SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended SEPTEMBER 30, 1997

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

For the transition period from _________ to ___________

                         Commission file number 1-12866

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

                 Canada                                      N/A
   ------------------------------------         --------------------------------

     (State or other jurisdiction of            (IRS Employer Identification
      incorporation or organization                        Number)

                  4001 Main Street, Vancouver, Washington       98663
--------------------------------------------------------------------------------
              (Address of Principal Executive Offices)         (Zip Code)

       Registrant's telephone number, including area code: (360) 906-7100

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

                                                     Name of Each Exchange
       Title of Each Class                           on Which Registered
       -------------------                           -------------------

Common Shares, without par value                     American Stock Exchange

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

                                      None

                  Indicate by check mark  whether the  Registrant  (1) has filed
all  reports  required  to be filed  by  Section  13 or 15(d) of the  Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter  period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /

<PAGE>
                  Indicate  by check mark if  disclosure  of  delinquent  filers
pursuant to Item 405 of Regulation S-K is not contained herein,  and will not be
contained,  to the best of the  Registrant's  knowledge,  in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /

                  The  aggregate  market  value  at  December  22,  1997  of the
Registrant's  Common Shares,  without par value (based upon the closing price of
$11.625  per  share of such  Shares on the  American  Stock  Exchange),  held by
non-affiliates of the Company was approximately $366,209,924.60.  Solely for the
purposes of this  calculation,  shares  held by  directors  and  officers of the
Registrant  have  been  excluded.   Such  exclusion   should  not  be  deemed  a
determination  or an admission by the Registrant that such  individuals  are, in
fact, affiliates of the Registrant.

                  Indicate  the  number  of  shares  outstanding  of each of the
issuer's classes of common stock, as of the latest practicable date: At December
22, 1997, there were outstanding  34,547,147 of the Registrant's  Common Shares,
without par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  Certain   portions  of  the   Registrant's   definitive  proxy
statement to be filed not later than January 28, 1998 pursuant to Regulation 14A
are  incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.



<PAGE>
ITEM 1.   BUSINESS

OVERVIEW

         GST Telecommunications,  Inc. (the "Company") provides a broad range of
integrated  telecommunications  products  and  services,  primarily  to business
customers  located in the western  continental  United  States and Hawaii.  As a
facilities-based  competitive  local  exchange  carrier  ("CLEC"),  the  Company
operates state-of-the-art, digital telecommunications networks that represent an
alternative to incumbent local exchange carriers  ("ILECs").  The Company's full
line  of   products,   which  offer  a   "one-stop"   solution   to   customers'
telecommunications services requirements,  include long distance, Internet, data
transmission and private line services, and local dial tone services, which were
recently introduced.

         The Company's  digital networks  currently serve 39 markets in Arizona,
California,  Hawaii, Idaho, New Mexico, Texas and Washington.  In addition,  the
Company has networks under construction which, when completed,  will serve three
additional markets and expand its regional footprint to Oregon. The Company also
constructs, markets and manages longhaul fiber optic facilities,  principally in
Arizona,  California and Hawaii.  The Company's  longhaul fiber optic facilities
currently  extend  approximately  600 route miles and an additional  1,100 route
miles are expected to become operational over the next 12 months.

         Management believes that the Company has an opportunity to leverage its
existing network  infrastructure  and service  capabilities to provide customers
with an integrated  telecommunications  package. The  Telecommunications  Act of
1996  (the  "Telecommunications  Act")  and state  regulatory  initiatives  have
substantially  changed  the  telecommunications  regulatory  environment  in the
United States. As a result of these regulatory changes, the Company is permitted
in  certain  states to  provide  local  dial tone in  addition  to its  existing
telecommunications   service   offerings.   In  order  to  capitalize  on  these
opportunities,  the  Company  has  accelerated  the  development  of  additional
networks  and  longhaul   fiber  optic   facilities   within  its  region  while
significantly  expanding  its  product  and service  offerings,  primarily  with
respect to the provision of local  services.  To facilitate its entry into local
services,  the Company has in service seven high capacity digital switches,  has
installed and is currently testing two additional high capacity digital switches
and is planning to deploy an additional five such switches through early 1998.

TELECOMMUNICATIONS SERVICES STRATEGY

         In conjunction with its network expansion,  the Company has developed a
strategy to leverage its existing facilities and  infrastructure,  customer base
and  experience  by  providing  a broad range of  integrated  telecommunications
services to meet the voice and data needs of its end-user customers. The Company
focuses   on  small   to   medium-sized   businesses   that   have   significant
telecommunications  requirements.  The Company,  through its  established  sales
channels,  offers: (i) bundled local and long distance  services;  (ii) flexible
pricing and  customized  products and services;  and (iii) an enhanced  level of
customer  service.  To meet its customers' needs, the Company offers a number of
telecommunications services, including:

         LOCAL SERVICES

         Where regulatory  conditions  permit,  the Company offers both switched
and  dedicated  local  service.   Dedicated  local  services   involve  a  fixed
communications  link,  usually between an end-user and a long distance carrier's
point-of  presence  ("POP").  With a switch,  it is possible  for the Company to
direct  traffic to any  end-user  or long  distance  carrier  provided  that the
Company has an interconnection agreement with the connecting carriers.


                                       -1-

<PAGE>
         To facilitate its entry into local services, the Company has in service
seven high capacity digital switches, has installed and is currently testing two
additional  high  capacity  digital  switches  and  is  planning  to  deploy  an
additional  five such  switches  through  early 1998.  As demand  warrants,  the
Company  plans to continue to install  switching  equipment  in its  operational
networks,  in markets  where it is  constructing  networks and in certain  other
cities where the Company will rely on ILEC facilities for  transmission.  Once a
switch  is  operational,   where  regulatory   conditions  and   interconnection
agreements  permit, the Company intends to offer local dial tone, in addition to
enhanced services such as integrated services digital network ("ISDN"), Centrex,
voice mail and other custom calling features.

         LONG DISTANCE SERVICES

         Under federal  regulations,  the Company is permitted to provide a full
range of interstate  switched access as well as enhanced  services.  The Company
offers basic and enhanced long  distance  services,  such as toll free,  calling
card,  prepaid  calling card and  international  call back  services,  targeting
primarily business customers purchasing between $200 and $15,000 of services per
month as well as  resellers  and other  carriers.  The  Company  purchases  long
distance  capacity under  agreements  with certain major long distance  carriers
that  provide the Company  capacity at rates that vary with the monthly  traffic
generated by the Company.

         The Company recently  expanded its long distance  products and services
through the acquisition of Action Telcom Co. ("Action  Telcom") for an aggregate
of 903,000 Common Shares valued at approximately $8.2 million,  and $3.9 million
in cash,  payable in three  equal  installments  at closing and on the first and
second anniversary dates thereof.  Additional Common Shares may be issued to the
former   shareholders  of  Action  Telcom  on  each  of  the  first  and  second
anniversaries  of the  closing  date of the merger if the average  closing  sale
price of a Common Share on the AMEX (or the  Company's  then  principal  trading
market) does not exceed $10.00 for the 10 consecutive  trading days ending three
trading days prior to each such anniversary. Action Telcom is a facilities-based
telecommunications  company  located in  Abilene,  Texas that  operates  its own
network and switching  equipment,  originating  and  terminating its own traffic
principally in Texas. The Company intends to continue to pursue  acquisitions of
long distance carriers.

         INTERNET SERVICES

         The Company presently offers  Internet-related  services in most of its
markets,  such as  dedicated  Internet  services,  World Wide Web  ("Web")  site
development  and  hosting,  provides  access and  upstream  transport  for local
Internet Service  Providers  ("ISPs"),  electronic data interchange  ("EDI") and
electronic  commerce  services  and  is in the  process  of  developing  various
Internet  software  applications.  The  Company  also  offers  dial-up  Internet
services to customers in Portland (Oregon), Vancouver (Washington), the State of
Hawaii and select  markets in  California  and  intends to begin  offering  such
services in the Los Angeles,  San  Francisco and Houston  metropolitan  areas in
1998. Management believes that these services will become an important component
of the Company's overall product offerings and intends to continue to expand its
Internet access and service business to other markets.

         DATA SERVICES

         The Company offers national and  international  frame relay services on
its own frame relay  network and through  interconnection  agreements  with data
service  providers.  Under these  agreements,  the Company and such data service
providers  have agreed to link their data  networks and  terminate one another's
traffic. The Company has deployed Cascade Communications frame relay switches in
21 markets in the western  United  States.  Such switches can provide both frame
relay and Internet services. The Company plans to offer data networking services
such as asynchronous transfer mode ("ATM"), high speed LAN connectivity service,
video conferencing, multi-media networking, frame relay and high capacity


                                       -2-


<PAGE>
access to the Internet. The Company has one ATM switch commercially  operational
in each of Los Angeles and Ontario, California.

         The Company offers its customers  monthly  network  management  reports
that allow users to track the  performance  of their  virtual  private  network.
Customer network  management support will permit customers to monitor and tailor
their  virtual  private  network as desired with a  communication  link into the
Company's network management systems.

         SHARED TENANT SERVICES

         The  Company  offers  shared  tenant  services to large  apartment  and
residential  communities  in Idaho,  New Mexico,  Oregon,  Utah and  Washington.
Shared tenant  services  bundle local,  long distance,  Internet  access,  cable
television and home alarm service.

         The  Company  provides  local dial tone  service  to its shared  tenant
customers  through  on-site PBX telephone  systems located within each apartment
complex that are connected to the ILEC.  As the Company  expands its network and
central office switching  facilities,  PBXs will be replaced with central office
access nodes originating from the Company's own dial tone facilities,  which the
Company  expects  to provide  significant  cost  savings  and  customer  feature
capability.  In addition,  the Company is in the process of connecting apartment
communities to its own fiber network,  thereby permitting the Company to realize
additional cost savings for transport.

         The  Company is  expanding  its  telecommunications  services  business
through  internal  development  and will continue to explore  opportunities  for
further expansion by acquisitions and joint ventures.

TELECOMMUNICATIONS NETWORK STRATEGY

         The Company's network strategy is to continue to develop and expand its
network  infrastructure to ultimately  assemble,  through a combination of owned
and leased facilities and joint ventures, an integrated regional network for the
on-net  provision of CLEC services  including  local,  long  distance,  Internet
access and data  services.  The  Company  will  continue to focus on the western
United  States  in order to take  advantage  of its  strategically  advantageous
position in California and Hawaii and the substantial telecommunications traffic
that exists among the western United States, Mexico, the Pacific Rim and western
Canada. Key elements in this strategy include:

         INITIAL  DEPLOYMENT.  The Company has identified  attractive markets in
its region and has sought to be one of the first  CLECs to obtain the  necessary
permits,  rights-of-way  and licenses to construct  and operate  networks in its
targeted markets. Initial network deployment is designed to provide connectivity
among the  Company's  facilities,  selected long distance  carriers'  POPs,  the
ILEC's central offices and the market's primary business  centers.  In addition,
the  Company  may  deploy  network  facilities  in markets  where it  achieves a
critical mass of customers using resold or leased facilities.

         EXPANSION.  Subsequent to initial network deployment, the Company seeks
to expand its network in a geographic area to efficiently address a large number
of  significant  users  of  telecommunications   services.  To  facilitate  this
expansion,  the Company has entered into strategic  agreements  with a number of
gas and  electric  utilities.  These  arrangements  have  enabled the Company to
obtain  access  to and  use  of  rights-of-way,  conduit  and  transmission  and
distribution facilities in a timely and cost-effective manner.

         INTERCONNECTION.   Management   believes   that  the  formation  of  an
integrated  regional  network  through  the  interconnection  of  the  Company's
individual  networks  will  provide  significant  advantages.   In  addition  to
providing the Company with a larger addressable  market, the  interconnection of
its  networks  is  expected  to allow the  Company  to carry its  intra-regional
telecommunications traffic on-net, thereby


                                       -3-


<PAGE>
improving  operating  margins by reducing  payments to other carriers for use of
their facilities, as well as to lease longhaul transport capacity to others.

         The  Company's  network  strategy  is best  evidenced  in the States of
California and Hawaii.  In  California,  the Company holds two  Certificates  of
Public Convenience and Necessity  ("CPCNs") from the California Public Utilities
Commission  ("CPUC"),  which allows the Company to install its fiber optic cable
along existing  public utility  corridors,  and has a statewide pole  attachment
agreement,  which enables the Company to expand its  infrastructure  without the
delays typically experienced in obtaining individual licenses and rights-of-way.

         In Hawaii,  the  Company  operates a digital  microwave  network and is
supplementing its microwave network with terrestrial fiber optic facilities. The
Company  has also  constructed  an  inter-island  fiber  network  to extend  its
services  throughout  the State.  The Hawaii Public  Utilities  Commission  (the
"HPUC") has approved the network  interconnection  agreement and pole attachment
and conduit occupancy agreements of GST Telecom Hawaii, Inc. ("GST Hawaii") with
GTE  Hawaiian  Telephone  Company  ("GTE").  The  Company  is in the  process of
completing its  connections to GTE's Hawaiian  network and installing  necessary
facilities and equipment.  GST Hawaii has also received the HPUC's approval of a
master   license/lease   agreement  with  Hawaiian   Electric  Company  and  its
subsidiaries  to place fiber optic cable on poles and in certain  facilities  on
all islands other than Kauai.

         The Company  recently  began to construct,  market and manage  longhaul
fiber optic facilities and plans to ultimately  assemble an integrated  regional
network for the on-net  provision of services and to lease longhaul  capacity to
others.

TELECOMMUNICATIONS NETWORKS AND FACILITIES

         The Company's networks comprise fiber optic cables,  microwave or other
wireless facilities, integrated switching facilities, advanced electronics, data
switching equipment, transmission equipment and associated wiring and equipment.
The  Company  typically  designs  its  networks  with a ring  architecture  with
connectivity to the ILEC's central offices,  POPs of long distance  carriers and
large concentrations of telecommunication intensive end-users.

         The  following  table  presents  information  as of September  30, 1997
concerning the Company's networks that are operational and under construction:


                                       -4-
<PAGE>
<TABLE>
<CAPTION>

                                                                               CURRENT
                                                            DATE             OPERATIONAL        ESTIMATED
                                                        COMMERCIALLY            ROUTE             ROUTE            APPROXIMATE
        LOCATION             SERVICE AREA              OPERATIONAL(1)          MILES(2)          MILES(3)         POPULATION(4)
        --------             ---------------        ------------------     -------------     -------------      ---------------
<S>                        <C>                      <C>                              <C>                 <C>            <C>
Arizona.................   Phoenix                  February 1994(5)                 12                                 984,403
                           Tucson                   September 1995                   27                                 405,390
California
   Northern California...  Concord, Oakland,        September 1997                   15                  22           1,324,859
                           San Francisco,
                           Walnut Creek,
                           Livermore
                           Hayward, San Ramon       September 1997                   11                                 146,801
                           Mare Island              January 1997                     12                   3               1,000
                           Pleasanton               August 1996                       8                                  50,553
   Southern California.... Loma Linda, Rialto,      April 1995                      106                                 541,195
                           Riverside, San
                           Bernardino, Monterey
                           Park
                           City of Industry,        August 1995                      46                                 133,779
                           Ontario
                           Los Angeles              December 1996                    --(6)                            3,485,398
                           Palm Springs             2nd Quarter 1998(7)                                  10              40,181
                           Pasadena                 1st Quarter 1998                                     11             131,591
   San Joaquin Valley..... Fresno, Bakersfield      November 1996                    44                   6             529,022
   Central Coast........   San Luis Obispo          4th Quarter 1997                                      5              41,958
                           Santa Barbara,           2nd Quarter 1998                                     17             171,571
                           Goleta
Hawaii..................   Honolulu (Oahu)          February 1997                    20                                 365,272
Idaho...................   Boise                    May 1997                          4                   1             125,738
New Mexico..............   Albuquerque              January 1996                     67                   5             384,736
Oregon..................   Portland                 1st Quarter 1998                                     54             437,319
Texas...................   Abilene                  June 1997                         1                                 106,654
Washington..............   Spokane                  September 1996                    3                                 177,196
                           Vancouver                November 1996                     6                   8              46,380
</TABLE>
--------------------------------------
(1)      Refers  to  the  month  during  which  the  Company's   network  became
         commercially  operational  or the  quarter  during  which  the  Company
         expects a network under construction to become operational. The Company
         deems a network to be  commercially  operational  when its fiber  optic
         cable and related electronics permit the Company to provide service.

(2)      Includes  owned and leased  miles  utilized by the  networks  that have
         become commercially operational.

(3)      Represents  the planned  owned and leased miles that will  comprise the
         network  under  construction  at the time the  network is  expected  to
         become  commercially   operational  or  miles  under  construction  for
         networks that have become commercially operational.

(4)      Based upon U.S. Census Bureau data.

(5)      The Company  acquired 100%  ownership of Phoenix  Fiber,  the owner and
         operator of the Phoenix Network,  in October 1996.  Prior thereto,  the
         Company held a 50% interest in and did not manage this network.

(6)      The network in Los Angeles interconnects longhaul traffic with the POPs
         of other carriers.

(7)      The fiber  lease and fiber  are in  place,  however  the  system is not
         operational  and no lease  payments  are  being  made on  account  of a
         dispute between Southern  California Edison Company ("SCE") and various
         property owners regarding SCE's power line right-of-way.


                                       -5-

<PAGE>
         The Company's decision to construct a network in a particular locale is
preceded  by a  review  of the  area's  demographic,  economic  and  competitive
characteristics  and   telecommunications   requirements.   The  characteristics
examined include location and concentration of potential business,  governmental
and academic end-users,  the locale's economic prospects,  information regarding
demand for the various  services offered by the Company and actual and potential
ILEC,  CLEC and other  competitors.  Market  demand is  estimated  using  market
research  conducted  by the  Company  and from  information  such as demand sets
provided by interexchange carriers ("IXCs").

         The  Company's  networks are  monitored by its network  control  center
located at the Company's corporate  headquarters in Vancouver,  Washington.  The
control  center is staffed by 28 employees  and provides  network  monitoring 24
hours a day, seven days a week.  Advanced  monitoring systems allow personnel to
diagnose and resolve  problems,  generally  before customers detect a meaningful
deterioration in service quality.

         The  Company  plans to  continue  to develop  and  expand  its  network
infrastructure to ultimately assemble, through a combination of owned and leased
facilities and joint  ventures,  an integrated  regional  network for the on-net
provision of CLEC services.

         The  following  table  presents  information  as of September  30, 1997
concerning the Company's  longhaul fiber optic  facilities  that are operational
and under construction:

<TABLE>
<CAPTION>
                                                                DATE                   CURRENT
                                                            COMMERCIALLY             OPERATIONAL             ESTIMATED
LOCATION                                                   OPERATIONAL(1)           ROUTE MILES(2)        ROUTE MILES(3)
--------                                                   --------------           --------------        --------------

<S>                                                    <C>                                    <C>                   <C>
Rialto to Oakland....................................  1st Quarter 1998                                             556
Los Angeles to San Luis Obispo.......................  3rd Quarter 1998                                             367
Ontario to Anaheim to Los Angeles....................  March 1997                              83
Rialto to Palm Springs...............................  2nd Quarter 1998(4)                                           54
Taft to Bakersfield..................................  May 1997                                39
Coalinga to Fresno...................................  November 1996                           44
Taft to Coalinga.....................................  1st Quarter 1998                                             102
Phoenix to Tucson....................................  4th Quarter 1997                                             217
Hawaii Fiber connecting Kauai, Hawaii, Oahu,
   Molokai, Maui & Lanai.............................  June 1997                               344                  
</TABLE>

-------------------------------------
(1)      Refers to the month the facilities became  commercially  operational or
         the quarter  during  which the Company  expects  the  facilities  under
         construction to become operational. The Company deems the facilities to
         be  commercially  operational  when its fiber  optic  cable and related
         electronics permit the Company to provide service.

(2)      Includes  owned  and  leased  miles  of  facilities  that  have  become
         commercially operational.

(3)      Represents  the planned  owned and leased miles that will  comprise the
         facilities  under  construction at the time the facilities are expected
         to become commercially operational.

(4)      The fiber  lease and fiber  are in place,  however,  the  system is not
         operational  and no lease  payments  are  being  made on  account  of a
         dispute between SCE and various  property owners  regarding SCE's power
         line right-of-way.

         The  following  table  presents  information  as of September  30, 1997
concerning the Company's high capacity  digital switches that are operational or
are planned to be installed:


                                       -6-


<PAGE>
<TABLE>
<CAPTION>
                                                                                               DATE COMMERCIALLY
                           LOCATION                                                             OPERATIONAL(1)
                           --------                                                    ---------------------------

<S>                        <C>                                                         <C> 
Arizona                    Phoenix..................................................   August 1997
                           Tucson...................................................   September 1997
California                 Fresno...................................................   1st Quarter 1998
                           Los Angeles..............................................   1st Quarter 1998
                           Riverside................................................   July 1997
                           San Francisco............................................   1st Quarter 1998
                           San Luis Obispo..........................................   4th Quarter 1997
                           Walnut Creek.............................................   4th Quarter 1997
Hawaii                     Honolulu.................................................   February 1997
Idaho                      Boise....................................................   4th Quarter 1997
New Mexico                 Albuquerque..............................................   September 1997
Oregon                     Portland (Vancouver, Washington).........................   1st Quarter 1998
Texas                      Houston..................................................   1st Quarter 1998
Washington                 Spokane..................................................   4th Quarter 1997
</TABLE>

--------------------
(1)      Refers to the month during which the switch became  operational  or the
         quarter  during  which  the  Company   expects  the  switch  to  become
         operational.

MANUFACTURING

         The Company, through its equipment subsidiary, NACT Telecommunications,
Inc. ("NACT"),  produces advanced  telecommunications  switching  platforms with
integrated applications software and network telemanagement capabilities. NACT's
customers  include long  distance  carriers,  prepaid debit  (calling)  card and
prepaid  cellular  network   operators,   international   callback/reorigination
providers  and other  specialty  telecommunications  service  providers.  NACT's
products  and  services  include the STX  application  switching  platform  (the
"STX"),  the NTS  telemanagement  and billing  system (the "NTS") and facilities
management  services.  The  Company  acquired  the stock of NACT over a 19-month
period commencing in September 1993 for aggregate consideration of approximately
$8.9  million,  consisting  of cash  and  Common  Shares.  In March  1997,  NACT
completed an initial public offering of its common stock (the "NACT  Offering"),
pursuant to which the Company and NACT sold one million and two million  shares,
respectively, of NACT's common stock, resulting in gross proceeds to the Company
and NACT of $10 million and $20 million,  respectively.  As a result of the NACT
Offering,  the Company's interest in NACT has been reduced to approximately 63%.
On September 30, 1997, the Company  announced  that it had retained  Hambrecht &
Quist LLC to explore  alternatives  for  monetizing  its 63%  interest  in NACT,
including a potential  sale of some or all of its shares of NACT's capital stock
to one or more strategic investors.

