SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended__________________

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

For the transition period from October 1, 1997 to December 31, 1997
                               ---------------    -----------------
                         Commission file number 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 March 10, 1998 of the Registrant's Common
Shares, without par value (based upon the closing price of $15 per share of such
Shares on the American Stock Exchange),  held by  non-affiliates  of the Company
was $500,419,635.  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 March 10, 1998,
there were outstanding 35,752,483 of the Registrant's Common Shares, without par
value.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain portions of the  Registrant's  definitive proxy statement filed
with the Securities and Exchange  Commission (the  "Commission")  on January 28,
1998  pursuant to  Regulation  14A are  incorporated  by  reference  in Items 10
through 12 of Part III of this Transition 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 40 markets in Arizona,
California,  Hawaii, Idaho, New Mexico, Texas, Washington and Guam. In addition,
the Company has networks under  construction  which, when completed,  will serve
two 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  700  route  miles  and  an
additional 1,600 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 eight high capacity  digital  switches and
has  installed and is currently  testing six  additional  high capacity  digital
switches that are expected to become operational by the end of the first quarter
of 1998.

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
eight high capacity digital switches and has installed and is currently  testing
six  additional  high  capacity  digital  switches  that are  expected to become
operational  by the end of the first  quarter of 1998. As demand  warrants,  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.

         During the fiscal year ended  September 30, 1997 ("Fiscal  1997"),  the
Company 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  Arizona,  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  continue to 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  December  31, 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>      
Arizona....................   Phoenix                  February 1994(5)               12                              984,403
                              Tucson                   September 1995                 27                              405,390
California
  Northern California......   Concord, Oakland,        September 1997                 33                14          1,324,859
                              San Francisco,
                              Walnut Creek,
                              Livermore
                              Hayward, San             September 1997                 11                              146,801
                              Ramon
                              Mare Island              January 1997                   12                 3              1,000
                              Pleasanton               August 1996                    42                               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                                      10             40,181
                                                       1998(7)
                              Pasadena                 1st Quarter 1998                                 11            131,591

  San Joaquin Valley.......   Fresno, Bakersfield      November 1996                  44                 6            529,022
  Central Coast............   San Luis Obispo          1st Quarter 1998                                  5             41,958
                              Santa Barbara,           2nd Quarter 1998                                 17            171,571
                              Goleta
Hawaii.....................   Honolulu (Oahu)          February 1997                  20                22            365,272
                              Kauai                    December 1997                  10                               51,177
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  December  31, 1997
concerning the Company's  longhaul fiber optic  facilities  that are operational
and under construction:

<TABLE>
<CAPTION>

                                                                                    CURRENT
                                                     DATE COMMERCIALLY            OPERATIONAL             ESTIMATED
LOCATION                                               OPERATIONAL(1)           ROUTE MILES(2)         ROUTE MILES(3)
--------                                               --------------        ------------------      -----------------
<S>                                                <C>                                     <C>                   <C>
San Francisco to Walnut Creek...................   3rd Quarter 1999                         34
Walnut Creek to Fresno..........................   3rd Quarter 1999                                              194
Fresno to Bakersfield...........................   December 1997                           163
Bakersfield to Ontario..........................   3rd Quarter 1999                                              201
Los Angeles to San Luis Obispo..................   3rd Quarter 1998                                              212
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...............................   1st Quarter 1998                                              217
Hawaii Fiber connecting Kauai, Hawaii,
   Oahu, Molokai, Maui & Lanai..................   June 1997                               344
Coalinga to San Luis Obispo.....................   4th Quarter 1998                                              120
Sylmar to Ventura...............................   2nd Quarter 1998                                               69
Los Angeles to Sylmar to Santa Monica...........   2nd Quarter 1998                                               67
Santa Monica to Los Angeles.....................   2nd Quarter 1998                                               19
Los Angeles to Palmdale.........................   1st Quarter 1998                                               72
Palmdale to Las Vegas...........................   1st Quarter 1998                                              320
Las Vegas to Phoenix............................   1st Quarter 1998                                              306
</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.


                                       -6-
<PAGE>
(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  December  31, 1997
concerning the Company's high capacity  digital switches that are operational or
are installed and currently being tested:

<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..........................................   December 1997
                           Walnut Creek.............................................   November 1997
Hawaii                     Honolulu.................................................   February 1997
Idaho                      Boise....................................................   1st Quarter 1998
New Mexico                 Albuquerque..............................................   September 1997
Oregon                     Portland (Vancouver, Washington).........................   1st Quarter 1998
Texas                      Houston..................................................   1st Quarter 1998
Washington                 Spokane..................................................   December 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.

         See  "Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations--Overview"  for a  description  relating to the Company's
recent sale of its interest in NACT.

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 Brooks Fiber Properties Inc.  ("Brooks") and recently
announced  that it  entered  into an  agreement  to acquire  MCI,  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.

         On  February  25,  1998,  U S WEST  Communications,  Inc.  ("U S WEST")
petitioned  the  Federal  Communications  Commission  (the "FCC") to allow it to
build and operate packet-and call-switched data networks across LATA boundaries,
to permit it to carry  interLATA  data  traffic  incident  to its  provision  of
digital subscriber line services,  to not require it to make those data services
available  on a  discounted  resale  basis  and to not  require  it to make  the
non-bottleneck  elements of such services  available on an unbundled  basis. The
Company provides  certain  services with which U S WEST proposed  services would
compete if such services are approved by the FCC.

         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  31,  1997,  the
Company had 305 sales and  marketing  employees  in 18 cities and  utilized  233
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.

         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.


                                       -9-

<PAGE>
         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  a  decision   implementing   the
interconnection  portions of the  Telecommunications  Act (the  "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 United States Court of Appeals for
the Eighth  Circuit  (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 Supreme  Court has  accepted for review 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.

         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:

                                      -10-

<PAGE>

         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  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.  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.

                                      -11-

<PAGE>
         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 45 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 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.

         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

                                      -12-

<PAGE>

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 permit foreign  nationals to own
up to 100% of a company that directly holds a common  carrier radio license.  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 Company is currently  examining the
procedures  that could be  utilized  to  transfer  such  licenses to the Company
without  compensation  to PNI. 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  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

                                      -13-
<PAGE>
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 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 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. An application was filed on February 5, 1998 to
expand CLEC authority to all authorized exchanges in Oregon.

         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.

                                      -14-
<PAGE>
         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.

         As of December 31, 1997,  the Company had 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
December 31, 1997,  Global had  approximately  14.6 million shares  outstanding.
Global is to issue to the Company additional common shares of Global, subject to
approval of the Vancouver Stock Exchange (the "VSE"),  in consideration  for the
transfer by the  Company to Global of its rights in and to a  telecommunications
project in Mexico.  Global  employs its own operating  management and has raised
capital required for its proposed activities.

         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")  for  approximately  $13.7  million.  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,  all of which
has been  advanced  to date.  Bestel is in the process of  constructing  a 2,270
kilometer fiber optic telecommunications  network in Mexico which, when operable
will provide  capability for Bestel to become a  facilities-based  long distance
carrier.

         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.  Global
recently announced it has entered into an agreement to transfer its 80% interest
in Vitacom to Highpoint Capital  Corporation,  a company which,  pursuant to the
agreement, will be controlled by Global.

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 was the winning bidder
for 10 MHz licenses in the FCC's F Block in 13 markets in Hawaii,  Idaho, Oregon
and Washington in an FCC auction.  Magnacom currently has an application on file
with the FCC  requesting  authority  to  effect a  reorganization  with PCS Plus
Holdings  Corporation ("PCS Plus Holdings"),  another company  controlled by Mr.
Warta  (the  "Reorganization").  Pursuant  to the  Reorganization,  each  of the
members of Magnacom will  contribute  their  interests in exchange for shares of
PCS Plus Holdings.  PCS Plus Holdings will in turn  contribute  such  interests,
along with the assets and licenses of Magnacom, to PCS Plus, Inc., a wholly


                                      -15-

<PAGE>
owned  subsidiary  of PCS  Plus  Holdings  ("PCS  Plus"),  which  in  turn  will
downstream such assets and licenses to its wholly owned subsidiaries.

         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 December  31,  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 and interests in
C and F block  licenses.  Accordingly,  until  such time as FCC  regulations  or
administrative  action  permit the Company to own in excess of 25% of  Magnacom,
the option by its terms is limited to a 24% interest in  Magnacom.  The Company,
Magnacom and PNI are in  negotiations  with  respect to modifying  the option in
order to provide,  among other  things,  that the Company own no more than a 25%
interest in Magnacom or PCS Plus Holdings upon exercise of such option.

         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.  PCS Plus Pacific  currently  has an
application on file with the FCC  requesting  authority for a pro forma transfer
of  control  pursuant  to which PCS Plus  Pacific  would  become a wholly  owned
subsidiary of PCS Plus.

         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.


                                      -16-

<PAGE>
EMPLOYEES

         As of December 31,  1997,  the Company and its  subsidiaries  had 1,100
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.

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
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.

         Concurrent  with the  Company's  sale of  NACT,  the  Company  and NACT
entered into an  agreement  whereby the Company  generally  will bear 50% of any
damages in the action, including reasonable attorneys fees, losses, liabilities,
claims  and  assessments,  royalties  and  license  fees.  Under the  agreement,
subsequent  to a  determination,  if any, by a court that the Aerotel  Patent is
valid and that it has been infringed,  the Company's  liability  associated with
royalties, license fees, refunds and cost of product replacement or modification
is limited to $2.0 million.

         Pretrial  discovery  has  commenced and is scheduled to be completed in
1998.  The case is not  expected  to be tried  until late 1998 at the  earliest.
NACT's patent counsel believes that NACT has valid


                                      -17-
<PAGE>

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 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 District  Court  consolidated  a
number of similar lawsuits filed by U S WEST 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 motions  filed by all other  defendants to dismiss the
complaint.  Should U S WEST prevail in its suit, it could have an adverse impact
on 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.  The state
court  consolidated  the case with a number of  substantially  similar  lawsuits
filed against other CLECs,  including  MFS,  Sprint,  MCI and AT&T. GST Net (AZ)
answered U S WEST's complaint on August 6, 1997,  alleging,  among other things,
that U S  WEST's  complaint  is  preempted  by the  Telecommunications  Act.  On
February 27, 1998,  GST Net(AZ)  joined in the other CLECs'  motions to dismiss.
Should U S WEST  prevail in its appeal,  it could have an adverse  impact on 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.

