<PAGE>   1
Exhibit 13










                                GTI CORPORATION

                               1997 ANNUAL REPORT








<PAGE>   2
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
                                                                           Reference Page
                                                                     --------------------------
                                                                          1997
                                                                      Annual Report
                                                                     to Stockholders  Form 10-K
                                                                     ---------------  ---------
<S>                                                                  <C>              <C>
Report of Independent Public Accountants                                   11
Consolidated Financial Statements:
 Consolidated Statements of Operations for the Years
 Ended December 31, 1997, 1996 and 1995                                    12
 Consolidated Balance Sheets as of December 31, 1997 and 1996              13
 Consolidated Statements of Stockholders' Equity for the Years Ended
 December 31, 1997, 1996 and 1995                                          14
 Consolidated Statements of Cash Flows for the Years Ended
 December 31, 1997, 1996 and 1995                                          15
 Notes to Consolidated Financial Statements                                16
Report of Independent Public Accountants on Schedule                                     F-2
Schedule II:  Valuation and Qualifying Accounts                                          F-3
</TABLE>


                                      F-1
<PAGE>   3




                                GTI CORPORATION

GTI Corporation, primarily through its wholly owned subsidiary Valor
Electronics, Inc. (collectively "the Company"), is an international supplier of
magnetics-based, signal management components to original equipment
manufacturers ("OEMs") of local area networks ("LAN") ,wide area networks
("WANs"), telecommunications and broadband systems (collectively "networks")
for data and voice communications.  In general, the Company's products isolate
and filter the communication signal at the point where two or more network
components are connected to assure that the signal is clean and that the
network and its components are protected.

THIS ANNUAL REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY.  INVESTORS
ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS
OR RESULTS MAY DIFFER MATERIALLY.  IN EVALUATING SUCH STATEMENTS, INVESTORS
SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING RISK FACTORS AND
UNCERTAINTIES, IDENTIFIED IN THIS ANNUAL REPORT WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS.  RISK FACTORS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
RECENT DECLINES IN SALES LEVELS, RECENT OPERATING LOSSES, POSSIBLE DECLINES IN
MARKET GROWTH RATES, DEPENDENCE ON KEY CUSTOMERS, POSSIBLE FAILURE OF PRODUCT
DEVELOPMENT ACTIVITIES, THE DEVELOPMENT OF ALTERNATIVE TECHNOLOGIES BY
COMPETITORS OF THE COMPANY OR ITS CUSTOMERS, PRICE PRESSURES AND OTHER
COMPETITIVE FACTORS, AND VOLATILITY IN THE MARKET FOR THE COMPANY'S PRODUCTS.
SEE ALSO THE SECTION TRENDS, UNCERTAINTIES AND PROSPECTIVE INFORMATION INCLUDED
ELSEWHERE HEREIN.

PRODUCTS

The Company designs, manufactures, markets, and supports a broad family of
standards-based magnetic components with application-specific interface
solutions for signal management in networking products.  These signal
management products provide signal processing and power transfer functions such
as circuit isolation and impedance matching, signal shaping and conditioning,
noise reduction and filtering, and voltage conversion.  These electrical
functions help enable the OEM's hardware and software product architecture to
transmit data over the transmission media.

Magnetics-based components are marketed under the Valor name and consist of
two categories, signal processing and power transfer, as more fully described
below.  The Company's products comply with the industry standards adopted by
the Institute of Electrical and Electronic Engineers ("IEEE") for the
conversion and transmission of data over copper wire and support the major
networking architectures which have evolved based on these standards.

The Company's magnetic-based components include a broad family of
standards-compliant, miniature, wire-wound transformers; integrated modules;
and subsystem products.  The Company works closely with networking customers
and integrated circuit companies to design products that complement the
manufacturers' integrated circuit or chip set configuration with magnetics
applications required to enable the integrated circuit to perform its desired
function.  The Company's products are located at most interface points of the
system where signal conversion is required.  For example, on the desktop in a
LAN application, these products are found inside the computer on the network
interface adapter card.   At the file server, these products are found near the
connection port of hubs or concentrators, routers, and switches, as well as
inside multiple-access units.

Magnetics-based components are an integral part of electronic circuitry.  In
LAN applications, circuits need to be isolated from each other, impedances
matched (signal levels stepped up or down), unwanted signals suppressed or
noise emissions filtered, and voltage converted.  The LAN topologies that these
networking products support differ in their requirements for transmission
speed, wiring specifications, and signaling-access methods of the LAN; and, as
a result, the component mix, quantity, placement, and degree of component
integration for these products will vary depending upon the LAN topology used.


                                       1


<PAGE>   4



Signal Processing Products - The majority of the Company's revenues are derived
from signal-processing products which consist of pulse transformers, chokes,
filters, and integrated filter modules.  Pulse transformers provide electrical
isolation of circuits and match impedances between different parts of circuits,
thus allowing for different circuits placed within close proximity on the same
board to handle voltage signals without causing data distortion or circuit
damage.  In a LAN using copper wire as the transmission medium, isolation
transformers are used on network adapter cards, generally located inside the
computer, close to the connector, to isolate the network wiring from the
adapter card itself.  This isolation prevents the network wire from
transferring voltage spikes into the system which would severely damage the
circuits.  Chokes are used for filtering and smoothing electrical signals, and
are often used in connection with transformers.  In a LAN, the required
magnetics application for chokes is signal conditioning and shaping at the
network interface point to suppress common mode noise (noise present equally on
pairs of wires where the signals are supposed to exist at opposite levels to
each other) emission on the transmit and receive line.  The Company's
transformers and chokes support Ethernet over coaxial cable; 10Base-T and Token
Ring LAN topologies; 100Base-TX Fast Ethernet, 155 Mbps Asynchronous Transfer
Mode ("ATM"), and fibre-channel applications.  Transformers and chokes are also
used in telecommunication products with ISDN, T1/E1/CEPT and xDSL interface
applications.  Filter products reduce or eliminate conducted noise frequencies
outside of the normal network frequencies from traveling along transmission
media as well as minimize large current or voltage spikes that would be deemed
excessive on the transmission cable.  Filter products are designed to work with
the most commonly used integrated circuits and generally support both transmit
or receive functions.  Filters are located at the transmit and receive
connection ports in such hardware as adapter cards, intelligent hubs, routers,
and switches and may be placed discretely on printed-circuit boards or into an
integrated filter module.

Integrated filter modules consist of a filter and a transformer and often a
choke in one single module and may also include resistors, compactors and
opto-isolators.  Integrated filter modules perform the combined functions of
signal isolation, impedance matching, signal conditioning, filtering, noise
suppression and overvoltage protection.  The Company's filter products support
applications for Ethernet over coaxial cable, 10Base-T, Token Ring, PCMCIA
credit card-sized standard, FDDI over copper, 100Base-VG, 100Base-T4, 155 Mbps
ATM, ADSL and Cable Modem.

Beginning in 1998, the Company offers a line of single, one-by-four and
two-by-six integrated connectors which integrate the Company's signal
processing products with RJ45 connectors in a strategic arrangement with AMP (a
connector manufacturer).  These integrated connectors offer size and
performance benefits as compared to the current approach of a separate signal
processing component and a separate RJ45 connector.

Power-Transfer Products -  The Company's principal power-transfer products are
DC/DC converters.  DC/DC converters take the bus or supply voltage, which
generally operates at a different voltage level than the integrated circuit,
and converts the voltage to a level to enable the integrated circuit to
function optimally.  DC/DC converters are also suitable for flash memory and
distributed power applications.  In a LAN, DC/DC two watt converters are
located in combination adapter cards and hubs and support Ethernet (10Base2/5)
over coaxial cable applications.  10Base-T topologies do not require a DC/DC
converter.

CUSTOMERS

The Company's products are sold directly or indirectly to more than 1,000
customers, including primarily OEM's and distributors.  Two of these customers
accounted for 18% and 13% of the Company's total sales in 1997.  Two customers
accounted for 20% and 10% of the Company's total sales in 1996, and two
customers accounted for 16% and 14% of the Company's total sales in 1995.  No
other customer accounted for 10% or more of total sales in these years, but
several other customers contributed more than 5% of the Company's total sales
in these years.  The sales percentage from the Company's OEM and distribution
customers has historically fluctuated and may continue to vary in future
periods.  Management believes that future sales concentration to these OEM and
distribution customers is likely to continue.  The importance of these
customers to the Company, combined with competitive pressures, could result in
the negotiation of lower sales prices for these customers which could adversely
affect the Company's results of operations and financial condition.  The loss
of one of these customers would have a material adverse effect on the Company's
results of operations and financial condition.


                                       2


<PAGE>   5



SALES AND MARKETING

The Company's products are sold in North America through 16 manufacturers'
representative organizations employing over 150 sales engineers trained to sell
the Company's products.  These products are also offered for sale through two
national and one regional electronics distributors with branches throughout the
United States and Canada.  The efforts of the representative organizations are
directed by three regional manager employees, and the efforts of the
distribution organizations are directed by a national distribution manager
employee, all of whom report to a vice president of sales.

The international sales structure comprises representative and distributor
networks in Europe and the Pacific Rim. There are directors of sales and
marketing in London, England, and Hong Kong who oversee sales in Europe and
Asia, respectively.  The Company employs customer service representatives to
process purchase orders and respond to customer inquiries.

COMPETITION

The market for magnetics-based components for network applications is highly
competitive.  The Company's LAN products have two principal competitors, Pulse
Engineering, Inc., (a subsidiary of Technitrol) and Bel Fuse, Inc. Each of
these competitors offers a broad product line, and each competes with levels of
manufacturing and engineering capabilities at least similar to the Company's.
In addition, numerous foreign-based firms with strong, low cost manufacturing
capabilities offer specific products with capabilities similar to the Company's
product lines.  There is no dominant competitor in the telecommunications
market for magnetic components, and competition varies according to location
and type of interface.  Among at least 30 competitors in the telecommunications
market, the Company competes most often with Pulse Engineering, Midcom,
Vacuumschmelze and UMEC.

