<PAGE>   1
                                                                Exhibit 13
                                                


 
                                GTI CORPORATION
                               1996 ANNUAL REPORT
<PAGE>   2
 
                               PRESIDENT'S LETTER
 
Dear Shareholder:
 
The year 1996 was a time of transition and re-focus for GTI Corporation. When I
joined GTI in early 1996, GTI owned two very different businesses: Promptus
Communications and Valor Electronics. At that time, Promptus was posting
operating losses and was struggling to successfully launch the Systems portion
of its business. Also at that time, Valor revenues were declining and as a
result, the Valor cost structure had become overly burdensome.
 
To address these issues and to begin re-building our foundation, decisive and
difficult actions were necessary. Many of these corrections were expensive and
painful, but were deemed to be the right steps at the right time. It would seem
that the most difficult corrections are now behind us, and that GTI's future is
brighter as a result.
 
Recognizing that Valor offers our best prospects for the future, we decided to
focus primarily on the restructuring of this operation. To provide the impetus
for the necessary changes, a new Senior Valor Management of skilled and
motivated leaders was recruited. To reduce costs and increase management
efficiency, the new Valor management team was consolidated with the GTI
Corporate Team, resulting in the elimination of exclusively holding company
management positions.
 
To further address our burdensome cost structure, a new wholly-owned
manufacturing operation was created in China. This permitted the elimination of
most third-party processing relationships in China, significantly reducing
manufacturing costs. Also as a result of this consolidation in China,
significant reductions in the overhead costs of our Hong Kong management
infrastructure was achieved. The cost of this restructuring was substantial, but
the savings should also be substantial. We believe that the resultant product
cost decreases will create more globally-competitive Valor products.
 
As a part of the restructuring in China, global material procurement, production
planning, and shipping logistics were streamlined and consolidated. These
changes, although initially painful, have resulted in significant reductions in
inventory levels as well as measurable increases in product quality and delivery
intervals, quality and order processing times.
 
Primarily as a result of the above actions in pursuit of customer satisfaction,
the Valor revenue decline of the previous five quarters was arrested in the
fourth quarter of 1996 and Valor's lower cost structure contributed to
encouraging improvements in fourth quarter financial results.
 
To facilitate continued focus on improved Valor operations, in January 1997, GTI
decided to divest its 72% ownership in Promptus Communications. In April 1997,
GTI agreed to this divestiture in exchange for cash and common shares of
VideoServer, Inc. totaling approximately $11.6 million. Although this
transaction resulted in a substantial non-recurring loss chargeable to 1996
operations, the loss was entirely related to goodwill associated with the
earlier Promptus purchase. The proceeds from this divestiture will provide
additional liquidity for GTI to pursue further strategic investments in Valor.
 
To enhance the growth of Valor, corporate focus is now on a strategic plan to
leverage Valor's core competence in magnetics through the development of new
subsystems specifically designed for high-growth markets. For example, Valor
recently introduced our FlexPHY line of Integrated LAN modules for the
telecommunications market. Also in conjunction with this strategic market focus,
product development and marketing groups have been realigned around three
primary opportunities: magnetic components, power solutions, and integrated
products. This new structure will allow Valor to focus on the customer needs in
specific markets and to expand revenues from magnetic component products.
 
Achieving total customer satisfaction in global growth markets shall continue to
be the company's mission. As we aggressively pursue this mission, we are
sincerely grateful for the support of our valued customers and suppliers, for
the dedication and hard work of our outstanding employees, and for the trust and
encouragement of our shareholders.
 
                                          Sincerely,
 
                                          Albert J. Hugo-Martinez
                                          President and
                                          Chief Executive Officer
<PAGE>   3
 
                                GTI CORPORATION
 
     GTI Corporation ("the Company") is a broad-based supplier of signal
management components to original equipment manufacturers ("OEMs") of local area
networks ("LAN") and wide area networks ("WANs") for data communications.
Through its Valor Electronics, Inc. ("Valor") subsidiary, 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 and internetworking 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 LAN
transmission media.
 
     The Company's principal products are magnetics-based components.
Magnetics-based components are marketed under the Valor name and consist of two
categories, signal processing and power transfer, as more fully described below.
Valor's products are compliant 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 ("LAN topologies"), 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, which is the conversion of the digital signal from inside the
computing device into an analog signal for transmission on the LAN medium or
cabling system. Valor's products are located at all interface points of the LAN
cabling system where signal conversion is required. For example, on the desktop,
these products are found inside the computer on the network interface adapter
card. In addition, these products are located within external connection devices
such as transceivers. 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.
 
     Signal Processing Product -- The Company's signal-processing products
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, to isolate the wire from the network
adapter card itself. This isolation prevents the wire from transferring voltage
spikes into the system which would severely damage the circuits and destroy the
signal. 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 noise emission on the transmit and receive line. The
Company's transformers and chokes support Ethernet over coax; 10Base-T and Token
Ring LAN topologies; and other high-speed LAN applications, such as 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, T-1/CEPT, and S and U interface applications. Filter
products reduce or eliminate conducted noise 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
 
                                        2
<PAGE>   4
 
functions. Filters are located at the transmit and receive connection ports in
such hardware as adapter cards, transceivers, 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 coax, 10Base-T, Token Ring, and the PCMCIA credit
card-sized standard as well as 100Base-TX Fast Ethernet, FDDI over copper, and
155 Mbps ATM.
 
     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 higher voltage level than the integrated circuit, and
converts the voltage to a different voltage 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 adapter cards and hubs and support Ethernet over coax
applications. 10Base-T topologies do not require a DC/DC converter. Higher power
levels (up to 40 watts) are used to support new sub-5v levels for faster
Pentium-type micro processors.
 