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 VSE (ticker symbol: GTE.U).

                                      -18-
<PAGE>
         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
                                                                      ----             ---                ----              ---

<S>                                                                <C>   <C>          <C>  <C>          <C>              <C>   
CALENDAR YEAR 1995
    Fourth Quarter........................................        $ 7 3/16          $ 5 9/16              --               --

CALENDAR YEAR 1996
    First Quarter.........................................          8 11/16           5 15/16             --               --
    Second Quarter........................................         15 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 .......................................         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 a credit  facility (the "Tomen  Facility") with Tomen America,
Inc. and its  affiliates  ("Tomen"),  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%  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.

                                      -19-

<PAGE>
NUMBER OF SHAREHOLDERS

         As of March 6, 1998,  there were 252 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 December 19, 1997,  the Company issued an aggregate of 24,554 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. ("Tri-Star").

         On November 20, 1997, the Company issued an aggregate of 221,838 Common
Shares  to  27  individuals  and/or  entities  as  an  installment   payment  in
consideration for the Company's acquisition in October 1996 of TotalNet.

         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.


                                      -20-

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

                                                       THIRTEEN
                                        YEAR ENDED   MONTHS ENDED                YEAR ENDED                  THREE MONTHS ENDED
                                        AUGUST 31,  SEPTEMBER 30,              SEPTEMBER 30,                    DECEMBER 31,
                                       -----------  -------------   ---------------------------------     -----------------------
                                           1993        1994(1)         1995        1996         1997          1996         1997
                                           ----        -------         ----        ----         ----          ----         ----
                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)               (UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Revenues:
<S>                                       <C>          <C>          <C>         <C>         <C>            <C>          <C>
         Telecommunications services..      $  --       $   112      $ 11,118    $ 31,726     $ 82,593       $18,437      $27,552
         Telecommunications products..         --         5,889         7,563       9,573       23,374         4,780        8,706
                                            -----       -------       -------     -------      -------        ------       ------
                  Total revenues......         --         6,001        18,681      41,299      105,967        23,217       36,258
Operating loss........................      (418)       (1,337)      (11,631)    (42,597)     (86,543)      (17,988)     (21,855)
Other expenses (income):
         Interest income..............       (35)         (254)         (303)     (5,549)      (7,026)         (839)      (4,101)
         Interest expense(2)..........         --            27           838      21,224       37,665         5,434       18,948
         Other, net...................        439         1,877         1,347       2,360      (5,359)           104        1,569
Income tax expense....................         --           502(3)        166(3)      157          903            --          850
                                           ------        ------        ------      ------       ------        ------       ------
Net loss(4)...........................    $ (822)      $(3,491)     $(11,315)   $(60,378)   $(113,338)     $(22,634)    $(39,593)
                                          =======      ========     =========   =========   ==========     =========    =========
Net loss per share, 
         basic and dilutive(5)........     $(.22)        $(.35)        $(.82)     $(3.18)      $(4.71)       $(1.02)      $(1.39)
                                           ======        ======        ======     =======      =======       =======      =======
Weighted average number of Common
         Shares outstanding...........      3,821         9,879        13,781      18,988       24,703        22,237       30,804
Ratio of earnings to fixed charges....         --            --            --          --           --            --           --
OTHER DATA:
Capital expenditures..................       $  4       $ 1,486      $ 33,922    $ 97,561     $225,743       $58,047      $46,663
EBITDA(6).............................      (418)         (779)       (8,807)    (33,936)     (51,881)      (13,208)     (12,032)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and investments    $ 4,746       $ 5,062       $ 6,895     $66,519      $59,184                   $199,053
Restricted cash and investments.......         --            --            --      16,000      171,750                    144,450
Property and equipment................          4         4,805        39,583     134,714      385,252                    433,680
Accumulated depreciation..............         --           221         1,550       7,139     (20,738)                   (26,785)
Investment in joint ventures(7).......      4,616         3,552         2,859       1,364           --                         --
Total assets..........................      9,398        26,769        73,125     301,701      728,405                    898,174
Current portion of long-term debt and
         capital lease obligations....         --            --           959       5,554       10,656                     10,865
Long term debt and capital lease obligations   --            --        19,746     234,127      628,043                    779,428
         (excluding current portion)..
Redeemable Preferred Shares...........         --            --            --          --       51,756                     54,635
Common Shares and commitment to issue
         Common Shares(8).............     10,511        25,075        51,660      98,101      149,880                    221,709
Accumulated deficit...................    (1,149)       (4,640)      (15,955)    (76,333)    (189,671)                  (229,264)
Shareholders' equity (deficit)........      9,362        20,435        35,705      21,768     (39,791)                    (7,555)


                                                                                  (FOOTNOTES APPEAR ON FOLLOWING PAGE)
</TABLE>

                                      -21-

<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"),  $15.2 million for Fiscal
         1997,  $2.5 million for the three  months  ended  December 31, 1996 and
         $3.7 million for the three months ended  December 31, 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) million for Fiscal 1994, (ii) $2.4 million for Fiscal 1995, (iii)
         $.4 million for Fiscal 1996,  (iv) $(.6) million  Fiscal 1997, (v) $.05
         million for the three  months  ended  December  31, 1996 and (vi) $(.5)
         million for the three months ended December 31, 1997.

(5)      Under  U.S.  Generally  Accepted  Accounting  Principles,  net  loss is
         increased  for  the  accretion  of  Redeemable   Preferred  Shares  (as
         hereinafter  defined)  totaling  $3.0  million for Fiscal 1997 and $3.1
         million for the three months ended December 31, 1997.

(6)      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.

(7)      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.

(8)      At December  31, 1997,  the Company was  committed to issue a number of
         Common  Shares with a market  value of $.6  million,  based on the then
         market value of the Common  Shares and payable at various  times in the
         fiscal year ending  December  31,  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 40 markets in Arizona,  California,  Hawaii,  Idaho,  New  Mexico,  Texas,
Washington and Guam. In addition,  the Company has networks  under  construction
which, when completed, will serve two 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  700
route  miles  and an  additional  1,600  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.


                                      -22-


<PAGE>
         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 acquisitions.  The Company expects to continue to make
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.

         The Company changed its fiscal year end from September 30th 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 is providing
investors  audited  financial  information for the three month transition period
ended December 31, 1997 and will provide audited  financial  information for the
subsequent  12-month  periods  ending  December 31st. As a result of the limited
revenues and significant  expenses associated with the expansion and development
of its  networks  and  services,  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  eight high capacity  digital  switches and has installed
and is currently  testing six additional high capacity digital switches that are
expected  to become  operational  by the end of the first  quarter  of 1998.  As
demand warrants, 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 $2.3 million per month as of January 1, 1998,
increasing to a maximum of $6.1 million per month over the next three years.  If
such  requirements  are not  satisfied,  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

                                      -23-

<PAGE>
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 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,  negative  EBITDA and losses while it expands
its network  operations and builds its customer base. 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 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.

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

         MANUFACTURING.  In a series of transactions  between 1993 and 1995, the
Company  acquired 100% of the outstanding  capital stock of NACT, which produces
advanced  telecommunications  switching  platforms with integrated  applications
software and network telemanagement  capabilities.  The aggregate  consideration
paid for the Company's  100%  interest in NACT was $8.9  million,  consisting of
$4.1 million in cash and notes payable and 956,283  Common Shares valued at $4.8
million. In February 1997, the


                                      -24-
<PAGE>
Company sold one million  shares of NACT's common stock for net proceeds of $9.0
million.  In February 1998, the Company sold its remaining  interest in NACT for
net proceeds of $86.5 million.

         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.  In  addition,  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 and Magnacom are presently in negotiations
with  respect  to  modifying  their  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 the foreign ownership of 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 term is
limited to a 24%  interest in  Magnacom.  The  Company,  Magnacom and PNI are in
negotiations  with  respect to modifying  the option in order to provide,  among
other things,  that the Company own no more than a 25% interest in Magnacom upon
exercise of such option.

         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  $6.0
million and $7.0 million, depending on the terms of the warrant.

RESULTS OF OPERATIONS

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

         REVENUES.  Total  revenue for the three months ended  December 31, 1997
increased  $13.1 million,  or 56.2%, to $36.3 million from $23.2 million for the
three months ended December 31, 1996.  Telecommunications  services  revenue for
the three months ended December 31, 1997 increased  $9.1 million,  or 49.4%,  to
$27.5 million from $18.4  million for the three months ended  December 31, 1996.
The increase in  telecommunications  services  revenue  resulted  primarily from
increased  local and long distance  service  revenue  generated by the Company's
networks.  To a  lesser  extent,  the  increase  in  revenue  resulted  from the
acquisitions  of Action Telcom in May 1997 and the Guam  operations of Sprint in
October 1997. Additionally, during the three months ended December 31, 1997, the
Company completed a $1.5 million longhaul conduit sale.  Product revenue for the
three months ended December 31, 1997 increased $3.9 million,  or 82.1%,  to $8.7
million  from $4.8 million for the three  months  ended  December 31, 1996.  The
increase in product  revenue  resulted  primarily  from the  inclusion of Action
Telcom's  sales of NAMS. To a lesser  extent,  the increase in product  revenues
resulted from increased unit sales of NACT's STX switch.


                                      -25-


<PAGE>
         OPERATING EXPENSES. Total operating expenses for the three months ended
December 31, 1997 increased $16.9 million, or 41.0%, to $58.1 million from $41.2
million for the three months ended December 31, 1996.  Network  expenses,  which
include direct local and long distance circuit costs, increased $3.7 million, or
23.5%, to $19.4 million, or 70.5% of telecommunications services revenue for the
three months  ended  December 31, 1997  compared to $15.7  million,  or 85.3% of
telecommunications  services  revenue for the three  months  ended  December 31,
1996.  The primary  reason for the decrease in network  expenses as a percent of
revenue is the increase in on-net revenues generated at the Company's network as
a percent of total revenues.  Facilities administration and maintenance expenses
(consisting  primarily  of costs  related to  personnel  providing  maintenance,
monitoring and technical  assistance  for the Company's  networks) for the three
months ended December 31, 1997 increased $.2 million,  or 5.6%, to $3.5 million,
or 12.7% of  telecommunications  services revenue,  compared to $3.3 million, or
18.0%  of  telecommunications  services  revenue,  for the  three  months  ended
December 31, 1996.