COMPETITION

         The telecommunications industry is highly competitive. In most markets,
the Company's  principal  competitor for local exchange services is the Regional
Bell Operating Company ("RBOC") or GTE Corporation and its affiliated  companies
(collectively,  the "GTE Companies"). Other competitors may include other CLECs,
microwave  and satellite  carriers,  wireless  telecommunications  providers and
private networks built by large end-users.  Potential competitors (using similar
or different  technologies)  include cable television  companies,  utilities and
RBOCs  outside  their current  local  service  areas.  In addition,  the Company
anticipates  competition from large long distance  carriers,  such as AT&T Corp.
("AT&T"),   MCI  Communications   Corporation  ("MCI")  and  Sprint  Corporation
("Sprint"),  which  have  begun  to offer  integrated  local  and long  distance
telecommunications  services.  AT&T also has  announced  its  intention to offer
local   services   using   a   new   wireless   technology.   Consolidation   of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, as well as the development


                                       -7-


<PAGE>
of new  technologies,  could give rise to  significant  new  competitors  to the
Company.  In addition,  a  continuing  trend toward  business  combinations  and
strategic  alliances  in the  telecommunications  industry  may further  enhance
competition. For example, WorldCom Inc. ("WorldCom") acquired MFS Communications
Company,  Inc. ("MFS") and recently  announced that it entered into an agreement
to acquire Brooks Fiber Properties Inc.  ("Brooks"),  each of which compete with
the Company in several of the markets in which the Company operates. The Company
cannot  determine  what  effect  such  acquisitions  will have on the  Company's
business, financial condition and results of operations.

         As a  recent  entrant  in the  integrated  telecommunications  services
industry,  the  Company  has not  achieved  and does not  expect  to  achieve  a
significant market share for any of its services. In particular,  the RBOCs, the
GTE  Companies  and  other  local   telephone   companies   have   long-standing
relationships  with their  customers,  have  financial,  technical and marketing
resources substantially greater than those of the Company, have the potential to
subsidize  competitive  services with revenues from a variety of businesses  and
currently  benefit from certain  existing  regulations that favor the ILECs over
the Company in certain  respects.  While recent  regulatory  initiatives,  which
allow CLECs such as the Company to interconnect  with ILEC  facilities,  provide
increased  business   opportunities  for  the  Company,   such   interconnection
opportunities  have been  accompanied by increased  pricing  flexibility for and
relaxation of regulatory oversight of the ILECs.

         To the extent the Company  interconnects with and uses ILEC networks to
service its  customers,  the Company will be dependent  upon the  technology and
capabilities  of the  ILECs  to meet  certain  telecommunications  needs  of the
Company's  customers  and to maintain  its service  standards.  The Company will
become increasingly dependent on interconnection with ILECs as switched services
become a greater percentage of the Company's  business.  The  Telecommunications
Act imposes interconnection  obligations on ILECs, but there can be no assurance
that the  Company  will be able to obtain the  interconnection  it  requires  at
rates,  and on terms and  conditions,  that permit the Company to offer switched
services at rates that are  simultaneously  competitive and  profitable.  In the
event that the Company  experiences  difficulties  in  obtaining  high  quality,
reliable and reasonably priced service from the ILECs, the attractiveness of the
Company's services to its customers could be impaired.

         The  long   distance   telecommunications   industry   has   relatively
insignificant  barriers  to  entry,  numerous  entities  competing  for the same
customers  and a high average churn rate,  as customers  frequently  change long
distance  providers  in response to the  offering of lower rates or  promotional
incentives by  competitors.  The Company  competes  with major  carriers such as
AT&T,  MCI,  Sprint and  WorldCom,  as well as other  national and regional long
distance  carriers and resellers,  many of whom are able to provide  services at
costs that are lower than the Company's current costs. Many of these competitors
have greater financial,  technological and marketing resources than the Company.
In addition, as a result of the  Telecommunications  Act, the RBOCs are expected
to become  competitors  in the long  distance  telecommunications  industry both
outside  of  their  service  territory  and  upon the  satisfaction  of  certain
conditions,  within their  service  territory.  SBC  Communications  Corporation
("SBC") has challenged the constitutionality of the provisions conditioning RBOC
entry  into  in-region  long  distance  service.  As a result  of the  Company's
acquisition of Action Telcom,  Call America  Business  Communications  Corp. and
certain of its affiliated companies (collectively, "GST Call America"), TotalNet
Communications, Inc. ("TotalNet") and the business of Texas-Ohio Communications,
Inc. and affiliated companies (collectively,  "Texas-Ohio"),  the Company's long
distance  operations  will account for a  significant  portion of the  Company's
revenues.  The Company believes that the principal competitive factors affecting
its long distance  operations are pricing,  customer service,  accurate billing,
clear pricing policies and, to a lesser extent, variety of services. The ability
of the Company to compete  effectively will depend upon its continued ability to
maintain high quality,  market driven  services at prices  generally equal to or
below those charged by its competitors. To maintain its competitive posture, the
Company  believes that it must be in a position to reduce its prices in order to
meet reductions in rates, if any, by others. Any such reductions could adversely
affect the Company.


                                       -8-


<PAGE>
         The  Internet  services  market  is  highly  competitive.  There are no
substantial  barriers to entry,  and the Company expects that  competition  will
continue to intensify. The Company's competitors in this market include Internet
service providers, other telecommunications companies, online services providers
and  Internet  software  providers.  Many  of  these  competitors  have  greater
financial,  technological  and marketing  resources than those  available to the
Company.

         The market for  telecommunications  products is highly  competitive and
subject to rapid  technological  change. NACT expects competition to increase in
the future from existing competitors in the distributed switching systems market
and from other  companies  that may enter  NACT's  existing  or future  markets,
including  major central office switch vendors.  NACT currently  competes with a
number of lower capacity switch  manufacturers  such as  Communications  Product
Development,  Inc. ("CPDI"), Integrated Telephony Products, Inc. ("ITP") and PCS
Telecom,  Inc.  ("PCS  Telecom").  NACT also  competes  with  providers  of open
architecture  (programmable)  hardware switching  platforms that are enhanced by
applications  providers  and value added  resellers.  Such  competitors  include
Excel, Inc. ("Excel"), which has agreements with software application providers.
As NACT's  business  develops  and it seeks to market its  switches to a broader
customer   base,   NACT's    competitors   may   include   larger   switch   and
telecommunications  equipment  manufacturers  such as Lucent  Technologies Inc.,
Harris  Corporation,  Siemens AG,  Alcatel  Alsthom,  Telefonaktiebolaget,  L.M.
Ericsson  and  Northern  Telecom,  Ltd.  Many of NACT's  current  and  potential
competitors  have  substantially  greater  financial,  technical  and  marketing
resources than NACT. Increased competition could materially and adversely affect
NACT's  business,  financial  condition and results of operations  through price
reductions and loss of market share. There can be no assurance that NACT will be
able to continue to compete  successfully with its existing  competitors or that
it will be able to compete successfully with new competitors.

         The  recent  World  Trade  Organization   ("WTO")  agreement  on  basic
telecommunications   services  could  increase  the  Company's  competition  for
telecommunication  services both  domestically and  internationally.  Under this
agreement,  the United States and other members of the WTO committed  themselves
to opening their telecommunications markets to competition and foreign ownership
and  to   adopting   regulatory   measures   to  protect   competitors   against
anticompetitive  behavior by dominant  telephone  companies,  effective  in some
cases as early as January 1, 1998.

SALES CHANNELS AND CUSTOMER SUPPORT

         The Company markets its services through five sales channels  including
a direct sales force, an inside sales (telemarketing)  group, alternate channels
including  referral  partners,  independent  agents and resellers,  a government
systems group and a wholesale carrier group. As of December 1, 1997, the Company
had 309 sales and  marketing  employees in 18 cities and utilized 214 agents and
independent contractors.

         The Company's  direct sales  personnel offer the Company's full line of
products  including  long  distance,  private  line,  Internet,  local  and data
transmission  services.  Sales compensation is  incentive-based  and designed to
facilitate both the acquisition and retention of customers.

         Teams of sales  engineers  and local  service  experts are available to
support the sales force in complex or more  technical  applications.  The inside
sales and  telemarketing  group and referral partner programs generate leads for
the direct sales force.  These groups also focus on smaller  customers  that may
use the full array of products but do not require extensive technical or on-site
support.

         Local  customer  service  representatives  are  assigned to  particular
customers and are supplemented by local technical sales support  personnel and a
centralized  group of customer service  representatives  located in call centers
who respond to after-hours customer inquiries and perform account maintenance.


                                       -9-


<PAGE>
         As of December 1, 1997, the Company had approximately 56,000 customers,
including  approximately  28,000 long distance,  6,600 local dial tone customers
and 14,500 Internet customers (substantially all of whom are dial-up customers).
Approximately  11,000 of such customers  purchase more than one of the Company's
services.

REGULATION

         The  Company's  telecommunications  services  business  is  subject  to
varying degrees of federal, state and local regulation.

         FEDERAL REGULATION

         The  FCC  regulates  interstate  and  international  telecommunications
services. The Company provides service either on a private carrier basis or on a
common  carrier  basis.  In the interstate  market,  the primary  distinguishing
factor between  private  carriers and common carriers is that the former provide
customized  services to select  customers  pursuant to  individually  negotiated
contracts.  Common carriers, on the other hand, hold themselves out to serve the
public generally. The FCC imposes certain regulations on common carriers such as
the RBOCs that have some degree of market power. The FCC imposes less regulation
on common carriers without market power including, to date, CAPs/CLECs.  The FCC
requires  common carriers to receive an  authorization  to construct and operate
telecommunications  facilities  between  the  United  States  and  international
points.

         In August  1996,  the FCC released its  Interconnection  Decision.  The
Interconnection  Decision establishes rules implementing the  Telecommunications
Act requirements  that ILECs negotiate  interconnection  agreements and provides
guidelines for review of such agreements by state public utilities  commissions.
On  July  18,  1997,  the  Eighth  Circuit  vacated  certain   portions  of  the
Interconnection   Decision,   including   provisions   establishing   a  pricing
methodology  and a procedure  permitting new entrants to "pick and choose" among
various  provisions  of existing  interconnection  agreements  between ILECs and
their  competitors.  On October 14, 1997,  the Eighth  Circuit issued a decision
vacating additional FCC rules that will likely have the effect of increasing the
cost of  obtaining  the  use of  combinations  of an  ILEC's  unbundled  network
elements. The Company had negotiated a number of interconnection agreements with
ILECs  prior to the July  18th  Eighth  Circuit  decision.  The  Eighth  Circuit
decisions  create  uncertainty  about the  rules  governing  pricing,  terms and
conditions  of  interconnection  agreements,  and  could  make  negotiating  and
enforcing  such  agreements  more  difficult  and  protracted  and  may  require
renegotiation of existing agreements. There can be no assurance that the Company
will be able to obtain or enforce interconnection agreements on terms acceptable
to the Company.  The FCC has sought a writ of certiorari  from the Supreme Court
for review of the Eighth Circuit decisions.

         In October 1996,  the FCC adopted an order in which it  eliminated  the
requirement that non-dominant  interstate  carriers such as the Company maintain
tariffs  on file  with the FCC for  domestic  interstate  services.  This  order
applies to all non-dominant interstate carriers,  including AT&T. The order does
not  apply to the RBOCs or other  local  exchange  providers.  The FCC order was
issued pursuant to authority granted to the FCC in the Telecommunications Act to
"forbear" from regulating any  telecommunications  services  provider if the FCC
determines  that  the  public  interest  will  be  served.  After  a  nine-month
transition period, relationships between interstate carriers and their customers
will be set by contract.  At that point long  distance  companies  may no longer
file with the FCC  tariffs for  interstate,  domestic,  interexchange  services.
Carriers have the option to immediately  cease filing  tariffs.  Several parties
have  filed  notices  for  reconsideration  of the FCC order  and other  parties
appealed the decision.  On February 13, 1997, the United States Court of Appeals
for the District of Columbia Circuit stayed the implementation of the FCC order.


                                      -10-


<PAGE>

         If  the  stay  is  lifted   and  the  FCC  order   becomes   effective,
telecommunications  carriers such as the Company, will no longer be able to rely
on the  filing  of  tariffs  with  the FCC as a means  of  providing  notice  to
customers of prices,  terms and conditions on which they offer their  interstate
services.  The  obligation to provide  non-discriminatory,  just and  reasonable
prices remains unchanged under the  Communications  Act of 1934, as amended (the
"Communications  Act").  While tariffs  provided a means of providing  notice of
prices,  terms and  conditions,  the Company has always relied  primarily on its
sales force and direct  marketing to provide such  information  to its customers
and expects to continue to do so in the future.

         The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit  interconnection to
their networks and establishing ILEC obligations with respect to:

         RECIPROCAL COMPENSATION. Requires all ILECs and CLECs to complete calls
originated by competing  carriers under reciprocal  arrangements at prices based
on a reasonable  approximation of incremental cost or through mutual exchange of
traffic without explicit payment.

         RESALE.  Requires  all  ILECs  and  CLECs  to  permit  resale  of their
telecommunications  services without unreasonable restrictions or conditions. In
addition,  ILECs are required to offer wholesale versions of all retail services
to other  telecommunications  carriers for resale at discounted rates,  based on
the costs avoided by the ILEC in the wholesale offering.

         INTERCONNECTION.   Requires   all  ILECs  and  CLECs  to  permit  their
competitors to interconnect with their facilities.  Requires all ILECs to permit
interconnection  at any  technically  feasible point within their  networks,  on
nondiscriminatory terms, at prices based on cost (which may include a reasonable
profit).  At the option of the carrier seeking  interconnection,  collocation of
the  requesting  carrier's  equipment  in the ILECs'  premises  must be offered,
except  where the ILEC can  demonstrate  space  limitations  or other  technical
impediments to collocation.

         UNBUNDLED  ACCESS.  Requires  all  ILECs to  provide  nondiscriminatory
access to unbundled network elements (including, network facilities,  equipment,
features,  functions, and capabilities) at any technically feasible point within
their networks,  on nondiscriminatory  terms, at prices based on cost (which may
include a reasonable profit).

         NUMBER  PORTABILITY.  Requires  all ILECs and CLECs to permit  users of
telecommunications   services  to  retain  existing  telephone  numbers  without
impairment  of quality,  reliability  or  convenience  when  switching  from one
telecommunications carrier to another.

         DIALING  PARITY.  Requires  all ILECs and CLECs to  provide  "1+" equal
access to competing  providers of telephone  exchange  service and toll service,
and to provide nondiscriminatory access to telephone numbers, operator services,
directory  assistance,  and  directory  listing,  with no  unreasonable  dialing
delays.

         ACCESS  TO  RIGHTS-OF-WAY.  Requires  all  ILECs  and  CLECs to  permit
competing  carriers  access to  poles,  ducts,  conduits  and  rights-of-way  at
regulated prices.

         ILECs are required to negotiate in good faith with carriers  requesting
any or all of the above arrangements.  If the negotiating  carriers cannot reach
agreement  within  a  prescribed  time,   either  carrier  may  request  binding
arbitration of the disputed issues by the state regulatory commission.  Where an
agreement  has  not  been  reached,  ILECs  remain  subject  to  interconnection
obligations  established  by the  FCC  and  state  telecommunication  regulatory
commissions.

         On May 8, 1997, the FCC released an order  establishing a significantly
expanded  federal  telecommunications  subsidy  regime.  For  example,  the  FCC
established new subsidies for services


                                      -11-


<PAGE>

provided to qualifying schools and libraries with an annual cap of $2.25 billion
and for services  provided to rural health care  providers with an annual cap of
$400  million.  The FCC  also  expanded  the  federal  subsidies  to  low-income
consumers.  Providers  of  interstate  telecommunications  service,  such as the
Company,  as well as certain other entities,  must pay for these  programs.  The
Company's  share of these  federal  subsidy  funds will be based on its share of
certain defined  telecommunications  end-user  revenues.  Although the FCC order
describes a method for  determining  the amount the Company must  contribute  to
support these subsidies,  the FCC has only provided the contribution factors for
first quarter 1998 Universal Service Fund contributions. The revised factors are
3.19% for the high cost and low income fund and 0.72% for the schools, libraries
and health care fund. The amounts  contributed  may be billed to customers.  The
Company is currently  unable to predict the effect that these required  payments
will  have  on its  financial  condition.  In the May 8th  order,  the FCC  also
announced that it will soon revise its rules for subsidizing service provided to
consumers in high cost areas.  Several  parties have appealed the May 8th order.
Such appeals have been  consolidated  and transferred to the United States Court
of Appeals for the Fifth Circuit where they are currently pending.  In addition,
on July 3, 1997,  several  ILECs filed a petition  for stay of the May 8th order
with the FCC. That petition is pending.

         The  Telecommunications  Act also  codifies the ILECs' equal access and
nondiscrimination  obligations and preempts  inconsistent state regulation.  The
Telecommunications  Act also contains special provisions that eliminate the AT&T
Antitrust  Consent  Decree  (and  similar  antitrust  restrictions  on  the  GTE
Companies)  restricting  the RBOCs from  providing  long  distance  services and
engaging in telecommunications equipment manufacturing.  These provisions permit
a RBOC to enter the long distance market in its  traditional  service area if it
satisfies several procedural and substantive  requirements,  including obtaining
FCC approval upon a showing that facilities-based  competition is present in its
market,  that the RBOC has  entered  into  interconnection  agreements  in those
states in which it seeks long distance relief,  the  interconnection  agreements
satisfy a  14-point  "checklist"  of  competitive  requirements,  and the FCC is
satisfied  that the  RBOC's  entry into long  distance  markets is in the public
interest.  SBC,  the RBOC  serving  some of the  states  served by the  Company,
applied to the FCC for such  authority  which was denied.  SBC has  appealed the
denial  and has sought to have the  provisions  declared  unconstitutional.  The
Telecommunications  Act  permits  the  RBOCs to  enter  the  out-of-region  long
distance market immediately upon its enactment.

         Under  the   Telecommunications   Act,  any  entity,   including  cable
television   companies   and   electric  and  gas   utilities,   may  enter  any
telecommunications  market,  subject to reasonable  state  regulation of safety,
quality   and   consumer    protection.    Because    implementation    of   the
Telecommunications   Act  is  subject  to  numerous  federal  and  state  policy
rulemaking proceedings and judicial review there is still uncertainty as to what
impact such legislation will have on the Company.

         Pursuant  to  authority  granted by the FCC,  the  Company  resells the
international  telecommunications  services of other common carriers between the
United  States and  international  points.  In connection  with such  authority,
certain of the  Company's  subsidiaries  have filed  tariffs  stating the rates,
terms and conditions for their  international  services.  The FCC has determined
that call  reorigination  service  using  uncompleted  call  signaling  does not
violate  United  States or  international  law, but has held that United  States
companies  providing such services must comply with the laws of the countries in
which they operate as a condition of such companies' Section 214 authorizations.

         With respect to its domestic service offerings, various subsidiaries of
the  Company  have filed  tariffs  with the FCC  stating  the  rates,  terms and
conditions for their interstate  services.  To the extent that such subsidiaries
provide intrastate services, they may be required to obtain authority from state
regulatory authorities prior to providing such services.  Such subsidiaries have
been granted intrastate toll authority in 44 states and the District of Columbia
and the  Company  is  applying  for  such  authority  in the  remaining  states,
excluding Alaska.  There can be no assurance that such state authorizations will
be granted. In

                                      -12-


<PAGE>
addition,  the Company has obtained authority to provide local exchange services
on a resale or  facilities-  based basis in 10 states and the Northern  Marianas
Islands.

         NACT   is   authorized   by   the   FCC   to   provide    international
telecommunications services. Any intrastate telecommunications services provided
by NACT may require authority from state regulatory  agencies and any interstate
services require NACT to file an FCC tariff. There can be no assurance that such
authorizations will be granted.

         Except in certain  designated  geographically  competitive  zones,  the
current policy of the FCC for most special access  services  dictates that ILECs
charge  all  customers  the same  price for the same  service.  Thus,  the ILECs
generally  cannot lower prices to those  customers  likely to contract for their
services  without also lowering charges for the same service to all customers in
the same geographic area, including those whose telecommunications  requirements
would not justify the use of such lower prices. The FCC may, however,  alleviate
this  constraint  on the ILECs and permit them to offer special rate packages to
very large customers, as it has done in few cases, or permit other forms of rate
flexibility.  The  FCC has  adopted  proposals  that  significantly  lessen  the
regulation of ILECs that are subject to  competition  in their service areas and
provide  such ILECs with  additional  flexibility  in pricing  their  interstate
switched and special access on a central office specific basis.

         In a  combined  Report  and Order and  Notice  of  Proposed  Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the  interstate  access charge  structure.  In the Report and Order,  the FCC
removed  restrictions  on ILECs'  ability to lower access prices and relaxed the
regulation  of new switched  access  services in those  markets  where there are
other providers of access services. If this increased pricing flexibility is not
effectively  monitored by federal  regulators,  it could have a material adverse
effect on the  Company's  ability  to  compete in  providing  interstate  access
services.  On May 16, 1997, the FCC released an order revising its access charge
rate  structure.  The new rules  substantially  increase  the costs  that  ILECs
subject to the FCC's price cap rules ("price cap LECs") recover through monthly,
non-traffic  sensitive access charges and substantially  decrease the costs that
price cap LECs recover through traffic sensitive access charges. In the May 16th
order,  the FCC also announced its plan to bring  interstate  access rate levels
more in line with cost.  The plan will  include  rules that grant price cap LECs
increased pricing flexibility upon  demonstrations of increased  competition (or
potential  competition)  in  relevant  markets.  The  manner  in  which  the FCC
implements  this approach to lowering access charge levels could have a material
effect on the  Company's  ability  to  compete in  providing  interstate  access
services.  Several parties have appealed the May 16th order.  Those appeals have
been  consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.

