under Washington law for matters
         described in note 10(a), above, as well as for breaches committed with
         respect to the wrongful use of GST funds for the purchase of
         telecommunications licenses.

         (d)  FORMER TREASURER

         On February 9, 1999, GST filed a Complaint in the Superior Court for
         the State of Washington, Clark County, against the former treasurer of
         the Company. The Complaint is based on alleged misconduct and includes
         claims for fraud, breach of fiduciary duty, unjust enrichment, and
         unfair business practices, and seeks an accounting, imposition of a
         constructive trust, compensatory damages, costs of suit, attorneys'
         fees, and treble damages. In particular, the Complaint seeks relief
         based on misuse of insider information in the purchase of stock,
         wrongful disbursements to third parties, and involvement in a
         fraudulent release of GST stock from escrow. The defendant has not yet
         responded to the Complaint.

         Pursuant to the guidance set forth in SFAS 5, Accounting for
         Contingencies, the Company has accrued certain loss provisions related
         to the legal proceedings detailed above. In the opinion of management,
         the ultimate disposition of such matters will not have a material
         adverse effect on the Company's consolidated financial position,
         results of operations or cash flows.

         The Company is also 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 consolidated financial position,
         results of operations or cash flows.


                                      F-27
<PAGE>   45
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

(11)     RELATED PARTY TRANSACTIONS

         MAGNACOM WIRELESS, LLC  (MAGNACOM)

         In 1996, the Company and Magnacom, a company owned by the Company's
         former Chairman and Chief Executive Officer, entered into a reseller
         agreement pursuant to which (i) the Company was to become a reseller of
         PCS services in markets in which Magnacom had obtained FCC licenses and
         (ii) Magnacom was to use the Company to provide switched local and long
         distance services in markets where the Company had operational
         networks. Pursuant to such agreement, the Company paid Magnacom $200,
         $0, $8,403 and $5,997 during the year ended December 31, 1998, the
         three months ended December 31, 1997, and the years ended September 30,
         1997 and 1996, respectively. In addition, the Company made operating
         advances to Magnacom of $925, $91 and $52 during the year ended
         December 31, 1998, the three months ended December 31, 1997 and the
         year ended September 30, 1997, respectively.

         In October 1998, Magnacom filed a petition for reorganization under
         Chapter 11 of the United States Bankruptcy Code. As a result, the
         Company wrote-off all amounts previously paid to Magnacom in the third
         quarter of 1998. The total write-off of approximately $15,668 is
         included in special charges in the accompanying consolidated statement
         of operations for the year ending December 31, 1998. The transactions
         with Magnacom form the basis for certain of the legal proceedings
         described in notes 10(b), 10(c) and 10(d).

         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 former Chairman and 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.

                                      F-28
<PAGE>   46
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

         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 up
         front fee of 1.50% of the aggregate principal amount of each project
         loan advanced and a commitment fee of .50% per annum on the unused
         portion of each project loan is payable to Tomen.

         Pursuant to the Tomen agreements, Tomen has purchased 1,586,595 shares
         of GST common stock for total cash consideration of $10,400 and holds a
         warrant to purchase an additional 75,000 shares of GST common stock at
         $12.61 per share, expiring in September 1999.

         OTHER

         The Company and GST paid approximately $1,929, $104, $2,066 and $2,264
         in legal fees during the year ended December 31, 1998, the three-month
         period ended December 31, 1997 and the years ended September 30, 1997
         and 1996, respectively, to a law firm having a member who is a director
         of the Company. As noted in note 10(b), the Company is currently in
         litigation with both the director and the related law firm.

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

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

         Payables to parent represent advances from GST to be used in
         constructing and operating the Company's telecommunications networks
         and the fair value of net assets transferred in certain business
         combinations.


                                      F-29
<PAGE>   47
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)
                      

(12)     SEGMENTS

         The Company has adopted SFAS No. 131, Disclosures about Segments of an
         Enterprise and Related Information. As an integrated communications
         provider, the Company has one reportable operating segment. While the
         Company's chief decision-makers monitor the revenue streams of various
         services, operations are managed and financial performance is evaluated
         based upon the delivery of multiple services over common network and
         facilities. This allows the Company to leverage its network costs in an
         effort to maximize return. As a result, there are many shared expenses
         generated by the various revenue streams; because management believes
         that any allocation of the expenses to multiple revenue streams would
         be impractical and arbitrary, management does not currently make such
         allocations internally. The chief decision-makers do, however, monitor
         revenue streams at a more detailed level than those depicted in the
         Company's historical general purpose financial statements. The
         following table presents revenues by service type:

<TABLE>
<CAPTION>
                                                 THREE-MONTH        YEARS ENDED
                                  YEAR ENDED    PERIOD ENDED       SEPTEMBER 30,
                                  DECEMBER 31,   DECEMBER 31,   ------------------
                                      1998           1997         1997      1996
                                  ------------   ------------   --------   -------
<S>                               <C>            <C>            <C>        <C>    
         Local services             $ 48,200        $ 7,034     $ 16,993   $ 3,934
         Long distance services       59,919         10,997       42,622    17,205
         Data services                 8,770          1,100        2,000        --
         Internet services             8,404          1,013        3,006     1,311
         Longhaul services            23,499          4,883       12,057     9,068
         Product                          --          7,300       21,982     9,573
         Other                         3,376            913        3,556       208
                                    --------        -------     --------   -------
         Total revenue              $152,168        $33,240     $102,216   $41,299
                                    ========        =======     ========   =======
</TABLE>

         Substantially all of the Company's revenue is attributable to customers
         in the United States. Additionally, all significant operating assets
         are located within the United States.