         Cost of product  revenue,  which  includes  the costs  associated  with
product revenue of NACT and Action Telcom,  increased $1.3 million, or 70.4%, to
$3.1  million for the three  months  ended  December  31, 1997 from $1.8 for the
three months  ended  December  31,  1996.  Cost of product  revenue was 35.6% of
product  revenue for the three months ended  December 31, 1997 compared to 38.1%
for the three  months ended  December 31, 1996.  The decrease in cost of product
revenue as a percentage of product revenue resulted  primarily from economies of
scale  related  to  increased  unit  sales of NACT's STX  switch.  Research  and
development  costs for the three months ended  December 31, 1997  increased  $.4
million,  or 90.5%,  to $.8 million  from $.4 million for the three months ended
December 31, 1996.  The increase was due to the addition of personnel to enhance
the  current  switch  product  line and to  facilitate  the  development  of new
switching products and applications.

         Selling, general and administrative expenses for the three months ended
December 31, 1997 increased $7.2 million,  or 47.2%, to $22.4 million from $15.2
million for the three months ended December 31, 1996. The increase is due to the
expansion  of  the  Company's  CLEC  and  enhanced  services   operations,   the
acquisition  of two  companies  between May and October 1997 and the hiring of a
significant number of marketing,  management  information and sales personnel to
implement the  Company's  integrated  services  strategy.  Selling,  general and
administrative  expenses  were 61.9% of total revenue for the three months ended
December 31, 1997  compared to 65.6% of total revenue for the three months ended
December 31, 1996.

         Depreciation  and  amortization for the three months ended December 31,
1997 increased $4.2 million, or 89.0%, to $8.9 million from $4.7 million for the
three  months  ended  December  31,  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
longhaul fiber optic facilities and installs additional  switches.  Depreciation
and  amortization was 24.4% of total revenue for the three months ended December
31, 1997 compared to 20.2% for the three months ended December 31, 1996.

         OTHER  EXPENSES/INCOME.  For the three months ended  December 31, 1997,
net other expenses  increased  $13.1 million,  or 281.8%,  to $17.7 million,  or
48.9% of total revenue,  from $4.6 million,  or 20.0% of total revenue,  for the
three months ended  December 31, 1996.  The primary  reason for the increase was
the inclusion of interest expense  associated with the Secured Notes and Accrual
Notes.  The increase in interest expense was partially offset by interest income
earned on the investment of a portion of the proceeds of the sale of such notes.
To a lesser extent,  net other expenses  increased due to the Company's share of
Global's losses and to NACT's income tax expense as well as minority interest in
the income of NACT.

                                      -26-


<PAGE>
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,  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.

                                      -27-

<PAGE>
         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. 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 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


                                      -28-


<PAGE>
operational.  To a lesser extent,  the increase in depreciation and amortization
was also due to increased  amortization  of  intangible  assets  resulting  from
acquisitions.

         OTHER  EXPENSES/INCOME.  Net other  expenses  income  for  Fiscal  1996
increased  $16.1 million to $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.

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

         The Company's net cash used in operating and investing  activities  was
$83.5  million,  $318.6  million and $139.0  million for the three  months ended
December 31, 1997, Fiscal 1997, and Fiscal 1996, respectively. Net cash provided
by financing  activities  from  borrowings and equity  issuances to fund capital
expenditures,  acquisitions  and  operating  losses was $226.7  million,  $313.1
million, and $194.3 million for the three months ended December 31, 1997, Fiscal
1997, and Fiscal 1996, respectively.

         Capital  expenditures  for the three  months  ended  December 31, 1997,
Fiscal  1997,  and Fiscal 1996 were $46.7  million,  $225.7  million,  and $97.6
million,  respectively.  The Company  estimates  1998  capital  expenditures  of
approximately  $245 million.  The majority of these expenditures are 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,  GST 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 October 1997,
the Company acquired the assets of Sprint's operations in Guam for consideration
of $2.0  million  in cash and $.5  million in  liabilities  for  services  to be
provided to Sprint.

                                      -29-

<PAGE>
         In  September  1996,  the  Company  entered  into a Loan  and  Security
Agreement  (the  "Siemens  Loan   Agreement")   with  Siemens  Telecom  Networks
("Siemens")  which provides for loans by Siemens of up to an aggregate of $226.0
million to finance the purchase of Siemens  equipment and certain equipment from
other  suppliers.  At December 31,  1997,  $116.0  million of such  facility was
available to the Company (of which $7.9 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 an equipment loan and
security agreement (the "NTFC Loan Agreement") with NTFC Capital Corp.  ("NTFC")
which provides for $50.0 million of equipment  financing to finance the purchase
of equipment  and products  from  Northern  Telecom Inc.  (all of which had been
provided to the Company at December 31, 1997).

         In 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 for  aggregate  net  proceeds of $20.8  million.  Each  Special
Warrant was  exercisable  for one common  share and  one-half of one warrant (an
"Ordinary Warrant") to purchase one additional common share for a purchase price
of $13.  Ordinary  Warrants to purchase  984,650 Common Shares were exercised in
February  1998  resulting  in  aggregate  net  proceeds  to the Company of $12.8
million.

         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.  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 February  1998, the Company  completed the sale of its remaining  interest in
NACT for net proceeds of $86.5 million.

         In May 1997, GST Equipment Funding,  Inc. ("GST Funding") completed the
sale of $265.0 million  principal amount of Secured Notes. Of the $255.8 million
of net proceeds from the issuance of the Secured Notes,  as of December 31, 1997
approximately $93.8 million had been used to purchase securities pledged to fund
the first six interest  payments on the Secured Notes and  approximately  $104.4
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  indenture  relating  to the  Secured  Notes  includes
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 offerings,  approximately  $211.2 million in the aggregate,
to

                                      -30-

<PAGE>
fund the  expansion  of its  infrastructure,  the  expansion of its products and
service offerings and for working capital and general corporate purposes.

         As of December 31, 1997, the Company had $790.3 million of indebtedness
outstanding. In addition, as of December 31, 1997, the Company had $25.0 million
of  availability  under the Tomen  Facility and $108.1  million of  availability
under  the  Siemens  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  $59.2 million (of which $35.1
million will be made from funds securing the Secured  Notes),  $63.3 million (of
which $35.1 million will be made from funds securing the Secured  Notes),  $66.1
million (of which $17.6  million  will be made from funds  securing  the Secured
Notes),  $115.9 million and $114.2 million in 1998,  1999,  2000, 2001 and 2002,
respectively.   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 December  31,  1997,  the Company had cash,  cash  equivalents,  and
investments,  including restricted cash and investments, of approximately $351.1
million,  compared to $230.9 million at September 30, 1997. The Company believes
that the net proceeds from the sale of NACT and the cash on hand  (including the
remaining  proceeds  from the  Secured  Notes  offering  available  to  purchase
equipment), and borrowings expected to be available under the Tomen Facility and
the Siemens  Loan  Agreement  will provide  sufficient  funds for 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  December  31,  1997,  the  Company had a U.S.  net  operating  loss
carryforward of  approximately  $130.4 million and a Canadian net operating loss
carryforward of approximately Cdn. $11.1 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.


                                      -31-
<PAGE>
         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial   Accounting   Standard  ("FAS")  No.  130,  "Reporting
Comprehensive  Income." FAS No. 130 established  standards for the reporting and
display of comprehensive income and its components in the financial  statements.
The Company is required to adopt the provisions of FAS No. 130 in 1998, however,
the  Company  believes  that  adopting  this new  accounting  standard  will not
materially  impact the manner of  presentation  of its  financial  statements as
currently and previously reported.

         In June 1997, the FASB issued FAS No. 131,  "Disclosure  about Segments
of an  Enterprise  and  Related  Information",  which  changes  the  way  public
companies report  information  about operating  segments.  FAS 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.  The Company is
required to adopt the provisions of FAS No. 131 in 1998. The Company has not yet
completed  its analysis of the impact on the financial  statements  that will be
caused by the adoption of this accounting standard.

YEAR 2000 PROGRAM

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

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

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

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

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by this item is incorporated by reference from
the Company's  definitive  proxy  statement filed with the Commission on January
28, 1998 pursuant to Regulation 14A of the General Rules and  Regulations  under
the Securities Exchange Act of 1934 ("Regulation 14A").

                                      -32-


<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.

         The information required by this item is incorporated by reference from
the Company's  definitive  proxy  statement filed with the Commission on 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 filed with the Commission on January
28, 1998 pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On June 23, 1994, the Company entered into agreements (the "GST Telecom
Agreements") with Pacwest (an entity controlled by John Warta, now the Company's
Chairman  of the Board  and  Chief  Executive  Officer),  pursuant  to which the
Company and Pacwest formed a new  corporation,  GST Telecom,  for the purpose of
developing  telecommunications  networks.  Under  the  terms of the  agreements,
Pacwest contributed the stock of GST Pacific,  GST Tucson and GST Hawaii and the
Company  made  certain  funding  commitments  (all of  which  were  subsequently
satisfied) and contributed its 60% interest in GST Tucson, for which the Company
received  60% and  Pacwest  received  40% of the capital  stock of GST  Telecom.
Effective  June 1, 1995,  the  Company  acquired  an  additional  20%  ownership
interest in GST Telecom from Pacwest in exchange for  1,000,000  Common  Shares.
Effective  October  20,  1995,  the Company  acquired  Pacwest's  remaining  20%
interest  in GST  Telecom  for which  Pacwest  was  eligible  to receive up to a
maximum of 1,000,000  Common  Shares  (valued at $10.00 per Common  Share) based
upon the fair market value of a 20% interest in GST Telecom,  as  determined  by
independent appraisal. The Company engaged an investment banking firm to provide
such appraisal,  which  appraisal  valued such 20% interest at not less than $10
million.  In November  1996,  1,000,000  Common  Shares,  which had been held in
escrow since  October 20, 1995,  were  distributed  to the designees of Pacwest,
principally Messrs. Warta and Sander.

         Prior to his  employment  with  the  Company,  Mr.  Warta  served  as a
consultant to Tomen for which he was paid a fee. Mr. Warta continued to serve as
a paid consultant to Tomen through June 1997 and served as an unpaid  consultant
from June  1997 to March  1998.  Simultaneously  with the  execution  of the GST
Telecom  Agreements,  Pacwest contracted with the Company to receive a fee equal
to 1% of the  aggregate  debt  and  equity  financing  provided  by Tomen to the
Company.  Mr. Sander,  Senior Vice President and Treasurer of the Company,  is a
member of Pacwest  and  participated  in such  fees.  During the last two fiscal
years,  the  Company  incurred  approximately  $635,000 of such fees to Pacwest.
Effective October 1, 1997, the obligation to pay any such fee was terminated.