         Under the  Communications  Act and other federal  regulations,  foreign
nationals may not own more than 20% of a company, or have more than a 20% voting
interest in a company,  that directly holds a common carrier radio license.  The
Communications Act also prohibits foreign nationals from owning 25% or more of a
company which, in turn,  controls a company holding a radio license,  if the FCC
finds that such alien participation  would not serve the public interest.  Under
the WTO agreement, the United States agreed to increase the foreign ownership up
to 100%.  On November  25,  1997,  the FCC adopted  rules  implementing  the WTO
policies for WTO member  states to acquire up to a 100%  indirect  interest in a
U.S.  radio  license.  Prior  approval  will  still  be  required,  however  the
application process is streamlined. The operations of GST Hawaii use among other
facilities,  microwave  radio  facilities  operating  pursuant  to FCC  licenses
granted to Pacwest Network,  Inc.  ("PNI"),  an entity controlled by John Warta,
the Chairman of the Board and Chief  Executive  Officer of the Company.  The FCC
also  has  the  authority,  which  it is not  presently  exercising,  to  impose
restrictions  on foreign  ownership  of  communications  service  providers  not
utilizing radio  frequencies,  which if exercised could have a material  adverse
effect on the Company's business. In addition, the Company may subsequently need
to obtain radio licenses to "fill in" certain customers in the networks that are
not practical to reach by wire. Should the Company require a common


                                      -13-

<PAGE>
carrier  radio  license in the future,  the FCC's new rules should  increase the
ability of the Company to acquire such a license.

         STATE REGULATION

         The  Telecommunications  Act is intended to increase competition in the
telecommunications  industry,  especially  in the local  exchange  market.  With
respect to local services,  ILECs are required to allow interconnection to their
networks and to provide  unbundled  access to network  facilities,  as well as a
number of other  procompetitive  measures.  Because  the  implementation  of the
Telecommunications  Act is subject to numerous state  rulemaking  proceedings on
these issues, it is currently  difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.

         State  regulatory  agencies have regulatory  jurisdiction  when Company
facilities and services are used to provide  intrastate  services.  A portion of
the Company's  current  traffic may be  classified  as intrastate  and therefore
subject  to state  regulation.  The  Company  expects  that it will  offer  more
intrastate services (including intrastate switched services) as its business and
product lines expand and state regulations are modified to allow increased local
services competition. To provide intrastate services, the Company generally must
obtain  a  CPCN  from  the  state  regulatory   agency  and  comply  with  state
requirements  for  telecommunications   utilities,   including  state  tariffing
requirements.  The Company has obtained  CPCNs for its  subsidiaries  to provide
intrastate  toll  service  in 44 states and the  District  of  Columbia  and has
applied  for such  authority  in the  remaining  states,  excluding  Alaska.  In
addition,  the Company has obtained authority to provide local exchange services
on a resale or  facilities-based  basis in 10 states and the  Northern  Marianas
Islands.

         ARIZONA.  In Arizona,  the Tucson and Phoenix  networks  and  alternate
access transmission  services,  to the extent that they provide the transmission
of messages or telephone service within Arizona,  could be deemed public service
corporations  and  subject  to  the  jurisdiction  of  the  Arizona  Corporation
Commission (the "ACC") for certain purposes. GST Net (AZ), Inc. ("GST Net (AZ)")
has received a Certificate of Convenience and Necessity  ("CCN") from the ACC to
provide  jurisdictionally  intrastate special access,  private line and/or local
exchange  services in Arizona.  GST Tucson  Lightwave,  Inc.  ("GST Tucson") has
entered into a license agreement with Pima County (the county in which Tucson is
located) which was officially recorded on July 16, 1996, to construct,  install,
maintain  and  operate  a  fiber  optics  communication  system  in  the  public
right-of-way.

         CALIFORNIA.  Both GST Pacific  Lightwave,  Inc. ("GST Pacific") and GST
Telecom  California,  Inc.  ("GST  California")  have been granted  authority to
provide both  facilities-based  and resale local exchange  services in the areas
served by Pacific Bell and GTE California  Incorporated ("GTE California").  GST
California and GST Pacific have entered into an  interconnection  agreement with
GTE California which became  effective  October 17, 1996. GST California and GST
Pacific have entered into an interconnection agreement with Pacific Bell for the
State of California which became effective December 30, 1996.

         HAWAII.  The HPUC has  granted  GST Hawaii a CPCN as a carrier of voice
and data on a point to point basis in Hawaii.  Under the HPUC's rules  governing
competition in telecommunication  services,  an application by GST Hawaii for an
expanded CPCN is no longer  necessary.  GST Hawaii must file an application  for
any proposed, modified, or new tariffed service, unless ordered otherwise by the
HPUC.  GST Hawaii's CLEC tariff became  effective on September 4, 1996. The HPUC
has  also  approved  GST  Hawaii's  interconnection  agreement  with  GTE and an
amendment  to the  original  interconnection  agreement  was approved in October
1997.  GST  Hawaii is in the  process of  completing  its  connections  to GTE's
Hawaiian network.

         IDAHO.  GST Telecom  Idaho,  Inc.  ("GST Idaho") has authority from the
Idaho  Public   Utilities   Commission  (the  "Idaho   Commission")  to  provide
telecommunications services on a statewide basis to


                                      -14-


<PAGE>

business  customers  with six or more  lines.  GST Idaho  has also been  granted
authority from the Idaho  Commission to provide  telecommunications  services to
customers  with  fewer  than  six  lines  in  the  GTE  Companies  and U S  WEST
Communications, Inc. ("U S WEST") exchanges.

         NEVADA. GST Telecom Nevada,  Inc. was granted CLEC and resale authority
on  September  27,  1996,  by the  issuance  of a CPCN  by  the  Public  Service
Commission of Nevada.

         NEW MEXICO.  On October 23,  1995,  GST  Telecom New Mexico,  Inc.  was
granted a CPCN from the New  Mexico  State  Corporation  Commission  to  provide
intrastate,  non-switched private line services. Its authority to provide resold
interexchange  services was approved on January 6, 1997 and its  statewide  CLEC
authority was granted on May 30, 1997.

         OREGON.  On March 5, 1997,  GST Telecom  Oregon,  Inc. was granted CLEC
authority in competitive zones.

         TEXAS. The Texas Public Utilities Commission on August 9, 1996 approved
the  application of GST Telecom  Texas,  Inc. ("GST Texas") for a certificate of
operating authority on a statewide basis to resell telecommunications  services.
GST Texas' authority was expanded to include  facilities-based  services on June
4, 1997.

         UTAH.  GST Telecom  Utah,  Inc.  obtained  competitive  local  exchange
authority in December 1996 to provide services statewide,  with the exception of
exchanges with fewer than 5,000 access lines owned or controlled by an ILEC with
fewer than 30,000 access lines within the State.

         WASHINGTON.   GST  Telecom  Washington,   Inc.  ("GST  Washington")  is
currently  authorized  to provide  both  resold and  facilities-based  services,
including local exchange services,  message toll,  operator services and carrier
access services.  GST Washington's  request for competitive  status was approved
June 11, 1997.

         LOCAL REGULATION

         The networks are subject to numerous local regulations such as building
codes  and  licensing.  Such  regulations  vary on a city by city and  county by
county  basis.  The  Company  needs to obtain  rights-of-way  over  private  and
publicly   owned  land  to  permit   the   installation   of  the  fiber   optic
telecommunication equipment.

GST GLOBAL TELECOMMUNICATIONS INC.

         At September  30, 1997,  the Company has  invested  approximately  $3.7
million in GST Global  Telecommunications Inc. ("Global") and held approximately
3.6 million common shares and warrants to purchase 750,000 additional shares. On
September 30, 1997,  Global had approximately  14.1 million shares  outstanding.
Global is to issue to the Company additional common shares of Global, subject to
approval of the Vancouver  Stock  Exchange  ("VSE"),  in  consideration  for the
transfer by the Company to Global of its rights in and to the Bestel Project. In
addition,  certain executive officers and directors hold an aggregate of 553,896
common shares of Global and options and warrants to purchase 224,500  additional
common shares of Global.  Global  employs its own operating  management  and has
raised capital required for its proposed  activities.  As of September 30, 1997,
Global had raised  approximately $21.0 million through private placements of its
common shares and $37.8 million through private placements of long term debt.

         Global has  subscribed,  through a  subsidiary,  GST  Mextel,  Inc.,  a
Delaware corporation,  for 49% of the outstanding shares of Bestel, S.A. de C.V.
("Bestel"). The total consideration is approximately $13.7


                                      -15-


<PAGE>

million,  of which  approximately $12.0 million has been paid. The remaining 51%
is  held by  Occidental  Telecommunicacion,  S.A.  de  C.V.  ("Occidental").  In
addition,  Global  has  agreed to loan an  aggregate  of up to $36.0  million to
Bestel,  of which $26.0  million  has been  advanced  to date.  Bestel  plans to
construct and operate a 2,270 kilometer fiber optic  telecommunications  network
in Mexico to become a  facilities-based  long distance  carrier,  of which as of
September 30, 1997 approximately  1,100 kilometers of conduit and 180 kilometers
of fiber optic cable has been constructed.

         Global has also  acquired  from Cable and  Wireless an 80%  interest in
Vitacom,  for a purchase  price of $1.5  million.  The  remaining 20% is held by
Cable and Wireless,  which can require Global to purchase such interest in 1999.
Vitacom is engaged in the provision of voice,  high speed data  information  and
other  services  and the  manufacture  and  sale of VSAT  (very  small  aperture
satellite terminal) and other equipment used to access the Internet.

MAGNACOM

         Magnacom  Wireless,  L.L.C.  ("Magnacom"),  a company 99% owned by PNI,
which is in turn controlled by John Warta,  the Company's  Chairman of the Board
and Chief Executive  Officer,  has acquired  various PCS licenses at auction and
through purchase. Magnacom holds 30 MHz (C Block) PCS licenses for 11 markets in
Arizona,  Arkansas, New Mexico, Oregon and Utah. Magnacom won 10 MHz licenses in
the FCC's F Block in 13 markets in Hawaii,  Idaho,  Oregon and  Washington in an
FCC auction.  Such  licenses have not yet been issued  because  Magnacom did not
timely submit the required down payment.  Magnacom is awaiting FCC action on its
request for a waiver of the down payment deadline.

         Magnacom and the Company have entered into a 12-year reseller agreement
(the "Magnacom Reseller  Agreement")  pursuant to which (i) the Company has been
designated a non-exclusive  reseller of PCS telephone services in the markets in
which  Magnacom has obtained  licenses,  and (ii) Magnacom has agreed to use the
Company  on an  exclusive  basis to  provide  switched  local and long  distance
services and other enhanced  telecommunications  services,  to all of Magnacom's
resellers in markets where the Company has operational networks. Magnacom agreed
to sell PCS  minutes to the  Company  at $.05 per  minute,  subject to  downward
adjustment  to equal  the most  favorable  rates  offered  to  Magnacom's  other
resellers (but in no event less than  Magnacom's  cost).  In connection with the
Magnacom  Reseller  Agreement,  as of September  30, 1997,  the Company had paid
Magnacom  approximately  $14.0 million as  prepayments  for future PCS services.
Magnacom and the Company are presently in negotiations with respect to modifying
the Magnacom Reseller Agreement to reflect certain  regulatory  requirements and
to provide  clarification  as to the basis upon which the Company  and  Magnacom
will provide such services.

         In  addition,  the Company  has been  granted a  conditional  option to
acquire up to PNI's entire  interest in Magnacom  (currently  99%),  conditioned
upon Magnacom and the Company  entering  into an agreement for the  construction
and/or operation of Magnacom's  facilities.  If and when the condition precedent
is met,  the  exercise  of the option  will be subject  to  compliance  with all
applicable FCC regulations relating to prior approval of any transfer of control
of PCS licenses,  including  those relating to foreign  ownership or control and
requirements  regarding  the ownership of C and F block  licenses.  Accordingly,
until such time as FCC regulations or  administrative  action permit the Company
to own in excess of 25% of Magnacom, the option by its terms is limited to a 24%
interest in Magnacom.

         In February  1997,  an affiliate of Magnacom,  PCS Plus  Pacific,  Inc.
formerly known as Guam Net, Inc. ("PCS Plus Pacific"), acquired from Poka Lambro
Telephone  Cooperative,  Inc. a 30 MHz (A Block) PCS license from the FCC in the
market consisting of Guam and the Northern Marianas Islands.  Concurrently,  the
Company entered into a reseller agreement on terms substantially  similar to the
Magnacom Reseller Agreement and paid PCS Plus Pacific  approximately $.4 million
as a prepayment for future PCS services.


                                      -16-

<PAGE>

         See  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" for a discussion of a warrant to purchase up to 4% of the
then  outstanding  Common Shares that may be issued in connection with financing
for Magnacom.

         The  provision of wireless  telecommunications  service by Magnacom and
PCS Plus Pacific will be dependent  upon their  ability to obtain the  financing
necessary  to make  payments  to the FCC under the terms of their  licenses,  to
obtain  working  capital and to build the  required  facilities,  including  the
purchase  of  telecommunications  equipment.  There  can  be no  assurance  that
Magnacom or PCS Plus  Pacific  will obtain such  financing or be able to provide
PCS services.  In such event,  the Company would likely be unable to recover its
payments to Magnacom and PCS Plus Pacific.

EMPLOYEES

         As of December 10,  1997,  the Company and its  subsidiaries  had 1,115
full-time  employees.  None  of  such  employees  is  covered  by  a  collective
bargaining agreement.  The Company considers its relationship with its employees
to be satisfactory.

RECENT DEVELOPMENTS

         On September 30, 1997, an affiliate of Tomen Corporation (together with
its affiliates,  "Tomen") agreed to provide the Company with up to $40.5 million
of debt financing for the Company's Hawaiian inter-island  submarine network and
various other terrestrial installations.  In connection with such financing, the
Company  entered into a credit  agreement  with Tomen  containing  substantially
similar terms as those previously  entered into under an existing  facility (the
"Tomen  Facility"),   except  that  the  loan  will  amortize  in  22  quarterly
installments beginning March 31, 2000.

         In November  1997, the Company  completed a public  offering (the "1997
Offering") of 6,440,000 Common Shares at $12.00 per share and $144 million of 12
3/4% Senior  Subordinated  Accrual  Notes due 2007 (the  "Accrual  Notes").  The
Accrual Notes bear interest at a rate of 12 3/4% per annum,  however no interest
will be paid thereon prior to May 15, 2003.  Until  November 15, 2002,  interest
will accrue and be  compounded  semi-annually  on each May 15 and  November  15,
commencing  May 15,  1998,  but will not be  payable  in  cash.  From and  after
November 15, 2002,  interest on the principal  amount and the final  accumulated
interest amount of the Accrual Notes will be payable semi-annually.  The Accrual
Notes are  redeemable at the option of the Company,  in whole or in part, at any
time on or after  November 15, 2002. In addition,  at any time prior to November
15, 2000, up to 33 1/3% of the aggregate  principal  amount of the Accrual Notes
may be  redeemed by the  Company  from the  proceeds of one or more sales of its
capital  stock  (other  than  redeemable  stock);  provided  that after any such
redemption at least $83.3 million  aggregate  principal  amount of Notes remains
outstanding.  The Company  intends to use the net proceeds from such  offerings,
aggregating   approximately  $211.2  million,  to  fund  the  expansion  of  its
infrastructure,  the  expansion of its products  and service  offerings  and for
working capital and general corporate purposes.

ITEM 2.  PROPERTIES.

         The Company owns a building comprising 60,000 square feet in Vancouver,
Washington.  The Company leases space containing its principal executive offices
at 4001 Main Street,  Vancouver,  Washington 98663. Its telephone number at that
address is (360) 906-7100.

         The  Company  leases  offices   elsewhere  in  the  United  States,  in
Vancouver,  British  Columbia  and in Japan,  pursuant to leases which expire on
various dates through December 31, 2007. The Company's  current aggregate annual
rental expense is approximately $4.6 million. The Company is negotiating leases


                                      -17-


<PAGE>

for  spaces in  California  and  Washington  for an  aggregate  additional  cost
expected to be approximately $112,000 per year.

ITEM 3.  LEGAL PROCEEDINGS.

         On  August  24,  1995,   Aerotel,   Ltd.  and  Aerotel   U.S.A.,   Inc.
(collectively,  "Aerotel")  commenced  an action  against NACT and a customer of
NACT in the  United  States  District  Court,  Southern  District  of New  York,
alleging that  telephone  systems  manufactured  and sold by NACT  incorporating
prepaid debit card features  infringe upon Aerotel's  patent which was issued in
November 1987 (the "Aerotel  Patent").  The initial  complaint  further  alleged
defamation and unfair  competition as a result of a Special Report  disseminated
by NACT to its customers and tortious  interference  with  prospective  business
relations,  alleging  that NACT  induced  third  parties  to  abandon  licensing
negotiations  with Aerotel.  Aerotel  sought  injunctive  relief,  damages in an
unspecified  amount,  damages of up to three times the damages found for willful
infringement  of the  Aerotel  Patent and an order  requiring  NACT to publish a
written  apology to Aerotel.  NACT filed an answer and  Counterclaim in which it
denied  infringement  of the Aerotel Patent and sought judgment that the Aerotel
Patent is invalid and  unenforceable  and that Aerotel has misused its patent in
violation of antitrust laws. NACT also denied that it had committed  defamation,
unfair competition or tortious interference with prospective business relations.
On May 3, 1996,  NACT  served its motion  for  summary  judgment.  The Court has
indicated it will deny such motion,  although the actual ruling has not yet been
received. In August 1997, Aerotel amended its complaint to include as defendants
the  Company  and GST USA,  Inc.  ("GST  USA") as well as Kyle Love,  the former
President of NACT and Dr.  Thomas E. Sawyer,  a director of the Company and NACT
and the  former  Chairman  and Chief  Executive  Officer  of NACT.  The  amended
pleadings seek in excess of $18.7 million in damages and allege that the Company
and GST USA have infringed the Aerotel patent, aided and abetted infringement by
others,  including  NACT, and  participated  in, and aided and abetted,  alleged
tortious  conduct by NACT.  The Company,  GST USA, Dr.  Sawyer and Mr. Love have
served answers denying all material allegations and intend to defend vigorously.
Pretrial  discovery has commenced and is scheduled to be completed in 1998.  The
case is not expected to be tried until late 1998 at the earliest.  NACT's patent
counsel believes that NACT has valid defenses to the Aerotel claims.  If upheld,
these defenses would also be valid for all defendants.  An unfavorable  decision
in this action could have a material adverse effect on the Company.

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


                                      -18-


<PAGE>

to the United States Court of Appeals for the Ninth Circuit on January 16, 1997.
On August 5, 1997, the Tucson City Council approved a settlement  agreement that
resolves the Superior Court action. Under the terms of the settlement agreement,
GST Tucson has agreed to pay the City the annual  license  fee called for by the
Tucson Code that amounts to 5 1/2% of gross revenues, and the City has permitted
GST Tucson to modify its current route map and to serve customers throughout the
City limits. While dismissing the pending state court appeal, the parties agreed
to allow the United  States Court of Appeals for the Ninth Circuit to decide the
pending  legal  issue  relating  to whether  companies  like GST Tucson  enjoy a
private right of action to assert  right-of-way  claims under Section  253(c) of
the Telecommunications Act in the United States District Courts.

         On or about  February 25, 1997, U S WEST filed a  declaratory  judgment
action against members of the ACC, the ACC, ACSI,  Brooks and the Company in the
United States  District Court in Arizona.  The Company  understands  that one or
more  substantially  similar  lawsuits  have been  filed  against  other  CLECs,
including MFS,  Sprint,  MCI and AT&T. U S WEST alleges that the ACC has entered
into an  interconnection  order  that  unlawfully  requires  U S WEST to  resell
services below cost,  imposes resale  restrictions  and denies U S WEST recovery
for construction and implementation  costs,  unlawfully treats the cost recovery
of access revenues for interim number  portability,  requires U S WEST to obtain
additional rights of way or build additional facilities solely to provide access
to the  Company,  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 the Company,  from taking any action to
enforce any of the order's allegedly unlawful provisions.  The Company's time to
answer or move against the complaint has been extended indefinitely by U S WEST,
pending  a  decision  with  respect  to a  motion  filed by MFS to  dismiss  the
complaint.  Should U S WEST prevail in its suit, it could have an adverse impact
on the Company's operations in Arizona.

         On or about  April 8,  1997,  U S WEST filed a state  court  proceeding
against the ACC,  individual members of the ACC, and GST Net (AZ), which holds a
CCN to provide local exchange service in Arizona. In its complaint appealing the
ACC's  February 6, 1997  decision  and order  granting GST Net (AZ) its CCN, U S
WEST alleges that the ACC's action violates certain  requirements of the Arizona
Constitution  relating  to rate of return  regulation,  carrier  of last  resort
obligations,  and equal protection. The appeal seeks to subject GST Net (AZ) and
U S WEST to identical  forms of  regulation,  treating  both  carriers as either
traditional monopoly carriers or as co-equal competitive companies. GST Net (AZ)
answered U S WEST's complaint on August 6, 1997,  alleging,  among other things,
that U S WEST's complaint is preempted by the Telecommunications Act. Should U S
WEST  prevail in its appeal,  it could have an adverse  impact on the  Company's
operations in Arizona; however, the magnitude thereof is uncertain at this time.

         The  Company is not a party to any other  material  legal  proceedings,
nor,  to the  knowledge  of the  Company,  are any  material  legal  proceedings
threatened  against the Company.  The Company 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 the  Company  or others  and to the  regulation  of the
provision of telecommunications service.

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


                                      -19-

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

MARKET INFORMATION

         The  Company's  Common  Shares,  without  par value,  are traded on the
American Stock  Exchange (the "AMEX")  (ticker  symbol:  GST) and on the Toronto
Stock Exchange (the "TSE") and the Vancouver  Stock Exchange (the "VSE") (ticker
symbol: GTE.U).

         The Common Shares have been listed on the AMEX since March 11, 1994 and
trade under the symbol  "GST," and have been listed on the TSE since  August 26,
1997 and on the VSE since February 28, 1991 and trade under the symbol "GTE.U."

         The following table sets forth,  for two most recent fiscal years,  the
high and low closing prices of the Common Shares as reported on the AMEX and the
TSE.
<TABLE>
<CAPTION>

                                                           AMEX                             TSE(1)
                                                  --------------------         ---------------------------

                                                       HIGH             LOW             HIGH              LOW
                                                       ----             ---             ----              ---

CALENDAR YEAR 1995

<S>                                                 <C>                <C>              <C>              <C>   
    Fourth Quarter................................  $7 3/16            $5 9/16            --               --

CALENDAR YEAR 1996

    First Quarter.................................   8 11/16           5 15/16            --               --
    Second Quarter................................   5 1/4             8 1/8              --               --
    Third Quarter.................................  13 1/2             9 1/4              --               --
    Fourth Quarter................................  11 1/4             7 3/4              --               --

CALENDAR YEAR 1997

    First Quarter.................................  10 3/8             7 3/8              --               --
    Second Quarter................................  10 7/16            6 1/2              --               --
    Third Quarter.................................  13 11/16           9 11/16          $13.95           $10.00
    Fourth Quarter (through December 22)..........  17                11 7/16            17.40            11.00
</TABLE>

--------------------------------------
(1) The Common Shares have been listed on the TSE since August 26, 1997.