The number of competitors and the characteristics of competition for the
Company's products varies based on the degree of engineering and design related
to each product.  Currently, competition is primarily based on engineering
design, quality, availability, and price.  Products with very little
engineering requirements or changes in design have more competitors and
typically compete on price.  Products with a high degree of engineering design
and component integration have fewer competitors and typically compete on the
ability to provide solutions.

The market for 10Base-T Ethernet and 10Base-2/5 products is becoming
increasingly mature and, as a result, manufacturing companies are entering the
marketplace with standard products and have sought to compete on the basis of
price.  The Company has competed in this environment by focusing on higher
degrees of engineering and functionality, product quality, and availability, as
well as the ability to cost re-engineer mature products.  See "Product
Development" for a discussion of new product development and emerging
communications markets.

MANUFACTURING AND SUPPLIERS

The manufacturing operations for the Company's products are labor intensive,
and primarily involve the winding of magnetic cores; the assembly and placement
of discrete and integrated circuit components onto printed circuit boards;
product encapsulation; testing; quality assurance; and marking of the final
component.  The Company conducts its manufacturing in two operations in the
People's Republic of China ("PRC") and one operation in the Philippines.  The
activities of these manufacturing operations are coordinated and supported by
the Company's San Diego-based headquarters and, in times of peak production,
may be supplemented by third-party subcontractors in the PRC and in the
Philippines.  All of the Company's manufacturing operations in the PRC and the
Philippines are certified pursuant to ISO 9002. The Company has direct product
supervision over the subcontractor operations.  The related subcontractor
arrangements are negotiated on a price-per-piece basis, renewable annually, and
generally provide to the Company flexibility to adapt its production schedule
in response to fluctuations in market demand.

The principal materials and fabricated components used in the Company's
products include ferrite cores, coilforms, leadframes, printed circuit boards,
epoxies, discrete and integrated circuit electronic components.  The Company
generally uses standard parts and components for its products and,
historically, has been able to obtain adequate supplies from several existing
sources.  Currently, pin coilforms, which are used in approximately 30% of
filter


                                       3


<PAGE>   6
products, are manufactured by a sole-sourced supplier.  An interruption in the
supply of pin coilforms or the inability of the Company to procure this
component from alternative sources at acceptable prices within a reasonable
time would materially and adversely affect the Company's business,
manufacturing operations, operating results, and financial condition.

PRODUCT DEVELOPMENT

The market for the Company's products is characterized by rapidly changing
technology, frequent new product introduction, and the requirement to conform
to evolving standards for networking data communications architectures.  The
Company's ability to develop and introduce new products to the market in a
timely manner or enhancements to existing products is crucial to its future
success.

The Company is developing its magnetics-based products for use in emerging
communications markets, such as Fast Ethernet, GigaBit, FDDI/CDDI, ATM, xDSL,
ISDN and T1/E1 standards. The Company works closely with networking customers
and integrated circuits manufacturers with which the Company's products must
interface and participates as a member in the IEEE and ANSI Standards
Committees and the ADSL Forum.  These efforts give the Company early access to
new technologies and new product plans, which the Company believes provide it
with timely information regarding the development of its products.  Concurrent
engineering projects with key customers are also becoming an important factor
in developing new products and product enhancements.  In 1997, 1996, and 1995,
the Company incurred design engineering and product development costs of
$3,166,000, $3,245,000 and $4,705,000, respectively.

FOREIGN OPERATIONS

Substantially all of the Company's manufacturing operations and approximately
52% of its identifiable assets (excluding goodwill) are located in the PRC and
the Philippines.  See also "Manufacturing and Suppliers" and "Properties."
There are risks inherent to these foreign operations, many of which are beyond
the control of the Company.  These risks include exposure to the effects of
political and economic instability and significant changes to existing
international treaties, fluctuating currency exchange rates, changes in
tariffs, taxes, duties and imposts, market forces, and changes in foreign laws
as well as difficulties in staffing and managing foreign subsidiaries and
oversight of subcontracting arrangements.  Such risks could result in
interruptions of manufacturing operations, capability, or substantial increases
in operating costs which, if prolonged, would have a material, adverse effect
on the Company's profitability and financial condition.  For example, if the
United States Government were to eliminate current favorable trade legislation
with China or increase customs duties, it could have a material adverse effect
on a significant portion of the Company's foreign operations.

INTERNATIONAL SALES

Sales to customers outside of the United States comprised approximately 46% of
the Company's total sales in 1997, of which approximately 21%, 22%, and 1% were
made to customers in Asia, Europe, and North America (outside the United
States), respectively.  Sales to customers outside the United States as a
percentage of total sales were approximately 48% in 1996, and 42% in 1995.
Additional geographic segment financial information is set forth in the Notes to
the Consolidated Financial Statements included elsewhere herein.

The Company has established sales offices in Hong Kong and London, England to
administer its international sales activities.  The Company believes that LAN,
telecommunication and broadband systems, which require magnetics-based
components such as those manufactured by the Company, will make further
penetration into international markets, as has been the case in the United
States.  Accordingly, the Company expects that international sales will
continue to represent a significant percentage of total future sales.
International sales are, however, subject to inherent risks, including changes
in regulatory requirements, fluctuating currency exchange rates, increases in
tariff and other barriers, difficulties in obtaining export licenses, and
potentially adverse tax consequences.


                                       4


<PAGE>   7



BACKLOG

As of December 31, 1997, the Company's backlog was approximately $8.6 million
compared to approximately $15.7 million as of December 31, 1996. While the
Company believes that the orders included in the backlog are firm, typical
customer terms generally include the ability to cancel or reschedule orders
without significant penalty.  In addition, the Company commits its
manufacturing and expense levels according to monthly and quarterly sales and
production forecasts.  If anticipated sales do not meet these forecasts, the
Company's operating results would be adversely affected.

As more fully discussed in the Trends, Uncertainties and Prospective
Information section of this Annual Report, the Company's backlog at the
beginning of each quarterly period is not sufficient to achieve anticipated
revenues for the quarter.  As a result, the Company's sales for any quarter are
dependent upon obtaining "turns business" (i.e., orders received in a quarter
for shipment within the same quarter).  Further, current trends are towards a
greater dependence on turns business as the Company's customers demand shorter
lead times and provide fewer long-term orders.  Management expects this trend
to continue.  If turns orders do not materialize, the Company's operating
results will be adversely affected.  The Company's future performance on a
quarter-to-quarter and year-to-year basis will be materially affected by the
volume, mix and timing of orders received.

MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS

The Company's Common Stock is traded on the NASDAQ/NMS--Symbol: GGTI.  The
prices quoted below have been furnished by the NASDAQ/NMS.  As of December 31,
1997, there were approximately 1,660 holders of record of the Company's Common
Stock.  The Company has not paid dividends on its Common Stock since 1982.


<TABLE>
<CAPTION>
             1997           1996
         ------------  -------------
QUARTER  HIGH    LOW    HIGH    LOW
-------  -----  -----  ------  -----
<S>      <C>    <C>    <C>     <C>
  1st    6 7/8  4 1/4  18 1/4  8 1/4
  2nd    6 3/4  4 3/4   9 1/2  7 1/4
  3rd    7 3/4  5 1/4   7 3/4  5 1/4
  4th    6 5/8  4 1/2   7 1/4  4 3/8
</TABLE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company have been
derived from the audited Consolidated Financial Statements of the Company.
This data should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report.


                                       5


<PAGE>   8
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                    1997              1996              1995              1994              1993
                                                  -------------------------------------------------------------------------------
<S>                                               <C>               <C>               <C>               <C>               <C> 
INCOME STATEMENT DATA
Sales                                             $82,591           $ 92,533          $114,836          $103,239          $88,575
                                                  ===============================================================================
Income (loss) from:
  Continuing operations                           $(3,133)          $ (7,651)         $  6,124          $  3,299          $10,890
  Discontinued operations, net of income taxes       --               (2,998)           (2,178)            1,962            2,310
  Disposal of discontinued operations, net 
  of income taxes                                    --              (10,822)           (2,000)             --               --
                                                  -------------------------------------------------------------------------------
Net income (loss)                                 $(3,133)          $(21,471)         $  1,946          $  5,261          $13,200
                                                  ===============================================================================
Diluted earnings (loss) per share:
  Continuing operations                           $ (0.38)          $  (0.88)         $   0.56          $   0.32          $  1.09
  Discontinued operations, net of income taxes        --               (0.33)            (0.20)             0.19             0.23
  Disposal of discontinued operations, net 
  of income taxes                                     --               (1.21)            (0.18)             --               --
                                                  -------------------------------------------------------------------------------
Net income (loss) per share                       $ (0.38)          $  (2.42)         $   0.18          $   0.51          $  1.32
                                                  ===============================================================================
Weighted average number of common shares
and common stock equivalents                        8,973              8,973            10,904            10,187           10,023
                                                  ===============================================================================
BALANCE SHEET DATA
Total Assets                                      $82,954           $ 91,524          $117,699          $ 99,948          $89,648
                                                  ===============================================================================
Working Capital                                   $33,813           $ 29,513          $ 53,690          $ 42,108          $38,055
                                                  ===============================================================================
Long-term debt, less current portion              $   625           $   --            $   --            $   --            $  --
                                                  ===============================================================================
Stockholders' equity                              $63,765           $ 67,150          $ 88,995          $ 77,563          $71,772
                                                  ===============================================================================
</TABLE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes to Consolidated Financial Statements
included elsewhere in this Annual Report.  Amounts are expressed in thousands
(except per share data).