         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.

         The  operations of the Company's  Hawaiian  microwave  network  require
radio  licenses  from the FCC.  PNI,  an entity  controlled  by Mr.  Warta,  the
Company's  Chairman of the Board and Chief Executive  Officer,  holds the Hawaii
microwave  licenses.  Under agreements  between the Company and PNI, the Company
pays a monthly  fee of $3,000 to PNI and PNI pays an  offsetting  monthly fee to
the Company, in connection with the operation and use of the network. PNI has an
application  pending  with the FCC to assign the  microwave  radio  licenses  to
Pacwest Network Hawaii Inc., an entity  controlled by John Warta. The Company is
currently  examining  the  procedures  that could be utilized  to transfer  such
licenses to the Company without compensation to PNI.


                                      -33-

<PAGE>
         See "Business - Magnacom" for a description of transactions relating to
Magnacom and PCS Plus Pacific, companies controlled by John Warta, the Company's
Chairman of the Board and Chief Executive Officer.

         In November 1996, 1,500,000 of the common shares of Global owned by the
Company were  purchased at cost from W. Gordon  Blankstein,  formerly a director
and Chairman of the Company.

         Stephen  Irwin,  Vice  Chairman and  Secretary  of the  Company,  is of
counsel to the law firm of Olshan  Grundman Frome & Rosenzweig  LLP,  counsel to
the Company.  In  connection  with such  services,  such firm  received  fees of
approximately $1.8 million for each of Fiscal 1996 and Fiscal 1997.

         Peter E.  Legault,  a director of the  Company,  is a director and Vice
President of Thomson  Kernaghan,  which was engaged by the Company during Fiscal
1996 and Fiscal 1997 to solicit  sources of financing  for the Company,  and was
one of the  placement  agents  for the  Company's  sale of special  warrants  in
October  1996.  In  connection  with such  services,  such firm received fees of
approximately $500,000 during Fiscal 1997.

         In May  1997,  the  Company  loaned  $100,000  to  Joseph  Basile,  the
President,  Chief Operating Officer and a director of the Company, to enable him
to purchase a new primary residence in the Vancouver,  Washington area. The loan
matures in March 2000,  accrues  interest at a rate of 6% per annum and is to be
prepaid  to the  extent of the  proceeds  from the sale of Mr.  Basile's  former
residence and from the sale of Common  Shares  acquired upon exercise of options
held by Mr.  Basile.  Such loan was made pursuant to the terms of his employment
agreement with the Company,  which was approved by the Board of Directors of the
Company.

         As of March 1, 1998, the Company has loaned $72,000 to Daniel Trampush,
Senior Vice President and Chief Financial Officer of the Company,  to enable him
to purchase a new primary residence in the Vancouver,  Washington area. The loan
is interest-free and matures in March 2002 and is to be prepaid to the extent of
the proceeds  from the sale of Common  Shares  acquired upon exercise of options
held by Mr. Trampush. Such loan was made pursuant to the terms of his employment
agreement with the Company,  which was approved by the Board of Directors of the
Company.

         In September  1997, an aggregate of 562,500 Common Shares were released
from  escrow to Ian  Watson  and W.  Gordon  Blankstein,  former  directors  and
officers of the Company.  Such Common Shares were issued to provide incentive in
the development of the Company's business and had been held in escrow since 1990
under the policies of the VSE. Such Common Shares were released  under the terms
of the applicable escrow agreement.  In accordance with U.S.  generally accepted
accounting   principles,   the  Company  recognized   compensation   expense  of
approximately  $5.6  million  when such Common  Shares were  released to Messrs.
Watson and Blankstein.

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

(a)(1)   Consolidated  Financial  Statements:  see  the  Index  to  Consolidated
         Financial Statements.
   (2)   Financial Statement Schedule:  see page S-1.
   (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").


                                      -34-

<PAGE>
   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; incorporated
         by reference  to Exhibit  10(a) to the Company Form 10-K for the fiscal
         year ended September 30, 1997 (the "1997 Form 10-K").
  10(b)  1996 Stock Option Plan of the Company, as amended to date, incorporated
         by reference to Exhibit 10(b) to the 1997 Form 10-K.
  10(c)  1996  Employee  Stock  Purchase  Plan of the Company,  incorporated  by
         reference to Exhibit 10(c) to the 1997 Form 10-K.
  10(d)  1996  Senior  Executive  Officer  Stock  Option  Plan  of the  Company,
         incorporated by reference to Exhibit 10(d) to the 1997 Form 10-K.
  10(e)  1996  Senior  Operating  Officer  Stock  Option  Plan  of the  Company,
         incorporated by reference to Exhibit 10(e) to the 1997 Form 10-K.
  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.

                                      -35-
<PAGE>
 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.,  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.

                                      -36-

<PAGE>
 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.
 10(hh)  Stock  Purchase  Agreement  dated  December  31,  1997 by and among GST
         Telecommunications,  Inc.,  GST  USA,  Inc.  and  World  Access,  Inc.,
         incorporated  by reference to Exhibit  99.2 to the  Company's  Form 8-K
         dated January 6, 1998.
 *10(ii) 1997 Stock Option Plan of the Company, as amended to date.
 *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  transition  period ended December 31, 1997: (i)
         Form 8-K dated  January 6,  1998,  reporting  under Item 5 thereof  the
         announcement  that World Access,  Inc. would buy a 63% interest in NACT
         from the Company.

                                      -37-

<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 17th day of March, 1998.

                                             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,  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              March 17, 1998
--------------------------------   Officer (Principal Executive Officer) and
      (John Warta)                 Director

 /s/ Daniel L. Trampush            Senior Vice President and Chief Financial           March 17, 1998
--------------------------------   Officer (Principal Financial Officer)
      (Daniel L. Trampush)

 /s/ Clifford V. Sander            Senior Vice President, Treasurer and Chief          March 17, 1998
--------------------------------   Accounting Officer (Principal Accounting
      (Clifford V. Sander)         Officer)

 /s/ Stephen Irwin                 Vice Chairman of the Board, Secretary and           March 17, 1998
--------------------------------   Director
      (Stephen Irwin)

 /s/ Joseph A. Basile, Jr.         President, Chief Operating Officer and              March 17, 1998
--------------------------------   Director
      (Joseph A. Basile, Jr.)
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

          SIGNATURE                         TITLE                                        DATE
          ---------                         -----                                        ----
<S>                                <C>                                                 <C> 

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

 /s/ Jack G. Armstrong
------------------------------     Director                                            March 17, 1998
       (Jack G. Armstrong)


------------------------------     Director
        (Mitsuhiro Naoe)

 /s/ Joseph G. Fogg, III
------------------------------     Director                                            March 17, 1998
      (Joseph G. Fogg, III)

 /s/ Thomas E. Sawyer
------------------------------     Director                                            March 17, 1998
       (Thomas E. Sawyer)

 /s/ A. Roy Megarry
------------------------------     Director                                            March 17, 1998
        (A. Roy Megarry)

The Company's Authorized
Representative
in the United States

 /s/ Daniel L. Trampush
------------------------------
Daniel L. Trampush                                                                     March 17, 1998
</TABLE>

<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

                                                                         Page(s)

GST TELECOMMUNICATIONS, INC.

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

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

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

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

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

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




                                      F-1

<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 December 31, 1997 and September
30,  1997 and 1996,  and the  related  consolidated  statements  of  operations,
shareholders'  (deficit) equity, and cash flows for the three-month period ended
December  31,  1997 and for each of the  years in the  three-year  period  ended
September  30,  1997.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,   in   all   material   respects,   the   financial   position   of  GST
Telecommunications,  Inc. and subsidiaries as of December 31, 1997 and September
30,  1997 and 1996,  and the  results of its  operations  and cash flows for the
three-month  period  ended  December  31,  1997 and for each of the years in the
three-year  period  ended  September  30, 1997,  in  conformity  with  generally
accepted accounting principles 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 the
three-month  period  ended  December  31,  1997 and 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
-------------------------
Portland, Oregon
February 25, 1998

                                      F - 2
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                           Consolidated Balance Sheets

                      (In thousands, except share amounts)

                                (In U.S. Dollars)
<TABLE>
<CAPTION>
                                                                                    December 31,            September 30,
                                       ASSETS                                           1997             1997           1996
                                       ------                                           ----             ----           ----

Current assets:
<S>                                                                                 <C>                <C>           <C>
      Cash and cash equivalents                                                     $  199,053         $ 55,862      $ 61,343
      Restricted cash and investments                                                   31,731           50,039        16,000
      Accounts receivable, net                                                          27,324           22,373         9,472
      Investments                                                                        7,619            3,322         5,176
      Inventory, net                                                                     3,412            3,458         2,406
      Other current assets                                                              13,127           12,588         6,151
                                                                                    ----------         --------      --------
                                                                                       282,266          147,642       100,548

Restricted investments                                                                 112,719          121,711             -
Property and equipment, net                                                            406,895          364,514       127,575
Goodwill, net                                                                           36,056           36,936        35,730
Other assets, net                                                                       60,238           57,602        37,848
                                                                                    ----------         --------      --------
                        Total assets                                                $  898,174         $728,405      $301,701
                                                                                    ==========         ========      ========
</TABLE>
<TABLE>
<CAPTION>

                 LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

Current liabilities:
<S>                                                                                 <C>                <C>           <C>     
      Accounts payable                                                              $   14,798         $ 21,707      $ 12,443
      Accrued expenses                                                                  30,869           42,131        26,743
      Current portion of capital lease obligations                                       6,286            6,423           722
      Current portion of long-term debt                                                  4,579            4,233         4,832
      Other current liabilities                                                            993              607           726
                                                                                    ----------         --------      --------
                                                                                        57,525           75,101        45,466
                                                                                    ----------         --------      --------

Other liabilities                                                                        1,409            1,088           158
Capital lease obligations, less current portion                                         13,994           15,340         1,453
Long-term debt, less current portion                                                   765,434          612,703       232,674
Minority interest                                                                       12,732           12,208           182