DIVIDENDS

         The Company  has never  declared  or paid any  dividends  on the Common
Shares and does not  presently  intend to pay  dividends on the Common Shares in
the  foreseeable  future.  The  Company's  Board of Directors  intends to retain
future  earnings,  if any,  to finance  the  development  and  expansion  of its
business.  Future  declaration  and  payment  of  dividends,  if  any,  will  be
determined  in light of the then current  conditions,  including  the  Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing  arrangements  and  other  factors  deemed  relevant  by the  Board of
Directors.  The Company's ability to declare or pay cash dividends, if any, will
be dependent upon the ability of the Company's  subsidiaries  to declare and pay
dividends  or  otherwise  transfer  funds to the  Company,  because  the Company
conducts  its  operations  entirely  through  subsidiaries.  Pursuant  to credit
agreements  under the Tomen Facility,  the Company's  subsidiaries  that own and
operate the Southern California,  Tucson,  Albuquerque and Hawaiian networks may
not pay any dividends or make any  distributions on their capital stock to their
shareholder, GST Telecom. Subsequent network financings under the Tomen Facility
are  expected to include  similar  prohibitions.  In addition,  indentures  (the
"Indentures") relating to the 13 7/8%


                                      -20-


<PAGE>
Senior  Discount  Notes due 2005 (the  "Senior  Notes") of GST USA,  the 13 7/8%
Convertible  Senior  Subordinated  Discount  Notes due 2005 of the Company  (the
"Convertible  Notes" and together with the Senior Notes, the "1995 Notes"),  the
13 1/4% Senior  Secured  Notes due 2007 (the  "Secured  Notes") of GST Equipment
Funding,  Inc., a wholly owned  subsidiary of GST USA ("GST Funding") and the 12
3/4% Senior  Subordinated  Accrual  Notes due 2007 of the Company (the  "Accrual
Notes")  limit,  and, for the  foreseeable  future,  effectively  prohibit,  the
ability of the Company to declare or pay cash dividends.

NUMBER OF SHAREHOLDERS

         As of  December  23,  1997,  there  were 256  holders  of record of the
Company's Common Shares.  The Company believes that there are in excess of 3,500
beneficial  owners of the Company's Common Shares  additional to such holders of
record.

RECENT SALES OF UNREGISTERED SECURITIES

         On September 19, 1997, the Company issued an aggregate of 29,160 Common
Shares to four individuals as an installment  payment in  consideration  for the
Company's  acquisition in September 1996 of Tri-Star Residential  Communications
Corp.

         On  September  30,  1997,  the Company  issued an  aggregate of 130,828
Common  Shares and  Warrants to purchase an aggregate  of an  additional  75,000
Common Shares to Tomen for a purchase  price of $1,375,000 in connection  with a
financing under the Tomen Facility.

         There were no underwriters  involved in any of the foregoing  issuances
of equity  securities  and such issuances  were exempt from  registration  under
Section 4(2) of the  Securities  Act of 1933, as amended,  as  transactions  not
involving a public offering.


                                      -21-

<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>

                                                              THIRTEEN
                                                               MONTHS                            YEAR ENDED
                                           YEAR ENDED           ENDED                           SEPTEMBER 30,
                                           AUGUST 31,       SEPTEMBER 30,          ----------------------------------------
                                              1993             1994(1)             1995              1996              1997
                                           ----------       -------------          ----              ----              ----

                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS DATA:
Revenues:

<S>                                              <C>             <C>               <C>               <C>               <C>
         Telecommunications services..           $  --           $   112           $ 11,118          $ 31,726          $ 82,593
         Telecommunications products..              --             5,889              7,563             9,573            23,374
                                                 -----           -------            -------           -------           -------
                  Total revenues......              --             6,001             18,681            41,299           105,967
Operating loss........................            (418)           (1,337)           (11,631)          (42,597)          (86,543)
Other expenses (income):
         Interest income..............             (35)             (254)              (303)           (5,549)           (7,026)
         Interest expense(2)..........              --                27                838            21,224            37,665
         Other, net...................             439             1,877              1,347             2,360           (5,359)
Income tax expense....................              --               502(3)             166(3)            157               903
                                                ------            ------             ------            ------            ------
Net loss(4)...........................          $ (822)          $(3,491)          $(11,315)         $(60,378)        $(113,338)
                                               =======          ========          =========         =========        ==========
Net loss per Common Share.............          $ (.22)            $(.35)             $(.82)           $(3.18)            $(4.59)
                                                ======            ======             ======           =======            =======
Weighted average number of Common
         Shares outstanding...........           3,821             9,879             13,781            18,988            24,703
Ratio of earnings to fixed charges....              --                --                 --                --                --
OTHER DATA:
Capital expenditures..................            $  4           $ 1,486           $ 33,922          $ 97,561          $225,743
EBITDA(5).............................            (418)             (779)            (8,807)          (33,936)          (51,881)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and investments         $ 4,746           $ 5,062            $ 6,895           $66,519           $59,184
Restricted cash and investments.......              --                --                 --            16,000           171,750
Property and equipment................               4             4,805             39,583           134,714           385,252
Accumulated depreciation..............              --               221              1,550             7,139          (20,738)
Investment in joint ventures(6).......           4,616             3,552              2,859             1,364                --
Total assets..........................           9,398            26,769             73,125           301,701           728,405
Current portion of long-term debt and
         capital lease obligations....              --                --                959             5,554            10,656
Long term debt and capital lease                    --                --             19,746           234,127           628,043
         obligations (excluding current
         portion).....................
Redeemable Preferred Shares...........              --                --                 --                --            51,756
Common Shares and commitment to issue
         Common Shares(7).............          10,511            25,075             51,660            98,101           149,880
Accumulated deficit...................         (1,149)           (4,640)           (15,955)          (76,333)         (189,671)
Shareholders' equity (deficit)........           9,362            20,435             35,705            21,768          (39,791)
</TABLE>


                                            (FOOTNOTES APPEAR ON FOLLOWING PAGE)


                                      -22-


<PAGE>
------------------------------------
(1)      The Company  changed its fiscal year end to September 30,  effective in
         1994.  As a result,  amounts  reported  for the  thirteen  months ended
         September  30,  1994  ("Fiscal  1994")  are  for  the 13  months  ended
         September 30, 1994.  Results for Fiscal 1994 include the acquisition of
         60% of GST Telecom,  the Company's  subsidiary  that owned and operated
         each of the  Company's  networks,  and, at various  times during Fiscal
         1994, an aggregate of 80% of NACT.

(2)      Excludes  capitalized interest of $.3 million for the fiscal year ended
         September  30, 1995 ("Fiscal  1995"),  $2.3 million for the fiscal year
         ended  September  30, 1996  ("Fiscal  1996") and $15.2  million for the
         fiscal  year ended  September  30,  1997  ("Fiscal  1997").  During the
         construction of the Company's  networks,  the interest costs related to
         construction  expenditures  are considered to be assets  qualifying for
         interest  capitalization under FASB Statement No. 34 "Capitalization of
         Interest Cost."

(3)      During  Fiscal  1994 and the first  eight  months of Fiscal  1995,  the
         Company owned less than 80% of GST Telecom and was therefore  unable to
         deduct for tax purposes the losses incurred by GST Telecom.

(4)      Includes  minority  interest in (income)  loss of  subsidiaries  of (i)
         $(2,000) for Fiscal 1994, (ii) $2.4 million for Fiscal 1995,  (iii) $.4
         million for Fiscal 1996 and (iv) $(.6) million Fiscal 1997.

(5)      EBITDA consists of loss before interest, income taxes, depreciation and
         amortization,  other  income and non-cash  expense.  EBITDA is provided
         because it is a measure commonly used in the industry.  It is presented
         to enhance an understanding of the Company's  operating  results and is
         not  intended  to  represent  cash flow or  results  of  operations  in
         accordance  with  generally  accepted  accounting  principles  for  the
         periods indicated.  See the Company's consolidated financial statements
         and notes thereto included elsewhere in this Annual Report.

(6)      Represents  principally  the Company's  then 50% ownership  interest in
         Phoenix Fiber Access, Inc. ("Phoenix Fiber"), the owner and operator of
         the Phoenix network. The Company acquired the remaining 50% interest in
         Phoenix Fiber effective as of October 1, 1996.

(7)      At  September  30,  1997,  the  Company  was  committed  to  issue  the
         following:  (i) 221,838  Common  Shares to the former  shareholders  of
         TotalNet  in  October  1997 and (ii) a number of Common  Shares  with a
         market  value of $.9  million,  based on the then  market  value of the
         Common  Shares and  payable at various  times in the fiscal year ending
         December  31,  1998  ("Fiscal  1998")  to the  former  shareholders  of
         Tri-Star.

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.  The  Company's  actual  results could differ
materially  from those  anticipated  in these  forward  looking  statements as a
result of certain factors discussed herein.

OVERVIEW

         The  Company  provides a broad range of  integrated  telecommunications
products and services,  primarily to business  customers  located in the western
continental  United States and Hawaii.  The Company's digital networks currently
serve 39 markets in Arizona,  California,  Hawaii,  Idaho, New Mexico, Texas and
Washington. In addition, the Company has networks under construction which, when
completed, will serve three additional markets and expand its regional footprint
to Oregon. The Company also constructs, markets and manages longhaul fiber optic
facilities,  principally  in  Arizona,  California  and  Hawaii.  The  Company's
longhaul fiber optic facilities  currently extend  approximately 600 route miles
and an additional 1,100 route miles are expected to become  operational over the
next 12 months.  The Company's  full line of products,  which offer a "one-stop"
solution to customers'  telecommunications  services requirements,  include long
distance, Internet, data transmission, and private line services, and local dial
tone services, which were recently introduced.

         The Company has invested  significant  capital and effort in developing
its  telecommunications   business.  This  capital  has  been  invested  in  the
development of the Company's  networks and longhaul fiber optic facilities,  for
the hiring and  development of an experienced  management  team, the development
and installation of operating systems,  the introduction of services,  marketing
and sales efforts and for


                                      -23-


<PAGE>
acquisitions.  The Company  expects to make increasing  capital  expenditures to
expand its networks and longhaul fiber optic  facilities and broaden its service
offerings and may consummate additional  acquisitions.  Proper management of the
Company's  growth will require the Company to maintain  quality control over its
services  and  to  expand  the  Company's  internal  management,  technical  and
accounting systems, all of which will require substantial investment.

         Effective in 1994, the Company changed its fiscal year end to September
30th,  in  order  to  conform  more  closely  to the  reporting  periods  of its
subsidiaries.  The Company is changing its fiscal year to December 31st in order
to align financial  reporting with regulatory  reporting and to the reporting of
others in the Company's  industry sector.  The Company will provide to investors
audited  financial  information  for the three month  transition  period  ending
December 31, 1997 and for the subsequent  12-month periods ending December 31st.
As a result of the limited revenues and significant expenses associated with the
expansion and development of its networks and services,  the Company's operating
results could vary significantly from period to period.

         LOCAL  SERVICES.  To  facilitate  its entry  into local  services,  the
Company has in service five high capacity digital switches, has installed and is
currently  testing  seven  additional  high  capacity  digital  switches  and is
planning to deploy an additional two such switches through early 1998. As demand
warrants,  the Company plans to continue to install  switching  equipment in its
operational  networks,  in  markets  where it is  constructing  networks  and in
certain  other  cities  where  the  Company  will  rely on ILEC  facilities  for
transmission.  Once a switch is operational, where regulatory conditions permit,
the Company  intends to offer local dial tone, in addition to enhanced  services
such as ISDN, Centrex, voice mail and other custom calling features.

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

         LONG  DISTANCE  SERVICES.  The Company  offers basic and enhanced  long
distance  services,  such as toll free,  calling card,  prepaid calling card and
international  call  back  services,   targeting  primarily  business  customers
purchasing  between  $200 and $15,000 of services per month as well as resellers
and other carriers.  As part of its strategy,  the Company has acquired a number
of long distance carriers and intends to continue to pursue acquisitions of long
distance  carriers in the future.  The Company  purchases long distance capacity
under  agreements  with certain  major long  distance  carriers that provide the
Company  capacity at rates that vary with the monthly  traffic  generated by the
Company.  The Company is  obligated to satisfy  certain  minimum  monthly  usage
requirements  of an  aggregate  of $1.6 million per month as of October 1, 1997,
increasing to a maximum of $6.1 million per month over the next three years.  If
such  requirements  are not  satisfied,  the  Company  may be required to pay an
underutilization fee in addition to its monthly bill.

         INTERNET  SERVICES.  The  Company  presently  offers   Internet-related
services in most of its markets,  such as dedicated Internet services,  Web site
development and hosting,  provides access and upstream transport for local ISPs,
EDI and electronic commerce services and is in the process of developing various
Internet  software  applications.  The  Company  also  offers  dial-up  Internet
services to customers in Portland (Oregon), Vancouver (Washington), the State of
Hawaii and select  markets in  California  and  intends to begin  offering  such
services in the Los Angeles,  San  Francisco and Houston  metropolitan  areas in
1998.


                                      -24-

<PAGE>
Management  believes that these  services will become an important  component of
the Company's  overall  product  offerings and intends to continue to expand its
Internet access and service business to other markets.

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

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

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

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

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

         MANUFACTURING.  In September 1993, the Company purchased a 52% interest
in NACT, which produces  advanced  telecommunications  switching  platforms with
integrated applications software and network telemanagement capabilities. During
Fiscal 1994, the Company  acquired in a series of transactions an additional 28%
interest  in  NACT.  The  aggregate  consideration  paid for the  Company's  80%
interest  in NACT was  $5.8  million,  consisting  of $3.2  million  in cash and
451,536 Common Shares.  On January 5, 1995, the Company  purchased the remaining
20% interest in NACT for consideration consisting


                                      -25-

<PAGE>
of $.9 million in cash and notes payable and 504,747  Common  Shares  (valued at
$2.2 million). In the third quarter of Fiscal 1996, NACT introduced the STX, the
first of a new  generation of switches.  In the NACT  Offering,  the Company and
NACT sold one million and two million  shares,  respectively,  of NACT's  common
stock,  resulting in gross proceeds to the Company and NACT of $10.0 million and
$20.0 million,  respectively.  As a result of the NACT  Offering,  the Company's
interest in NACT has been reduced to  approximately  63%. On September 30, 1997,
the  Company  announced  that it had  retained  Hambrecht & Quist LLC to explore
alternatives for monetizing its 63% interest in NACT, including a potential sale
of some or all of its shares of NACT's  capital  stock to one or more  strategic
investors.

         In May 1997, the Company  acquired  Action Telcom,  a  facilities-based
telecommunications  company  located in  Abilene,  Texas that  operates  its own
network and switching  equipment,  originating  and  terminating its own traffic
principally in Texas. Action Telcom manufactures the Network Analysis Management
System  ("NAMS"),  a UNIX based  software and hardware  platform  that  provides
automated  real-time  billing record  collection,  fraud  protection and network
design.

         The  Company  has  entered  into  a  12-year  reseller  agreement  with
Magnacom, a company 99% owned by PNI, which is in turn controlled by John Warta,
the Company's  Chairman of the Board and Chief  Executive  Officer,  pursuant to
which the Company has paid Magnacom  approximately  $14.0 million as prepayments
for future PCS services.  The Company has been granted a  conditional  option to
acquire up to PNI's entire interest in Magnacom,  subject to compliance with FCC
regulations.

         Magnacom is currently  negotiating with a telecommunications  equipment
vendor to provide  equipment and other financing and to invest in Magnacom.  The
terms of any such  transaction  may include the  issuance by the Company to such
vendor of a warrant to purchase up to 4% of the then outstanding  Common Shares.
If such warrant is issued,  the Company will record a one-time noncash charge in
an amount equal to the value of the warrant. Although there can be no assurance,
the  Company  believes  that the value of such a warrant  could be between  $3.0
million and $4.0 million, depending on the terms of the warrant.

RESULTS OF OPERATIONS

FISCAL 1997 COMPARED TO FISCAL 1996

         REVENUES.  Total revenue for Fiscal 1997 increased  $64.7  million,  or
156.6%, to $106.0 million from $41.3 million for Fiscal 1996. Telecommunications
services  revenue for Fiscal 1997 increased $50.9 million,  or 160.3%,  to $82.6
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  GST Call America and  TotalNet,  as well as
increased CLEC service revenue generated by the Company'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 $13.8 million,  or 144.2%, to $23.4 million from $9.6 million for
Fiscal  1996.  The  increase  in product  revenue  resulted  primarily  from the
introduction  in April 1996 of NACT's STX switch and  subsequent  increased unit
sales.  To a  lesser  extent  the  increase  in  product  revenue  is due to the
inclusion of Action  Telcom's sales of network  management and fraud  protection
systems which was acquired May 31, 1997.

         OPERATING EXPENSES.  Total operating expenses for Fiscal 1997 increased
$108.6 million, or 129.5%, to $192.5 million from $83.9 million for Fiscal 1996.
Network  expenses,  which include direct local and long distance  circuit costs,
increased   $39.7  million,   or  149.2%,   to  $66.3   million,   or  80.2%  of
telecommunications  services  revenue for Fiscal 1997 compared to $26.6 million,
or 83.8% of  telecommunications  services  revenue for Fiscal  1996.  Facilities
administration and maintenance expenses  (consisting  primarily of costs related
to personnel providing maintenance,  monitoring and technical assistance for the
Company's  networks) for Fiscal 1997 increased $2.0 million,  or 19.3%, to $12.3
million,


                                      -26-
<PAGE>
or 14.9% of telecommunications  services revenue,  compared to $10.3 million, or
32.5% of  telecommunications  services  revenue,  for Fiscal  1996.  The primary
reason for the increase in network  expenses as a percent of  telecommunications
services revenue and 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  includes  the costs  associated  with
product revenue of NACT and Action Telcom, increased $4.0 million, or 101.1%, to
$8.0 million for Fiscal 1997 from $4.0 for Fiscal 1996.  Cost of product revenue
was 34.2% 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  primarily  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 71.3%,  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
$46.1 million,  or 138.2%,  to $79.5 million from $33.4 million for Fiscal 1996.
The increase is due to the expansion of the Company's CLEC and enhanced services
operations,  the  acquisition  of four companies from September 1996 to May 1997
and the hiring of a significant number of marketing,  management information and
sales  personnel to implement the Company's  integrated  services  strategy.  In
addition,  the  increase in  selling,  general  and  administrative  expense was
partially  attributable  to a one-time $7.4 million  non-cash charge recorded in
Fiscal  1997 when  750,000  Common  Shares  were  released  from escrow upon the
resolution of a contingency.  Selling,  general and administrative expenses were
75.0% of total  revenue for Fiscal 1997  compared to 80.8% of total  revenue for
Fiscal 1996.

         Depreciation  and amortization for Fiscal 1997 increased $15.9 million,
or 191.1%,  to $24.2 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 the Company's  acquisitions.  The
Company  expects that  depreciation  will continue to increase as it expands its
networks and long haul fiber optic facilities and installs additional  switches.
Depreciation  and  amortization  was  22.8% of total  revenue  for  Fiscal  1997
compared to 20.1% for Fiscal 1996.

         OTHER  EXPENSES/INCOME.  For Fiscal 1997, net other expenses  increased
$9.0 million, or 50.7%, to $26.8 million, or 25.3% of total revenue,  from $17.8
million,  or 43.1% 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
the Company's  shares of NACT in February  1997. If the gain had been  excluded,
other  expenses for Fiscal 1997 would have  increased  $16.4 million over Fiscal
1996. Such increase  primarily  resulted from increased  interest expense due to
the issuance of the 1995 Notes in December  1995 and the issuance of the Secured
Notes in May 1997. The Company  expects that interest  expense will increase due
to the issuance and sale of the Secured Notes and the Accrual Notes. To a lesser
extent,  other  expenses  increased  due to income tax expense  attributable  to
income  of NACT,  which as of March 1, 1997 is no  longer  consolidated  for tax
purposes.

FISCAL 1996 COMPARED TO FISCAL 1995

         REVENUES.  Total revenues for Fiscal 1996 increased  $22.6 million,  or
121.0%, to $41.3 million from $18.7 million for Fiscal 1995.  Telecommunications
services  revenues for Fiscal 1996 increased  $20.6  million,  or 185%, to $31.7
million from $11.1 million for Fiscal 1995.  The increase in  telecommunications
services   revenues  resulted  from  the  continuing  growth  of  long  distance
(including revenues  associated with Fiscal 1995 and 1996 acquisitions),  local,
Internet and data services.  Acquisitions  (primarily the acquisition of ITG but
also the  acquisitions  of GST Call America and the businesses of Hawaii On Line
and  Texas-Ohio)  accounted for $15.1 million of the increase in such  revenues.
Telecommunications products

                                      -27-


<PAGE>
revenues for Fiscal 1996 increased $2.0 million, or 26.6%, over Fiscal 1995. The
increase in telecommunications  products revenues resulted from the introduction
by NACT of the STX product line in the third quarter of Fiscal 1996.

         OPERATING EXPENSES.  Total operating expenses for Fiscal 1996 increased
$53.6 million,  or 176.8%,  to $83.9 million from $30.3 million for Fiscal 1995.
Network  expenses,  which include direct local and long distance  circuit costs,
increased $16.5 million to $26.6 million from $10.1 million for Fiscal 1995, due
to  an  expanded   customer  base  and  increased  usage.  As  a  percentage  of
telecommunications  services revenues, network expenses decreased from 90.9% for
Fiscal 1995 to 83.8% for Fiscal 1996. Facilities  administration and maintenance
expenses  for Fiscal 1996  increased  $8.2  million to $10.3  million  from $2.1
million  for  Fiscal  1995.  As  a  percentage  of  telecommunications  services
revenues,  facilities  administration  and maintenance  expenses  increased from
18.9%  for  Fiscal  1995 to 32.5% for  Fiscal  1996.  The  increase  related  to
additional   personnel  and  facility  costs  required  by  continuing   network
expansion, a substantial portion of which are incurred before the realization of
revenues.

         Cost of product  revenues at NACT for Fiscal 1996 increased $.9 million
to  $4.0  million  from  $3.1  million  for  Fiscal  1995.  As a  percentage  of
telecommunications  products  revenues for Fiscal 1996, cost of product revenues
increased  nominally  as compared to Fiscal  1995 due to initial  lower  margins
resulting  from the  discontinuance  of NACT's former switch  product line as it
began to offer the new STX to existing customers. Research and development costs
increased nominally for Fiscal 1996 relative to Fiscal 1995 as the Company moved
to more  rapidly  develop an  improved  billing  system  product and to maintain
ongoing research and development of the Company's existing hardware and software
product lines.