                             RESULTS OF OPERATIONS

1997 COMPARED TO 1996

Revenues declined by 10.7% from $92,533 in 1996 to $82,591 in 1997.  This
decrease resulted from an approximate 17.0% decrease in average selling prices
(including the effects of changes in mix), offset somewhat by an approximate
4.7% increase in unit volume.  Management attributes the decrease in average
selling prices to the competitive pressures caused by downward pressures on
prices in the market for networking products for which the Company provides
components.  The decrease in average selling prices also resulted from a
greater current year mix of lower-priced components for telecommunications
markets.  The 4.7% increase in unit volume resulted primarily from initial
successes in the telecommunications markets as a result of the Company's
strategy to build on its LAN magnetics expertise and to penetrate new
telecommunications and broadband markets.

Two of the Company's OEM customers collectively accounted for 31% and 30% of
the Company's sales in the current and prior year, respectively.  The sales
percentage from the Company's OEM customers has historically fluctuated and may
continue to vary in future periods.  Management believes that future sales
concentration to these customers is likely to continue.  The importance of
these customers to the Company, combined with competitive pressures, could
result in the negotiation of lower sales prices for these customers which could
adversely effect the Company's results of operations and financial condition.
The loss of one of these customers would have a material adverse affect on the
Company's results of operations and financial condition.


                                       6


<PAGE>   9
Cost of sales decreased $12,186 or 16.2% from $75,350 (81.4% of revenue) in 1996
to $63,164 (76.5% of revenue) in 1997.  Gross profit increased $2,244 or 13.1%
from $17,183 in 1996 to $19,427 in 1997.  Gross profit as a percent of sales
increased from 18.6% to 23.5% in 1996 and 1997, respectively.  These improved
margins resulted primarily from decreased labor and overhead costs resulting
from the 1996 replacement of China subcontract labor with direct employees and
facilities which more than offset the decreased sales prices.  Nevertheless,
based on the Company's current overhead structure, if future volumes decline,
the actual cost per unit and gross profit could be materially and adversely
affected.

Operating expenses for 1997 decreased by $3,980 or 15.5% from $25,722 (27.8% of
sales) in 1996 to $21,742 (26.3% of sales) in 1997.  The prior year included a
$1,900 charge related to the restructuring of the Company's Asia operations, a
$650 charge related to the settlement and legal costs of a class action
lawsuit, and an $871 charge related to employee severance.  Absent these
prior-year costs, operating expenses decreased $559 or 2.5% primarily as a
result of decreased professional fees and decreased administrative personnel,
offset somewhat by increased sales and marketing expenditures.

Other expenses increased $656 from $162 in 1996 to $818 in 1997 primarily
because of a $499 net loss on the liquidation of the VideoServer shares
received in connection with the Promptus divestiture.

The Company's tax provision (benefit) related to continuing operations was $0
in 1997 compared to a $1,050 benefit in 1996.  These tax amounts are
disproportionate to the related loss from continuing operations because the
Company's net operating loss carryforwards have been used to decrease the
amount of the permanently reinvested off-shore earnings that had not been taxed
in prior years.

The increase in gross profit and the decreases in operating expenses, offset
somewhat by the increase in other expenses and the decrease in tax benefits,
resulted in a loss from continuing operations in 1997 of $3,133 or $0.38 per
share.  This compares to a loss from continuing operations of $7,651 or $0.88
per share in 1996.  Including the effects of discontinued operations in 1996,
the net loss decreased $18,338 from $21,471 or $2.42 per share in the prior
year to $3,133 or $0.38 per share in 1997.

1996 COMPARED TO 1995

Revenues declined by 19.4%, from $114,836 in 1995 to $92,533 in 1996.  This
decrease consisted of an approximate 5.3% decrease in average selling prices
and an approximate 14.9% decrease in unit volume.  Management attributes the
decrease in average selling prices to the competitive pressures caused by
downward pressures on prices in the market for networking products for which
the Company provides components.  The decrease in unit volume is attributed to
certain product quality issues that management believes have since been
addressed.

Cost of sales decreased by 8.9%, from $82,729 in 1995 to $75,350 in 1996.  This
decrease was due primarily to the decline in unit sales volume and the factors
discussed below related to gross margin.

Gross margin decreased by 46.5%, from $32,107 in 1995 to $17,183 in 1996.
Gross margin as a percent of revenue decreased by 33.6%, from 28% in 1995 to
18.6% in 1996.  The decline in gross margin resulted primarily from the decline
in unit volume and from increased excess and obsolete inventory provisions in
1996.  The decrease in gross margin as a percent of revenues resulted primarily
from the effects of fixed costs spread over lesser volume and from the price
decline described above.  This decrease was off set slightly by decreased labor
and overhead costs resulting from the May 1996 formation of the Company's
wholly-owned manufacturing operation in China, from the resultant termination
of subcontract processing arrangements in China, and from the resultant
restructuring of the Company's Hong Kong management team.

Operating expenses increased by 1.3%, from $25,382 in 1995 to $25,722 in 1996.
The 1996 operating expenses included a $1,900 charge related to the
restructuring of the Company's off-shore operations, particularly in Hong Kong,
a $650 charge related to the settlement and legal costs of a class action
lawsuit, and a $871 charge related to employee severance.  The 1995 operating
expenses included a $1,376 charge related to severance.  Absent these


                                       7


<PAGE>   10
charges in 1996 and 1995, operating expenses decreased by 5.6% resulting
primarily from reductions in commissions expense and personnel.

Other expenses increased from $29 in 1995 to $162 in 1996 primarily as a result
of gains on the sale of certain fixed assets in 1995.

The Company's tax provision (benefit) related to continuing operations changed
from an expense of $506 in 1995 to a net benefit of $1,050 in 1996.  The net
tax benefit in 1996 resulted primarily from the carryback of the U.S. portion
of the 1996 consolidated loss.  The 1995 expense is significantly less than a
provision based on the U.S. Federal tax rate due to off-shore tax holidays and
due to the Company's intentions (at that time) to not repatriate off-shore
earnings.

The decreased revenue levels, decreased gross margin and increased operating
expenses, off-set somewhat by income tax consequences, resulted in a loss from
continuing operations after taxes of $7,651 ($0.88 per share) in 1996.  This
compares to income from continuing operations after taxes of $6,124 ($0.56 per
share on a diluted basis) in 1995.

The Company discontinued three operations during the years 1995 and 1996.
Losses from discontinued operations were $2,998 ($.33 per share) in 1996
compared to $2,178 ($.20 per share on a diluted basis) in 1995.  Estimated loss
on disposal of discontinued operations was $10,822 ($1.21 per share) in 1996
and $2,000 ($.18 per share on a diluted basis) in 1995.  Including the effect
of discontinued operations, the net loss was $21,471 ($2.42 per share) in 1996
compared to net income of $1,946 ($.18 per share on a diluted basis) in 1995.

TRENDS, UNCERTAINTIES AND PROSPECTIVE INFORMATION

The Company expects that revenues in its first quarter of 1998 will be
substantially less than the $18 million level achieved in the fourth quarter of
1997.  Management believes that this continuing revenue decline results from an
overall softening in demand for computer and networking products, from adverse
economic conditions in Asia, and from intensified competition and resultant
price declines in the LAN market.  Many of the Company's key customers have
indicated a softening of demand for computer and networking products in the
first quarter of 1998, and this trend may continue.  As a result of the
continuing revenue decline, the 1998 first quarter loss will substantially
exceed the $1.6 million loss recorded in the fourth quarter of 1997.  In
response to this adverse trend and for other reasons, the Company has initiated
ongoing revenue enhancement and cost reduction programs.  However, there can be
no assurance that revenues will increase, nor can there be any assurance that
the Company will be able to reduce costs in an amount sufficient to offset the
negative effects of the revenue decline.

Management believes that its future operating results will be influenced by a
number of factors including, but not limited to: general economic conditions;
the growth of the LAN and internetworking markets; the growth of broadband,
global services and high-speed, digital, network and telecommunications
applications; timely new product introductions; dependence on key OEM
customers; market acceptance of new networking, telecommunications and
broadband technologies; market acceptance of the Company's products; and
numerous competitive forces.  It is anticipated that the Company's operating
results in the foreseeable future will remain dependent on the success of the
Company to identify, develop, manufacture, and market new products or to
enhance existing product offerings.

The majority of the Company's sales continue to be derived from products that
support Ethernet applications.  The Company's operating results could be
affected if there is an unexpected change in such technologies or if the
Company does not respond appropriately to expected changes.  The Company
supplies OEM's with product compliant with all relevant IEEE, ANSI, and ATM
forum standards for 100Base-TX Fast Ethernet, TP/PMD (FDDI over copper), xDSL,
and 155 Mbps ATM applications.  The success of these advanced products is
dependent on many factors, such as the Company's ability to manufacture these
products in sufficient quantities to meet anticipated demand and the overall
market acceptance of these new technologies.  The inability of these advanced
networking products to gain market acceptance or potential delays of the
widespread installation of such products


                                       8


<PAGE>   11



could subject The Company's existing products to increased competition and
pricing pressures, which would adversely affect the Company's operating
results.

The Company's future performance will also be affected by the volume, mix, and
timing of orders received during a particular period.  There can be no
assurance that orders from existing customers will continue at the levels of
previous years or that the Company will be able to obtain orders from new
customers.  If anticipated orders do not develop, or changes in delivery
schedules or cancellation of orders occur, the Company's per-unit manufacturing
costs, expenditures, and inventory levels could be disproportionately high in
relation to sales.  This could have an adverse effect on the Company's
operating results and liquidity for that quarterly period.

The Company's results and stock price have been, and may continue to be,
subject to significant volatility, particularly on a quarterly basis.  A
further reduction in sales or increase in operating losses could have an
immediate and significant adverse affect on the trading price of the Company's
Common Stock in any given quarterly period.