CUSTOMERS
 
     Valor's products are sold directly or indirectly to more than 1,000
customers, including the following 10 customers which individually represented,
at a minimum, 2% of the Company's 1996 sales and collectively represented
approximately 71% of the Company's 1996 sales:
 
<TABLE>
            <S>                                  <C>
            Accton                               Hyo Sung Computers
            Avnet Engineering                    Jabil Circuits
            Bay Networks, Inc.                   Motorola, Inc.
            Cabletron Systems, Inc.              SCI
            Hewlett-Packard Company              3Com Corporation
</TABLE>
 
     Two customers, 3Com Corporation and SCI Manufacturing, Inc., accounted for
approximately 20% and 10%, respectively, of the Company's total sales in 1996.
Two customers, 3Com Corporation and Bay Networks, Inc., accounted for 16% and
14%, respectively, of the Company's total sales in 1995. One customer, 3Com
Corporation, accounted for 22% of the Company's total sales in 1994. The sales
percentage from Valor's OEM customers has historically fluctuated and may
continue to vary in future periods. Management believes that future sales
concentration to these OEM customers is likely to continue; consequently, such
concentration may adversely affect both average selling prices, future sales
growth, gross margins, and the Company's financial condition.
 
SALES AND MARKETING
 
     Valor's products are sold domestically (including Canada) 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 three national and two regional electronics distributors with branches
throughout the United States and Canada. The largest distributor is
Hamilton/Hallmark (a subsidiary of Avnet Engineering). In January 1997, one of
the regional distributors became a national distributor of Valor's products. The
efforts of the representative and distribution organizations are directed by
three regional manager employees who report to a vice president of sales and
marketing. Additionally, during 1997, Valor added a national distribution
manager who reports to the vice president of sales and marketing.
 
     The international sales structure comprises representative and distributor
networks in Europe and the Pacific Rim. There are directors of sales and
marketing in Munich, Germany, and Hong Kong who oversee sales in Europe and the
Pacific Rim, respectively. The Company employs customer service representatives
to process purchase orders and respond to customer inquiries.
 
                                        3
<PAGE>   5
 
COMPETITION
 
     The market for magnetics-based components for LAN applications is highly
competitive. Valor's products have two principal competitors, Pulse Engineering,
Inc., (a subsidiary of Technitrol) and Bel Fuse, Inc. with each offering a broad
product line and competing with similar levels of manufacturing and engineering
capabilities. In addition, numerous foreign-based firms, mainly Taiwanese with
strong manufacturing capabilities, offer specific products with capabilities
similar to the Company's standard and mature product lines. These firms tend to
compete on a product-specific basis or a protocol-specific basis but do not
compete across all products and LAN applications offered by the Company.
 
     The number of competitors and the characteristics of competition for
Valor'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 Company believes that its engineering program and
relationship with customers give it a competitive advantage over companies with
fewer engineering resources with respect to products requiring a high degree of
engineering and component integration.
 
     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 believes that it has been able to compete effectively 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 Valor'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.
Valor conducts its manufacturing in the Asia Pacific Region via five operations
in the People's Republic of China ("PRC") and two operations in the Philippines.
The activities of these manufacturing operations are coordinated and supported
by Valor's San Diego-based headquarters. All of the manufacturing operations in
the PRC and the Philippines are certified pursuant to ISO 9002. Of the five
operations in the PRC, two are owned by Valor and three are operated through
subcontracting arrangements over which the Company has direct product
supervision. Of the two operations in the Philippines, one is owned by Valor and
the other is operated through subcontracting arrangements over which the Company
has direct product supervision. The subcontract 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 Valor'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 existing sources. During 1996, the Company
has sought to establish close supplier relationships for its principal materials
and components for its principal materials and fabricated components, through a
supplier quality program, and believes that, in the case of non-critical
components, there are a number of alternative qualified vendors to supply parts
in a timely manner. Currently, pin coilforms, which are used in approximately
30% of filter 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.
 
                                        4
<PAGE>   6
 
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.
 
     Valor is developing its magnetics-based products for use in emerging
communications markets, such as Fast Ethernet, FDDI/CDDI, ATM, xDSL, and PCMCIA
standards. Valor works closely with networking customers and integrated circuits
manufacturers with which Valor's products must interface and participates as a
member in the IEEE and ANSI Standards Committees. These efforts give Valor early
access to new technologies and new product plans, which Valor believes provide
it with advantages in the timely development of its products. Concurrent
engineering projects with key customers are also becoming an important factor in
developing new products and product enhancements. Valor is also developing
products for sale in broader telecommunication markets (including ISDN) and
products for flash memories, in addition to developing subsystems with higher
degrees of component integration and value-added for its major customers. In
1996, 1995, and 1994, Valor incurred design engineering and product development
costs of $3,245,000, $4,705,000, and $5,464,000, respectively.
 
FOREIGN OPERATIONS
 
     Substantially all of Valor's manufacturing operations and approximately 54%
of its identifiable assets (excluding goodwill) are located in the PRC and
Philippines. See the discussion "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, market forces, and 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. 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. In 1996, the Company obtained formal approval and began to
operate in China as a Wholly Foreign-Owned Enterprise ("WFOE"), and believes
that conducting its operations in China under the WFOE structure will
potentially mitigate certain risks and uncertainties associated with the
previous contractual arrangements in China.
 