         Selling,  general and administrative  expenses increased $22.0 million,
or 193.5%, to $33.4 million from $11.4 million for Fiscal 1995. The increase was
due to the expansion of the Company's CLEC and enhanced services operations, and
to a lesser extent, the acquisitions  during Fiscal 1996 of GST Call America and
Tri-Star and the businesses of Hawaii On Line and Texas-Ohio. The implementation
of the  Company's  integrated  services  strategy  has  resulted  in  additional
marketing, management information and sales staff.

         Depreciation and amortization for Fiscal 1996 increased $5.9 million to
$8.3 million  from $2.4  million for Fiscal 1995 due to  increased  depreciation
resulting from newly  constructed  networks  becoming  operational.  To a lesser
extent,  the increase in depreciation and amortization was also due to increased
amortization of intangible assets resulting from acquisitions.

         OTHER EXPENSES.  Other expenses for Fiscal 1996 increased $16.1 million
to $18.0 million from $1.9 million for Fiscal 1995. The increase was principally
the result of additional interest expense associated with the 1995 Notes, offset
by interest income  resulting from the investment of the proceeds of the sale of
the 1995 Notes (the "1995 Notes Offering").

LIQUIDITY AND CAPITAL RESOURCES

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

         At September  30, 1997,  the Company had cash,  cash  equivalents,  and
investments,  including restricted cash and investments, of approximately $230.9
million, compared to $82.5 million at September 30, 1996. The Company's net cash
used in operating and investing  activities was $321.8 million,  $139.0 million,
$35.6 million for Fiscal 1997,  Fiscal 1996 and Fiscal 1995,  respectively.  Net
cash provided by

                                      -28-

<PAGE>

financing  activities  from  borrowings  and equity  issuances  to fund  capital
expenditures,  acquisitions  and  operating  losses was $316.4  million,  $194.3
million  and $37.4  million  for  Fiscal  1997,  Fiscal  1996 and  Fiscal  1995,
respectively.

         Capital  expenditures for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were
$225.7  million,  $97.6  million and $33.9  million,  respectively.  The Company
estimates  capital  expenditures of  approximately  $286 million from October 1,
1997 to December 31, 1998. The majority of these  expenditures is expected to be
made for the construction of network and longhaul fiber optic facilities and the
purchase of switches  and related  equipment to  facilitate  the offering of the
Company's services.  Continued  significant capital expenditures are expected to
be made  thereafter.  In  addition,  the  Company  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 the Company's  control,  including  economic  conditions,
competition, regulatory developments and the availability of capital.

         In addition to the Company's  capital  expenditures in Fiscal 1996, the
Company  acquired the business of Texas-Ohio for a purchase price of $.6 million
and the assumption of certain liabilities. All other acquisitions consummated by
the Company in Fiscal 1996 (Hawaii On Line, Tri-Star, Call America and TotalNet)
were in consideration of Common Shares. In the first quarter of Fiscal 1997, the
Company  acquired  the  remaining  50%  interest  in Phoenix  Fiber owned by ICG
Telecom  Group,  Inc.  ("ICG") in  consideration  of (i) the repayment to ICG at
closing of  approximately  $2.1  million of  intercompany  indebtedness  and the
repayment,  under certain circumstances,  of up to an additional $2.0 million of
such intercompany indebtedness and (ii) the indemnification of ICG in respect of
all  indebtedness of Phoenix Fiber to the Company and third parties,  other than
certain  liabilities  of Phoenix  Fiber that were  assumed by ICG.  Prior to the
acquisition  of the  remaining  50%  interest,  the Company had  contributed  an
aggregate of $5.0 million to Phoenix Fiber.  In May 1997,  the Company  acquired
Action Telcom for 903,000 Common Shares valued at $8.2 million, and $3.9 million
in cash,  payable in three  equal  installments  at closing and on the first and
second  anniversaries  thereof.  Additional  Common  Shares may be issued to the
former  shareholders of Action Telcom on such  anniversaries  if the then market
price of the Common Shares does not exceed $10.00 per share.

         In September 1996, the Company entered into the Siemens Loan Agreement,
which  provides for loans by Siemens of up to an aggregate of $226.0  million to
finance the  purchase of Siemens  equipment  and  certain  equipment  from other
suppliers.  At September 30, 1997, $116.0 million of such facility was available
to the Company (of which $5.8 million had been  provided).  The Company may seek
to increase  the amount of such  facility  up to $226.0  million on an as needed
basis,  subject  to the  negotiation  and  execution  of  mutually  satisfactory
documentation.  In  December  1996,  the  Company  entered  into the  NTFC  Loan
Agreement,  which  provides for $50.0 million of equipment  financing to finance
the purchase of equipment  and products  from Nortel (of which $44.6 million had
been provided as of September 30, 1997).

         In October 1996, the Company completed a private placement of 2,000,000
special  warrants  (the "Special  Warrants") at a purchase  price of $11 1/8 per
Special  Warrant.  Each Special  Warrant is exercisable for one Common Share and
one-half of one underlying warrant to purchase one additional Common Share for a
purchase  price of $13,  expiring  February  1998.  The Company  received  $20.8
million in net proceeds in conjunction with the sale of the Special Warrants.

         In February  1997,  the Company  consummated a private  placement  (the
"Princes Gate Investment"),  of $50.0 million of Series A Preference Shares (the
"Redeemable  Preferred  Shares") with an affiliate of Princes Gate Investors II,
L.P. ("Princes Gate").  Princes Gate is a limited  partnership  consisting of an
affiliate  of Morgan  Stanley  and certain  private  investors.  The  Redeemable
Preferred  Shares,  which are convertible at any time after February 28, 2000 at
an imputed price of $11 3/8 per share, will not pay dividends in cash, except to
the extent cash dividends are paid on Common Shares.

                                      -29-

<PAGE>

In addition,  the liquidation and redemption prices of the Redeemable  Preferred
Shares will accrete at a semi-annual  rate of 11 7/8%. On February 28, 2004, and
under  certain  circumstances,  the  Redeemable  Preferred  Shares  will also be
subject to mandatory  conversion or redemption,  provided that to the extent the
Company is prohibited from paying the redemption  price in cash,  holders of the
Redeemable  Preferred Shares may elect to convert such shares into Common Shares
and if  such  election  is not  made,  the  Company  may  extend  the  mandatory
redemption date to August 28, 2007.

         In March 1997,  NACT completed an initial public offering of its common
stock  pursuant  to which the  Company and NACT sold one million and two million
shares,  respectively,  of NACT's common stock, resulting in net proceeds to the
Company and NACT of approximately $9.0 million and $18.1 million, respectively.

         In May 1997, GST Equipment Funding,  Inc. ("GST Funding") completed the
sale (the  "Secured  Notes  Offering")  of $265.0  million  principal  amount of
Secured  Notes.  Of the $255.8  million of net proceeds from the issuance of the
Secured  Notes,  as of September 30, 1997  approximately  $93.8 million had been
used to purchase  securities  pledged to fund the first six interest payments on
the  Secured  Notes and  approximately  $91.3  million had been used to purchase
equipment, including approximately $41.5 million that had been used to refinance
indebtedness of GST USA incurred to purchase  equipment.  The Indentures include
restrictive  covenants which,  among other items,  limit or restrict  additional
indebtedness incurred by the Company,  investment in certain  subsidiaries,  the
sale of assets and the payment of dividends.

         In November 1997, the Company  completed a public offering of 6,440,000
Common Shares at $12 per share and $144.0 million of Accrual Notes.  The Accrual
Notes accrete to a total principal value of $266.9 million in November 2002 with
semi-annual cash interest payments  beginning May 2003. The Company will use the
net proceeds of such offering, approximately $211.2 million in the aggregate, to
fund the  expansion  of its  infrastructure,  the  expansion of its products and
service offerings and for working capital and general corporate purposes.

         As of September 30, 1997, the Company had approximately  $638.7 million
of indebtedness outstanding.  In addition, as of September 30, 1997, the Company
had $25.0 million of availability  under the Tomen  Facility,  $110.2 million of
availability  under the Siemens Loan Agreement and $5.4 million of  availability
under  the  NTFC  Loan   Agreement.   Although  the   Company's   liquidity  was
substantially improved as a result of the proceeds received from the sale of the
1995 Notes,  the  Secured  Notes and the Accrual  Notes,  the Company  will have
significant  debt  service  obligations.  The  Company  will be required to make
principal and interest  payments of approximately  $58.4 million (of which $35.1
million will be made from funds securing the Secured  Notes),  $65.8 million (of
which $35.1 million will be made from funds securing the Secured  Notes),  $67.7
million (of which $17.6  million  will be made from funds  securing  the Secured
Notes),  $114.7 million and $112.6 million in 1998,  1999,  2000, 2001 and 2002,
respectively.  However,  the Company will need to refinance a substantial amount
of such indebtedness.  In addition,  the Company anticipates that cash flow from
operations will be  insufficient to repay the 1995 Notes,  the Secured Notes and
the Accrual  Notes in full and that such notes will need to be  refinanced.  The
ability of the Company to effect such  refinancings  will be dependent  upon the
future performance of the Company,  which will be subject to prevailing economic
conditions  and to  financial,  business and other  factors,  including  factors
beyond the control of the Company.  There can be no  assurance  that the Company
will be able to improve its earnings  before  fixed  charges or that the Company
will be able to meet its debt service obligations.

         At September  30, 1997,  the Company had cash,  cash  equivalents,  and
investments,  including restricted cash and investments, of approximately $230.9
million.  The  Company  believes  that the net  proceeds  of the 1997  Offering,
together with cash on hand  (including  the remaining  proceeds from the Secured
Notes Offering available to purchase  equipment),  and borrowings expected to be
available under the Tomen Facility and the equipment  financing  agreements with
Siemens and NTFC will provide sufficient

                                      -30-

<PAGE>

funds for the Company to expand its  business as  presently  planned and to fund
its operating  expenses through March 2000.  Thereafter,  the Company expects to
require  additional  financing.  In  the  event  that  the  Company's  plans  or
assumptions  change or prove to be inaccurate,  or its cash resources,  together
with  borrowings  under  the  current   financing   arrangements   prove  to  be
insufficient  to fund the  Company's  growth and  operations,  or if the Company
consummates  additional  acquisitions,  the  Company  may be  required  to  seek
additional  sources of capital (or seek additional capital sooner than currently
anticipated).  The  Company  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 the Company or, if
available, that it can be concluded on terms acceptable to the Company or within
the limitations contained within the Company's financing  arrangements.  Failure
to obtain such financing could result in the delay or abandonment of some or all
of the Company's  development or expansion plans and could have material adverse
effect on the Company's  business.  Such failure could also limit the ability of
the  Company  to  make  principal  and  interest  payments  on  its  outstanding
indebtedness.  The  Company  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 a  facility  will be
available  to the  Company  in the  future  or  that  if  such a  facility  were
available,  that it would be available on terms and conditions acceptable to the
Company.

INCOME TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS

         At  September  30,  1997,  the Company had a U.S.  net  operating  loss
carryforward of  approximately  $110.5 million and a Canadian net operating loss
carryforward of approximately  Cdn. $9.2 million.  While such loss carryforwards
are available to offset future taxable  income of the Company,  the Company 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 the Company experiences an "ownership
change" as defined in Section 382 of the Code and the analogous provision of the
Canada Act.

         In February  1997,  the FASB issued SFAS No. 128,  "Earnings Per Share"
("SFAS 128").  This  statement  establishes a different  method of computing net
income per share than is currently  required  under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS 128, the Company will be required to
present  both  basic net  income  per share and  diluted  net  income per share.
Because of the Company's net loss position, both basic and dilutive net loss per
share are expected to be  comparable  to the  currently  presented  net loss per
share. The Company expects to adopt SFAS 128 in the first quarter of Fiscal 1998
and, at that time,  all  historical  net income per share data presented will be
restated to conform to the provisions of SFAS 128.

         In June 1997, the FASB issued SFAS No. 131,  "Disclosure about Segments
of an Enterprise and Related  Information"  ("SFAS No. 131"),  which changes the
way public companies report information about operating segments.  SFAS No. 131,
which is based on the  management  approach  to segment  reporting,  establishes
requirements  to report  selected  segment  information  quarterly and to report
entity-wide  disclosures about products and services,  major customers,  and the
material  countries  in which the  entity  holds  assets  and  reports  revenue.
Management  has not yet evaluated the effects of this change on its reporting of
segment information. The Company will adopt SFAS No. 131 in Fiscal 1998.

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

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


                                      -31-

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

         Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A of the General Rules and  Regulations  under the
Securities Exchange Act of 1934 ("Regulation 14A").

ITEM 11. EXECUTIVE COMPENSATION.

         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A.

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

         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item is incorporated by reference from
the Company's  definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

           AND REPORTS ON FORM 8-K.

(a)(1)   Consolidated  Financial  Statements:  see  the  Index  to  Consolidated
         Financial Statements.
   (2)   Financial Statement Schedules:  see the Index to Consolidated Financial
         Statements.
   (3)   Exhibits:
   3(a)  Certificate  of  Incorporation  of the  Company,  as  amended  to date,
         incorporated  by reference to Exhibit 3(a) to the  Company's  Form 10-K
         for the fiscal year ended  September  30,  1996,  as amended (the "1996
         Form 10-K").
   3(b)  By-Laws of the Company as amended to date, incorporated by reference to
         Exhibit 3.1 to the Company's Form S-3 (No. 333-38091) (the "Form S-3").
   4(a)  Senior Notes  Indenture dated as of December 19, 1995, by and among GST
         USA,  Inc.,  the Company and United  States Trust  Company of New York,
         incorporated by reference to Exhibit 2.3 to the Company's Form 20-F for
         the fiscal year ended September 30, 1995 (the "1995 Form 20- F").
   4(b)  Convertible Notes Indenture dated as of December 19, 1995, by and among
         the Company, GST USA, Inc. and United States Trust Company of New York,
         incorporated by reference to Exhibit 2.4 to the 1995 Form 20-F.
   4(c)  Indenture dated as of May 13, 1997, by and among GST Equipment Funding,
         Inc., the Company, GST USA, Inc. and United States Trust Company of New
         York,  incorporated  by reference to Exhibit 10.2 to the Company's Form
         10-Q for the period ended June 30, 1997 (the "June 1997 10- Q").
   4(d)  Indenture dated as of November 19, 1997, by and between the Company and
         United States Trust Company of New York,  incorporated  by reference to
         Exhibit 4.1 to the Company's Form S-3 (No.  333-38301)  (the "Debt Form
         S-3").
 *10(a)  1995 Stock Option Plan of the Company, as amended to date.


                                      -32-


<PAGE>
 *10(b)  1996 Stock Option Plan of the Company, as amended to date.
 *10(c)  1996 Employee Stock Purchase Plan of the Company.
 *10(d)  1996 Senior Executive Officer Stock Option Plan of the Company.
 *10(e)  1996 Senior Operating Officer Stock Option Plan of the Company.
  10(f)  Amended and Restated  Credit  Agreement  dated as of April 26, 1995, by
         and  between  GST  Pacific  Lightwave,  Inc.  and Tomen  America  Inc.,
         incorporated by reference to Exhibit 1.2 to the 1995 Form 20-F.
  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,  incorporated
         by reference to Exhibit 10.4 to the June 1997 Form 10-Q.
  10(h)  Agreement  and Plan of Merger,  dated  September  27, 1996 (the "Merger
         Agreement"),  by and among TotalNet  Communications Inc.  ("TotalNet"),
         GST Newco of Texas, Inc. and the Company,  incorporated by reference to
         Exhibit  2.1 to the  Company's  Form 8-K dated  October  17,  1996 (the
         "October Form 8-K")
  10(i)  Letter dated October 17, 1996 amending the Merger  Agreement  among the
         Company,  GST Newco of  Texas,  Inc.,  and  TotalNet,  incorporated  by
         reference to Exhibit 2.2 to the October Form 8-K
  10(j)  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., incorporated
         by reference to Exhibit 10(l) to the 1996 Form 10-K.
 10(k)   Amendment No. 2 to GST  Telecommunications,  Inc. Common Stock Purchase
         Agreement  dated as of May 24, 1996,  by and among the  Company,  Tomen
         America  Inc.  and Tomen  Corporation,  incorporated  by  reference  to
         Exhibit 10(m) to the 1996 Form 10-K.
 10(l)   Credit  Agreement  dated as of May 24,  1996,  by and  between  GST New
         Mexico  Lightwave,  Inc. and TM  Communications  LLC,  incorporated  by
         reference to Exhibit 10(n) to the 1996 Form 10-K.
 10(m)   Credit  Agreement  dated as of May 24, 1996,  by and between GST Tucson
         Lightwave, Inc. and TM Communications LLC, incorporated by reference to
         Exhibit 10(o) to the 1996 Form 10-K.
 10(n)   Amended and  Restated  Consulting  Agreement  dated as of  September 1,
         1995, by and between Sunwest  Ventures,  Inc. and GST USA, Inc. and GST
         Telecom,  incorporated  by reference to Exhibit  10(p) to the 1996 Form
         10-K.
 10(o)   Personal Services Agreement dated as of October 1, 1995, by and between
         GST USA, Inc. and GST Telecom Inc. and Stephen Irwin,  incorporated  by
         reference to Exhibit 10(q) to the 1996 Form 10-K.
 10(p)   Restated  and Amended  Employment  Agreement  dated as of  September 1,
         1995, by and between GST USA, Inc. and GST Telecom Inc. and John Warta,
         incorporated by reference to Exhibit 10(r) to the 1996 Form 10-K.
 10(q)   Restated  and Amended  Employment  Agreement  dated as of  September 1,
         1995,  by and between GST USA,  Inc. and GST Telecom Inc. and Robert H.
         Hanson,  incorporated  by reference  to Exhibit  10(s) to the 1996 Form
         10-K.
 10(r)   Amended and  Restated  Employment  Agreement  dated as of  September 1,
         1995, by and between GST USA, Inc. and GST Telecom Inc. and Clifford V.
         Sander,  incorporated  by reference  to Exhibit  10(t) to the 1996 Form
         10-K.
 10(s)   Employment Agreement dated March 11, 1997, by and between GST USA, Inc.
         and Joseph Basile, Jr, incorporated by reference to Exhibit 10.1 to the
         Company's  Form 10-Q for the period  ended  March 31,  1997 (the "March
         1997 10-Q").
 10(t)   Employment  Agreement  dated February 10, 1997, by and between GST USA,
         Inc.  and GST Telecom  Inc.  and Daniel L.  Trampush,  incorporated  by
         reference to Exhibit 10.2 to the March 1997 Form 10-Q.
 10(u)   Reseller  Agreement  dated  as of  October  30,  1996,  by and  between
         Magnacom  Wireless,  L.L.C.,  and GST  Telecom  Inc.,  incorporated  by
         reference to Exhibit 10(z) to the 1996 Form 10-K.
 10(v)   Agreement  and Plan of Merger  dated as of  September  26,  1996 by and
         among Call America Business  Communications  Corporation,  Call America
         Business Communications of Fresno, Inc.,

                                      -33-


<PAGE>
         Call  America  Business   Communications  of  Bakersfield,   Inc.,  the
         shareholders of such companies, GST Newco of California,  Inc., and the
         Company,  incorporated  by reference to Exhibit  10(u) to the 1996 Form
         10-K.
 10(w)   Agreement  and Plan of Merger  dated as of May 31,  1997,  by and among
         Action Telcom Co., Britt E. Bilberry,  Timothy Harding Bilberry, Paul S
         Bilberry,  GST Action  Telecom,  Inc. and the Company,  incorporated by
         reference to Exhibit 2.1 to the Company's Form 8-K dated May 31, 1997.
 10(x)   Equipment  Loan and Security  Agreement  dated December 19, 1996 by and
         between  NTFC Capital  Corporation  and GST  Equipco,  incorporated  by
         reference to Exhibit 10(v) to the 1996 Form 10-K.
 10(y)   Loan and  Security  Agreement  dated  as of  September  4,  1996 by and
         between Siemens  Stromberg-Carlson  ("Siemens") and GST Switchco,  Inc.
         ("GST  Switchco"),  incorporated  by reference to Exhibit  10(d) to the
         Company's  Form  10-Q for the  period  ended  December  31,  1996  (the
         "December 1996 Form 10-Q").
 10(z)   Unconditional  Continuing Guaranty dated as of September 4, 1996 by and
         between Siemens and GST USA, Inc., incorporated by reference to Exhibit
         10(e) to the December 1996 Form 10-Q.
 10(aa)  Unconditional  Limited Guaranty Agreement dated as of December 19, 1996
         made  by  GST  USA,  Inc.,  in  favor  of  NTFC  Capital   Corporation,
         incorporated  by reference to Exhibit  10(f) to the December  1996 Form
         10-Q.
 10(bb)  Securities Purchase  Agreement,  dated as of February 28, 1997, between
         the Company and Ocean Horizon SRL, incorporated by reference to Exhibit
         4.1 to the Company's  Form 8-K dated  February 28, 1997 (the  "February
         Form 8-K").
 10(cc)  Securityholders  Agreement,  dated as of February 28, 1997, between the
         Registrant and Ocean Horizon SRL,  incorporated by reference to Exhibit
         4.2 to the Company's February Form 8-K.
 10(dd)  Credit  Agreement  dated as of  September  30,  1997 by and between GST
         Telecom Hawaii, Inc. and TM Communications  Hawaii LLC, incorporated by
         reference to Exhibit 99.1 to the Company's Form 8-K dated September 30,
         1997 (the "September 8-K").
 10(ee)  Service Agreement dated as of September 30, 1997 by and between Pacwest
         Network, Inc. and GST Telecom Hawaii, Inc, incorporated by reference to
         Exhibit 99.2 to the September 8-K.
 10(ff)  Management  Agreement  dated as of  September  30,  1997 by and between
         Pacwest  Network,  Inc. and GST Telecom Hawaii,  Inc.,  incorporated by
         reference to Exhibit 99.3 to the September 8-K.
 10(gg)  Agreement  dated as of  September  30,  1997 by and among  GST  Telecom
         Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc.,  incorporated
         by reference to Exhibit 99.4 to the September 8-K.
 *21     Subsidiaries of the Company.
 *23     Consent to the incorporation by reference in the Company's Registration
         Statements  on Forms S-3 and S-8 of the  independent  auditors'  report
         included herein.
 *27     Financial Data Schedule.

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

(b)      Reports on Form 8-K: The Registrant filed the following Current Reports
         on Form 8-K  during the fourth  quarter  of Fiscal  1997:  (i) Form 8-K
         dated  September 9, 1997,  reporting under Item 8 thereof the change in
         its fiscal year end from September 30 to December 31; and (ii) Form 8-K
         dated   September  30,  1997,   reporting  under  Item  5  thereof  the
         consummation  of a $40.5  million  financing  with  affiliates of Tomen
         Corporation.