Throughout the world, many existing computer programs use only two digits to
identify a year in the date field.  These programs were designed and developed
without considering the impact of the upcoming change in the century.  If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000.  The Year 2000 issue affects virtually all companies and
organizations.  During 1997, the Company completed a migration of its
information systems (for all functions of the Company) to new Enterprise
Resource Planning software (database and applications software) which fully
addresses the Year 2000 issue.  Also, the Company's management has reviewed and
evaluated the potential impact of the Year 2000 issue on other application
software, firmware and hardware utilized by the Company and have concluded that
the Company has no additional or significant exposure (from an operational or a
financial perspective) related to this matter.


                        LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 1997, the Company satisfied its working capital
and capital expenditure requirements through net borrowings from a related
party, the proceeds from the disposal of Promptus, income tax refunds and
internally generated cash from operations (net income before depreciation and
amortization).  The Company's primary uses of these available funds was to add
equipment, to increase inventories and to reduce current liabilities.  These
sources and uses of cash are detailed in the Consolidated Statements of Cash
Flows included elsewhere in this Annual Report.

In February 1997, the Company obtained a $2,500 two-year term note from its
majority shareholder as more fully described in the Notes to Consolidated
Financial Statements included elsewhere in this Annual Report.  The first
payment on this note of $625 plus interest was paid in August 1997, and the
second payment of $625 plus interest was paid in February 1998.

In April 1997, the Company completed the divestiture of its interest in
Promptus Communications, Inc.  The Company received approximately $8.2 million
in cash, net of transaction costs, and 157,795 shares of VideoServer (NASDAQ:
VSVR) common stock.  As of December 31, 1997 the Company had sold all of these
shares of VideoServer for total proceeds of approximately $1.8 million.

In September 1997, the Company received a $3.5 million Federal tax refund
resulting from the carryback of the 1996 U.S. operating loss and 1995 U.S
capital loss to prior profitable periods.  The Company is now in a Federal tax
loss carryforward position, and no further Federal tax refunds are available.
As of December 31, 1997, the Company does have foreign and state tax refunds
receivable totaling about $3 million which the Company expects to collect in
1998.  The Company's 1994 Federal tax return is currently under audit, and the
1997 and prior years' Federal, state and foreign tax returns are subject to
audit.  Such audits could result in adjustments to the Company's tax position.


                                       9


<PAGE>   12
In 1997, the Company purchased capital equipment approximating $3.7 million.
These expenditures were primarily for production equipment and information
systems.  The Company anticipates that capital expenditures will total about $3
to $5 million per year for the foreseeable future, depending on revenue growth
rates, if any.  These capital expenditures are anticipated to be primarily for
automation equipment to further improve quality, increase capacity and increase
manufacturing labor efficiency.  The Company's capital expenditure estimates
assume that future additional capacity needs, if any, are realized through
expansion in subcontractor relationships, requiring a relatively low level of
facility expenditures.  The Company anticipates that most of its capital
expenditures for the foreseeable future will be funded through cash on hand or
cash generated from operations.

Management believes that funds on hand and funds generated by operations will
be sufficient to finance working capital needs, projected capital-expenditure
requirements and debt maturities at least through the next twelve months
assuming that revenues achieve anticipated levels.  However, if revenue levels
continue to decline (see also Trends, Uncertainties and Prospective Information
included elsewhere herein), then the Company may be forced to seek additional
financing.  There can be no assurance that additional financing will be
available in amounts or at terms acceptable to the Company.

In January 1998, the Company retained investment bankers to assist the Company
regarding the identification and investigation of strategic alternatives that
might be available to the Company, including a possible sale of the Company.
No such strategic transaction has been negotiated to date, and there can be no
assurance that any such strategic transaction will be consummated.  If a sale
of the Company occurs, there can be no assurance regarding the price per share
to be received by the Company's shareholders.


                                       10


<PAGE>   13



Report of Independent Public Accountants



To the Stockholders and Board of Directors, GTI Corporation:

We have audited the accompanying consolidated balance sheets of GTI Corporation
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 GTI Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.



                                              ARTHUR ANDERSEN LLP


San Diego, California
February 25, 1998


                                       11


<PAGE>   14
                                GTI CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                 ---------------------------------------------------
                                                   1997                1996                   1995
                                                 -------             --------               --------

<S>                                              <C>                 <C>                    <C>
Sales                                            $82,591             $ 92,533               $114,836
Cost of sales                                     63,164               75,350                 82,729
                                                 -------             --------               --------
Gross profit                                      19,427               17,183                 32,107
Operating expenses                                21,742               25,722                 25,382
                                                 -------             --------               --------
Operating profit (loss)                           (2,315)              (8,539)                 6,725
Other (income) expense, net
  Loss on sale of securities                         499                   --                     --
  Interest (income)                                 (308)                 (91)                   (93)
  Interest expense                                   537                  319                    342
  Other (income) expenses                             90                  (66)                  (220)
                                                 -------             --------               --------
Income (loss) from continuing
  operations before income taxes and 
  minority interest                               (3,133)              (8,701)                 6,696
Provision (benefit) for income taxes                  --               (1,050)                   506
Minority interest in earnings of
  subsidiaries                                        --                   --                     66
                                                 -------             --------               --------
Income (loss) from continuing
  operations                                      (3,133)              (7,651)                 6,124
Loss from discontinued operations,
  net of income taxes of $0 and $515 
  for 1996 and 1995, respectively                     --                2,998                  2,178
Loss on disposal of discontinued
  operations, net of income taxes                     --               10,822                  2,000
                                                 -------             --------               --------
Net income (loss)                                $(3,133)            $(21,471)              $  1,946
                                                 =======             ========               ========
NET INCOME (LOSS) PER SHARE OF 
COMMON STOCK AND COMMON STOCK EQUIVALENTS:

            Basic EPS
------------------------------------------
Income (loss) from continuing operations         $ (0.38)            $  (0.88)              $   0.65
Loss from discontinued operations                     --                (0.33)                 (0.24)
Loss on disposal of discontinued
  operations                                          --                (1.21)                 (0.22)
                                                 -------             --------               --------
Net loss                                         $ (0.38)            $  (2.42)              $   0.19
                                                 =======             ========               ========
Weighted average number of common shares           8,973                8,973                  8,973
                                                 =======             ========               ========
          Diluted EPS
------------------------------------------
Income (loss) from continuing operations         $ (0.38)            $  (0.88)              $   0.56
Loss from discontinued operations                     --                (0.33)                 (0.20)
Loss on disposal of discontinued operations           --                (1.21)                 (0.18)
                                                 -------             --------               --------
Net loss                                         $ (0.38)            $  (2.42)              $   0.18
                                                 =======             ========               ========
Weighted average number of common shares
  and common stock equivalents                     8,973                8,973                 10,904
                                                 =======             ========               ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       12


<PAGE>   15
                                GTI CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                  AS OF DECEMBER 31,     
                                                                           ------------------------------
                                                                              1997                 1996 
                                                                           ---------             --------
<S>                                                                         <C>                   <C>
Current assets:
  Cash and cash equivalents                                                  $ 6,967               $ 3,219
  Accounts receivable, net of allowances of $339 and $201, respectively       12,061                11,502
  Inventories                                                                 21,794                18,551
  Income tax receivable                                                        2,926                 3,435
  Prepaid expenses and other                                                   2,786                 3,367
  Net assets of discontinued operations                                          290                11,637
                                                                             -------               -------
                                         Total current assets                 46,824                51,711
Property, plant and equipment, net                                            14,800                15,974
Goodwill, less accumulated amortization of $4,907 and $4,211,
  respectively, and other assets                                              21,330                23,839
                                                                             -------               -------
TOTAL ASSETS                                                                 $82,954               $91,524
                                                                             =======               =======
Current liabilities:
  Accounts payable, accrued and other liabilities                            $11,761               $17,298
  Short-term borrowings                                                            -                 4,900
  Current portion of long-term debt due to affiliate                           1,250                     -
                                                                             -------               -------
                                         Total current liabilities            13,011                22,198

Long-term debt due to affiliate, net of current portion                          625                     -
Deferred income taxes and other liabilities                                    5,553                 2,176

Stockholders' equity:
  Preferred stock, 1,000,000 shares authorized, first series,
    $35.00 cumulative convertible, 8,110 shares issued and outstanding         8,110                 8,110
  Common stock, par value $.04 per share, 12,000,000 shares authorized,
    8,973,475 shares issued and outstanding                                      359                   359
  Additional paid in capital                                                  44,082                44,082
  Retained earnings                                                           11,227                14,644
  Cumulative translation adjustment                                              (13)                  (45)
                                                                             -------               -------
                                         Total stockholders' equity           63,765                67,150
                                                                             -------               -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $82,954               $91,524
                                                                             =======               =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       13


<PAGE>   16
                                GTI CORPORATION
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      THREE YEARS ENDED DECEMBER 31, 1997
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                 First Series                   Additional                               Cumulative        Total
                                   Preferred       Common        Paid-in       Retained      Treasury    Translation   Stockholders'
                                     Stock          Stock        Capital       Earnings        Stock     Adjustment       Equity
                                 ---------------------------------------------------------------------------------------------------
<S>                               <C>               <C>           <C>           <C>           <C>         <C>           <C>

Balance, December 31, 1994           $8,110           $339       $34,567       $34,737       $(1,040)         $850         $77,563
Net income                                                                       1,946                                       1,946
Sale of 650,000 shares of Common
  Stock, of which 250,000
  shares were issued
  from Treasury Stock, in
  connection with the 72%
  acquisition of Promptus
  Communications, Inc.                                  16         8,655                        1,040                        9,711
Issuance of 114,125 shares of Common
  Stock under stock option plans                         4           860                                                       864
Preferred Stock dividend                                                          (284)                                       (284)
Cumulative translation gain on
  sale of assets of the E-Group                                                                               (835)           (835)
Translation adjustment                                                                                          30              30
                                 ---------------------------------------------------------------------------------------------------
Balance, December 31, 1995            8,110            359        44,082        36,399              -           45          88,995
Net loss                                                                       (21,471)                                    (21,471)
Preferred Stock dividend                                                          (284)                                       (284)
Translation adjustment                                                                                         (90)            (90)
                                 ---------------------------------------------------------------------------------------------------
Balance, December 31, 1996            8,110            359        44,082        14,644              -          (45)         67,150
Net loss                                                                        (3,133)                                     (3,133)
Preferred Stock dividend                                                          (284)                                       (284)
Translation adjustment                                                                                          32              32
                                 ---------------------------------------------------------------------------------------------------
Balance, December 31, 1997           $8,110           $359       $44,082       $11,227        $     -        $ (13)        $63,765
                                 ===================================================================================================
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.