Commitments and contingencies

Redeemable preference shares:
      Authorized - 10,000,000 no par shares; 500 shares issued and outstanding
           at December 31, 1997 and September 30, 1997, no shares issued or
           outstanding at September 30, 1996                                            54,635           51,756             -

Shareholders' (deficit) equity:
      Common shares:
           Authorized - unlimited number of no par common shares; issued and
               outstanding - December 31, 1997 - 34,564,898 shares, September
               30, 1997 - 27,627,442 shares, September 30, 1996 - 21,257,697 shares    221,105          145,475        72,647
      Commitment to issue common shares:
           December 31, 1997 - 50,887 shares, September 30, 1997 - 288,061 shares,
               September 30, 1996 - 1,988,230 shares                                       604            4,405        25,454
      Accumulated deficit                                                             (229,264)        (189,671)      (76,333)
                                                                                      --------         --------        ------
                                                                                        (7,555)         (39,791)       21,768
                                                                                      ---------        --------        ------
                        Total liabilities and shareholders' (deficit) equity          $898,174         $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)

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

                                                                           Three-month
                                                                           period ended           YEARS ENDED SEPTEMBER 30,
                                                                           December 31,       ---------------------------------
                                                                              1997            1997           1996          1995
                                                                              ----            ----           ----          ----

<S>                                                                         <C>           <C>             <C>          <C>
Revenues:
      Telecommunication and other services                                  $   27,552    $    82,593     $   31,726   $   11,118
      Product                                                                    8,706         23,374          9,573         7,563
                                                                            ----------    -----------     ----------     ---------

                     Total revenues                                             36,258        105,967         41,299        18,681
                                                                            -----------   -----------     ----------     ---------

Operating costs and expenses:
      Network expenses                                                          19,427         66,250         26,580        10,103
      Facilities administration and maintenance                                  3,511         12,304         10,317         2,096
      Cost of product revenues                                                   3,102          7,990          3,974         3,096
      Selling, general and administrative                                       22,428         79,491         33,375        11,373
      Research and development                                                     781          2,316          1,352         1,270
      Depreciation and amortization                                              8,864         24,159          8,298         2,374
                                                                            ----------    -----------     ----------     ---------

                     Total operating costs and expenses                         58,113        192,510         83,896        30,312
                                                                            ----------    -----------     ----------     ---------

                     Loss from operations                                      (21,855)       (86,543)       (42,597)      (11,631)
                                                                            ----------    -----------     ----------     ---------

Other expenses (income):
      Interest income                                                           (4,101)        (7,026)        (5,549)         (303)
      Interest expense, net of amounts capitalized                              18,948         37,665         21,224           838
      Loss from joint venture and investments                                    1,286          1,482          1,521         1,187
      Other                                                                        283         (6,841)           839           160
                                                                            ----------    -----------     ----------       -------

                                                                                16,416         25,280         18,035         1,882
                                                                            ----------    -----------     ----------     ---------
                     Loss before minority interest in (income)
                           loss of subsidiaries and income tax                 (38,271)      (111,823)       (60,632)      (13,513)
                                                                            ----------    -----------     ----------     ---------

Income tax expense:
      Current                                                                      758          1,802            157            70
      Deferred                                                                      92           (899)             -            96
                                                                            ----------    -----------     ----------      --------

                                                                                   850            903            157           166
                                                                            -----------   -----------     ----------     ---------
                     Loss before minority interest in (income)
                           loss of subsidiaries                                (39,121)      (112,726)       (60,789)      (13,679)

Minority interest in (income) loss of subsidiaries                                (472)          (612)           411         2,364
                                                                            ----------    -----------     ----------     ----------
                     Net loss                                               $  (39,593)   $  (113,338)    $  (60,378)  $  (11,315)
                                                                            ==========    --=========     ==========     ==========
Net loss per share, basic and dilutive                                      $    (1.39)   $     (4.71)    $   (3.18)   $     (0.82)
                                                                            ==========    ===========     ==========     ==========
Weighted average common shares, basic
      and diluted                                                           30,804,376     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 shares for services             34,057           150            -           -             -               150
Issuance of common shares in business
      combinations                              1,719,785         8,785      (551,536)     (3,038)           -             5,747
Issuance of common shares, net                  4,593,598        17,965            -           -             -            17,965
Issuance of common shares under option
      plans                                       442,200         1,230            -           -             -             1,230
Commitment to issue 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 shares for services             85,627           621            -           -             -               621
Issuance of common shares in business
      combinations                              1,200,873        11,097      (168,249)       (747)           -            10,350
Issuance of common shares, net                  1,189,849         9,672            -           -             -             9,672
Issuance of common shares under option
      plans                                        67,500           293            -           -             -               293
Commitment to issue shares for business
      combinations                                     -             -      1,819,981      24,707            -            24,707
Issuance of common shares under employee
      shares purchase plan                         13,558           132            -           -             -               132
Accrual of compensation costs for share
      awards 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 shares for services             25,000           221            -           -             -               221
Issuance of common shares in business
      combinations                              3,132,854        29,394    (1,700,169)    (21,049)           -             8,345
Issuance of common shares and warrants,
      net                                       2,505,882        32,666            -           -             -            32,666
Issuance of common shares under option
      plans                                       643,016         3,309            -           -             -             3,309
Issuance of common shares under employee
      shares purchase plan                         62,993           400            -           -             -               400
Accrual of compensation costs for share
      awards and option plans                          -          9,807            -           -             -             9,807
Accretion of redeemable preference shares              -         (2,969)           -           -             -            (2,969)
Net loss                                               -             -             -           -       (113,338)        (113,338)
                                              -----------        ------     ---------     -------     ---------       ----------

Balance, September 30, 1997                    27,627,442       145,475       288,061       4,405      (189,671)         (39,791)

Issuance of common shares in business
      combinations                                246,392         3,801      (237,174)     (3,801)           -                -
Issuance of common shares, net                  6,440,000        73,092            -           -             -            73,092
Issuance of common shares under option
      plans                                       158,209         1,107            -           -             -             1,107
Issuance of common shares under employee
      shares purchase plan                         75,198           463            -           -             -               463
Accrual of compensation costs for share
      awards and option plans                          -            179            -           -             -               179
Accretion of redeemable preference shares              -         (3,145)           -           -             -            (3,145)
Conversion of senior subordinated discount
      notes                                        17,657           133            -           -             -               133
Net loss                                               -             -             -           -        (39,593)         (39,593)
                                              -----------      --------     ---------     -------     ---------          -------

Balance, December 31, 1997                     34,564,898      $221,105        50,887     $   604     $(229,264)         $(7,555)
                                              ===========      ========     =========     =======     =========          =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F - 5
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                      Consolidated Statements of Cash Flows

                                 (In thousands)

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

                                                                      Three-month
                                                                      period ended             Years ended September 30,
                                                                      December 31,      ---------------------------------------
                                                                        1997            1997              1996           1995
                                                                        ----            ----              ----           ----
Operations:
<S>                                                                  <C>             <C>               <C>            <C>      
      Net loss                                                       $(39,593)       $(113,338)        $(60,378)      $(11,315)
      Adjustments to reconcile net loss to net cash used
           in operations:
               Minority interest in income (loss) of subsidiary           472              612             (411)        (2,364)
               Depreciation and amortization                           10,115           26,634            9,496          2,824
               Deferred income taxes                                       92             (899)              -              96
               Accretion of interest                                    8,276           19,236           19,978             -
               Non-cash stock compensation and other expense              374           10,028            1,293            301
               Loss on disposal of assets                                  -               679            1,012            122
               Equity in losses of investments and joint venture        1,286            1,482            1,521          1,187
               Gain on sale of subsidiary shares                           -            (7,376)              -              -
               Changes in non-cash operating working capital:
                     Accounts receivable, net                          (3,547)         (11,284)          (1,066)        (1,549)
                     Inventory                                             46             (455)          (2,019)           (13)
                     Other current and other assets, net                 (631)          (7,172)          (5,304)          (417)
                     Accounts payable and accrued liabilities         (18,177)          24,970            2,387           (190)
                     Other liabilities                                    707             (119)             185            262
                                                                    ---------        ---------         --------       --------

                           Cash used in operations                    (40,580)         (57,002)         (33,306)       (11,056)
                                                                    ---------        ---------         --------       --------

Investments:
      Acquisition of subsidiaries, net of cash acquired                (2,105)          (1,618)          (1,441)           207
      Settlement of notes receivable                                       -                 -               -           3,367
      Purchase of investments                                          (4,297)          (3,247)          (9,799)           848
      Proceeds from sale of investments                                    -             5,176            5,493             -
      Purchase of fixed assets                                        (45,970)        (222,001)         (76,192)       (27,730)
      Proceeds from sale of fixed assets                                   -             5,774                8             -
      Purchase of other assets                                         (1,866)         (14,058)          (7,743)        (1,829)
      Change in cash and investments restricted for the
           purchase of property and equipment                          11,143          (58,701)         (16,000)            -
      Proceeds from the sale of subsidiary shares, net                    141           27,105               -             615
                                                                     --------        ---------         --------       --------

                           Cash used in investing activities          (42,954)        (261,570)        (105,674)       (24,522)
                                                                     --------        ---------         --------       --------

Financing:
      Proceeds from long-term debt                                    151,420           353,257         196,207         19,857
      Issuance of redeemable preference shares, net                        -             48,679              -              -
      Principal payments on long-term debt and capital leases         (10,101)           (7,455)         (2,112)          (816)
      Issuance of common shares, net of issuance costs                 74,629            27,692          10,098         19,195
      Deferred debt financing costs                                    (5,380)          (12,033)         (9,894)          (853)
      Change in investments restricted to finance interest
           payments                                                    16,157           (97,049)             -              -
                                                                     --------        ----------        --------       --------

                           Cash provided by financing activities      226,725           313,091         194,299         37,383
                                                                     --------        ----------        --------       --------

                           Increase (decrease) in cash and cash
                                 equivalents                          143,191            (5,481)         55,319          1,805

Cash and cash equivalents, beginning of period                         55,862            61,343           6,024          4,219
                                                                     --------        ----------        --------       --------

Cash and cash equivalents, end of period                             $199,053        $   55,862        $ 61,343       $  6,024
                                                                     ========        ==========        ========       ========

                                                                     (Continued)
</TABLE>

                                      F - 6
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                Consolidated Statements of Cash Flows, Continued

                                 (In thousands)

                                (In U.S. Dollars)
<TABLE>
<CAPTION>
                                                                   Three-monthd
                                                                   period ended        Years ended September 30,
                                                                   December 31,    ---------------------------------
                                                                      1997         1997            1996         1995
                                                                      ----         ----            ----         ----

Supplemental disclosure of cash flow information:
<S>                                                                 <C>          <C>            <C>           <C>    
      Cash paid for interest                                        $21,684      $ 4,982        $ 1,813       $   364
      Cash paid for income taxes                                      1,038          638            -             264

Supplemental schedule of non-cash investing and
   financing activities:
           Recorded in business combinations:
               Assets                                                 2,605       14,148         45,477        17,081
               Liabilities                                              500        4,369         11,665         7,706
               Minority interest                                        -            -           (2,686)        1,797
               Commitment to issue shares                               -            -            5,613         1,494
               Common Shares                                            -          8,161         29,444         5,747
           Amounts in accounts payable and accrued
               liabilities for the purchase of fixed assets
               at end of period                                      19,029       19,718         18,291         4,363
           Accretion of redeemable preference shares                  3,145        2,969            -             -
           Assets acquired through capital leases                       480       21,765            -             128
           Debt converted to equity                                     133        -                -             -
</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)

                December 31, 1997 and 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 and data
         services, and produces telecommunications switching equipment and
         software.