INTERNATIONAL SALES
 
     Sales to customers outside of the United States comprised approximately
48.6% of the Company's total net sales in 1996, of which approximately 19.3%,
27.7%, and 1.6% were made to customers in the Pacific Rim, Europe, and North
America, respectively. Sales to customers outside the United States as a
percentage of total sales were approximately 42.6% in 1995, and 36.5% in 1994.
The Company also exports products to international markets from its Valor
domestic operations. Valor's export sales as a percentage of total domestic
sales were 1.9%, 4.6%, and 9.7% for 1996, 1995, and 1994, respectively.
Additional geographic segment financial information is set forth in Footnote 13
to the Financial Statements under the caption "Geographic Segments," included
herein.
 
     The Company has established sales offices in Hong Kong and Munich, Germany,
to administer its international sales activities for Valor. The Company believes
that LANs, 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.
 
                                        5
<PAGE>   7
 
BACKLOG
 
     The backlog of unfilled orders as of December 31, 1996, was approximately
$15,736,000, compared to approximately $25,800,000 as of December 31, 1995. The
Company generally manufactures its products against firm orders and forecasted
demand. 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 future quarterly period are dependent upon obtaining
orders in a quarter for shipment within the same quarter. Therefore, the
Company's backlog may not be indicative of actual revenues for the future
quarterly period. 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 within 30 days of the initial order placement date 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 effected.
 
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,
1996, there were approximately 1,470 holders of the Company's Common Stock. The
Company has not paid dividends on its Common Stock since 1982.
 
<TABLE>
<CAPTION>
                                                          1996                 1995
                                                     --------------       --------------
                          QUARTER                    HIGH       LOW       HIGH       LOW
        -------------------------------------------  ----       ---       ----       ---
        <S>                                          <C>        <C>       <C>        <C>
          1st......................................  18 1/4      8  1/4    17 1/4     9  1/2
          2nd......................................    9 1/2     7  1/4    19 1/2     9  1/2
          3rd......................................    7 3/4     5  1/4    23 5/8    15  1/2
          4th......................................    7 1/4     4  3/8    19 7/8    10  1/2
</TABLE>
 
SELECTED CONSOLIDATED FINANCIAL DATA
 
     The income statement data of the Company presented below for each of the
five fiscal years ended December 31, 1996, and the balance sheet data as of
December 31, 1996, 1995, 1994, 1993, and 1992 have been derived from the audited
Consolidated Financial Statements of the Company that are included as part of
this Annual Report and the Company's Annual Reports for the prior three fiscal
years.
 
     The selected consolidated financial data set forth below 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 as part of this Annual Report.
 
                                        6
<PAGE>   8
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                            ------------------------------------------------------
                                              1996        1995        1994       1993       1992
                                            --------    --------    --------    -------    -------
                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>         <C>         <C>         <C>        <C>
INCOME STATEMENT DATA
Sales                                       $ 92,533    $114,836    $103,239    $88,575    $63,985
                                            ========    ========    ========    =======    =======
Income (loss) from continuing operations    $ (7,651)   $  6,124    $  3,699    $10,890    $ 7,032
Income (loss) from discontinued
  operations, net                             (2,998)     (2,178)      1,962      2,310      1,998
Loss on disposal of discontinued
  operations, net                            (10,822)     (2,000)         --         --         --
                                            --------    --------    --------    -------    -------
Net income (loss)                           $(21,471)   $  1,946    $  5,261    $13,200    $ 9,030
                                            ========    ========    ========    =======    =======
Net income (loss) per share of Common
  Stock -- primary and fully diluted
Income (loss) from continuing operations    $  (0.88)   $   0.56    $   0.32    $  1.09    $  0.72
Income (loss) from discontinued operations     (0.34)      (0.20)       0.20       0.23       0.21
Loss on disposal of discontinued
  operations                                   (1.20)      (0.18)         --         --         --
                                            --------    --------    --------    -------    -------
Net income (loss)                           $  (2.42)   $   0.18    $   0.52    $  1.32    $  0.93
                                            ========    ========    ========    =======    =======
Weighted average shares outstanding            8,973      10,873      10,187     10,023      9,713
                                            ========    ========    ========    =======    =======
BALANCE SHEET DATA
Total assets                                $ 91,524    $117,699    $ 99,948    $89,648    $66,721
                                            ========    ========    ========    =======    =======
Working capital                             $ 29,513    $ 53,690    $ 42,108    $38,055    $25,157
                                            ========    ========    ========    =======    =======
Long-term debt                              $     --    $     --    $     --    $    --    $ 2,625
                                            ========    ========    ========    =======    =======
Stockholders' equity                        $ 67,150    $ 88,995    $ 77,563    $71,772    $48,480
                                            ========    ========    ========    =======    =======
</TABLE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
     This Annual Report contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider various factors (including
risk factors) identified in this Annual Report which could cause actual results
to differ materially from those indicated by such forward-looking statements.
 
     The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report. Dollar amounts below are expressed in thousands.
 
     In March 1997, Promptus entered into an agreement (the "NAC Transaction")
to sell the net assets of its Network Access Card business (the "NAC's") for
approximately $20.0 million, subject to regulatory approval. These sale proceeds
will consist of $14.5 million in cash and 223,881 shares of common stock of
VideoServer Inc Subject to the closing of the NAC Transaction, Promptus will
purchase 100% of the Promptus shares held by the Company and repay certain
indebtedness to the Company for an aggregate of approximately $11.6 million, net
of certain transaction costs. The net proceeds to the Company are estimated to
consist of $8.2 million in cash and approximately 158,000 shares of common stock
of VideoServer Inc., resulting in a loss on disposal of approximately $10.8
million. Management expects these transactions to close in the quarter ended
June 28, 1997, and has based its estimated loss on the disposal of Promptus
based on the terms of these pending transactions. Accordingly, these businesses
have been accounted as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
 
                                        7
<PAGE>   9
 
                             RESULTS OF OPERATIONS
 
1996 as 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 also attributed to these
market conditions as well as to certain manufacturing and product issues that
resulted from the 1996 restructuring of the Company's off-shore manufacturing
operations. Management believes that these issues have been and continue to be
addressed, and that measurable improvements have been made. Management further
believes that these improvements contributed directly to the improved fourth
quarter 1996 results where revenues increased by 8.6% as compared to the
immediately preceding quarter. This was the first increase in sequential
quarterly revenue levels after six quarters of sequential quarterly revenue
decline. However, there can be no assurance that revenues will continue to
increase or that revenue will return to 1995 levels.
 