                                       14


<PAGE>   17
                                GTI CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                 --------------------------------------------------------
                                                   1997                    1996                    1995
                                                 ---------               --------                --------
<S>                                               <C>                   <C>                    <C>
Cash flows from operating activities:
  Net income (loss)                                $(3,133)              $(21,471)                $1,946
  Adjustments to reconcile net
  income (loss) to net cash provided
  (used) by continuing operations:
    Loss from discontinued operations                    -                  2,998                  2,178
    Loss on disposal of discontinued operations          -                 10,822                  2,000
    Depreciation and amortization                    5,608                  5,319                  4,757
    Loss on sale of securities                         499                      -                      -
    Minority interest in earnings  of subsidiary         -                      -                     66
    Loss on disposal of equipment                      202                      -                    201
    Deferred income taxes                              719                  1,289                 (1,945)
    Change in assets and  liabilities:
      Accounts receivable                             (559)                 7,954                   (680)
      Inventories                                   (3,243)                10,694                 (8,958)
      Income taxes receivable                          509                 (3,435)                     -
      Prepaid expenses and other                     2,115                 (1,231)                  (326)
      Accounts payable, accrued and other
        liabilities                                 (5,537)                (5,335)                 3,246
      Other non-current liabilities                  2,658                    223                    384
                                                    ------                 ------                -------
  Net cash provided (used) by                         (162)                 7,827                  2,869
   continuing operations
  Net operating cash used by  discontinued
   operations                                         (701)                (2,898)                (3,697)
                                                    ------                 ------                -------
Net cash provided (used) by operating
 activities                                           (863)                 4,929                   (828)
                                                    ------                 ------                -------
Cash flows from investing activities:
  Purchases of property, plant  and equipment       (3,661)                (6,060)                (4,509)
  Capital expenditures of discontinued
   operations                                           --                   (978)                (1,897)
  Purchase of Promptus, net of cash acquired            --                    --                 (19,089)
  Proceeds from disposal of  discontinued           
   operations                                       11,549                  2,412                 11,750
                                                    ------                 ------                 ------
Net cash provided (used) by investing activities     7,888                 (4,626)               (13,745)
                                                    ------                 ------                -------
Cash flows from financing activities:
  Proceeds from (repayment of)
   credit facility, net                             (4,900)                   666                  2,579
  Proceeds from long-term debt due to affiliate,
   net of repayments                                 1,875                     --                     --
  Isssuance of common stock                             --                     --                 10,575
  Preferred stock cash dividend  paid                 (284)                  (213)                  (284)
                                                    ------                 ------                -------
Net cash provided (used) by financing activities    (3,309)                   453                 12,870        
                                                    ------                 ------                -------
Net change in cumulative translation adjustment         32                    (90)                    30
                                                    ------                 ------                -------
Net increase (decrease) in cash and cash
 equivalents                                         3,748                    666                 (1,673)
Cash and cash equivalents - beginning of period      3,219                  2,553                  4,226
                                                    ------                 ------                -------
Cash and cash equivalents - end of period           $6,967                 $3,219                 $2,553
                                                    ======                 ======                =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.



                                       15


<PAGE>   18




                                GTI CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements include the
accounts of GTI Corporation and its majority-owned subsidiaries (collectively
the Company).  All significant intercompany transactions and balances have been
eliminated.

Financial Statement Preparation - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions.  These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses, and disclosure
of contingent assets and liabilities.  Actual results could differ from
management's estimates.

Cash Equivalents - Cash equivalents consist of short-term, highly liquid
investments purchased with a maturity date of three months or less.  Cash
equivalents are stated at cost, which approximates market value.

Concentration of Credit Risk and Geographic Operations - The Company invests a
portion of its excess cash in debt instruments of financial institutions with
strong credit ratings and has established guidelines relative to
diversification and maturities that maintain safety and liquidity.  The Company
has not experienced any significant losses on its cash equivalents.  The
Company sells its products to customers in diversified industries worldwide.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses.  Actual losses
have been within management's expectations.  As of  December 31, 1997, two
large customers represented approximately 46% of the Company's net accounts
receivable balance.  A significant portion of the Company's manufacturing
operations and its inventories are concentrated in the People's Republic of
China (the "PRC") and, to a lesser extent, the Philippines.

Inventories - Inventories are stated at the lower of cost (first-in, first-out)
or market and include direct labor, materials, and manufacturing overhead.

Property, Plant, and Equipment - Property, plant, and equipment are stated at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method over estimated useful lives of 7 to 25 years for buildings
and improvements and 3 to 7 years for machinery, equipment, furniture, and
fixtures.  Expenditures for property additions together with major renewals and
improvements are capitalized.  Maintenance, repairs, and minor renewals and
betterments are charged to expense.

Excess of Cost over Net Assets of Acquired Companies - The excess of
acquisition cost over the fair value of net assets (goodwill) of Valor
Electronics, Inc. ("Valor," the Company's primary operating subsidiary) is
being amortized using the straight-line method over 35 years.  The Company
periodically re-evaluates the original assumptions and rationale utilized in
the establishment of the carrying value and estimated life of this asset.
Management believes that there has been no impairment of the goodwill as
reflected in the Company's consolidated financial statements as of December 31,
1997.  The Company is subject to technological changes, which could cause
management to reassess its estimate of the realizability of goodwill and/or its
amortization period.  The determinants used for this evaluation include
management's estimate of the asset's continuing ability to generate positive
income from operations and positive cash flow in future periods as well as the
strategic significance of the intangible asset to the Company's business
objectives.  Cost in excess of net assets of Valor, net of amortization, was
$19,149 and $19,845 as of December 31, 1997 and 1996, respectively.

Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."  This
statement requires an asset and liability approach to account for income taxes.
The Company provides deferred income taxes for temporary differences that will
result in taxable or


                                       16


<PAGE>   19
deductible amounts in future years based on the reporting of certain costs in
different periods for financial statement and income tax purposes.

Foreign Currency Translation - Assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date, and revenue and expenses are translated at the average
exchange rate for the period.  Translation gains or losses of the Company's
foreign subsidiaries are not included in net income but are reported as a
separate component of stockholders' equity.  The functional currency of those
subsidiaries is the primary currency in which the subsidiary operates.  Gains
and losses on transactions in denominations other than the functional currency
of the Company's foreign operations, while not material in amount, are included
in the results of operations.  Most of the Company's worldwide sales and
inventory and equipment purchases are denominated in U.S. dollars, and most of
the Company's cash is invested in U.S. dollars. As a result, the Company
typically does not enter into foreign exchange transactions to hedge balance
sheet and intercompany balances against movements in foreign exchange rates.

Net Income (Loss) Per Share of Common Stock - In 1997 the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share," which sets forth the basis for the computation of "basic" earnings per
share and "dilutive" earnings per share.  Basic EPS excludes dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period.  Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that would then share in the
earnings of the entity.  Diluted EPS is computed on the basis of the weighted
average shares of Common Stock outstanding plus common equivalent shares
arising from the effect of cumulative convertible Preferred Stock, using the
if-converted method, and dilutive stock options, using the treasury-stock
method.  All EPS amounts for prior years and quarters have been restated to
conform to these new standards, and the effect of the restatement was not
significant.

Recent Accounting Pronouncements - In 1997, the Financial Accounting Standards
Board issued Statements No. 130 ("SFAS 130"), "Reporting Comprehensive Income"
and No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information."  SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.  The statement requires that an enterprise classify
items of other comprehensive income by their nature in a financial statement
and to display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
a statement of financial position.  SFAS 131 establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial statements.  Both
SFAS 130 and 131 are effective for fiscal years beginning after December 15,
1997.

NOTE 2: BUSINESS COMBINATION AND DISCONTINUED OPERATIONS

Promptus - In January 1995, the Company completed the acquisition of
approximately 72% of the issued and outstanding capital stock of Promptus for
approximately $19.1 million in cash, net of cash acquired. The acquisition was
accounted for as a purchase and, accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated
fair-market value. This allocation resulted in approximately $17.2 million of
costs in excess of the net assets acquired, which was being amortized over 20
years.

In March 1997, Promptus entered into an agreement (the "NAC Transaction") to
sell the net assets of its Network Access Card business ("NAC") for
approximately $20,000, consisting of $14,500 in cash and 223,881 shares of
VideoServer, Inc. Immediately after the closing of the NAC transaction, Promptus
purchased 100% of the Promptus shares held by the Company and repaid certain
indebtedness to the Company for an aggregate of approximately $11,600, net of
certain transaction costs.  The net proceeds to the Company at closing were
$8,200 in cash and approximately 158,000 shares of common stock of VideoServer,
Inc. resulting in a loss on disposal of approximately $10,800.  As a result of
this divestiture, the operations prior to closing and the loss on disposal of 

                                       17

<PAGE>   20
Promptus are included within discontinued operations.  In 1997, the Company
incurred an additional $499 loss resulting from the decline in value of
VideoServer from the date of closing to the date the Company was able to
liquidate the VideoServer shares.  This $499 loss was recorded in 1997 in
continuing operations.