         The consolidated  financial statements for the three-month period ended
         December 31, 1997 and the years ended September 30, 1997, 1996 and 1995
         have been  reported in U.S.  dollars,  the  functional  currency of the
         Company.

   (b) CHANGE IN FISCAL YEAR-END

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

               Revenues                                       $  23,217
               Loss from operations                             (17,988)
               Other expenses, net                               (4,646)
               Income tax expense                                   -
               Net loss                                         (22,634)
               Loss per share, basic and diluted                  (1.02)

   (c) 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.

   (d) CASH AND CASH EQUIVALENTS

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

                                                                     (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) ACCOUNTS AND NOTES RECEIVABLE

         The  Company  maintains a security  interest in the  telecommunications
         systems it sells  until the Company is paid in full.  Notes  receivable
         from customers  total $4,055,  $3,334 and $623 at December 31, 1997 and
         September  30,  1997 and 1996,  respectively.  Management  provides  an
         allowance  for doubtful  accounts  and notes based on current  customer
         information  and  historical  statistics.  The  allowance  for doubtful
         accounts  was  $3,956,  $3,582  and  $1,264 at  December  31,  1997 and
         September 30, 1997 and 1996, respectively.

   (f)  CASH AND INVESTMENTS

         The Company follows the provisions of Statement of Financial Accounting
         Standard (SFAS) No. 115,  "Accounting  for Certain  Investments in Debt
         and Equity Securities".

         The  Company  classifies  its  restricted  investments,  consisting  at
         December 31, 1997 of $143,375 in U.S. Treasury securities and $1,075 in
         certificates of deposit, as  available-for-sale  and  held-to-maturity.
         Held-to-maturity  investments,  recorded at  amortized  cost,  totaling
         $81,966 and  $97,049 at  December  31,  1997 and  September  30,  1997,
         respectively,  and maturing  between three months and three years,  are
         restricted   primarily   for  interest   payments.   Available-for-sale
         investments,  totaling  $62,484 and  $74,701 at  December  31, 1997 and
         September 30, 1997,  respectively,  and maturing between two months and
         one year, are restricted  for equipment  purchases.  Available-for-sale
         securities are recorded at amortized cost which approximates the market
         value of such securities at December 31, 1997 and September 30, 1997.

         The Company's  unrestricted  investments  totaling  $7,619,  $3,322 and
         $5,176  at  December  31,  1997  and   September  30,  1997  and  1996,
         respectively, consist of U.S. government securities and certificates of
         deposit,   all  maturing   within  one  year,  and  are  classified  as
         available-for-sale which approximates market value.

                                                                     (Continued)

                                      F - 9
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (g) INVENTORY, NET

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

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

<S>                                                  <C>            <C>           <C>   
               Raw materials                         $1,577         $1,290        $  378
               Work in process                          587            499           346
               Finished and refurbished goods         1,248          1,669         1,682
                                                     ------         ------        ------
                              Inventory, net         $3,412         $3,458        $2,406
                                                     ======         ======        ======
</TABLE>

   (h) INVESTMENTS IN AFFILIATES

         The   Company   has  an   approximate   25%   interest  in  GST  Global
         Telecommunications, Inc. (GST Global), a corporation traded publicly 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 $593,  $1,879 and  $3,634 at  December  31,  1997,
         September 30, 1997 and 1996, respectively.

   (i)  MINORITY INTEREST

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

         As  discussed in note 13, the Company  sold its  remaining  interest in
         NACT in February 1998.

                                                                     (Continued)

                                     F - 10
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (j)  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.  Depreciation expense totaled $6,240,  $14,985, $5,569 and
         $1,198 for the  three-month  period ended December 31, 1997 and for the
         years ended September 30, 1997, 1996 and 1995, respectively.

   (k) 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  $1,054,  $4,044,  $1,690 and $389 for the
         three-month  period  ended  December  31,  1997 and for the years ended
         September 30, 1997, 1996 and 1995, respectively.

   (l)  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.

                                                                     (Continued)

                                     F - 11
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

  (m)  NET LOSS PER SHARE

         Effective October 1, 1997, the Company adopted SFAS No. 128,  "Earnings
         Per Share". Accordingly, "basic net loss per share" for the three-month
         period ending December 31, 1997 and for all prior periods  presented is
         computed using the weighted average number of common shares outstanding
         during  each  period.  Given  the  Company's  net loss for all  periods
         presented,  the effect of potentially dilutive common share equivalents
         are  anti-dilutive.  Therefore,  the weighted  average number of common
         shares  outstanding  for the  basic  and  diluted  net loss  per  share
         calculations are equal for all periods presented. Net loss is increased
         for redeemable  preference shares' accretion totaling $3,145 and $2,969
         for the  three-month  period ended December 31, 1997 and the year ended
         September 30, 1997, respectively.

   (n) ISSUANCE OF SUBSIDIARY STOCK

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

   (o) 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  16.8%, 20.8%, 46.9% and 26.8% of
         the Company's consolidated  telecommunications services revenue for the
         three-month  period  ended  December  31,  1997 and for the years ended
         September 30, 1997, 1996 and 1995, respectively.

   (p) INCOME TAXES

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

                                                                     (Continued)

                                     F - 12
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                               (In U.S. Dollars)

   (q) 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.

   (r)  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.

   (s)  ADVERTISING COSTS

         The Company expenses advertising costs as incurred.

   (t)  RECLASSIFICATIONS

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

                                                                     (Continued)

                                     F - 13
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(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 TELCOM CO. (ACTION TELCOM)

         In the  third  quarter  of  1997,  the  Company  acquired  100%  of the
         outstanding  capital  stock of Action  Telcom,  a Texas  company  which
         provides long distance and ancillary  telecommunications  services, and
         produces software used in the telecommunications  industry. The Company
         acquired  Action  Telcom 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 $3,863 was recorded
         as a result of this acquisition.

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

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

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

                                                                     (Continued)

                                     F - 14
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (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 703,229
         common  shares  valued at $8,814.  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.

   (f)  OTHERS

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

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

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

                                                                     (Continued)

                                     F - 15
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         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.  Pro forma results for the three-month period
         ended December 31, 1997 are not shown as the current period acquisition
         was effective October 1, 1997.

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

               Revenues                        $ 118,098         $ 88,079
               Net loss                         (115,419)         (70,097)
               Net loss per share                  (4.68)           (3.15)
                                                         
         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.

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

                                                 December 31,  September 30,  September 30,
                                                    1997           1997            1996
                                                    ----           ----            ----
<S>                                                <C>           <C>          <C>     
            Telecommunications networks            $132,028      $ 95,447     $ 25,551
            Electronic and related equipment         68,636        60,050       31,547
            Leasehold improvements                   21,673         9,201        3,619
            Furniture, office equipment and
                  other                              15,089        14,643        8,746
            Buildings                                 3,366         3,366        2,134
            Construction in progress                192,888       202,545       63,117
                                                   --------      --------     --------
                                                    433,680       385,252      134,714

            Less accumulated depreciation           (26,785)      (20,738)      (7,139)
                                                   --------     ---------     --------
                                                   $406,895      $364,514     $127,575
                                                   ========     =========     ========
</TABLE>

         Property  and  equipment  includes  $192,888,  $202,545  and $63,117 of
         equipment which had not been placed in service at December 31, 1997 and
         September  30, 1997 and 1996,  respectively,  and  accordingly,  is not
         being  depreciated.  During the  three-month  period ended December 31,
         1997 and the three  years  ended  September  30,  1997,  1996 and 1995,
         $3,726,  $15,170,  $2,316  and  $291  of  interest,  respectively,  was
         capitalized  as part of  telecommunications  networks  and  networks in
         progress.