     In 1996, two of Valor's customers individually accounted for approximately
20% and 10% of sales. This compares to 16% and less than 10% of sales in 1995.
Additionally, there was a third customer who accounted for 14% of sales in 1995.
The sales percentage from these and other 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; consequently, such
concentration may adversely affect both average selling prices and future sales
growth.
 
     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 dollars 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.
 
     The decline in gross margin in 1996 was off-set slightly by decreased
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 restructure
of the Company's Hong Kong management team. These reductions in overhead costs
began to turn through inventory and to positively impact margins in the fourth
quarter of 1996, during which margins as a percent of revenue increased to
22.1%. Assuming the Company maintains fourth quarter 1996 unit volume and
average sales price levels, management expects future margins as a percent of
sales to approximate at least 25%. However, there can be no assurance that
future quarter volume and average selling prices will continue, and there can be
no assurance that competitive pricing pressures will not decrease future
margins.
 
     Operating expenses increased by 1.3%, from $25,382 in 1995 to $25,722 in
1996. The 1996 operating expenses include 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 the severance of certain corporate
employees. The 1995 operating expenses included a $1,376 charge related to
severance. Absent these 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.
 
                                        8
<PAGE>   10
 
     The Company's tax provision 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 results primarily from the planned 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 to not repatriate off-shore earnings. Management
believes that the Company's future effective tax rate could fluctuate based on
the geographic origin of Valor's earnings, future financial performance, and
future decisions on the repatriation of foreign 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) in 1995.
 
     The Company discontinued three operations during the years 1995 and 1996 as
more fully described in the accompanying notes to financial statements. Losses
from discontinued operations were $2,998 ($.34 per share) in 1996 compared to
$2,178 ($.20 per share) in 1995. Estimated loss on disposal of discontinued
operations was $10,822 ($1.20 per share) in 1996 and $2,000 ($.18 per share) 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) in
1995.
 
1995 compared to 1994
 
     The increase in sales of $11,597 or 11.2% in 1995 from 1994 was primarily
due to increased unit demand (13%) over the prior year for the Company's LAN
magnetics-based components. The growth in sales reflects increased unit volume
across substantially all product families supplied to OEMs for LAN and
internetworking products. International sales continued to remain strong during
1995 increasing 69%, representing 41% of the Company's sales in 1995 compared to
30% in 1994. Substantially all of the increase was a result of increased sales
to existing international OEM customers.
 
     The year-over-year 18% increase in gross profit from $27.1 million in 1994
to $32.1 million in 1995 is a result of increased unit volumes. The increase in
gross profit as a percentage of sales of 1.7% from 1994 is a result of
stabilized product average selling prices, particularly filter products; reduced
raw material costs per unit; reduced manufacturing costs; and, to a lesser
extent, economies of scale associated with increased manufacturing volumes.
 
     The 7.1% increase in selling, general and administrative expenses from
$23.7 million to $25.4 million is due to increased selling costs associated with
Valor's higher sales volume and a charge of approximately $1,376 relating to
certain severance costs. The decrease in selling, general and administrative
expenses, as a percentage of sales, is a result of administrative efficiencies
in relation to sales growth and a decrease in selling costs as a percentage of
sales offset by the severance costs. Management believes that selling, general
and administrative expenses may vary as a percentage of future sales.
 
     Non-operating income (expense), net, consists primarily of interest income
and expense and net foreign currency translation costs. The decrease in interest
income, net, in 1995 from 1994 is primarily a result of increased interest
expense related to increased borrowings on the credit facility to facilitate
Valor's growth.
 
     A significant portion of Valor's operations resides in foreign countries
with lower tax rates than the United States. These foreign operations generated
a significant portion of the Company's total earnings in 1995 and 1994, and
account for the significantly lower, effective income tax rate than the
statutory United States corporate income tax rate.
 
     The increase in income from continuing operations during 1995 is primarily
due to an increase in Valor's sales, gross profit as a percentage of sales and a
decrease in selling, general, and administrative spending as a percentage of
sales offset by increased interest expense during 1995.
 
                                        9
<PAGE>   11
 
PROSPECTIVE INFORMATION
 
     The Company believes that its future operating results will be influenced
by a number of factors including, but not limited to, general economic
conditions; the continued growth of the LAN and internetworking markets; the
growth of broad-band, global services and high-speed, digital, network
applications; timely new product introductions; dependence on key OEM customers;
market acceptance of the networking technologies; the future operating and
financial performance of Valor'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 Valor in identifying, developing,
manufacturing, and marketing new products or enhancing existing product
offerings. 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 majority of Valor's sales continue to be derived from products that
support Ethernet and 10Base-T applications. Valor's operating results could be
affected if there is an unexpected change in such technologies or if Valor does
not respond appropriately to expected changes. Valor supplies OEM's 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 could subject
Valor'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 quarterly period. The
Company's backlog at the beginning of any particular quarter is not sufficient
to achieve expected sales or profitability for that quarter. To achieve its
sales and profitability objectives in a quarter, the Company is dependent upon
obtaining substantial orders in that quarter for shipment during that quarter.
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. Additionally, there can be no assurance that orders received
and requested for shipment in a specific quarter will not be canceled or the
requested date of shipment changed to a subsequent quarter. If anticipated
orders do not develop or changes in delivery schedules or cancellation of orders
occur, the per-unit manufacturing costs, expenditures, and inventory levels
could be disproportionately high in relation to sales. This could have an
adverse affect on the Company's operating results for that quarterly period.
 