E-Group - In December 1995, the Company completed the divestiture of certain
assets and liabilities of the E-Group for approximately $12,500, resulting in a
gain of approximately $3,000, net of income taxes of $2,500.  The Company
received $11,750 in cash paid at the closing, $250 in escrow funds, and a $500
promissory note due in three years.  The escrow funds will remain in escrow
until June 1997, at which time, if no purchase price adjustment occurs, all
escrow funds will be remitted to the Company.

Esco - In February 1996, the Company sold 100% of Esco's common stock in
exchange for approximately $4,100, consisting of $2,200 in cash and a $1,900
promissory note due in equal installments over six years,  resulting in a loss
on disposal of approximately $5,000, net of income tax benefits of
approximately $1,300.  This loss was accrued in 1995.

The sales of the E-Group, Esco and Promptus were made pursuant to formal
divestiture plans adopted by the Company's Board of Directors which required the
plans to be carried out within one year. Accordingly, these businesses have been
accounted as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30.

The operating results of the discontinued operations during the period of the
Company's ownership are summarized as follows:


<TABLE>
<CAPTION>
                                                1996                1995
                                              ----------------------------
<S>                                           <C>                 <C>
      Sales                                   $ 17,735            $ 54,771
                                              ---------------------------- 
      Loss before tax provision
        and minority interest income            (3,530)             (2,209)
      Income tax provision                           -                 515
      Minority interest income                     532                 546
                                              ----------------------------
      Net loss                                $ (2,998)           $ (2,178)
                                              ============================
      Basic earnings (loss) per share         $  (0.33)           $  (0.24)
                                              ============================
</TABLE>

Interest expense has been allocated to loss on discontinued operations for the
year ended December 31, 1995 based upon specifically identified debt incurred
in connection with the acquisition of Promptus.  The amount of interest expense
allocated was approximately $865.


                                       18


<PAGE>   21



NOTE 3:  SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURE

Supplemental cash flow information are summarized as follows:


<TABLE>
<CAPTION>
                                                             1997                  1996                 1995
                                                            ------                ------               -------
<S>                                                         <C>                   <C>                  <C>
Interest paid including interest related to
 discontinued operations                                    $  440                $  376               $ 1,207
                                                            ======                ======               =======
Income taxes paid                                           $1,085                $2,636               $ 1,559
                                                            ======                ======               =======
Business acquisition, net of cash acquired:
 Working capital, other than cash acquired                  $    -                $    -               $   644
 Plant and capital                                                                                       1,314
 Purchase price in excess of the net assets acquired                                                    17,230
 Other assets                                                                                            1,183
 Non-current liabilities                                                                                (1,282)
                                                            ------                ------               -------
Net cash used to acquire Promptus                           $    -                $    -               $19,089
                                                            ======                ======               =======
</TABLE>

In connection with the disposal of the E-Group in December 1995, the Company
used the cash proceeds of approximately $11,750 to repay the outstanding
principal and interest on a bank term loan of $4,100 and repaid the remaining
$7,650 against the outstanding principal amount on a bank credit facility.  The
term loan and credit facility were both used in connection with the acquisition
of Promptus.


NOTE 4:  SUPPLEMENTARY FINANCIAL INFORMATION

Inventory consisted of the following:


<TABLE>
<CAPTION>
                                  1997                 1996
                                -------              -------
<S>                             <C>                  <C>
Raw materials                   $ 9,881              $ 7,441
Work in process                   2,871                3,748
Finished goods                    9,042                7,362
                                -------              -------
Total inventories               $21,794              $18,551
                                =======              =======
</TABLE>


                                       19


<PAGE>   22





Property, plant and equipment consisted of the following:


<TABLE>
<CAPTION>
                                                         1997           1996
                                                      --------       --------
<S>                                                   <C>            <C>
     Land                                             $     12       $     12
     Buildings and improvements                          5,647          4,683
     Machinery and equipment                            22,177         20,549
     Furniture and fixtures                              4,055          3,429
                                                      --------       --------
     Property, plant and equipment, gross               31,891         28,673
     Less:  accumulated depreciation                   (17,091)       (12,699)
                                                      --------       --------
     Property, plant and equipment, net               $ 14,800       $ 15,974
                                                      ========       ========
</TABLE>

Accounts payable and accrued liabilities consisted of the following:


<TABLE>
<CAPTION>
                                                        1997           1996
                                                      -------        --------
<S>                                                   <C>            <C>
     Accounts Payable                                 $ 5,032        $  6,700
     Employee compensation                              3,045           3,810
     Federal, local, foreign and other taxes                -           2,759
     Other accrued liabilities                          3,684           3,782
     Accrued severance costs                                -             247
                                                      -------        --------
                                                      $11,761        $ 17,298
                                                      =======        ========
</TABLE>

NOTE 5:  CREDIT AGREEMENTS AND RELATED-PARTY NOTE

Through December 1997 the Company had a line of credit agreement with a bank.
Interest on outstanding borrowings accrued at prime plus one and one quarter
percent, and the line was secured by substantially all the Company's domestic
assets.  The line of credit agreement expired in December 1997, and as of
December 31, 1997 and 1996, there were zero and $4.9 million, respectively,
outstanding under this arrangement.

In February 1998, the Company negotiated a new line of credit, subject to
activation.  However, based on recent financial performance (see Note 13), it
is unlikely that this line will be activated.

In February 1997, the Company entered into a Note Purchase Agreement (the
"Note") with Telemetrix PLC ("Telemetrix," the Company's majority shareholder).
By the terms of the Note, Telemetrix loaned $2,500 to the Company with
principal to be repaid in four equal semi-annual installments of $625,000 (plus
applicable interest) beginning August 1997 and ending February 1999.  Interest
accrues at Prime plus 4% (12.5% as of December 31, 1997).  The loan is secured
by a subordinated security interest in all of the Company's assets.  As of
December 31, 1997, the outstanding balance on this Note was $1,875.  Also, by
the terms of the Note and related agreements, the Company granted Telemetrix a
warrant to acquire 150,000 shares of GTI common stock at an exercise price of
$6 per share.  The warrant expires 30 days after the Note is repaid in full.


                                       20


<PAGE>   23




NOTE 6:  INCOME TAXES

The components of the provision (benefit) for income taxes for the years ended
December 31 are as follows:


<TABLE>
<CAPTION>
                               1997                 1996                  1995
                             -------             --------                ------
<S>                          <C>                 <C>                     <C>
     Federal
      - current              $     -             $ (2,988)               $ (358)
      - deferred               1,998                1,264                  (762)
     Foreign
      - current               (1,998)               2,031                 1,714
      - deferred                   -               (1,156)                   71
     State and local               -                 (201)                 (159)
                             -------             --------                ------
                             $     -             $ (1,050)               $  506
                             =======             ========                ======
</TABLE>

The components of the income tax provision (benefit) were based on the
following sources of pre-tax income (loss):


<TABLE>
<CAPTION>
                               1997                  1996                 1995
                             --------             --------             --------
<S>                          <C>                  <C>                  <C>
     Total United States     $ (9,129)            $(13,341)            $ (2,289)
     Total Foreign              5,996                4,640                8,985
                             --------             --------             --------
                             $ (3,133)            $ (8,701)            $  6,696
                             ========             ========             ========
</TABLE>

The components of the net deferred income tax asset were as follows:


<TABLE>
<CAPTION>
                                                     1997                1996
                                                   -------             --------
<S>                                                <C>                 <C>
     Accelerated depreciation                      $    30             $     51
     Compensation                                       99                  532
     Reserves                                          745                  674
     NOL, capital loss, AMT credit carryovers        5,261                  866
     Miscellaneous accrued expenses                    121                    -
     Other                                             423                   90
     Valuation reserve - capital loss                 (643)                (651)
                                                   -------             --------
                                                   $ 6,036              $ 1,562
                                                   =======             ========
</TABLE>

The components of the net deferred income tax liabilities were as follows:


<TABLE>
<CAPTION>
                                                     1997                 1996
                                                   -------               ------
<S>                                                <C>                   <C>
     Accelerated depreciation of foreign assets    $     -               $    -
     Earnings not permanently reinvested             6,472                    -
                                                   -------               ------
                                                   $ 6,472               $    -
                                                   =======               ======
</TABLE>


                                       21


<PAGE>   24
A reconciliation from the Federal income tax provision at the statutory rate to
the effective rate is as follows:


<TABLE>
<CAPTION>
                                                        1997            1996         1995
                                                      -------         -------      --------
<S>                                                   <C>             <C>          <C>
Statutory Federal tax on income before income taxes   $(1,065)        $(2,958)     $  1,719
Effect of foreign losses with no tax benefit                -               -             -
State income taxes, net of federal benefit                  -            (201)         (191)
Differences between US and foreign tax rates                -             986        (1,050)
Foreign tax refund                                     (1,998)              -             -
Earnings not permanently reinvested                     4,675               -             -
Non-deductible expenses                                   258             748            28
Benefit of NOL carryforward                            (1,870)              -             -
Other                                                       -             375             -
                                                      -------         -------      --------
                                                      $     -         $(1,050)     $    506
                                                      =======         =======      ========
</TABLE>

Income tax provision is not recorded for US Federal income taxes on a portion
of the undistributed earnings of foreign subsidiaries as such earnings are
intended to be permanently reinvested in those operations.  Such earnings would
become taxable upon the sale or liquidation of these foreign subsidiaries or
upon the remittance of dividends.  Accumulated undistributed earnings of
foreign subsidiaries on which US taxes have not been provided are approximately
$37,300, which would result in a related tax liability of $9,300, net of
estimated foreign tax credits of $6,700, if such earnings were repatriated.