                                                                     (Continued)
                                     F - 16
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(4) ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                  December 31,     September 30,      September 30,
                                                     1997               1997              1996
                                                     ----               ----              ----
<S>                                                 <C>               <C>               <C>    
            Fixed asset purchases                   $12,157           $11,531           $14,153
            Acquisition costs                           500              --               4,213
            Carrier costs                                98             2,113             4,057
            Interest payable                          8,096            18,076               430
            Payroll and related liabilities           2,721             3,278             1,747
            Other                                     7,297             7,133             2,143
                                                    -------           -------           -------

                              Total                 $30,869           $42,131           $26,743
                                                    =======           =======           =======
</TABLE>

(5) LONG-TERM DEBT

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

            Senior secured notes, 13.25%,
                  due May 1, 2007                    $265,000         $265,000         $   --
            Note payable to Tomen, LIBOR
                  plus 3% (9.0% at December 31,
                  1997)                                61,793           69,137           31,771
            Note payable to NTFC, LIBOR
                  plus 3.5% (9.5% at December 31,
                  1997)                                50,000           44,634             --
            Note payable to Siemens, LIBOR
                  plus 3.5% (9.5% at December 31,
                  1997)                                 7,889            5,846             --
            Senior discount notes, 13.875%,
                  due December 15, 2005               210,136          203,280          177,760
            Convertible senior subordinated
                  discount notes, 13.875%, due
                  December 15, 2005                    26,133           25,410           22,220
            Senior subordinated accrual notes,
                  12.75%, due November 15, 2007       146,142             --               --
            Other                                       2,920            3,629            5,755
                                                     --------         --------         --------

                                                      770,013          616,936          237,506

            Less current portion of long-term debt      4,579            4,233            4,832
                                                     --------         --------         --------

                                                     $765,434         $612,703         $232,674
                                                     ========         ========         ========
</TABLE>


                                                                     (Continued)
                                     F - 17
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                               (In U.S. Dollars)

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

               Year ending December 31:

                     1998                                      $  4,579
                     1999                                        14,628
                     2000                                        19,115
                     2001                                        22,242
                     2002                                        22,945
                     Thereafter                                 686,504
                                                                -------

                                                               $770,013
                                                                =======

   (a) SENIOR SECURED NOTES

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

   (b) TOMEN FACILITY

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

   (c) NTFC CAPITAL CORPORATION (NTFC) AGREEMENT

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

                                                                     (Continued)

                                     F - 18


<PAGE>

                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (d) SIEMENS TELCOM NETWORKS (SIEMENS) AGREEMENT

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

   (e) SENIOR DISCOUNT NOTES 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  rank  in  right  of  payment  with  all   unsubordinated
         indebtedness of the Company while the  Convertible  Notes are 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 Notes will be  redeemable  at the
         option of the Company. The 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)

   (f)  SENIOR SUBORDINATED ACCRUAL NOTES

         In  November  1997,  the  Company  issued  $144,000  in  12.75%  Senior
         Subordinated  Accrual Notes (the Accrual  Notes).  Cash interest on the
         Accrual Notes will not be accrued until November 15, 2002 or paid until
         May 15, 2003.  The Accrual Notes accrete to a total  principal  amount,
         due November 15,  2007,  of $266,885 by November 15, 2002.  The Accrual
         Notes are subordinated to all senior indebtedness, including the Notes.

         The Accrual Notes are redeemable at the option of the Company, in whole
         or in part after  November 15, 2002.  Prior to November 15, 2000, up to
         one-third of the aggregate principal amount of the Accrual Notes may be
         redeemed by the Company  from the  proceeds of one or more sales of the
         Company's common shares.

         The Accrual Notes are subject to certain debt covenants.

(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  $224,000 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.

                                                                     (Continued)

                                     F - 20

<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         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.

(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 50,887 shares valued at
         $604 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  follows 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
         three-month  period  ended  December  31,  1997 and for the years ended
         September   30,  1997  and  1996   totaled   $149,   $9,747  and  $666,
         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 for the three-month
         period ended  December 31, 1997 and for the years ended  September  30,
         1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                         Fixed option awards     Performance-based option awards    Employee Stock Purchase Plan
                                         -------------------     -------------------------------    ----------------------------
                                  December 31,   September 30,   December 31,    September 30,     December 31,   September 30,
                                                 -------------                   -------------                 -------------
                                      1997      1997      1996      1997       1997      1996          1997      1997     1996
                                      ----      ----      ----      ----       ----      ----          ----      ----     ----
<S>                                    <C>       <C>       <C>        <C>       <C>       <C>          <C>       <C>      <C>
         Expected volatility            58%       56%       60%       -          56%       60%          58%       56%      60%
         Risk free interest rate       5.4%      6.3%      6.1%       -         6.3%      6.1%         5.3%      5.4%     5.3%
         Expected life (in years)      3.5       3.5       3.5        -         5.0       5.0           .5        .5       .5
</TABLE>

                                                                     (Continued)

                                     F - 21
<PAGE>

                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

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

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

<S>                                                   <C>                     <C>              <C>      
               Fixed option awards                    $    6.17               $    4.61        $    4.41
               Performance-based option awards               -                     4.97             5.18
               Employee Stock Purchase Plan                1.81                    1.81             2.85
</TABLE>

         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  share would have been  increased  to the pro forma
         amounts indicated below:
<TABLE>
<CAPTION>

                                                        Three-month
                                                       period ended             Year ended       Year ended
                                                       December 31,            September 30,    September 30,
                                                           1997                    1997             1996
                                                           ----                    ----             ----

<S>                                                    <C>                     <C>                 <C>
               Net loss:
                     As reported                       $   (39,593)            $  (113,338)        $  (60,378)
                     Pro forma                             (41,342)               (116,214)           (61,949)

               Net loss per common share, 
                      basic and diluted:
                          As reported                  $      (1.39)           $     (4.71)        $     (3.18)
                          Pro forma                           (1.44)                 (4.82)              (3.24)
</TABLE>

         Pro forma net loss reflects only options granted since October 1, 1995.
         Therefore,  the full impact of calculating  compensation cost for stock
         options  under  SFAS 123 is not  reflected  in the pro  forma  net loss
         amounts presented above because compensation cost is reflected over the
         options' vesting period and compensation cost for options granted prior
         to September 30, 1995 is not considered.

                                                                     (Continued)

                                     F - 22
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         FIXED STOCK OPTION AWARDS

         Under the 1995 Stock  Option Plan (1995 Plan) and the 1996 Stock Option
         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  Officer Stock Option Plan (Operating  Officer Plan).
         These options have a term of five years and become exercisable  ratably
         over a four-year vesting period.

         A summary of the status of the  Company's  fixed stock option awards as
         of December  31, 1997 and  September  30,  1997,  1996 and 1995 and the
         changes  during the period and years ended on those dates is  presented
         below:

<TABLE>
<CAPTION>
                                               December 31,          September 30,         September 30,        September 30,
                                                  1997                  1997                  1996                  1995
                                            ------------------    --------------------   -----------------   --------------------

                                                      Weighted                Weighted            Weighted               Weighted
                                                       average                 average             average                average
                                                      exercise                exercise            exercise               exercise
                                             Shares     price     Shares        price    Shares     price    Shares        price
                                             ------     -----     ------        -----    ------     -----    ------        -----
<S>                                        <C>         <C>        <C>        <C>        <C>        <C>         <C>       <C>
               Outstanding at
                    beginning of
                    period                 2,924,534   $ 8.62     2,461,205  $ 7.11     1,605,553  $  5.81     876,500   $  3.55
               Granted                       175,000    10.29     1,190,000    9.89       963,373     9.07   1,186,035      6.33
               Exercised                    (158,209)    7.00      (643,016)   5.15       (67,500)    4.33    (442,200)     2.78
               Forfeited                     (51,456)    9.82       (83,655)   8.89       (40,221)    6.54     (14,782)     4.69
                                          -----------           -----------            ----------           ----------

               Outstanding at
                    end of period          2,889,869     8.79     2,924,534    8.62     2,461,205     7.11   1,605,553      5.81
                                          ==========            ===========            ==========           ==========

               Number of options
                    exercisable at
                    end of period            793,789                955,933             1,208,908            1,078,600
</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)

         The following table summarizes information about fixed stock options
outstanding at December 31, 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                178,796              1.2 years       $    4.85                97,361       $      4.92
                 6.75-7.06                796,277              2.8 years            6.76               543,053              6.75
                 9.94-12.00             1,914,796              4.4 years           10.01               153,375             10.00
</TABLE>

         PERFORMANCE-BASED STOCK OPTION AWARDS

         Under the 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 December 31, 1997 and  September 30, 1997 and 1996 and the
         changes  during the period and years ended on those dates is  presented
         below:

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

                                                                   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 period                          900,000    $  10.00          600,000    $  10.00            -    $     -
               Granted                                      -          -            300,000       10.00       600,000       10.00
               Exercised                                    -          -                 -          -              -          -
               Forfeited                                    -          -                 -          -              -          -
                                                    ----------                   ----------                ----------         -
               Outstanding at end of period            900,000       10.00          900,000       10.00       600,000       10.00
                                                    ==========                   ==========                ==========
</TABLE>

                                                                     (Continued)

                                     F - 24


<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         At December 31, 1997, the exercise price and weighted average remaining
         contractual  life of  outstanding  options  was  $10.00  and 4.3 years,
         respectively. 200,000 options were exercisable at December 31, 1997 and
         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  75,198,  62,993 and 13,558  shares under the  purchase  plan
         during the  three-month  period  ended  December 31, 1997 and the years
         ended September 30, 1997 and 1996, respectively.

   (c) WARRANTS OUTSTANDING

         Warrants outstanding and exercisable at December 31, 1997:

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

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

         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 in April 1999 were granted in conjunction
         with a private  placement  of common  shares 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;  984,650
         warrants were exercised subsequent to year-end (see note 13(b)).

                                                                     (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 for the three-month  period ended December 31, 1997 and the years
         ended September 30, 1997, 1996 and 1995 as follows:

<TABLE>
<CAPTION>
                                                         December 31,    September 30,     September 30,   September 30,
                                                             1997            1997              1996            1995
                                                             ----            ----              ----            ----
<S>                                                         <C>             <C>               <C>             <C>  
            Computed expected income tax
                  expense (benefit) at Canadian
                  statutory rate                            (39)%           (39)%             (39)%           (39)%
            Expected state/province income
                  tax expense (benefit)                      (4)             (4)               (4)             (6)
            Increase (decrease) in valuation
                  allowance                                  37              30                21              38
            Amortization of goodwill                          1               1                 1               5
            Minority interest                                -                -                 -              (7)
            Effect of difference in United
                  States statutory rate                       5               5                 5               5
            Effect of acquisition of new
                  subsidiaries                                -               2                10               1
            Non-deductible interest                           2               2                 2               -
            Other                                             -               4                 4               4
                                                             ---             ---               --              ---

                        Income tax expense                    2%              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>
                                                                         December 31,        September 30,     September 30,
                                                                            1997                 1997              1996
                                                                            ----                 ----              ----
<S>                                                                        <C>               <C>               <C>     
            Deferred tax assets:
                 United States Federal and
                     state net operating loss
                     carryforwards                                         $ 47,550          $ 40,303          $ 16,378
                 Canadian net operating loss
                     carryforwards                                            5,001             4,162             3,065
                 Non-deductible interest                                     18,365            13,757             4,608
                 Canadian non-deductible
                     interest                                                 2,859             1,875               798
                 Canadian capital loss
                     carryforward                                               128               128               128
                 Other                                                        4,528             3,828             2,063
                                                                           --------          --------          --------

                           Total gross deferred
                                tax assets                                   78,431            64,053            27,040

                 Less valuation allowance                                   (67,970)          (53,480)          (19,429)
                                                                           --------          --------          --------

            Deferred tax liabilities:
                 Furniture, fixtures and
                     equipment, due to
                     differences in depreciation                              5,398             4,960             2,110
                 Capitalized software/
                     intangibles                                              5,498             5,956             5,501
                                                                           --------          --------          --------

                           Total gross deferred
                                tax liabilities                              10,896            10,916             7,611
                                                                           --------          --------          --------

                           Net deferred tax
                                liabilities                                $   (435)         $   (343)         $   --
                                                                           ========          ========          ========
</TABLE>
                                                                     (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  valuation  allowance for deferred tax assets as of October 1, 1994
         was  $2,388.  The net  change  in  total  valuation  allowance  for the
         three-month  period  ended  December  31,  1997 and for the years ended
         September 30, 1997, 1996 and 1995 was an increase of $14,490,  $34,051,
         $12,695 and $4,346, respectively.