     There is one key component (pin coil forms -- see "Manufacturing and
Suppliers") that Valor uses in its manufacturing and assembly process that is
currently available only from a single source. There can be no assurance that
this supplier will be able to meet future demand for components in a timely and
cost-effective manner. The Company's operating results and customer
relationships could be adversely affected by either price increases or an
interruption or reduction in products shipped due to an interruption or
reduction in supply of any key components.
 
     The Company's results and stock price have been, and may continue to be,
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in sales or earnings could have an immediate and significant adverse
affect on the trading price of the Company's Common Stock in any given quarterly
period.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     In 1996, the Company's liquidity was adversely effected by ongoing
operating losses at Promptus, by increased operating losses at Valor, and by the
costs of restructuring Valor, among other things. These liquidity requirements
were funded primarily through proceeds from the sale of operations discontinued
in 1995 and by reductions in Valor inventory and receivable levels. To help
compensate for the 1996 net reduction in available liquidity, in February 1997
the Company obtained a two year term note from its majority shareholder as more
full described below. Also in March 1997, the Company signed an agreement to
sell its majority interest in Promptus as more fully described below. Assuming
the Promptus transaction closes, the Company's liquidity should be adequate for
the coming year also as more fully described below.
 
                                       10
<PAGE>   12
 
     The Company's current principal sources of liquidity are cash, cash
equivalents, available borrowings on its credit facility (see below), and the
expected proceeds from the divestiture of Promptus (see also below). On December
31, 1996, 1995, and 1994, cash and cash equivalents totaled $3.2 million, $2.6
million and $4.2 million, respectively. On December 31, 1996, 1995, and 1994,
line of credit borrowings totaled $4.9 million, $4.2 million and $4.9 million,
respectively. Net cash provided (used) by continuing operations was $7.8
million, $2.9 million and $(3.8) million, respectively. Cash provided by
continuing operations increased by approximately $4.9 million in 1996, as
compared to 1995, primarily as a result of reductions in inventory and accounts
receivable balances, offset somewhat by the increased losses from continuing
operations. Net cash provided from the sale of discontinued operations was
$2,412, $11,750 and $0, and net cash provided (used) by discontinued operations
was ($2,898), ($3,697) and $4,447 in 1996, 1995, and 1994, respectively.
 
     The Company has a line of credit agreement with a bank that expires on June
30, 1997. The total amount available under the line is $7.5 million, subject to
the balance of eligible accounts receivable. The entire $7.5 million was
available as of December 31, 1996 and as of March 31, 1997. Interest accrues at
prime plus one and one-quarter percent, and outstanding borrowings are
collaterized by substantially all the Company's domestic assets. As of December
31, 1996, the Company was in default of a financial covenant contained in the
agreement, which default has been waived by the bank.
 
     In February 1997, Valor obtained a $2.5 million two year term note from
Telemetrix PLC, the Company's majority shareholder. This note is to be repaid by
Valor 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% per annum (subject to a possible upward adjustment) and the loan
is secured by a subordinated security interest in all of Valor's domestic fixed
assets.
 
     In March 1997, the Company's 72% owned subsidiary Promptus Communications,
Inc. ("Promptus") agreed to sell the assets and associated liabilities of its
Network Access Card business to VideoServer, Inc. for about $20 million, subject
to regulatory approval. This total consideration will include $14.5 million cash
and 223,881 shares of VideoServer common stock. Upon closing of the asset sale,
Promptus has agreed to repay loans from the Company and to redeem all the
Promptus common stock held by the Company in exchange for an aggregate of about
158,000 shares of the VideoServer common stock plus a total of about $8.2
million cash, net of transaction costs. As a result of this redemption of the
Company's interest in Promptus, the Promptus minority shareholders will own 100%
of Promptus which will consist primarily of the Systems business. Management
anticipates that these transactions will close during the second quarter ended
June 28, 1997, and that the VideoServer stock to be received by the Company will
be sold in 1997.
 
     Management anticipates that its line of credit agreement described above
will be extended or replaced during 1997 assuming that the Promptus divestiture
is completed and assuming break-even or better results at Valor beginning in the
first quarter 1997. Management further anticipates that an extended line of
credit, coupled with the proceeds from the Telemetrix note and the anticipated
proceeds from the planned divestiture of Promptus, should give to the Company
the liquidity it needs to pursue its strategic plan for Valor, at least for the
coming year. However, there can be no assurance that the Company's interest in
Promptus will be sold for the amount or within the time frame anticipated by
management, that Valor will maintain break-even or better results, or that
Valor's strategic plan will be successful.
 
     If the Company's interest in Promptus is not sold within the next few
months, and/or if the Company does not maintain break-even or better revenue
levels, then the Company may be forced to curtail its strategic plan and/or to
seek further capital infusions. Also, the current line of credit agreement
expires on June 30, 1997 and there can be no assurance that the bank will renew
the facility. Although management believes it will be able to identify an
asset-based lender to replace the line of credit, if necessary, there can be no
assurance that such will be located. Neither can these be any assurance that
additional capital infusions will be available to the Company in sufficient
amounts, if at all, and, if available, there can be no assurance that the
related terms and conditions will be acceptable to the Company. Failure of the
Company to obtain such credit facility and/or capital infusion, if needed, would
have a material and adverse effect on the Company.
 