NOTE 7:  COMMITMENTS AND CONTINGENCIES

Lease Commitments:  The Company leases machinery and equipment, computer
equipment, office furniture and leased facilities under various operating
leases.  These leases expire on various dates through 2002.  Under the terms of
most of the leases, the Company is required to pay all taxes, insurance and
maintenance.  The total future minimum annual lease payments under these
operating lease agreements are as follows:


<TABLE>
<CAPTION>
                 Year Ended
                December 31,
                ------------
                    <S>                    <C>
                    1998                   $2,366
                    1999                    2,191
                    2000                    1,290
                    2001                      824
                    2002                      640
                 Thereafter                     -
                                           ------
                                           $7,311
                                           ======
</TABLE>

Rental expense amounted to $3,468, $2,879 and $3,280 in the years ended
December 31, 1997, 1996 and 1995, respectively.

Litigation:  In December 1995, a class-action lawsuit was filed in the United
States District Court, Southern District of California, against the Company and
certain of its officers and directors alleging violations of the Securities
Exchange Act of 1934.  In November 1996, the court approved a Stipulation of
Settlement with prejudice resulting in a release of all claims.  The settlement
amount, paid by the Company in 1996, was $400.

The Company is involved in various legal proceedings and claims arising in the
ordinary course of business, none of which, in the opinion of management, is
expected to have a material effect on the Company's consolidated financial
position or results of operations.

Change of Control Contingencies:  In February 1998, the Company retained
investment bankers to assist the Company regarding the identification and
investigation of strategic alternatives that might be available to the Company,
including a possible sale of the Company. No such strategic transaction has
been negotiated to date, and there can be no assurance that any such strategic
transactions will be consummated. If a sale of the Company occurs, there can be
no assurance regarding the price per share to be received by the Company's
shareholders. Also, if a change of control of GTI occurs, the Company will owe
stay-on bonuses to certain employees aggregating approximately $1,200 and a
success fee to the investment bankers, depending on the price of the strategic
transaction, if any.



                                       22


<PAGE>   25
NOTE 8:  PREFERRED STOCK

The preferred stock is convertible at the discretion of the holder, at a rate
of 234.314 shares of common stock per share of preferred stock, into 1,900,287
shares of the Company's common stock.  Dividends accrue on this preferred stock
at a rate of $35.00 per share per year and are payable quarterly.  The
preferred shares have a liquidation preference of $1,000 per share and have a
par value of $1.00 per share.


NOTE 9:  EARNINGS PER SHARE

The following represents a reconciliation of the numerator and the denominator
of the Basic EPS computation to the numerator and denominator of the Diluted
EPS computation:



<TABLE>
<CAPTION>
                                              For the year ended           For the year ended             For the year ended
                                               December 31, 1997            December 31, 1996              December 31, 1995
                                          ---------------------------    ----------------------------  ---------------------------
                                          Income            Per share    Income             Per share  Income            Per share
                                          (loss)   Shares    amount      (loss)    Shares    amount    (loss)   Shares    amount
                                          ---------------------------    ----------------------------  ---------------------------
<S>                                      <C>       <C>      <C>         <C>        <C>       <C>       <C>      <C>       <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net loss                                 $(3,133)                       $(21,471)                      $1,946
Less:  preferred stock
  dividend                                  (284)                           (284)                        (284)
                                         -------                        --------                       ------
Loss available for common stockholders    (3,417)  8,973                 (21,755)  8,973                1,662    8,973
Basic income (loss) per share                               $(0.38)                          $(2.42)                      $0.19
                                                            ======                           ======                       =====
DILUTIVE EARNINGS (LOSS) PER SHARE:
Assumed exercise of stock options            -  antidilutive               -  antidilutive                          31
Convertible preferred stock                  -  antidilutive               -  antidilutive                284    1,900
                                         ---------------                ----------------               ---------------
Loss available for common stockholders   $(3,417)  8,973                $(21,755)  8,973               $1,946   10,904
                                         ===============                ================               ===============
Dilutive income (loss) per share                            $(0.38)                          $(2.42)                      $0.18
                                                            ======                           ======                       =====
</TABLE>

Implementation of SFAS 128 had no significant impact to the Company's
computation of Dilutive EPS relative to its historical calculation of EPS under
APB Opinion No. 15.


NOTE 10:  STOCK-BASED COMPENSATION PLANS

Stock Option Plans:  The Company has five stock option plans that provide for
the granting of either incentive stock options or non-qualified stock options
to key employees and non-employee members of the Company's Board of Directors.
All current outstanding options are non-qualified stock options.  The options
granted under these plans are to purchase common stock at not less than
fair-market value at the date of grant.  Employee options are generally
exercisable one year from date of grant in cumulative annual installments of
25%, and they generally fully vest upon a change of control of GTI.
Non-employee director options are exercisable in full at the date of grant.
The options have terms of five to ten years.


                                       23


<PAGE>   26
The following summarizes stock options activity for 1997:


<TABLE>
<CAPTION>
                                                                                     Exercise
                                                                Shares             Price Range
                                                              ---------           --------------
<S>                                                           <C>                 <C> 
Outstanding as of December 31, 1996                             826,250           $5.25 - $35.00
Granted                                                         461,750           $5.50 - $6.38
Exercised                                                             -                        -
Forfeited                                                      (261,625)          $5.25 - $35.00
                                                              ---------           --------------
Outstanding as of December 31, 1997                           1,026,375           $5.25 - $28.75
                                                              =========           ==============
Number of shares exercisable as of December 31, 1997            246,561           $5.25 - $28.75
                                                              =========           ==============
Weighted average fair value of options granted                    $5.69
                                                              =========
</TABLE>

The outstanding options expire at various dates through December 2007.  As of
December 31, 1997, 147,925 shares were available for future grant under all
plans.

Additionally, as of December 31, 1997, a warrant was outstanding for 150,000
shares of common stock at an exercise price of $6 per share.  This warrant,
issued to an affiliated party, expires 30 days after the note payable to said
affiliated party is paid in full.  The anticipated retirement of said note is
February 1999.

As permissible under Statement of Financial Accounting Standards No. 123, the
Company accounts for stock options granted as per the methodology prescribed
under Accounting Principles Board Opinion No. 25, which recognizes compensation
cost based upon the intrinsic value of the equity award.  Accordingly, no
compensation expense was recognized in the consolidated statement of operations
for any equity awards granted during 1997, 1996 and 1995.

The following table represents pro forma net income (loss) and pro forma
earnings (loss) per share had the Company elected to account for equity awards
using the fair-value-based method beginning with all equity award grants
commencing on January 1, 1995.  In estimating the pro forma compensation
expense for each equity award granted during the years ended December 31, 1997,
1996 and 1995, the Company used the Black Scholes option pricing model, a
risk-free interest rate of 6.5%, expected dividend yield of zero, expected
option lives of 6.5 years, and expected volatility of 83.2%.  The estimated pro
forma compensation cost resulting in the pro forma net income (loss) and
earnings (loss) per share may not be representative of actual results had the
Company accounted for equity awards using the fair-value-based method.


<TABLE>
<CAPTION>
                                              1997                  1996                   1995
                                            -------              --------                 ------
<S>                                         <C>                  <C>                      <C>
Net income (loss) as reported               $(3,133)             $(21,471)                $1,946
                                            =======              ========                 ======
Pro forma net income (loss)                 $(3,470)             $(21,777)                $1,838
                                            =======              ========                 ======

Basic EPS as reported                        $(0.38)               $(2.42)                $ 0.19
                                            =======              ========                 ======
Pro forma Basic EPS                          $(0.42)               $(2.46)                $ 0.17
                                            =======              ========                 ======

Diluted EPS as reported                      $(0.38)               $(2.42)                $ 0.18
                                            =======              ========                 ======
Proforma Diluted EPS                         $(0.42)               $(2.46)                $ 0.17
                                            =======              ========                 ======
</TABLE>


                                       24


<PAGE>   27



NOTE 11:  EMPLOYEE BENEFIT PLANS

The Company has a defined contribution plan that qualifies as a cash or
deferred profit sharing plan under Sections 401(a) and 401(k) of the Internal
Revenue Code.  The plan is available to substantially all domestic employees.
Under the plan, participating employees may defer between 1% and 15% of their
pre-tax compensation.  The Company contributes 50% for each dollar contributed
per employee up to a maximum of 3% of the employee's defined compensation.  In
addition, the plan provides for an employer profit sharing contribution in such
amounts as the Board of Directors may annually determine.  The Company also has
similar plans for foreign employees which are governed by the laws in the
country in which they are established.  Company contributions under all plans
were $81, $120 and $145 in 1997, 1996 and 1995, respectively.  There were no
amounts paid relating to the discretionary employer profit sharing contribution
in any of these years.

The Company had no other programs that required payment of post-retirement
benefits to current or retired employees.


NOTE 12:  SEGMENT INFORMATION AND MAJOR CUSTOMERS

In the year ended December 31, 1997, two customers represented 18% and 13%,
respectively, of the Company's consolidated sales.  In the year ended December
31, 1996, two customers represented 20% and 10%, respectively, of the Company's
consolidated sales.  In the year ended December 31, 1995, two customers
represented 16% and 14%, respectively, of the Company's consolidated sales.

Through its Valor subsidiary, the Company operates in one industry segment.
Valor is a manufacturer and distributor of magnetic-based components,
integrated modules, and subsystems for signal processing and power-management
functions in networking and internetworking products.  Valor products are used
principally in the data communications industry by OEMs for local area networks
and wide area networks.