                                      -34-


<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly  authorized,  in the
City of Vancouver, State of Washington, on the 23rd day of December, 1997.

                                        GST TELECOMMUNICATIONS, INC.

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

                                POWER OF ATTORNEY

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

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended,  this  report  has been duly  signed by the  following  persons  in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>

     SIGNATURE                             TITLE                                    DATE

<S>                               <C>                                            <C> 
/S/ JOHN WARTA                    Chairman of the Board, Chief Executive         December 23, 1997
--------------------------        Officer (Principal Executive Officer) and
    (John Warta)                  Director



/S/ DANIEL L. TRAMPUSH            Senior Vice President and Chief Financial      December 23, 1997
--------------------------        Officer (Principal Financial Officer)
    (Daniel L. Trampush)



/S/ CLIFFORD V. SANDER            Senior Vice President, Treasurer and Chief     December 23, 1997
--------------------------        Accounting Officer (Principal Accounting
    (Clifford V. Sander)          Officer)



/S/ STEPHEN IRWIN                 Vice Chairman of the Board, Secretary and      December 23, 1997
--------------------------        Director
    (Stephen Irwin)
</TABLE>



<PAGE>
<TABLE>
<CAPTION>

     SIGNATURE                             TITLE                                    DATE

<S>                               <C>                                            <C> 
/S/ JOSEPH A. BASILE, JR.         President, Chief Operating Officer and         December 23, 1997
--------------------------        Director
    (Joseph A. Basile, Jr.)



/S/ ROBERT H. HANSON              Director                                       December 23, 1997
--------------------------
    (Robert H. Hanson)



/S/ IAN WATSON                    Director                                       December 23, 1997
--------------------------
    (Ian Watson)



---------------------------       Director
    (W. Gordon Blankstein)



---------------------------       Director
    (Peter E. Legault)



/S/ JACK G. ARMSTRONG             Director                                       December 23, 1997
--------------------------
    (Jack G. Armstrong)


/S/  MITSUHIRO NAOE
--------------------------        Director                                       December 23, 1997
    (Mitsuhiro Naoe)



/S/ JOSEPH G. FOGG, III           Director                                       December 23, 1997
--------------------------
    (Joseph G. Fogg, III)



/S/ THOMAS E. SAWYER              Director                                       December 23, 1997
--------------------------
    (Thomas E. Sawyer)



/S/ A. ROY MEGARRY                Director                                       December 23, 1997
--------------------------
    (A. Roy Megarry)

The Company's Authorized                                                         December 23, 1997
Representative
in the United States

/S/ DANIEL L. TRAMPUSH
--------------------------
Daniel L. Trampush
</TABLE>



<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                         Page(s)

GST TELECOMMUNICATIONS, INC.

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

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

Consolidated Statements of Operations for the 
  years ended September 30, 1997, 1996
  and 1995...................................................................F-4

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

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

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


                                       F-1
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                        Consolidated Financial Statements

                           September 30, 1997 and 1996

                   (With Independent Auditors' Report Thereon)


<PAGE>


                          INDEPENDENT AUDITORS' REPORT

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

We  have  audited  the   accompanying   consolidated   balance   sheets  of  GST
Telecommunications, Inc. and subsidiaries as of September 30, 1997 and 1996, and
the related  consolidated  statements  of  operations,  shareholders'  (deficit)
equity,  and cash  flows for each of the years in the  three-year  period  ended
September  30,  1997.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

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

Accounting  principles  generally  accepted in the United States vary in certain
significant  respects from accounting  principles  generally accepted in Canada.
Application  of accounting  principles  generally  accepted in Canada would have
affected  results of operations and  shareholders'  (deficit) equity for each of
the years in the  three-year  period ended  September  30,  1997,  to the extent
summarized in note 11 to the consolidated financial statements.



                                          /s/ KPMG PEAT MARWICK LLP
                                          -------------------------
                                          KPMG PEAT MARWICK LLP
Portland, Oregon
November 26, 1997

                                      F - 2


<PAGE>

                          GST TELECOMMUNICATIONS, INC.

                           Consolidated Balance Sheets

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

                                                                                                            SEPTEMBER 30,
                                                          ASSETS                                      1997              1996
                                                                                                      ----              -----
                                                                                                         (In U.S. Dollars)

<S>                                                                                              <C>              <C>
Current assets:
     Cash and cash equivalents                                                                   $      55,862    $      61,343
     Restricted cash and investments                                                                    50,039           16,000
     Accounts receivable, net                                                                           22,373            9,472
     Investments                                                                                         3,322            5,176
     Inventory, net                                                                                      3,458            2,406
     Other current assets                                                                               12,588            6,151
                                                                                                    ----------        ---------

                                                                                                       147,642          100,548
                                                                                                    ----------        ---------

Restricted investments                                                                                 121,711               -
Property and equipment, net                                                                            364,514          127,575
Goodwill, net                                                                                           36,936           35,730
Other assets, net                                                                                       57,602           37,848
                                                                                                    ----------        ---------

                  Total assets                                                                   $     728,405    $     301,701
                                                                                                    ==========        =========

                 LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

Current liabilities:
     Accounts payable                                                                            $      21,707    $      12,443
     Accrued expenses                                                                                   42,131           26,743
     Current portion of capital lease obligations                                                        6,423              722
     Current portion of long-term debt                                                                   4,233            4,832
     Other current liabilities                                                                             607              726
                                                                                                    ----------        ---------

                                                                                                        75,101           45,466
                                                                                                    ----------        ---------

Other liabilities                                                                                        1,088              158
Capital lease obligations, less current portion                                                         15,340            1,453
Long-term debt, less current portion                                                                   612,703          232,674
Minority interest                                                                                       12,208              182

Commitments and contingencies

Redeemable preference shares:
     Authorized - 10,000,000 no par shares; 500 shares issued and outstanding at
        September 30, 1997, no shares issued or outstanding at September 30, 1996                       51,756               -

Shareholders' (deficit) equity:
     Common shares:
        Authorized - unlimited number of no par common shares; issued and outstanding -
           September 30, 1997 - 27,627,442 shares, September 30, 1996 - 21,257,697 shares              145,475           72,647
     Commitment to issue common shares:
        September 30, 1997 - 288,061 shares, September 30, 1996 - 1,988,230 shares                       4,405           25,454
     Accumulated deficit                                                                              (189,671)         (76,333)
                                                                                                    ----------        ---------

                                                                                                       (39,791)          21,768
                                                                                                    ----------        ---------

                  Total liabilities and shareholders' (deficit) equity                             $   728,405    $     301,701
                                                                                                    ==========        =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F - 3


<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                      Consolidated Statements of Operations

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

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

                                                                                         (In U.S. Dollars)

<S>                                                                      <C>               <C>                <C>       
Revenues:
     Telecommunication services                                          $   82,593      $     31,726       $     11,118
     Product                                                                 23,374             9,573              7,563
                                                                         ------------        --------        -----------

                Total revenues                                              105,967            41,299             18,681
                                                                         ----------          --------          ---------

Operating costs and expenses:
     Network expenses                                                        66,250            26,580             10,103
     Facilities administration and maintenance                               12,304            10,317              2,096
     Cost of product revenues                                                 7,990             3,974              3,096
     Selling, general and administrative                                     79,491            33,375             11,373
     Research and development                                                 2,316             1,352              1,270
     Depreciation and amortization                                           24,159             8,298              2,374
                                                                         ----------          --------          ---------

                Total operating costs and expenses                          192,510            83,896             30,312
                                                                         ----------          --------          ---------
                Loss from operations                                        (86,543)          (42,597)           (11,631)
                                                                         ----------            ------             ------

Other expenses (income):
     Interest income                                                         (7,026)           (5,549)              (303)
     Interest expense, net of amounts capitalized                            37,665            21,224                838
     Loss from joint venture and investments                                  1,482             1,521              1,187
     Other                                                                   (6,841)              839                160
                                                                          ----------           ------             -------

                                                                             25,280            18,035              1,882
                                                                         ----------          --------          ---------

                Loss before minority interest in (income)
                    loss of subsidiary and income tax                      (111,823)          (60,632)           (13,513)
                                                                            -------            ------             ------

Income tax expense:
     Current                                                                  1,802               157                 70
     Deferred                                                                  (899)                -                 96
                                                                         -----------          -------            --------

                                                                                903               157                166
                                                                         ----------          --------          ---------

                Loss before minority interest in (income)
                    loss of subsidiaries                                   (112,726)          (60,789)           (13,679)

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

                Net loss                                                 $ (113,338)     $    (60,378)      $    (11,315)
                                                                         ==========            ======          =========
Net loss per share                                                       $    (4.59)     $      (3.18)      $      (0.82)
                                                                          =========          ========          =========

Weighted average common and common
     equivalents shares outstanding                                      24,702,870        18,988,127         13,780,796
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F - 4
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

            Consolidated Statements of Shareholders' (Deficit) Equity

                      (In thousands, except share amounts)

                                (In U.S. Dollars)
<TABLE>
<CAPTION>

                                                                               Commitment to
                                                                               issue common                              Total
                                            Common Shares                      shares (note 7)                        shareholders'
                                       ---------------------------         ----------------------    Accumulated      (deficit)
                                        Shares             Amount             Shares     Amount       deficit           Equity
                                        ------             ------             ------     ------       -------           ------

<S>                                      <C>              <C>               <C>         <C>          <C>              <C>
Balance, September 30, 1994              11,910,650       $ 22,036          551,536     $   3,038    $  (4,640)       $ 20,434

Issuance of common stock for
     services                                34,057            150                -             -            -             150
Issuance of common stock in
     business combinations                1,719,785          8,785         (551,536)       (3,038)           -           5,747
Issuance of common stock, net             4,593,598         17,965                -             -            -          17,965
Issuance of common stock under
     option plans                           442,200          1,230                -             -            -           1,230
Commitment to issues shares for
     business combinations                       -               -          336,498         1,494            -           1,494
Net loss                                         -               -               -              -     (11,315)         (11,315)
                                         ----------       --------          -------       -------     --------        --------

Balance, September 30, 1995              18,700,290         50,166          336,498         1,494      (15,955)         35,705

Issuance of common stock for
     services                                85,627            621                -             -            -             621
Issuance of common stock in
     business combinations                1,200,873         11,097         (168,249)         (747)           -          10,350
Issuance of common stock, net             1,189,849          9,672                -             -            -           9,672
Issuance of common stock under
     option plans                            67,500           293                 -             -            -             293
Commitment to issues shares for
     business combinations                        -             -          1,819,981       24,707            -          24,707
Issuance of common stock under
     employee stock purchase plan            13,558           132                 -             -            -             132
Accrual of compensation costs for
     stock award and option plans                 -           666                 -             -            -             666
Net loss                                          -             -                 -             -      (60,378)        (60,378)
                                         ----------     ---------         ---------    ----------      --------       --------

Balance, September 30, 1996              21,257,697        72,647         1,988,230        25,454      (76,333)         21,768

Issuance of common stock for
     services                                25,000           221                 -             -            -             221
Issuance of common stock in
     business combinations                3,132,854        29,394        (1,700,169)      (21,049)           -           8,345
Issuance of common stock and
     warrants, net                        2,505,882        32,774                 -             -            -          32,774
Issuance of common stock under
        option plans                        643,016         3,309                 -             -            -           3,309
Issuance of common stock under
     employee stock purchase plan            62,993           400                 -             -            -             400
Accrual of compensation costs
     for stock award and option
     plans                                        -         9,807                 -             -            -           9,807
Accretion of redeemable
     preference shares                            -        (3,077)                -             -            -          (3,077)
Net loss                                          -             -                 -             -     (113,338)       (113,338)
                                         ----------      --------           -------    ----------     ---------       --------

Balance, September 30, 1997              27,627,442      $145,475           288,061    $    4,405    $(189,671)      $ (39,791)
                                         ==========      ========           =======    ==========    =========       ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F - 5
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                      Consolidated Statements of Cash Flows

                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                            Years Ended September 30,
                                                                                   -----------------------------------------
                                                                                   1997               1996              1995
                                                                                   ----               ----              ----

                                                                                               (In U.S. Dollars)

<S>                                                                              <C>                <C>          <C>          
Operations:
     Net loss                                                                    $(113,338)         $(60,378)    $    (11,315)
     Adjustments to reconcile net loss to net cash used in operations:
        Minority interest in income (loss) of subsidiary                               612              (411)          (2,364)
        Depreciation and amortization                                               26,634             9,496            2,824
        Deferred income taxes                                                         (899)                -               96
        Deferred compensation                                                           -                  7              151
        Accretion of interest                                                       19,236            19,978                -
        Stock compensation and other expense                                        10,028             1,286              150
        Loss on disposal of assets                                                     679             1,012              122
        Loss on investments and joint venture                                        1,482             1,521            1,187
        Gain on sale of subsidiary shares                                           (7,376)                -                -
     Changes in non-cash operating working capital:
        Accounts receivable, net                                                   (11,284)           (1,066)          (1,549)
        Inventory                                                                     (455)           (2,019)             (13)
        Other current and other assets, net                                         (7,172)           (5,304)            (417)
        Accounts payable and accrued liabilities                                    24,970             2,387             (190)
        Other current liabilities                                                     (119)              185              262
                                                                                ----------         ----------         --------

                Cash used in operations                                            (57,002)          (33,306)         (11,056)
                                                                                ----------         ----------           ------

Investments:
     Acquisition of subsidiaries, net of cash acquired                              (1,618)           (1,441)             207
     Settlement of notes receivable                                                      -                 -            3,367
     Purchase of investments                                                        (3,247)           (9,799)             848
     Proceeds from sale of investments                                               5,176             5,493                -
     Purchase of fixed assets                                                     (222,001)          (76,192)         (27,730)
     Proceeds from sale of fixed assets                                              5,774                 8                -
     Purchase of other assets                                                      (14,058)           (7,743)          (1,829)
     Change in cash and investments restricted for the
        purchase of property and equipment                                         (61,960)          (16,000)               -
     Proceeds from the sale of subsidiary shares, net                               27,105                 -              615
                                                                                ----------         ----------        --------

                Cash used in investing activities                                 (264,829)         (105,674)         (24,522)
                                                                                   -------        -----------         --------

Financing:
     Proceeds from long-term debt                                                  353,257           196,207           19,857
     Issuance of redeemable preferred stock, net                                    48,679                 -                -
     Principal payments on long-term debt and capital leases                        (7,455)           (2,112)            (816)
     Issuance of common shares, net of issuance costs                               27,692            10,098           19,195
     Deferred debt financing costs                                                 (12,033)           (9,894)            (853)
     Purchase of restricted securities to finance interest payments                (93,790)                -                -
                                                                                ----------       -----------           ------

                Cash provided by financing activities                              316,350           194,299           37,383
                                                                                ----------        ----------         --------

                (Decrease) increase in cash and cash equivalents                    (5,481)           55,319            1,805

Cash and cash equivalents, beginning of year                                        61,343             6,024            4,219
                                                                                ----------        ----------         --------

Cash and cash equivalents, end of year                                          $   55,862        $   61,343          $ 6,024
                                                                                ==========         ==========         ========
</TABLE>

                                                                     (Continued)

                                      F - 6
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                Consolidated Statements of Cash Flows, Continued

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                           Years Ended September 30,
                                                                                   ------------------------------------------
                                                                                   1997               1996              1995
                                                                                   ----               ----              ----

                                                                                               (In U.S. Dollars)

Supplemental disclosure of cash flow information:
<S>                                                                          <C>                <C>               <C>
     Cash paid for interest                                                  $       4,982      $       1,813     $        364
     Cash paid for income taxes                                                        638                  -              264

Supplemental schedule of non-cash investing and
     financing activities:
        Recorded in business combinations:
           Assets                                                                   14,148             45,477           17,081
           Liabilities                                                               4,369             11,665            7,706
           Minority interest                                                             -             (2,686)           1,797
           Commitment to issue shares                                                    -              5,613            1,494
           Common stock                                                              8,161             29,444            5,747
        Amounts in accounts payable and accrued
           liabilities for the purchase of fixed assets
           at year-end                                                              19,718             18,291            4,363
        Accretion of redeemable preferred share costs
           into common stock                                                         3,077                  -               -
        Assets acquired through capital leases                                      21,765                  -              128
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F - 7


<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                           September 30, 1997 and 1996

                                (In U.S. Dollars)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   (a) DESCRIPTION OF THE COMPANY

       GST  Telecommunications,  Inc. (the Company) is a Canadian company 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 access and
       data services,  and produces  telecommunications  switching equipment and
       software.

       The consolidated  financial  statements for the years ended September 30,
       1997,  1996 and 1995 have been reported in U.S.  dollars,  the functional
       currency of the Company.

   (b) 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. All significant  intercompany  accounts have
       been eliminated.

   (c) CASH AND CASH EQUIVALENTS

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

   (d) ACCOUNTS AND NOTES RECEIVABLE

       The  Company  maintains  a security  interest  in the  telecommunications
       systems it sells until the Company is paid in full.  Management  provides
       an allowance  for doubtful  accounts and notes based on current  customer
       information  and  historical  statistics.   The  allowance  for  doubtful
       accounts  was  $3,582  and  $1,264  at  September   30,  1997  and  1996,
       respectively.


                                                                     (Continued)

                                      F - 8
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (e) RESTRICTED CASH AND INVESTMENTS

       The Company  adopted the provisions of Statement of Financial  Accounting
       Standard (SFAS) No. 115,  "Accounting for Certain Investments in Debt and
       Equity Securities".  Accordingly, the Company classifies its investments,
       consisting  of  $170,675  in  U.S.  Treasury  securities  and  $1,075  in
       certificates  of deposit,  as  available-for-sale  and  held-to-maturity.
       Held-to-maturity  investments,   recorded  at  amortized  cost,  totaling
       $97,049 and maturing  between one and three  years,  are  restricted  for
       interest payments.  Available-for-sale investments,  totaling $74,701 and
       maturing  between one month and two years,  are  restricted for equipment
       purchases.  Available-for-sale  securities are recorded at amortized cost
       which  approximates  the market value of such securities at September 30,
       1997.

   (f)  INVENTORY, NET

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

                                                         1997            1996
                                                         ----            ----

           Raw materials                             $     1,290    $       378
           Work in process                                   499            346
           Finished and refurbished goods                  1,669          1,682
                                                       ---------      ---------

                      Inventory, net                 $     3,458    $     2,406
                                                       =========      =========

   (g) INVESTMENTS IN AFFILIATES

       The   Company   has  an   approximate   25%   interest   in  GST   Global
       Telecommunications,  Inc. (GST Global),  a publicly traded corporation on
       the Vancouver Stock Exchange which conducts telecommunications operations
       on a worldwide  basis.  The carrying value of this  investment,  which is
       included in other assets in the accompanying  consolidated balance sheet,
       was $1,879 at September 30, 1997.


                                                                     (Continued)

                                      F - 9
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (h) 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.

   (i)  PROPERTY AND EQUIPMENT

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

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

       Construction,  engineering  and overhead  costs  directly  related to the
       development of the Company's networks are capitalized. The Company begins
       depreciating   these  costs  when  the   networks   become   commercially
       operational.

   (j)  GOODWILL

       Goodwill is  amortized,  using the  straight-line  method,  over  periods
       ranging  from five to twenty  years.  The Company  assesses  the carrying
       amount  of  goodwill  for  impairment   whenever  events  or  changes  in
       circumstances  indicate that the carrying  amount may not be recoverable.
       Measurement  of any  impairment  would  include a comparison of estimated
       future  operating  cash  flows  anticipated  to be  generated  during the
       remaining  life of the goodwill to the net carrying  value.  Amortization
       charged to  operations  was  $4,044,  $1,690 and $389 for the years ended
       September 30, 1997, 1996 and 1995, respectively.


                                                                     (Continued)

                                     F - 10
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (k) REVENUE RECOGNITION

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

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

   (l)  LOSS PER SHARE

       Loss per share has been calculated  using the weighted  average number of
       common and dilutive  common  equivalent  shares assumed to be outstanding
       during the period (using the treasury  stock method).  Common  equivalent
       shares consist of options and warrants to purchase common stock.

  (m) ISSUANCE OF SUBSIDIARY STOCK

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

   (n) CONCENTRATION OF CREDIT RISK

       For purposes of segment  reporting,  the Company is  presently  operating
       100% in the telecommunications  industry in the United States and results
       of operations are derived from United States operations and substantially
       all  assets  reside in the  United  States.  The  Company  is  exposed to
       concentration of credit risk principally  from accounts  receivable.  The
       Company's five largest  telecommunications  services customers  accounted
       for approximately  20.8%,  46.9% and 26.8% of the Company's  consolidated
       telecommunications  services  revenue for the years ended  September  30,
       1997, 1996 and 1995, respectively.


                                                                     (Continued)

                                     F - 11
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (o) INCOME TAXES

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

   (p) FINANCIAL INSTRUMENTS

       The  carrying  amounts  reported in the  balance  sheet for cash and cash
       equivalents,  receivables, short-term borrowings and accounts payable and
       accrued liabilities  approximate fair values due to the short maturity of
       those instruments.

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

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

   (q) USE OF ESTIMATES

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

                                                                     (Continued)

                                     F - 12
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

    (r) ADVERTISING COSTS

       The Company expenses advertising costs as incurred.

    (s) NEW ACCOUNTING PRONOUNCEMENT

       In February 1997, the Financial  Accounting Standards Board (FASB) issued
       Statement  of SFAS  No.  128,  "Earnings  per  Share"  (SFAS  128).  This
       statement  establishes  a different  method of  computing  net income per
       share than is  currently  required  under the  provisions  of  Accounting
       Principles  Board (APB)  Opinion No. 15.  Under SFAS 128,  the Company is
       required  to present  both basic net  income  per share and  diluted  net
       income per share.  The  Company  will adopt SFAS 128 in the period  ended
       December  31,  1997  and  will  restate  all  prior  earnings  per  share
       presentations  to conform to the provisions of SFAS 128.  Management does
       not expect loss per share under SFAS 128 to be materially  different from
       currently reported loss per share under APB Opinion No. 15.

   (t)  RECLASSIFICATIONS

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

(2) ACQUISITIONS

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

   (a) ACTION TELECOM, CO. (ACTION)

       In  the  third  quarter  of  1997,  the  Company  acquired  100%  of  the
       outstanding  capital stock of Action, a Texas company which provides long
       distance and ancillary telecommunications services, and produces software
       used in the telecommunications  industry. The Company acquired Action for
       consideration  of 903,000 common shares valued at $8,161,  $1,290 in cash
       and $2,580 in notes  payable.  The  purchase  agreement  provides  for an
       additional  payment  of up to  150,000  common  shares  over the next two
       years, contingent on future market values of the Company's common shares.
       Goodwill of $3,689 was recorded as a result of this acquisition.