         The  Company  has  non-capital   losses  for  income  tax  purposes  of
         approximately  Canadian  $11,114  available to reduce Canadian  taxable
         income of future years, expiring as follows:

            1998                                                $   676
            1999                                                  2,043
            2000                                                     -
            2001                                                  1,574
            2002                                                  1,877
            2003                                                  3,079
            2004                                                  1,865
                                                                  -----

                                                                 $11,114
                                                                 =======

         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 December 31,  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 $130,426 available to reduce United States taxable income
         of future years, expiring as follows:

            2006                                                $    405
            2007                                                     537
            2008                                                   2,800
            2009                                                   5,020
            2010                                                  36,922
            2011                                                  64,893
            2012                                                  19,849
                                                                  ------

                                                                $130,426
                                                                ========


                                                                     (Continued)

                                     F - 28


<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         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.

(9) LEASES

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

<TABLE>
<CAPTION>
                                                       December 31,      September 30,      September 30,
                                                          1997               1997               1996
                                                          ----               ----               ----
<S>                                                    <C>                <C>                <C> 
            Equipment                                  $ 27,003           $ 26,769           $  2,068
            Less accumulated amortization                (6,408)            (4,828)              (291)
                                                       --------           --------           --------

                                                       $ 20,595           $ 21,941           $  1,777
                                                       ========           ========           ========
</TABLE>

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

         The Company also has  noncancelable  operating  leases,  primarily  for
         facilities, which expire over the next five years. Rental expense under
         operating  leases  was  $1,114,   $3,385,   $1,501  and  $866  for  the
         three-month  period  ended  December  31,  1997 and for the years ended
         September 30, 1997, 1996 and 1995, respectively.


                                                                     (Continued)

                                     F - 29
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

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

                                                Capital        Operating
                                                Leases          Leases
                                                ------          ------
           Year ending September 30:

               1998                             $ 8,400        $ 4,510
               1999                               3,319          4,013
               2000                               3,176          3,054
               2001                               3,097          2,465
               2002                               2,780          2,317
               Thereafter                        12,930          9,012
                                                 ------          -----

                   Total minimum lease payments  33,702        $25,371
                                                               =======

           Less amount representing interest 
               (at rates ranging from 8.7% 
                to 17.0%)                       13,422
                                                ------

                   Net minimum lease payments   20,280

           Less current installments of 
               obligations under capital 
               leases                           6,286
                                                -----

                   Obligations under capital 
                     leases, excluding
                     current installments      $13,994
                                               =======


                                                                     (Continued)

                                     F - 30
<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 $2,300 to $6,100 per
         month over the next three years. The Company may be required to pay the
         carriers for differences  between the commitment amounts and the actual
         amounts billed.

   (c) LEGAL PROCEEDINGS

         On  August  24,  1995,   Aerotel,   Ltd.  and  Aerotel   U.S.A.,   Inc.
         (collectively, "Aerotel") filed a patent infringement suit against NACT
         alleging  that  telephone   systems   manufactured  and  sold  by  NACT
         incorporate  prepaid  calling  features  which  infringe  upon a patent
         issued to Aerotel in  November  1987.  The  complaint  further  alleges
         defamation and unfair  competition  by NACT and seeks various  damages.
         NACT has filed an Answer and Counterclaim  denying patent infringement,
         committing defamation or unfair competition and seeks judgment that the
         Aerotel  patent is invalid  and that  Aerotel has misused its patent in
         violation of antitrust laws. On May 3, 1996, NACT served its motion for
         summary  judgment,  which  the Court  has  indicated  it will deny such
         motion,  although  the Court has not yet  issued  its  ruling.  Aerotel
         amended its complaint to include as defendants the Company and GST USA,
         Inc. (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 - 31
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         Concurrent with the sale of NACT (see note 13(b)), the Company and NACT
         entered into an agreement  whereby the Company  generally will bear 50%
         of  any  damages,   including   reasonable   attorney   fees,   losses,
         liabilities, claims and assessments,  royalties and license fees. Under
         the agreement,  subsequent to a determination,  if any, by a Court that
         the Aerotel  patent is valid and it has been  infringed,  the Company's
         liability  associated with royalties and license fees, refunds and cost
         of product replacement or modification is limited to $2,000.

         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 $4,169 at December 31, 1997.  Zions provides lease financing
         to NACT customers on a recourse basis.

   (e) EMPLOYMENT AGREEMENTS

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

(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 following,  these  statements also
         conform,  in all material  respects,  with those accounting  principles
         that are generally accepted in Canada (Canadian GAAP):

         o        Certain  shares held in escrow are excluded  from the weighted
                  average  share  calculation  until their  release  from escrow
                  under U.S. GAAP while,  under Canadian  GAAP,  such shares are
                  included  in the  weighted  average  share  calculation.  As a
                  result,  Canadian GAAP  weighted  average  shares  outstanding
                  exceeds U.S.  GAAP  weighted  average  shares  outstanding  by
                  172,732,  906,806,  750,000 and  750,000  shares for the three
                  months ended  December 31, 1997 and the years ended  September
                  30, 1997, 1996 and 1995, respectively.

                                                                     (Continued)
                                     F - 32
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

         o        Compensation expense associated with  performance-based  stock
                  awards  totaling  $149,  $9,747  and $666 for the  three-month
                  period  ended  December  31,  1997  and  for the  years  ended
                  September 30, 1997 and 1996, respectively,  is included in the
                  statements of operations for U.S. GAAP purposes  while,  under
                  Canadian  GAAP,  compensation  expense for stock awards is not
                  recognized in the statements of operations. For the year ended
                  September  30,  1997,  compensation  expense  includes  $7,446
                  recorded in  conjunction  with the  release of 750,000  common
                  shares held in escrow.

         o        Accretion of redeemable  preference shares totaling $3,145 and
                  $2,969 for the three-month  period ended December 31, 1997 and
                  for the  year  ended  September  30,  1997,  respectively,  is
                  excluded from the statements of operations and included in net
                  loss per share for U.S. GAAP purposes  while,  under  Canadian
                  GAAP,  such  accretion is included in both the  statements  of
                  operations and net loss per share.

         The Company's  results of operations under Canadian GAAP are summarized
         as follows:

<TABLE>
<CAPTION>
                                Three-month
                               period ended                       Years ended September 30,
                               December 31,        ---------------------------------------------
                                   1997             1997                 1996               1995
                                   ----             ----                 ----               ----
<S>                           <C>               <C>                  <C>               <C>          
      Net loss                $    (42,589)     $  (106,560)         $   (59,712)      $    (11,315)

      Loss per share          $      (1.37)     $     (4.16)         $     (3.03)      $      (0.78)

      Weighted average
            common and
            common equivalent
            shares outstanding  30,977,108       25,609,676           19,738,127         14,530,796

</TABLE>
                                                                     (Continued)

                                     F - 33
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(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.

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

   (b) PACWEST NETWORK, INC. (PNI)

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

                                                                     (Continued)

                                     F - 34
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

   (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 December 31, 1997. GST Global owes the Company $714, at December 31,
         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.

   (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.

   (e) OTHER

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

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

                                                                     (Continued)

                                     F - 35
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

               (In thousands, except per share and share amounts)

                                (In U.S. Dollars)

(13) SUBSEQUENT EVENTS

   (a) SALE OF NACT

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

   (b) EXERCISE OF WARRANTS

         In  February  1998,  warrants to purchase  984,650  common  shares were
         exercised for net proceeds of $12,800,  and warrants to purchase 15,350
         common shares expired.

                                     F - 36

<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
GST Telecommunications, Inc.:

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

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



/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP


Portland, Oregon
February 25, 1998

                                      S-1
<PAGE>
                          GST TELECOMMUNICATIONS, INC.

                        Valuation and Qualifying Accounts
<TABLE>
<CAPTION>


                                      Balance at    Charged    Written off    Balance at
                                       beginning   to bad debt   against       end of
Allowance for doubtful accounts        of period    expense     allowance      period
-------------------------------        ---------    -------     ---------      ------

<S>                                       <C>        <C>          <C>        <C>
Three months ended December 31, 1997      3,582      1,541        1,167      3,956

Year ended September 30, 1997             1,264      5,737        3,419      3,582

Year ended September 30, 1996             1,402      1,809        1,947      1,264

Year ended September 30, 1995                60      1,354           12      1,402
</TABLE>





                                      S-2
<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; incorporated
         by reference  to Exhibit  10(a) to the Company Form 10-K for the fiscal
         year ended September 30, 1997 (the "1997 Form 10-K").
  10(b)  1996 Stock Option Plan of the Company, as amended to date, incorporated
         by  reference  to  Exhibit  10(b) to the 1997  Form  10-K.  10(c)  1996
         Employee Stock Purchase Plan of the Company,  incorporated by reference
         to Exhibit  10(c) to the 1997 Form 10-K.  10(d) 1996  Senior  Executive
         Officer Stock Option Plan of the Company,  incorporated by reference to
         Exhibit  10(d) to the 1997  Form  10-K.  10(e)  1996  Senior  Operating
         Officer Stock Option Plan of the Company,  incorporated by reference to
         Exhibit 10(e) to the 1997 Form 10-K.  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.


<PAGE>
 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.,  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.



<PAGE>
 10(hh)  Stock  Purchase  Agreement  dated  December  31,  1997 by and among GST
         Telecommunications,  Inc.,  GST  USA,  Inc.  and  World  Access,  Inc.,
         incorporated  by reference to Exhibit  99.2 to the  Company's  Form 8-K
         dated January 6, 1998.
 *10(ii) 1997 Stock Option Plan of the Company, as amended to date.
 *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.