                                       11
<PAGE>   13
 
     The Company made capital expenditures of approximately $6.1 million and
$4.5 million in 1996 and 1995, respectively, a significant portion of which was
expended by Valor for additional equipment to automate its manufacturing
operations and/or to support increased manufacturing volume. The Company
currently estimates its 1997 capital expenditures will range between $4 million
and $8 million, depending on the need for further increases in automation and
capacity at Valor. The Company anticipates that most such capital expenditures
will be funded through cash generated from operations.
 
     Dividends on the Company's 8,110 shares of outstanding, cumulative
convertible Preferred Stock accrue at a rate of $35.00 per share, per year,
payable quarterly. In 1996, dividends totaling $213 were paid and $71 were in
arrears as of December 31, 1996.
 
     In connection with the acquisition of Promptus, the Company entered into an
agreement for the contingent purchase of the remaining 1.6 million shares or
approximately 29% of Promptus's capital stock. The first mutual put/call right
occurred January 1997 for 30% of the remaining Promptus shares, which put/call
has been postponed pending the resolution of the divestiture transactions
described above. If the Promptus divestiture does not occur, the Company may be
obligated to purchase 30% of the remaining Promptus shares held by the minority
shareholders. The price to be paid will be based upon a predetermined formula
using forecast and actual results of Promptus in 1997, 1998, and 1999. Because
of the determinants, it is not presently possible to assess whether the
condition for this contingent purchase will be satisfied nor is it possible to
estimate the price at which such shares might be purchased. In the event the
mutual put/call right is exercised, the Company will be obligated to pay up to
$4.80 per share in cash and may pay the amount in excess of $4.80 in cash,
Common Stock, or a combination thereof. If the Promptus divestiture does not
occur, the put/call obligation could have a material and adverse effect on the
Company.
 
                                       12
<PAGE>   14
 
                    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, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
                                          ARTHUR ANDERSEN LLP
 
San Diego, California
March 25, 1997
 
                                       13
<PAGE>   15
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                           ------------------------------------
                                                             1996          1995          1994
                                                           --------      --------      --------
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER
                                                                       SHARE DATA)
<S>                                                        <C>           <C>           <C>
Sales....................................................  $ 92,533      $114,836      $103,239
Cost of goods sold.......................................    75,350        82,729        76,122
                                                           --------      --------      --------
Gross profit.............................................    17,183        32,107        27,117
Selling, general and administrative expense..............    25,722        25,382        23,695
                                                           --------      --------      --------
Operating profit (loss)..................................    (8,539)        6,725         3,422
Other income (expense), net
  Interest income........................................        91            93           173
  Interest expense.......................................      (319)         (342)         (122)
  Other..................................................        66           220           226
                                                           --------      --------      --------
Income (loss) from continuing operations before income
  taxes and minority interest............................    (8,701)        6,696         3,699
Provision (benefit) for income taxes.....................    (1,050)          506           264
Minority interest in earnings of subsidiaries............        --            66           136
                                                           --------      --------      --------
Income (loss) from continuing operations.................    (7,651)        6,124         3,299
Income (loss) from discontinued operations, net of income
  taxes of $0, $515, and $1,085 for 1996, 1995, and 1994,
  respectively...........................................    (2,998)       (2,178)        1,962
Loss on disposal of discontinued operations, including
  income taxes of $1,298 and $1,186, respectively........   (10,822)       (2,000)           --
                                                           --------      --------      --------
Net income (loss)........................................  $(21,471)     $  1,946      $  5,261
                                                           ========      ========      ========
Net income (loss) per share of Common Stock:
  Income (loss) from continuing operations...............    $(0.88)       $ 0.56         $0.32
  Income (loss) from discontinued operations.............     (0.34)        (0.20)         0.20
  Loss on disposal of discontinued operations............     (1.20)        (0.18)           --
                                                             ------        ------        ------
Net income (loss) per share..............................    $(2.42)       $ 0.18         $0.52
                                                             ======        ======        ======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       14
<PAGE>   16
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                           AS OF DECEMBER 31,
                                                                          --------------------
                                                                           1996         1995
                                                                          -------     --------
                                                                              (DOLLARS IN
                                                                               THOUSANDS,
                                                                            EXCEPT PER SHARE
                                                                                 DATA)
<S>                                                                       <C>         <C>
Current Assets
  Cash and cash equivalents.............................................  $ 3,219     $  2,553
  Receivables, net of allowances of $201 and $225, respectively.........   11,502       19,456
  Inventories...........................................................   18,551       29,245
  Prepaid expenses and other............................................    6,802        3,761
  Net assets of discontinued operations.................................   11,637       25,551
                                                                          -------     --------
          Total current assets..........................................   51,711       80,566
Property, plant, and equipment, net.....................................   15,974       14,963
Goodwill, less accumulated amortization of $4,211 and $3,515, and
  other.................................................................   23,839       22,170
                                                                          -------     --------
          Total Assets..................................................  $91,524     $117,699
                                                                          =======     ========
 