(13)     SPECIAL CHARGES

         Special charges for the year ended December 31, 1998 consist of (i) a
         $15,668 write-off of amounts paid to Magnacom (see note 12), (ii)
         $13,799 in charges for abandoned and impaired projects resulting from a
         change in the Company's strategic direction to focus on its core,
         domestic-based business, and (iii) $1,113 in costs related primarily to
         the severance of former members of management. Of such items, only the
         severance costs are accrued on the Company's balance sheet at December
         31, 1998, and the Company expects that such costs will be paid out in
         the first quarter of 1999.


                                      F-30
<PAGE>   48
                                  GST USA, INC.
                                and Subsidiaries
            Notes to Consolidated Financial Statements - (Continued)

(14)     FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts reported in the balance sheet for cash and cash
         equivalents, accounts and notes receivable, accounts payable and
         accrued expenses approximate fair values due to the short term
         maturities of those instruments. The carrying amounts for current and
         non-current restricted investments approximate fair value due to the
         composition of such investments and the related maturities. The
         carrying amount of unrestricted investments is based upon fair value as
         determined by quoted market prices.

         The following table details the carrying amounts and estimated fair
         values of publicly traded long-term debt (the financial instruments for
         which carrying value and estimated fair value differ at December 31,
         1998):

<TABLE>
<CAPTION>
                                                        DECEMBER 31, 1998
                                                      ---------------------
                                                      CARRYING       FAIR 
                                                       AMOUNT        VALUE
                                                      --------     --------
<S>                                                   <C>          <C>     
         Long-term debt:
            Senior secured notes, 13.25%              $265,000     $273,933
            Senior secured discount notes, 10.5%       320,997      239,555
            Senior discount notes, 13.875%             240,304      228,415
</TABLE>

         The fair value of publicly traded long-term debt is estimated based on
         quoted market prices. For substantially all other long-term debt,
         carrying amounts approximate fair values as incremental borrowings
         available to the Company are at similar rates and 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 impact the
         estimates.

                                      F-31
<PAGE>   49
                                  GST USA, INC.

                          Financial Statement Schedule

                           December 31, 1998 and 1997

                   (With Independent Auditors' Report Thereon)
<PAGE>   50
                          INDEPENDENT AUDITORS' REPORT



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


Under date of March 1, 1999, we reported on the consolidated balance sheets of
GST USA, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's (deficit) equity, and cash
flows for the year ended December 31, 1998, the three-month period ended
December 31, 1997, and for each of the years in the two-year period ended
September 30, 1997, which are included in the annual report on Form 10-K for the
year ended December 31, 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedule as listed in the accompanying
index. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.

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

                                    /s/ KPMG Peat Marwick LLP






Portland, Oregon
March 1, 1999
<PAGE>   51
GST USA, Inc.
Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                Balance at     Charged     Written off   Balance at
                                                beginning    to bad debt     against         end
          Allowance for doubtful accounts       of period      expense       expense      of period
         ------------------------------------------------------------------------------------------
<S>                                             <C>          <C>           <C>           <C>
         Year ended December 31, 1998              3,956        4,647         3,121         5,482 

         Three months ended December 31, 1997      3,567        1,541         1,152         3,956 

         Year ended September 30, 1997             1,264        5,722         3,419         3,567 

         Year ended September 30, 1996             1,402        1,809         1,947         1,264 
</TABLE>



                                      S-2
<PAGE>   52
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 30th day of March, 1999.

                                        GST USA, INC.



                                                 By:   /s/ Robert A. Ferchat
                                                     --------------------------
                                                 Robert A. Ferchat
                                                 Chairman of the Board


                                POWER OF ATTORNEY

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

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities on March 30, 1999.

<TABLE>
<CAPTION>
         SIGNATURE                                TITLE
         ---------                                -----
<S>                               <C>
  /s/ Robert A. Ferchat           Chairman of the Board and Director
-------------------------------
     (Robert A. Ferchat)

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

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

  /s/ Daniel L. Trampush          Senior Vice President and Chief Financial 
-------------------------------   Officer (Principal Financial Officer)
     (Daniel L. Trampush)
</TABLE>
<PAGE>   53
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
-------
<S>       <C>
  *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.

 #4(d)   Indenture dated as of May 4, 1998 by and among GST Telecommunications,
         GST USA, Inc., GST Network Funding, Inc. and the United States Trust
         Company of New York, as trustee.

##10(a)  Stock Purchase Agreement dated December 31, 1997 by and among GST
         Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
         incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
         January 6, 1997.

#10(b)   Placement Agreement dated April 29, 1998 by and among GST
         Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc., and
         several Placement Agents named in Schedule I thereto.

#10(c)   Registration Rights Agreement dated May 4, 1998 by and among GST
         Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc. and
         Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., Credit
         Suisse First Boston Corporation and SBC Warburg Dillon Read Inc.

#10(d)   Collateral Pledge and Security Agreement dated as of May 4, 1998 from
         GST Network Funding, Inc. to United States Trust Company of New York,
         as trustee.

#10(e)   Reimbursement and Commitment Fee Agreement dated May 4, 1998 among GST
         Telecommunications, Inc., GST USA, Inc. and GST Network Funding, Inc.

###27    Financial Data Schedule.
</TABLE>

-------------------

*        Incorporated by reference to GST USA's Registration Statement on Form
         S-4 (No. 333-33601-02).

**       Incorporated by reference to GST's Quarterly Report on Form 10-Q for
         the period ended June 30, 1997.

***      Incorporated by reference to GST's Annual Report on Form 20-F for the
         fiscal year ended September 30, 1995.

#        Incorporated by reference to GST's Form 8-K filed May 19, 1998.

##       Incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
         January 6, 1998.

###      Filed herewith.