                                                                     (Continued)

                                     F - 13
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (b) PHOENIX FIBER ACCESS, INC.

       In the first quarter of 1997,  the Company paid $2,000 in cash to acquire
       the remaining 50% of Phoenix Fiber Access, Inc.,  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 Access,  Inc. is an Arizona company engaged
       in  providing   competitive   local  exchange  services  in  the  Phoenix
       metropolitan area.

   (c) CALL AMERICA BUSINESS COMMUNICATIONS, INC. (CALL AMERICA)

       In  the  fourth  quarter  of  1996,  the  Company  acquired  100%  of the
       outstanding  capital  stock of Call  America,  a California  company that
       provides long distance and ancillary communications services. The Company
       acquired Call America for consideration of 1,313,505 common shares valued
       at  $14,905.  An  additional  130,000  common  shares have been placed in
       escrow and will be issued to the former  owners of Call  America in 1998,
       subject to certain  indemnification  clauses  contained  in the  purchase
       agreement.  Additionally,  $533 in notes  receivable  due from the former
       owners of Call America will be forgiven if certain  operating  milestones
       are met over the next ten years.  Goodwill of $10,175  was  recorded as a
       result of this acquisition.

   (d) TOTALNET COMMUNICATIONS, INC. (TOTALNET)

       In  the  fourth  quarter  of  1996,  the  Company  acquired  100%  of the
       outstanding capital stock of TotalNet,  a long distance service provider.
       The Company acquired  TotalNet for consideration of 401,160 common shares
       valued at $4,373 and a commitment to issue  221,838  common shares valued
       at $3,498 in November  1997.  An  additional  80,232  common  shares were
       released from escrow to the former  owners of TotalNet in November  1997,
       subject to certain  indemnification  clauses  contained  in the  purchase
       agreement.   Goodwill  of  $4,774  was  recorded  as  a  result  of  this
       acquisition.

   (e) 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  valued  at  $15,447,  which  shares  were  paid to  Pacwest,  LLC
       (Pacwest),  an entity  controlled by the Chief  Executive  Officer of the
       Company.   Goodwill  of  $15,330  was   recorded  as  a  result  of  this
       acquisition.


                                                                     (Continued)

                                     F - 14
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (f)  OTHERS

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

       During 1996, the Company  acquired the assets of  Reservations,  Inc. dba
       Hawaii Online (HOL), the assets of Texas-Ohio Communications, Inc. (TOC),
       and  100%  of the  outstanding  capital  stock  of  Tri-Star  Residential
       Communications, Inc. (Tri-Star). HOL is an Internet service provider; TOC
       is a long distance service provider;  and Tri-Star provides shared tenant
       services  consisting  of long  distance,  cable  television  and security
       service to tenants of multi-dwelling apartment units.  Consideration paid
       for these  acquisitions  consisted  of 175,333  common  shares  valued at
       $1,559, a commitment to issue  approximately  66,223 common shares valued
       at $907 over the next  year,  and $719 of cash.  Goodwill  of $1,103  was
       recorded as a result of these acquisitions.

       The pro forma results shown below reflect results of operations as if the
       acquisitions  described above occurred as of the beginning of each of the
       periods presented:

                                            Year                 Year
                                            ended                ended
                                        September 30,        September 30,
                                            1997                 1996
                                            ----                 ----
                                                    (Unaudited)

           Revenues                  $     115,342         $     85,323
           Net loss                       (113,271)             (67,949)
           Net loss per share                (4.48)               (3.05)

       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.


                                                                     (Continued)

                                     F - 15
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(3) PROPERTY AND EQUIPMENT

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

     Telecommunications networks                $   95,447         $   25,551
     Electronic and related equipment               60,050             31,547
     Leasehold improvements                          9,201              3,619
     Furniture, office equipment and other          14,643              8,746
     Buildings                                       3,366              2,134
     Construction in progress                      202,545             63,117
                                                ----------         ----------
                                                   385,252            134,714

     Less accumulated depreciation                 (20,738)            (7,139)
                                                ----------         ----------

                                                $  364,514         $  127,575
                                                ==========         ==========

       Property and equipment  includes  $202,545 and $63,117 of equipment which
       had  not  been  placed  in  service  at  September  30,  1997  and  1996,
       respectively, and accordingly, is not being depreciated. During the three
       years ended September 30, 1997, 1996 and 1995,  $15,170,  $2,316 and $291
       of interest,  respectively, was capitalized as part of telecommunications
       networks and networks in progress.

(4) ACCRUED EXPENSES

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

         Fixed asset purchases                  $ 11,531         $    14,153
         Accrued acquisition costs                     -               4,213
         Carrier costs                             2,113               4,057
         Accrued interest payable                 18,076                 430
         Payroll and related liabilities           3,278               1,747
         Other                                     7,133               2,143
                                                --------         -----------

                    Total                       $ 42,131         $    26,743
                                                ========         ===========


                                                                     (Continued)

                                     F - 16
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

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

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

<S>                                                                             <C>               <C>
         Senior secured notes, 13.25%, due May 1, 2007                          $  265,000        $          -
         Note payable to Tomen, LIBOR plus 3% (8.8%
              at September 30, 1997)                                                69,137              31,771
         Note payable to NTFC, LIBOR plus 3.5%
              (9.3% at September 30, 1997)                                          44,634                   -
         Note payable to Siemens, LIBOR plus 4.5%
              (10.3% at September 30, 1997)                                          5,846                   -
         Senior discount notes, 13.875%, due December 15,
              2005                                                                 203,280             177,760
         Convertible senior subordinated discount notes,
              13.875%, due December 15, 2005                                        25,410              22,220
         Other                                                                       3,629               5,755
                                                                                ----------        ------------

                                                                                   616,936             237,506

              Less current portion of long-term debt                                 4,233               4,832
                                                                                ----------        ------------

                                                                                $  612,703       $     232,674
                                                                                 =========       =============
</TABLE>

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

           Year ended September 30:

                1998                                      $       4,233
                1999                                             14,107
                2000                                             19,185
                2001                                             21,943
                2002                                             22,001
                Thereafter                                      535,467
                                                          -------------

                                                          $     616,936
                                                          =============

                                                                     (Continued)

                                     F - 17
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (a) SENIOR SECURED NOTES

       In the third  quarter of 1997,  the  Company  issued  $265,000  in senior
       secured  notes due May 1,  2007.  The notes  bear  interest  at a rate of
       13.25% with semiannual  interest payments due beginning November 1, 1997.
       Approximately  $93,790 of the proceeds are  restricted  to fund the first
       six scheduled  interest  payments.  The remainder of the net proceeds are
       restricted  to  the  purchase  and  installation  of   telecommunications
       equipment.  The notes are  secured by the  equipment  purchased  with the
       proceeds and are subject to certain debt covenants.

   (b) TOMEN AMERICA, INC. FACILITY

       In the first quarter of 1995, the Company entered into a master financing
       agreement with Tomen America,  Inc. (Tomen).  Under the agreement,  Tomen
       will loan up to $100,000 to  subsidiaries  of the Company for development
       and construction of network projects. As of September 30, 1997, Tomen has
       agreed to provide a total of $74,950 in debt  financing to the  Company's
       subsidiaries  for  construction and operation of its fiber optic networks
       in  Southern  California,  New  Mexico,  Arizona  and  Hawaii.  The Tomen
       financing  is secured by the  equipment  purchased  with the proceeds and
       subject to certain debt covenants.

   (c) NTFC CAPITAL CORPORATION AGREEMENT

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


                                                                     (Continued)
                                     F - 18

<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (d) SIEMENS STROMBERG-CARLSON AGREEMENT

       In the  fourth  quarter  of 1996,  the  Company  entered  into a loan and
       security agreement with Siemens  Stromberg-Carlson  (Siemens).  Under the
       terms of the  agreement,  Siemens will loan up to $226,000 to the Company
       for the purchase and  installation  of  telecommunications  switching and
       related equipment.  At September 30, 1997,  $116,000 was available to the
       Company.  Amounts borrowed under the agreement initially bear interest at
       LIBOR plus 4.5% and are secured by the equipment. Such interest decreases
       to LIBOR plus 3.5% at the time each  initial  loan is converted to a term
       loan, which conversion occurs at the first calendar quarter following the
       initial  loan.  The Company is committed to purchase a minimum of $16,500
       in equipment over three years.  Amounts borrowed under the agreement will
       be repaid in twenty-four quarterly  installments  beginning five quarters
       after the initial loan is  converted to a term loan.  The loan is subject
       to certain debt covenants.

   (e) SENIOR DISCOUNT NOTES AND CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES

       In the first quarter of 1996, the Company issued  approximately  $160,000
       in 13.875%  Senior  Discount  Notes  (the  senior  notes) and  $20,000 in
       13.875% Convertible Senior  Subordinated  Discount Notes (the convertible
       notes) maturing on December 15, 2005 (together the Notes). The Notes were
       sold at a  substantial  discount  and there  will be no  accrual  of cash
       interest prior to December 15, 2000 or payment of interest until June 15,
       2001.  The Notes accrete to a total  principal  amount,  due December 15,
       2005, of  approximately  $351,500 by December 15, 2000.  The senior notes
       will rank in right of payment with all unsubordinated indebtedness of the
       Company while the convertible  notes will be junior to all senior Company
       debt.

       Each of the convertible  notes is convertible at the option of the holder
       into common shares.  The number of shares to be issued upon conversion is
       based on an accreted value on the conversion  date divided by $7.563.  In
       addition, all of the convertible notes may be automatically  converted to
       common  shares by the  Company if the  Company's  common  shares  sustain
       certain market value levels for thirty consecutive trading days.

       On or after December 15, 2000, the senior and  convertible  notes will be
       redeemable at the option of the Company.

       The senior and convertible notes are subject to certain debt covenants.

                                                                     (Continued)

                                     F - 19
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(6) REDEEMABLE PREFERENCE SHARES

       The Company's  Board of Directors has the authority,  without any further
       vote or action by the Company's  shareholders,  to issue up to 10,000,000
       Preference  Shares,  without  par  value,  in one or more  series  and to
       determine   the   designations,   powers,   preferences   and   relative,
       participating,  optional  or  other  rights  thereof,  including  without
       limitation,  the dividend rate (and whether  dividends  are  cumulative),
       conversion  rights,  voting  rights,  rights  and  terms  of  redemption,
       redemption price and liquidation preference.

       In February 1997, the Company  consummated a private placement of $50,000
       of 500 Redeemable  Preference Shares. The Redeemable Preference Shares do
       not pay dividends in cash,  except to the extent such  dividends are paid
       on Common Shares. In addition, the liquidation, conversion and redemption
       prices of the Redeemable Preference Shares accrete semiannually at a rate
       of 11.875%.

       The  Company is required to redeem the  Redeemable  Preference  Shares on
       February 28, 2004 (the Mandatory Redemption Date) in cash at a redemption
       price of approximately  $224 per share (the Mandatory  Redemption Price);
       provided  that to the extent the Company is  prohibited  from paying such
       redemption  price in cash,  the holders of Redeemable  Preference  Shares
       have the option to convert each Redeemable Preference Share into a number
       of Common Shares equal to the Mandatory  Redemption  Price divided by 95%
       of the then market price for Common  Shares.  In the event the Company is
       prevented  from paying the  redemption  price for  Redeemable  Preference
       Shares in cash and any holder of  Redeemable  Preference  Shares does not
       exercise such conversion  option, the Company has the option of extending
       the  Mandatory  Redemption  Date to August 28, 2007.  The Company has the
       option of redeeming the  Redeemable  Preference  Shares at any time after
       February 28, 2000 in cash at a redemption price per Redeemable Preference
       Share  equal to the number of Common  Shares  into which such  Redeemable
       Preference  Share is then  convertible  multiplied  by the price at which
       such  Redeemable  Preference  Share  would  become  subject to  mandatory
       conversion.

       Redeemable Preference Shares are convertible at the option of the holders
       into Common Shares at any time after  February 28, 2000 or earlier upon a
       change of control of the Company.  The holders of  Redeemable  Preference
       Shares have the right to require the Company to  repurchase  their shares
       upon a change of control of the Company after February 28, 2002; prior to
       that time,  holders have a right to convert their  Redeemable  Preference
       Shares  into  Common  Shares  upon a  change  of  control.  Further,  the
       Redeemable  Preference  Shares are subject to mandatory  conversion  into
       Common  Shares if the market price of Common Shares  exceeds  $15.925 per
       share (subject to adjustment)  for a specified  period after February 28,
       2000.

                                                                     (Continued)

                                     F - 20
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(7) SHAREHOLDERS' (DEFICIT) EQUITY

   (a) COMMITMENT TO ISSUE SHARES

       Pursuant to the terms of the purchase agreements discussed in note 2, the
       Company is  committed to issue  approximately  288,061  shares  valued at
       $4,405 at various times over the next year.

   (b) STOCK-BASED COMPENSATION

       The Company has five stock-based  compensation plans, which are described
       below. The Company has adopted SFAS No. 123,  "Accounting for Stock-Based
       Compensation"  (SFAS  123).  In  accordance  with SFAS 123,  the  Company
       applies APB Opinion No. 25 and related  Interpretations in accounting for
       its plans. Accordingly, compensation cost is generally not recognized for
       options awarded in the 1995 and 1996 Stock Incentive  Plans, the Employee
       Stock  Purchase  Plan and fixed  stock  option  awards  under the  Senior
       Operating and Executive  Officer  Stock Option Plans.  Compensation  cost
       recognized in the statements of operations for the years ended  September
       30, 1997 and 1996 totaled  approximately  $9,747 and $665,  respectively,
       for  performance-based  awards.  The fair value of each  option  grant is
       estimated on the date of the grant using the Black-Scholes option-pricing
       model  assuming  no dividend  yield and the  following  weighted  average
       assumptions for grants in 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                                 Employee
                                                     Fixed option         Performance        stock purchase
                                                       awards               awards                plan
                                                     ------------         -----------        --------------

                                                     1997      1996       1997      1996       1997      1996
                                                     ----      ----       ----      ----       ----      ----

<S>                                                  <C>       <C>        <C>       <C>        <C>       <C> 
           Expected volatility                        56%       60%        56%       60%        56%       60%
           Risk free interest rate                   6.3%      6.1%       6.3%      6.1%       5.4%      5.3%
           Expected life (in years)                  3.5        3.5       5.0       5.0         .5        .5
</TABLE>

       The  weighted  average  fair  value of option  awards  granted  under the
       various plans are as follows:

                                                          1997         1996
                                                          ----         ----

           Fixed stock option awards                  $    4.61    $    4.41
           Performance-based option awards                 4.97         5.18
           Employee stock purchase plan                    1.81         2.85


                                                                     (Continued)

                                     F - 21
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

       Had  compensation  cost for the Company's five  stock-based  compensation
       plans been  determined  pursuant to SFAS 123, the  Company's net loss and
       net loss per common and common equivalent share would have been increased
       to the pro forma amounts indicated below:

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

           Net loss:
                As reported                   $  (113,338)        $  (60,378)
                Pro forma                        (116,214)           (61,949)

           Net loss per common and common
                equivalent share:
                   As reported                $     (4.59)        $    (3.18)
                   Pro forma                        (4.70)             (3.24)

       The effects of applying SFAS 123 for providing  pro-forma  disclosure for
       1997 and 1996 are not  likely  to be  representative  of the  effects  on
       reported  net loss and loss per share for future  periods  since  options
       vest over several years and additional awards may be made.

       FIXED STOCK OPTION AWARDS

       Under the 1995  Stock  Incentive  Plan  (1995  Plan)  and the 1996  Stock
       Incentive  Plan (1996 Plan),  the Company has  authorized the issuance of
       1,750,000 and 700,000 common shares, respectively. The 1995 Plan and 1996
       Plan   provide  for  the  granting  of   incentive   stock   options  and
       non-statutory stock options to employees, officers and employee directors
       and  consultants  at an  exercise  price no less than 100% of the  market
       value on the last  trading  day prior to the date of grant.  The  options
       have a maximum  term of five years and become  exercisable  at such times
       and in such  installments,  for each individual  option, as determined by
       the  Board of  Directors;  however,  no option  vests  until at least six
       months after the date of grant.

       In addition, the Company grants fixed option awards under the 1996 Senior
       Operating Office Plan (Operating Officer Plan). These options have a term
       of five years and become  exercisable  ratably  over a four-year  vesting
       period.

                                                                     (Continued)

                                     F - 22
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

       A summary of the status of the Company's  fixed stock option awards as of
       September 30, 1997,  1996 and 1995 and the changes during the years ended
       on those dates is presented below:
<TABLE>
<CAPTION>

                                           1997                        1996                         1995
                                    ------------------        ----------------------      ----------------------
                                                 Weighted                    Weighted                  Weighted
                                                  average                     average                   average
                                                 exercise                    exercise                  exercise
                                     Shares        Price        Shares         Price       Shares        Price
                                     ------        -----        ------         -----       ------        -----

<S>                                <C>           <C>           <C>          <C>            <C>         <C>    
           Outstanding at
               beginning of
               year                2,461,205     $  7.11       1,605,553    $   5.81       876,500     $  3.55
           Granted                 1,190,000        9.89         963,373        9.07     1,186,035        6.33
           Exercised                (643,016)       5.15         (67,500)       4.33      (442,200)       2.78
           Forfeited                 (83,655)       8.89         (40,221)       6.54       (14,782)       4.69
                                 -----------                 -----------               -----------

           Outstanding at
               end of year         2,924,534        8.62       2,461,205        7.11     1,605,553        5.81
                                 ===========                 ===========               ===========

           Number of options
               exercisable at
               end of year           955,933                   1,208,908                 1,078,600
</TABLE>

       The  following  table  summarizes  information  about fixed stock options
       outstanding at September 30, 1997:
<TABLE>
<CAPTION>

                                               Options Outstanding                     Options Exercisable
                                               -------------------                     -------------------
                                                       Weighted
                                                        average         Weighted                       Weighted
                                         Number        remaining         average         Number         average
              Range of                  of shares     contractual       exercise        of shares      exercise
           Exercise Prices             Outstanding       Life             Price        Exercisable       Price
           ---------------             -----------       ----             -----        -----------       -----

<S>       <C>                           <C>             <C>            <C>               <C>         <C>
          $    3.55-5.00                  199,076       1.4 years      $  4.82           117,942     $    4.86
               6.75-7.06                  910,708       3.1 years         6.76           655,241          6.75
              9.94-10.00                1,814,750       4.7 years         9.98           182,750         10.00
</TABLE>


                                                                     (Continued)

                                     F - 23
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

       PERFORMANCE-BASED STOCK OPTION AWARDS

       Under the 1996 Senior  Operating  Officer  Stock  Option Plan  (Operating
       Officer  Plan) and the 1996 Senior  Executive  Officer  Stock Option Plan
       (Executive  Plan),  the Company  grants  stock  options to purchase up to
       900,000 and 600,000 common shares, respectively, to selected individuals.
       Vesting for these performance-based  awards is based upon the achievement
       of certain  Company  operating  and common  share price  milestones.  The
       options have a maximum term of six years.

       A summary of the status of the Company's  performance-based  stock option
       awards as of September 30, 1997 and 1996 and the changes during the years
       ended on those dates is presented below:
<TABLE>
<CAPTION>

                                                                      1997                        1996
                                                               ----------------------      --------------------
                                                                             Weighted                  Weighted
                                                                              average                   average
                                                                             exercise                  exercise
                                                                Shares         Price       Shares        Price
                                                                ------         -----       ------        -----

<S>                                                             <C>          <C>          <C>           <C>   
           Outstanding at beginning of year:                    600,000      $ 10.00            -       $    -
           Granted                                              300,000        10.00      600,000        10.00
           Exercised                                                 -             -            -            -
           Forfeited                                                 -             -            -            -
                                                              ---------                 ---------

           Outstanding at end of year                           900,000        10.00      600,000        10.00
                                                              =========                 =========
</TABLE>

       At September 30, 1997, the exercise price and weighted average  remaining
       contractual  life of  outstanding  options  was  $10.00  and  4.5  years,
       respectively. No options were exercisable at September 30, 1997 and 1996.

       EMPLOYEE STOCK PURCHASE PLAN

       Under the 1996 Employee  Stock  Purchase Plan (the  Purchase  Plan),  the
       Company has authorized the issuance of 500,000 common shares which allows
       eligible  employees  of the  Company  to  purchase  common  shares of the
       Company at 85% of the market  value on the date of grant.  Employees  who
       own 5% or more of the voting rights of the Company's  outstanding  common
       shares may not  participate  in the Purchase  Plan.  Employees  purchased
       62,993  and  13,558  shares  under  the  purchase  plan in 1997 and 1996,
       respectively.

                                                                     (Continued)

                                     F - 24
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (c) WARRANTS OUTSTANDING

       Warrants outstanding and exercisable at September 30, 1997:

                Number of
              common shares           Exercise                Exercise
                issuable                price              expiration date
                --------                -----              ---------------

                   171,155              $12.96                     May 1998
                    75,000              $12.61               September 1999
                    50,000              $10.00                   April 1999
                   300,000               $6.75               September 2000
                 1,000,000              $13.00                February 1998

       The 246,155 warrants expiring in May 1998 and September 1999 were granted
       to Tomen in conjunction with the Tomen financing  agreements.  The 50,000
       warrants  expiring  on April  1999 were  granted  in  conjunction  with a
       private  placement  of common stock  during  1994.  The 300,000  warrants
       expiring in September 2000 were granted to a director of the Company. The
       1,000,000  warrants expiring in February 1998 were granted in conjunction
       with a stock offering during fiscal year 1997.


                                                                     (Continued)

                                     F - 25
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(8) INCOME TAXES

       The  provision  for income  taxes  differs  from the amount  computed  by
       applying  the  Canadian  statutory  income tax rate to net income  before
       taxes as follows:
<TABLE>
<CAPTION>

                                                                               1997        1996        1995
                                                                               ----        ----        ----

<S>                                                                            <C>         <C>         <C>  
         Computed expected income tax expense
              (benefit) at Canadian statutory rate                             (39)%       (39)%       (39)%
         Expected state/province income tax expense
              (benefit)                                                         (4)         (4)         (6)
         Increase (decrease) in valuation allowance                             30          21          38
         Amortization of goodwill                                                1           1           5
         Minority interest                                                      -           -           (7)
         Effect of difference in United States
              statutory rate                                                     5           5           5
         Effect of acquisition of new subsidiaries                               2          10           1
         Non-deductible interest                                                 2           2          -
         Other                                                                   4           4           4
                                                                                --          --          --        

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


                                                                     (Continued)

                                     F - 26
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

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

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

         Deferred tax assets:
<S>                                                                  <C>                 <C>     
            United States Federal and state net
                operating loss carryforwards                         $     40,303        $ 16,378
            Canadian net operating loss carryforwards                       4,162           3,065
            Non-deductible interest                                        13,757           4,608
            Canadian non-deductible interest                                1,875             798
            Canadian capital loss carryforward                                128             128
            Other                                                           3,828           2,063
                                                                     ------------        --------

                    Total gross deferred tax assets                        64,053          27,040

            Less valuation allowance                                      (53,480)        (19,429)
                                                                     ------------       ---------

         Deferred tax liabilities:
            Furniture, fixtures and equipment,
                due to differences in depreciation                          4,960           2,110
            Capitalized software/intangibles                                5,956           5,501
                                                                     ------------       ---------

                    Total gross deferred tax liabilities                   10,916           7,611
                                                                     ------------       ---------

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

       The valuation allowance for deferred tax assets as of October 1, 1994 was
       $2,388.  The net change in total valuation  allowance for the years ended
       September 30, 1997, 1996 and 1995 was an increase of $34,051, $12,695 and
       $4,346, respectively.