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Short-term borrowings.................................................  $ 4,900     $  4,234
  Accounts payable, accrued and other liabilities.......................   17,298       22,642
                                                                          -------     --------
          Total current liabilities.....................................   22,198       26,876
                                                                          -------     --------
Deferred income taxes and other non-current liabilities.................    2,176        1,828
                                                                          -------     --------
Commitments and contingencies
Stockholders' Equity
  Preferred Stock, authorized 1,000,000 shares, first series, $35.00
     cumulative convertible, issued and outstanding 8,110 shares........    8,110        8,110
  Common Stock, par value $0.04 per share, authorized 12,000,000 shares,
     issued 8,973,475 in 1996 and 1995..................................      359          359
  Additional paid-in capital............................................   44,082       44,082
  Retained earnings.....................................................   14,644       36,399
  Cumulative translation adjustments....................................      (45)          45
                                                                          -------     --------
          Total stockholders' equity....................................   67,150       88,995
                                                                          -------     --------
Total Liabilities and Stockholders' Equity..............................  $91,524     $117,699
                                                                          =======     ========
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                       15
<PAGE>   17
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                      FIRST SERIES            ADDITIONAL                         CUMULATIVE
                                       PREFERRED     COMMON    PAID-IN     RETAINED   TREASURY   TRANSLATION
THREE YEARS ENDED DECEMBER 31, 1996      STOCK       STOCK     CAPITAL     EARNINGS    STOCK     ADJUSTMENTS
------------------------------------  ------------   ------   ----------   --------   --------   -----------
                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>            <C>      <C>          <C>        <C>        <C>
Balance, December 31, 1993..........     $8,110       $337     $ 34,269    $ 29,760   $ (1,040)     $ 336
  Net Income........................     --           --         --           5,261      --         --
  Issuance of 56,825 shares of
     Common Stock under stock option
     plans..........................     --              2          298       --         --         --
  Preferred Stock dividend..........     --           --         --            (284)     --         --
  Translation adjustment............     --           --         --           --         --           514
                                         ------       ----      -------    --------    -------      -----
Balance, December 31, 1994..........      8,110        339       34,567      34,737     (1,040)       850
  Net income........................     --           --         --           1,946      --         --
  Sale of 650,000 shares of Common
     Stock, of which 250,000 shares
     were issued from Treasury
     Stock, in connection with the
     71% acquisition of Promptus
     Communications, Inc............     --             16        8,655       --         1,040      --
  Issuance of 114,125 shares of
     Common Stock under stock option
     plans..........................     --              4          860       --         --         --
  Preferred Stock dividend..........     --           --         --            (284)     --         --
  Cumulative translation gain on
     sale of assets of the
     E-Group........................     --           --         --           --         --          (835)
  Translation adjustment............     --           --         --           --         --            30
                                         ------       ----      -------    --------    -------      -----
Balance, December 31, 1995..........      8,110        359       44,082      36,399      --            45
  Net loss..........................     --           --         --         (21,471)     --         --
  Preferred Stock dividend..........     --           --         --            (284)     --         --
  Translation adjustment............     --           --         --           --         --           (90)
                                         ------       ----      -------    --------    -------      -----
Balance, December 31, 1996..........     $8,110       $359     $ 44,082    $ 14,644   $  --         $ (45)
                                         ======       ====      =======    ========    =======      =====
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       16
<PAGE>   18
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1996         1995        1994
                                                              --------     --------     -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>          <C>
Cash Flows from Operating Activities:
  Net income (loss).........................................  $(21,471)    $  1,946     $ 5,261
  Adjustments to reconcile net income (loss) to net cash
     provided (used) by continuing operations:
     Loss (income) from discontinued operations.............     2,998        2,178      (1,962)
     Loss on disposal of discontinued operations............    10,822        2,000          --
     Depreciation and amortization..........................     5,319        4,757       3,124
     Minority interest expense in earnings of subsidiary....        --           66         136
     Loss on disposal of equipment..........................        --          201          --
  Deferred income taxes.....................................     1,289       (1,945)        291
  Changes in assets and liabilities:
     Receivables............................................     7,954         (680)     (8,520)
     Inventories............................................    10,694       (8,958)     (8,904)
     Prepaid expenses and other assets......................    (4,666)        (326)       (163)
     Accounts payable and accrued liabilities...............    (5,335)       3,246       6,085
     Other non-current liabilities..........................       223          384         883
                                                              --------     --------     -------
       Net cash provided (used) by continuing operations....     7,827        2,869      (3,769)
  Net cash provided (used) by discontinued operations.......    (2,898)      (3,697)      4,447
                                                              --------     --------     -------
       Net cash provided (used) by operating activities.....     4,929         (828)        678
                                                              --------     --------     -------
Cash Flows from Investing Activities:
  Purchases of plant and equipment..........................    (6,060)      (4,509)     (7,687)
  Capital expenditures of discontinued operations...........      (978)      (1,897)       (971)
  Purchase of Promptus, net of cash acquired................        --      (19,089)         --
  Proceeds from disposal of discontinued operations.........     2,412       11,750          --
                                                              --------     --------     -------
       Net cash used by investing activities................    (4,626)     (13,745)     (8,658)
                                                              --------     --------     -------
Cash Flows from Financing Activities:
  Short-term borrowings, net................................       666        2,579       1,655
  Issuance of Common Stock..................................        --       10,575         300
  Preferred Stock dividend paid.............................      (213)        (284)       (284)
                                                              --------     --------     -------
       Net cash provided by financing activities............       453       12,870       1,671
Net change in cumulative translation adjustments............       (90)          30         498
                                                              --------     --------     -------
Net increase (decrease) in cash and cash equivalents........       666       (1,673)     (5,811)
Cash and cash equivalents at beginning of period............     2,553        4,226      10,037
                                                              --------     --------     -------
Cash and cash equivalents at end of period..................  $  3,219     $  2,553     $ 4,226
                                                              ========     ========     =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       17
<PAGE>   19
 