The Company operates predominately in the Unites States, the Peoples' Republic
of China, the Philippines, Hong Kong and the United Kingdom.  Transfers between
geographic areas primarily represent intercompany export sales between the
related companies.  In computing income from continuing operations before
income taxes and minority interest, no allocations of general corporate
expenses have been made.  Identifiable assets include those assets directly
identified to those operations in each geographical area.  The assets in
North America consist of operating assets and goodwill (net of amortization).


                                       25


<PAGE>   28
GEOGRAPHIC SEGMENTS

<TABLE>
<CAPTION>
                                                                                                    Adjustments
                                                              North                                    and
                                                             America        Asia        Europe      Eliminations     Consolidated
                                                             --------------------------------------------------------------------
<S>                                                         <C>          <C>          <C>            <C>              <C>
YEAR ENDED DECEMBER 31, 1997
Sales to unaffiliated customers                              $ 46,044     $ 18,584      $17,963      $      -          $ 82,591
Transfers between geographic segments                               -       57,611            -       (57,611)                -
                                                             ------------------------------------------------------------------
Total Sales                                                  $ 46,044     $ 76,195      $17,963      $(57,611)         $ 82,591
                                                             ==================================================================
Income (loss) before income taxes and minority interest      $(12,180)    $  8,638      $   409      $      -          $ (3,133)
                                                             ==================================================================
Identifiable Assets                                          $ 32,705     $ 42,854      $ 7,395      $      -          $ 82,954
                                                             ==================================================================
YEAR ENDED DECEMBER 31, 1996
Sales to unaffiliated customers                              $ 48,316     $ 36,454      $ 7,763      $      -          $ 92,533
Transfers between geographic segments                               -       54,192          459       (54,651)                -
                                                             ------------------------------------------------------------------
Total Sales                                                  $ 48,316     $ 90,646      $ 8,222      $(54,651)         $ 92,533
                                                             ==================================================================
Income (loss) before income taxes and minority interest      $(10,310)    $    727      $   882      $      -          $ (8,701)
                                                             ==================================================================
Identifiable Assets                                          $ 49,775     $ 37,215      $ 4,534      $      -          $ 91,524
                                                             ==================================================================
YEAR ENDED DECEMBER 31, 1995
Sales to unaffiliated customers                              $ 66,671     $ 33,373      $14,792      $      -          $114,836
Transfers between geographic segments                              (2)      67,846            -       (67,844)                -
                                                             ------------------------------------------------------------------
Total Sales                                                  $ 66,669     $101,219      $14,792      $(67,844)         $114,836
                                                             ==================================================================
Income (loss) before income taxes and minority interest      $ (2,289)    $  7,951      $ 1,034      $      -          $  6,696
                                                             ==================================================================
Identifiable Assets                                          $ 66,364     $ 48,522      $ 2,813      $      -          $117,699
                                                             ==================================================================
</TABLE>

Export sales, principally to customers in Canada and Latin America, were
$1,109, $908 and $3,048 in the years ended December 31, 1997, 1996 and 1995,
respectively.  These export sales are included in the North America amounts
above.

   
NOTE 13:  SUBSEQUENT EVENTS

The Company's revenues in the first quarter of 1998 were $14,002 (unaudited)
compared to $22,393 (unaudited) in the comparable quarter of 1997, and the
first quarter 1998 loss was about $5,700 (unaudited, including a restructuring
charge of about $1,500, subject to finalization, and the cumulative effect of
an accounting change of $899). In response to this adverse trend and for other
reasons, the Company has initiated ongoing revenue enhancement and cost
reduction programs. However, there can be no assurance that revenues will
increase, nor can there be any assurance that the Company will be able to
reduce costs in an amount sufficient to offset the negative effects of the
revenue decline. While management believes the Company has sufficient financial
resources, if revenue levels continue to decline, then the Company may be
forced to seek additional financing. There can be no assurance that additional
financing will be available in amounts or at terms acceptable to the Company.

In January 1998, the Company retained investment bankers to assist the Company
regarding the identification and investigation of strategic alternatives that
might be available to the Company, including a possible sale of the Company. No
such strategic transaction has been negotiated to date, and there can be no
assurance that any such strategic transaction will be consummated. If a sale of
the Company occurs in the short term, it is likely that the sales price to be
received by the Company's shareholders will be less than the historical book
value reflected in the accompanying December 31, 1997 balance sheet.
    


                                       26


<PAGE>   29
NOTE 14:  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The Company's condensed quarterly results of operations for the years ended
December 31, 1997 and 1996 were as follows:


<TABLE>
<CAPTION>
                                                                     First     Second     Third      Fourth
                                                                    Quarter    Quarter   Quarter     Quarter       Total
                                                                    -----------------------------------------------------
<S>                                                                 <C>        <C>       <C>         <C>          <C>
YEAR ENDED DECEMBER 31, 1997
Sales                                                               $22,393    $23,011    $19,130     $18,057     $82,591
                                                                    -----------------------------------------------------
Gross Profit                                                          5,884      6,503      3,845       3,195      19,427
                                                                    -----------------------------------------------------
Income (loss) from continuing operations before taxes                   288       (112)    (1,772)     (1,537)     (3,133)
Provision (benefit) from income taxes                                   100        177       (277)          -           -
                                                                    -----------------------------------------------------
Income (loss) from continuing operations                                188       (289)    (1,495)     (1,537)     (3,133)
Income (loss) from discontinued operations, net of income taxes           -          -          -           -           -
Loss on disposal of discontinued operations, net of income taxes          -          -          -           -           -
                                                                    -----------------------------------------------------
Net income (loss)                                                      $188      $(289)   $(1,495)    $(1,537)    $(3,133)
                                                                    =====================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations                              $0.01     $(0.04)    $(0.17)     $(0.18)     $(0.38)
Income (loss) from discontinued operations                                -          -          -           -           -
Loss on disposal of discontinued operations                               -          -          -           -           -
                                                                    -----------------------------------------------------
Net income (loss) per share                                           $0.01     $(0.04)    $(0.17)     $(0.18)     $(0.38)
                                                                    =====================================================
YEAR ENDED DECEMBER 31, 1996
Sales                                                               $26,618    $23,017    $20,560     $22,338     $92,533
                                                                    -----------------------------------------------------
Gross Profit                                                          5,929      3,689      2,628       4,937      17,183
                                                                    -----------------------------------------------------
Income (loss) from continuing operations before taxes                  (855)    (2,935)    (4,291)       (620)     (8,701)
Provision (benefit) from income taxes                                  (300)      (650)      (100)           -     (1,050)
                                                                    -----------------------------------------------------
Income (loss) from continuing operations                               (555)    (2,285)    (4,191)       (620)     (7,651)
Income (loss) from discontinued operations, net of income taxes      (1,083)      (480)      (936)       (499)     (2,998)
Loss on disposal of discontinued operations, net of income taxes          -          -          -     (10,822)    (10,822)
                                                                    -----------------------------------------------------
Net income (loss)                                                   $(1,638)   $(2,765)   $(5,127)   $(11,941)   $(21,471)
                                                                    =====================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations                             $(0.07)     (0.26)     (0.47)      (0.08)     $(0.88)
Income (loss) from discontinued operations                            (0.12)     (0.05)     (0.10)      (0.06)      (0.33)
Loss on disposal of discontinued operations                              -          -          -        (1.21)      (1.21)
                                                                    -----------------------------------------------------
Net income (loss) per share                                          $(0.19)    $(0.31)    $(0.57)     $(1.35)     $(2.42)
                                                                    =====================================================
</TABLE>


                                       27


<PAGE>   30





                             CORPORATE INFORMATION


<TABLE>
<S>                               <C>                               <C>
OFFICERS                          CORPORATE OFFICES                 PRODUCT DEVELOPMENT &
Albert J. Hugo-Martinez           9715 Business Park Avenue         MANUFACTURING
President                         San Diego, California 92131-1642  LOCATIONS
Chief Executive Officer           619-537-2500                      San Diego, California
Director                                                            Shenzhen, Peoples Repub. of China
                                                                    Cabuyao, Laguna, Philippines
Bruce C. Myers                    INDEPENDENT PUBLIC
Vice President - Finance          ACCOUNTANTS
Chief Financial Officer           Arthur Andersen LLP               PRIMARY SALES AND
Secretary                                                           DISTRIBUTION LOCATIONS
                                                                    San Diego, California
NON-EMPLOYEE DIRECTORS            TRANSFER AGENT                    Kowloon, Hong Kong
Ken E. Maud                       Chemical Mellon Shareholder       London, England
Chairman of the Board             Service, LLC

Timothy M. Curtis
Chief Executive - Telemetrix PLC

Edmund B. Fitzgerald
Professor
Managing Director - Woodmont
Associates

Robert E. Venter
Chief Executive - Power
Technologies Ltd.
Director, Telemetrix PLC
</TABLE>


                                       28

<PAGE>   31
             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES





To GTI Corporation:

We have audited in accordance with generally accepted auditing standards the
consolidated financial statements included in this Form 10K, and have issued
our report thereon dated February 25, 1998. Our audits of the consolidated
financial statements were made for the purpose of forming an opinion on those
statements taken as a whole. The supplemental Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This supplemental schedule has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.






                                        ARTHUR ANDERSEN LLP




San Diego, California
February 25, 1998



                                      F-2
<PAGE>   32
                                GTI CORPORATION

                 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                         Balance at     Charged to
                        Beginning of    Costs and      Accounts      Balance at
Description                Period        Expenses    Written Off     end of Year
----------------------------------------------------------------------------------

<S>                     <C>             <C>          <C>             <C>
Allowance for
doubtful accounts:

Year ended
December 31, 1997            $201          $168             $(30)          $339

Year ended
December 31, 1996            $225          $ 60             $(84)          $201

Year ended
December 31, 1995            $143          $ 90             $ (8)          $225

</TABLE>


                                      F-3