                                                                     (Continued)

                                     F - 27
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

     The Company has non-capital losses for income tax purposes of approximately
Canadian $9,249 available to reduce Canadian taxable income of future years,
expiring as follows:

         1999                                             $     676
         2000                                                   2,043
         2001                                                   -
         2002                                                   1,574
         2003                                                   1,877
         2004                                                   3,079
                                                          -----------

                                                          $     9,249
                                                          ===========

       Based on a history of recurring  losses,  it is questionable  whether the
       Company  will be  allowed  to utilize  these  Canadian  losses if the tax
       authority  determines  that the Company has no reasonable  expectation of
       profit.  As of September  30,  1997,  the Company also has a Canadian net
       capital  loss  carryforward  of $280.  Net capital  losses can be carried
       forward  indefinitely  but can only be utilized to offset taxable capital
       gain.

       The  Company  has  net  operating  losses  for  income  tax  purposes  of
       approximately  $110,577  available to reduce United States taxable income
       of future years, expiring as follows:

         2007                                                 $     405
         2008                                                       537
         2009                                                     2,800
         2010                                                     5,020
         2011                                                    36,922
         2012                                                    64,893
                                                              ----------

                                                              $ 110,577
                                                              =========

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


                                                                     (Continued)

                                     F - 28


<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(9) LEASES

       The Company is obligated  under capital leases for equipment which expire
       at various  dates during the next five years.  At September  30, 1997 and
       1996, the gross amounts of equipment and related accumulated amortization
       recorded under capital leases were as follows:

                                                  1997            1996
                                                  ----            ----

         Equipment                           $     26,793    $     2,068
         Less accumulated amortization             (4,835)          (291)
                                                ---------        -------

                                             $     21,958    $     1,777
                                                =========        =======


       The  Company  also has  noncancelable  operating  leases,  primarily  for
       facilities,  which expire over the next five years.  Rental expense under
       operating  leases  was  $3,385,  $1,501  and  $866  for the  years  ended
       September 30, 1997, 1996 and 1995, respectively.

       Future minimum lease payments under noncancelable leases (with initial or
       remaining  lease terms in excess of one year) and future minimum  capital
       lease payments as of September 30, 1997 are:

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

        Year ending September 30:

           1998                                           $ 8,856    $    4,150
           1999                                             4,436         3,697
           2000                                             3,089         3,121
           2001                                             3,168         2,355
           2002                                             2,772         2,211
           Thereafter                                      13,148         7,045
                                                          -------     ----------

                    Total minimum lease payments           35,469    $   22,579
                                                          =======     =========

        Less amount representing interest (at rates
           ranging from 8.7% to 17.0%)                     13,706
                                                          -------

                    Net minimum lease payments             21,763

        Less current installments of obligations under
           capital leases                                   6,423
                                                          -------
              Obligations under capital leases, excluding
                 current installments                     $15,340
                                                          =======

                                                                     (Continued)
                                     F - 29
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(10) COMMITMENTS AND CONTINGENCIES

   (a) PENSION AND PROFIT SHARING PLANS

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

   (b) LONG DISTANCE CARRIERS

       The Company is party to various  contracts  with long  distance  carriers
       pursuant to which the Company is committed to minimum  service fees.  The
       average monthly minimum commitments range from $1,600 to $6,100 per month
       over the  next  three  years.  The  Company  may be  required  to pay the
       carriers for  differences  between the commitment  amounts and the actual
       amounts billed.

   (c) LEGAL PROCEEDINGS

       On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
       "Aerotel")  filed a patent  infringement  suit against NACT alleging that
       telephone  systems  manufactured  and  sold by NACT  incorporate  prepaid
       calling  features  which  infringe  upon a patent  issued to  Aerotel  in
       November  1987.  The  complaint  further  alleges  defamation  and unfair
       competition by NACT and seeks various  damages.  NACT has filed an Answer
       and Counterclaim  denying patent infringement,  committing  defamation or
       unfair  competition and seeks judgment that the Aerotel patent is invalid
       and that Aerotel has misused its patent in  violation of antitrust  laws.
       On May 3, 1996,  NACT served its motion for summary  judgment,  which the
       Court has not yet ruled upon. Aerotel amended its complaint to include as
       defendants the Company and GST USA. The amended pleadings allege that the
       Company and GST USA have infringed the Aerotel patent,  aided and abetted
       infringement by others,  including NACT, and  participated  in, and aided
       and abetted  alleged  tortious  conduct by NACT.  The Company and GST USA
       have served answers denying all material allegations and intend to defend
       vigorously.  Pretrial  discovery  has  commenced  and is  scheduled to be
       completed  in 1998.  The case is not expected to be tried until late 1998
       at the  earliest.  NACT's  patent  counsel  believes  that NACT has valid
       defenses to the Aerotel claims.  If upheld,  these defenses would also be
       valid for all  defendants.  An unfavorable  decision in this action could
       have a  material  adverse  effect on the  Company.  Based on  information
       currently  available,  the  Company's  management  is of the opinion that
       there will be no material  impact of the  Company's  financial  position,
       results  of  operations,  or  cash  flows  as  a  result  of  this  suit.
       Accordingly,  no provision for loss has been provided in the accompanying
       consolidated financial statements.

                                                                     (Continued)

                                     F - 30
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

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

   (d) REPURCHASE AGREEMENT

       NACT is guarantor for financing  transactions executed under a repurchase
       agreement with Zions Credit  Corporation  (Zions) for a maximum of $3,482
       at September 30, 1997.  Zions provides lease  financing to NACT customers
       on a recourse basis.

   (e) EMPLOYMENT AGREEMENTS

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

(11) RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
     IN THE UNITED STATES AND IN CANADA

       These financial statements have been prepared by management in accordance
       with generally accepted accounting  principles in the United States (U.S.
       GAAP).   Except  for  the   compensation   expense  and  loss  per  share
       calculations noted below, these statements also conform,  in all material
       respects, with those accounting principles that are generally accepted in
       Canada (Canadian GAAP).


                                                                     (Continued)

                                     F - 31
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

       From October 1994 to September  1997,  750,000 common shares were held in
       escrow, their release subject to the approval of regulatory  authorities.
       In September 1997, such common shares were released from escrow. For U.S.
       GAAP purposes:  (i) the Company recorded  compensation  expense of $7,446
       which is the amount by which their market value  exceeded  their issuance
       price,  and  (ii) the  shares  were not  included  in the loss per  share
       calculations   until   September  5,  1997.   Under  Canadian  GAAP:  (i)
       compensation expense is not recorded, and (ii) the shares are included in
       the loss per share calculations for all periods. The Company's results of
       operations under Canadian GAAP are summarized as follows:
<TABLE>
<CAPTION>

                                                            Year Ended September 30,
                                                      ----------------------------------
                                                       1997           1996          1995
                                                       ----           ----          ----

<S>                                            <C>               <C>           <C>         
         Net loss                              $     (105,892)   $   (60,378)  $   (11,315)

         Loss per share                        $        (4.13)   $     (3.06)  $     (0.78)

         Weighted average common
              and common equivalent
              shares outstanding                   25,609,676    $19,738,127    14,530,796
</TABLE>

(12) RELATED PARTY TRANSACTIONS

   (a) MAGNACOM WIRELESS, LLC (MAGNACOM)

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

                                                                     (Continued)

                                     F - 32
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

       In addition, the Company has been granted a conditional option to acquire
       up to PNI's entire interest in Magnacom (currently 99%), conditioned upon
       Magnacom and the Company  entering into an agreement for the construction
       and/or  operation of Magnacom's  facilities.  The condition  precedent to
       such option has not yet been met. If and when the condition  precedent is
       met,  the exercise of the option will be subject to  compliance  with all
       applicable FCC regulations  relating to prior approval of any transfer of
       control of PCS licenses, including those relating to foreign ownership or
       control  and  requirements  regarding  the  ownership  of C and  F  block
       licenses.   Accordingly,   until   such  time  as  FCC   regulations   or
       administrative  action  permit  the  Company  to own in  excess of 25% of
       Magnacom,  the  option  by its  terms is  limited  to a 24%  interest  in
       Magnacom.

   (b) PACWEST NETWORK, INC. (PNI)

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

   (c) GST GLOBAL

       In a series of transactions during the third and fourth quarters of 1996,
       the Company acquired 3,600,000 shares of Canadian  Programming  Concepts,
       Inc.  (CPC),  a  Canadian  corporation  which is  publicly  traded on the
       Vancouver Stock Exchange,  for  consideration  of $3,659.  CPC's name was
       subsequently  changed to GST  Global.  The  Company's  shares  constitute
       approximately 25% of GST Global's total  outstanding  shares at September
       30, 1997. Several officers and directors of the Company own shares in GST
       Global amounting to approximately 4% of GST Global's  outstanding  shares
       at September 30, 1997. GST Global owes the Company $627, at September 30,
       1997, for  reimbursement of expenses made by the Company on behalf of GST
       Global.

       GST Global is to issue to the  Company  additional  common  shares of GST
       Global, subject to regulatory approval, in consideration for the transfer
       by the Company to GST Global of its rights in and to a telecommunications
       project in Mexico.

                                                                     (Continued)

                                     F - 33
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (d) TOMEN

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

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

   (d) OTHER

       The Company paid approximately  $2,066,  $2,264 and $770 in legal fees in
       1997, 1996 and 1995, respectively,  to a firm having a member who is also
       a director of the Company.

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


                                                                     (Continued)

                                     F - 34
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(13) GST USA

       In August 1994, the Company formed a  wholly-owned  subsidiary,  GST USA,
       and transferred all U.S. assets, liabilities and operations into GST USA.
       Selected financial information is as follows:

     Selected balance sheet information:

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

         Current assets                 $      138,029     $      77,506
         Non-current assets                    543,631           168,882
                                            ----------        ----------

                                        $      681,660     $     246,388
                                            ==========        ==========

         Current liabilities            $      151,692     $      34,286
         Non-current liabilities               600,836           210,243
         Minority interest                      12,208               182
         Share capital                          74,936            69,957
         Accumulated deficit                  (158,012)          (68,280)
                                           -----------        ----------

                                        $      681,660     $     246,388
                                            ==========        ==========


                                                                     (Continued)

                                     F - 35
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

     Selected information from statements of operations:
<TABLE>
<CAPTION>

                                                                                  Years ended
                                                                                 September 30,
                                                                   -----------------------------------------
                                                                     1997             1996              1995
                                                                     ----             ----              ----

<S>                                                                <C>            <C>                 <C>     
         Revenues                                                  $   66,548     $     37,721        $ 18,681
         Operating costs and expenses                                (138,083)         (77,590)        (28,942)
                                                                      -------           ------          ------

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

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

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

         Income tax expense                                              (903)             (72)           (166)
                                                                   ----------        ---------       ---------

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

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

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


                                                                     (Continued)

                                     F - 36
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

     Selected information from statements of cash flows:
<TABLE>
<CAPTION>

                                                                                  Year ended
                                                                                 September 30,
                                                                   -----------------------------------------
                                                                     1997             1996              1995
                                                                     ----             ----              ----

         Operations:
<S>                                                            <C>               <C>              <C>          
             Loss for the year                                 $     (93,169)    $     (55,155)   $     (9,447)
             Items not involving cash                                 29,584            29,256           1,590
             Changes in non-cash operating
                working capital                                        9,002            (6,400)         (3,419)
                                                                  ----------        ----------       ---------

                      Cash used in operations                        (54,583)          (32,299)        (11,276)

             Investing                                              (259,723)          (105,090)       (29,684)
             Financing                                               327,543            174,915         43,544
                                                                  ------------      ----------      -----------

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

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

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

(14) SUBSEQUENT EVENTS

       In November 1997, the Company completed a public offering of 6,440,000 of
       its common shares at $12 per share.  Proceeds of the stock offering,  net
       of offering expenses,  were approximately  $72,766.  Concurrent with such
       stock  offering,  the Company  issued  $144,000 in 12.75% senior  accrual
       notes due November 2007. The notes accrete to a total principal amount of
       $266,885 by November 2002 with semiannual interest payments beginning May
       2003. Proceeds from the issuance of such notes, net of offering expenses,
       were approximately $138,410.

       The Company has announced  that it has retained  Hambrecht & Quist LLC to
       explore alternatives for monetizing its 63% interest in NACT, including a
       potential  sale of some or all of its shares of NACT's  capital  stock to
       one or more strategic investors.

                                     F - 37
<PAGE>
                                  EXHIBIT INDEX

EXHIBIT

   3(a)  Certificate  of  Incorporation  of the  Company,  as  amended  to date,
         incorporated  by reference to Exhibit 3(a) to the  Company's  Form 10-K
         for the fiscal year ended  September  30,  1996,  as amended (the "1996
         Form 10-K").
   3(b)  By-Laws of the Company as amended to date, incorporated by reference to
         Exhibit 3.1 to the Company's Form S-3 (No. 333-38091) (the "Form S-3").
   4(a)  Senior Notes  Indenture dated as of December 19, 1995, by and among GST
         USA,  Inc.,  the Company and United  States Trust  Company of New York,
         incorporated by reference to Exhibit 2.3 to the Company's Form 20-F for
         the fiscal year ended September 30, 1995 (the "1995 Form 20-F").
   4(b)  Convertible Notes Indenture dated as of December 19, 1995, by and among
         the Company, GST USA, Inc. and United States Trust Company of New York,
         incorporated by reference to Exhibit 2.4 to the 1995 Form 20-F.
   4(c)  Indenture dated as of May 13, 1997, by and among GST Equipment Funding,
         Inc., the Company, GST USA, Inc. and United States Trust Company of New
         York,  incorporated  by reference to Exhibit 10.2 to the Company's Form
         10-Q for the period ended June 30, 1997 (the "June 1997 10-Q").
   4(d)  Indenture dated as of November 19, 1997, by and between the Company and
         United States Trust Company of New York,  incorporated  by reference to
         Exhibit 4.1 to the Company's  Form S-3 (No. 333- 38301) (the "Debt Form
         S-3").
 *10(a)  1995 Stock Option Plan of the Company, as amended to date.
 *10(b)  1996 Stock Option Plan of the Company, as amended to date.
 *10(c)  1996 Employee Stock Purchase Plan of the Company.
 *10(d)  1996 Senior Executive Officer Stock Option Plan of the Company.
 *10(e)  1996 Senior Operating Officer Stock Option Plan of the Company.
  10(f)  Amended and Restated  Credit  Agreement  dated as of April 26, 1995, by
         and  between  GST  Pacific  Lightwave,  Inc.  and Tomen  America  Inc.,
         incorporated by reference to Exhibit 1.2 to the 1995 Form 20-F.
  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,  incorporated
         by reference to Exhibit 10.4 to the June 1997 Form 10-Q.
  10(h)  Agreement  and Plan of Merger,  dated  September  27, 1996 (the "Merger
         Agreement"),  by and among TotalNet  Communications Inc.  ("TotalNet"),
         GST Newco of Texas, Inc. and the Company,  incorporated by reference to
         Exhibit  2.1 to the  Company's  Form 8-K dated  October  17,  1996 (the
         "October Form 8-K")
  10(i)  Letter dated October 17, 1996 amending the Merger  Agreement  among the
         Company,  GST Newco of  Texas,  Inc.,  and  TotalNet,  incorporated  by
         reference to Exhibit 2.2 to the October Form 8-K
  10(j)  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., incorporated
         by reference to Exhibit 10(l) to the 1996 Form 10-K.
 10(k)   Amendment No. 2 to GST  Telecommunications,  Inc. Common Stock Purchase
         Agreement  dated as of May 24, 1996,  by and among the  Company,  Tomen
         America  Inc.  and Tomen  Corporation,  incorporated  by  reference  to
         Exhibit 10(m) to the 1996 Form 10-K.
 10(l)   Credit  Agreement  dated as of May 24,  1996,  by and  between  GST New
         Mexico  Lightwave,  Inc. and TM  Communications  LLC,  incorporated  by
         reference to Exhibit 10(n) to the 1996 Form 10-K.
 10(m)   Credit  Agreement  dated as of May 24, 1996,  by and between GST Tucson
         Lightwave, Inc. and TM Communications LLC, incorporated by reference to
         Exhibit 10(o) to the 1996 Form 10-K.
 10(n)   Amended and  Restated  Consulting  Agreement  dated as of  September 1,
         1995, by and between Sunwest  Ventures,  Inc. and GST USA, Inc. and GST
         Telecom,  incorporated  by reference to Exhibit  10(p) to the 1996 Form
         10-K.
 10(o)   Personal Services Agreement dated as of October 1, 1995, by and between
         GST USA, Inc. and GST Telecom Inc. and Stephen Irwin,  incorporated  by
         reference to Exhibit 10(q) to the 1996 Form 10-K.

<PAGE>

 10(p)   Restated  and Amended  Employment  Agreement  dated as of  September 1,
         1995, by and between GST USA, Inc. and GST Telecom Inc. and John Warta,
         incorporated by reference to Exhibit 10(r) to the 1996 Form 10-K.
 10(q)   Restated  and Amended  Employment  Agreement  dated as of  September 1,
         1995,  by and between GST USA,  Inc. and GST Telecom Inc. and Robert H.
         Hanson,  incorporated  by reference  to Exhibit  10(s) to the 1996 Form
         10-K.
 10(r)   Amended and  Restated  Employment  Agreement  dated as of  September 1,
         1995, by and between GST USA, Inc. and GST Telecom Inc. and Clifford V.
         Sander,  incorporated  by reference  to Exhibit  10(t) to the 1996 Form
         10-K.
 10(s)   Employment Agreement dated March 11, 1997, by and between GST USA, Inc.
         and Joseph Basile, Jr, incorporated by reference to Exhibit 10.1 to the
         Company's  Form 10-Q for the period  ended  March 31,  1997 (the "March
         1997 10-Q").
 10(t)   Employment  Agreement  dated February 10, 1997, by and between GST USA,
         Inc.  and GST Telecom  Inc.  and Daniel L.  Trampush,  incorporated  by
         reference to Exhibit 10.2 to the March 1997 Form 10-Q.
 10(u)   Reseller  Agreement  dated  as of  October  30,  1996,  by and  between
         Magnacom  Wireless,  L.L.C.,  and GST  Telecom  Inc.,  incorporated  by
         reference to Exhibit 10(z) to the 1996 Form 10-K.
 10(v)   Agreement  and Plan of Merger  dated as of  September  26,  1996 by and
         among Call America Business  Communications  Corporation,  Call America
         Business   Communications  of  Fresno,   Inc.,  Call  America  Business
         Communications   of  Bakersfield,   Inc.,  the   shareholders  of  such
         companies, GST Newco of California, Inc., and the Company, incorporated
         by reference to Exhibit 10(u) to the 1996 Form 10-K.
 10(w)   Agreement  and Plan of Merger  dated as of May 31,  1997,  by and among
         Action Telcom Co., Britt E. Bilberry,  Timothy Harding Bilberry, Paul S
         Bilberry,  GST Action  Telecom,  Inc. and the Company,  incorporated by
         reference to Exhibit 2.1 to the Company's Form 8-K dated May 31, 1997.
 10(x)   Equipment  Loan and Security  Agreement  dated December 19, 1996 by and
         between  NTFC Capital  Corporation  and GST  Equipco,  incorporated  by
         reference to Exhibit 10(v) to the 1996 Form 10-K.
 10(y)   Loan and  Security  Agreement  dated  as of  September  4,  1996 by and
         between Siemens  Stromberg-Carlson  ("Siemens") and GST Switchco,  Inc.
         ("GST  Switchco"),  incorporated  by reference to Exhibit  10(d) to the
         Company's  Form  10-Q for the  period  ended  December  31,  1996  (the
         "December 1996 Form 10-Q").
 10(z)   Unconditional  Continuing Guaranty dated as of September 4, 1996 by and
         between Siemens and GST USA, Inc., incorporated by reference to Exhibit
         10(e) to the December 1996 Form 10-Q.
 10(aa)  Unconditional  Limited Guaranty Agreement dated as of December 19, 1996
         made  by  GST  USA,  Inc.,  in  favor  of  NTFC  Capital   Corporation,
         incorporated  by reference to Exhibit  10(f) to the December  1996 Form
         10-Q.
 10(bb)  Securities Purchase  Agreement,  dated as of February 28, 1997, between
         the Company and Ocean Horizon SRL, incorporated by reference to Exhibit
         4.1 to the Company's  Form 8-K dated  February 28, 1997 (the  "February
         Form 8-K").
 10(cc)  Securityholders  Agreement,  dated as of February 28, 1997, between the
         Registrant and Ocean Horizon SRL,  incorporated by reference to Exhibit
         4.2 to the Company's February Form 8-K.
 10(dd)  Credit  Agreement  dated as of  September  30,  1997 by and between GST
         Telecom Hawaii, Inc. and TM Communications  Hawaii LLC, incorporated by
         reference to Exhibit 99.1 to the Company's Form 8-K dated September 30,
         1997 (the "September 8-K").
 10(ee)  Service Agreement dated as of September 30, 1997 by and between Pacwest
         Network, Inc. and GST Telecom Hawaii, Inc, incorporated by reference to
         Exhibit 99.2 to the September 8-K.
 10(ff)  Management  Agreement  dated as of  September  30,  1997 by and between
         Pacwest  Network,  Inc. and GST Telecom Hawaii,  Inc.,  incorporated by
         reference to Exhibit 99.3 to the September 8-K.
 10(gg)  Agreement  dated as of  September  30,  1997 by and among  GST  Telecom
         Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc.,  incorporated
         by reference to Exhibit 99.4 to the September 8-K.
 *21     Subsidiaries of the Company.
 *23     Consent to the incorporation by reference in the Company's Registration
         Statements  on Forms S-3 and S-8 of the  independent  auditors'  report
         included herein.
 *27     Financial Data Schedule.

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