                   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 (the "Company"); its wholly-owned
subsidiaries, Valor Electronics, Inc., ("Valor") and Esco Sales, Inc., ("Esco")
(see Note 2); and its majority-owned subsidiary, Promptus Communications, Inc.,
("Promptus") (see Note 2 ). All significant intercompany balances and
transactions 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 cash in debt instruments of financial institutions
throughout the world with strong credit ratings and has established guidelines
relative to diversification and maturities that maintain safety and liquidity.
The Company has not experienced any 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 and estimates. At December 31, 1996, three large
customers represented approximately 14.7%, 14.4% and 10.7%, respectively, of the
Company's net accounts receivable balance. A significant portion of the
Company's manufacturing operations are concentrated in the People's Republic of
China (the "PRC") and the Philippines. At December 31, 1996, a significant
amount of the Company's physical inventories and equipment were concentrated in
two facilities located in the PRC and one facility in the Philippines. There is
one key component that the Company uses in its manufacturing and assembly
process that is currently available only from a single source. There can be no
assurance that this supplier will be able to meet future demand for components
in a timely and cost-effective manner. The Company's operating results and
customer relationships could be adversely affected by either price increases or
an interruption or reduction in products shipped due to an interruption or
reduction in supply of any key components.
 
     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 Cost over Net Assets of Acquired Company -- The excess of
acquisition cost over the fair value of net assets (goodwill) of Valor 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 Valor goodwill as of December
31, 1996. 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 in the future. 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
$19,845 and $20,542 at December 31, 1996, and 1995, respectively.
 
                                       18
<PAGE>   20
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
     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 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 operations 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.
Substantially all of the Company's worldwide sales are conducted in U.S.
dollars. 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. The Company does not enter
into foreign exchange transactions to hedge certain balance sheet exposures and
intercompany balances against movements in foreign exchange rates.
 
     Net Income (Loss) Per Share of Common Stock -- Net income (loss) per share
("EPS") of Common Stock for 1996, 1995, and 1994 is computed on the basis of the
weighted average shares of Common Stock outstanding plus dilutive 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. In loss years such as 1996, the preferred stock is
assumed not converted, and the related annual preferred stock dividends of $284
are added to the loss to calculate EPS from continuing operations. The number of
shares used for the calculation are 8,973,475, 10,873,000, and 10,187,000 in
1996, 1995, and 1994, respectively. Fully diluted earnings per share are
approximately the same as primary earnings per share for all years presented.
 
     Stock Based Compensation -- During 1996, the Company elected to adopt the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the
provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value-based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in APB 25. SFAS 123 requires that companies electing to continue using the
intrinsic value method must make pro forma disclosures of net income and
earnings per share as if the fair-value-based method of accounting has been
applied. (See Note 9)
 
     Reclassifications -- The consolidated financial statements for all periods
presented have been restated to reflect Promptus, the E-Group, and Esco as
discontinued operations in accordance with APB 30 (see Note 2).
 
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
financed through a combination of secured bank borrowings of approximately $9.9
million; proceeds, net of issuance costs, from the issuance of 650,000 shares of
Common Stock (of which 250,000 were from Treasury Shares) of approximately $9.7
million; and $500 of cash on hand. In addition to the purchase price, the
Company provided approximately $1.0 million to Promptus employees in the form of
secured promissory notes for use in the exercise of stock options, which
occurred at the transaction's closing. The acquisition was accounted for as a
purchase. Accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based on their estimated fair-market value. The
resulting goodwill of approximately $17.2 million was being amortized over 20
years. Promptus's results of operations have been included in the Company's
results effective January 1, 1995.
 
     In March 1997, Promptus entered into an agreement (the "NAC Transaction")
to sell the net assets of its Network Access Card business (the "NAC's") for
approximately $20.0 million, subject to regulatory approval. These sale proceeds
will consist of $14.5 million in cash and 223,881 shares of common stock of
 
                                       19
<PAGE>   21
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
VideoServer, Inc. Subject to the closing of the NAC Transaction, Promptus will
purchase 100% of the Promptus shares held by the Company and repay certain
indebtedness to the Company for an aggregate of approximately $11.6 million, net
of certain transaction costs. The net proceeds to the Company are estimated to
consist of $8.2 million in cash and approximately 158,000 shares of common stock
of VideoServer Inc., resulting in a loss on disposal of approximately $10.8
million. The estimated loss on disposal of Promptus includes an assumption
regarding the value of the VideoServer, Inc. shares. The ultimate proceeds to
the Company for the VideoServer, Inc. shares is subject to market volatility and
fluctuation. Management expects these transactions to close in the quarter ended
June 28, 1997, and has estimated the loss on the disposal of Promptus based on
the terms of these pending transactions.
 
     E-Group In December 1995, the Company completed the divestiture of certain
assets and liabilities of the E-Group for approximately $12.5 million, resulting
in a gain of approximately $3.0 million, net of income taxes of $2.5 million.
The Company received $11.75 million 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 $4.1 million, consisting of $2.2 million in cash and
a $1.9 million promissory note due in equal installments over six years,
resulting in a loss on disposal of approximately $5.0 million, net of income tax
benefits of approximately $1.3 million. This loss was accrued in 1995.
 
     The sales of the E-Group and Esco and the pending sale of Promptus were
made pursuant to formal divestiture plan 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 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                        -------------------------------
                                                         1996        1995        1994
                                                        -------     -------     -------
        <S>                                             <C>         <C>         <C>
        Sales.........................................  $17,735     $54,771     $38,668
                                                        -------     -------     -------
        Income (loss) before tax provision and
          minority interest income....................  $(3,530)    $(2,209)    $ 3,047
        Income tax provision..........................       --         515       1,085
        Minority interest income......................      532         546          --
                                                        -------     -------     -------
        Net income (loss).............................  $(2,998)    $(2,178)    $ 1,962
                                                        =======     =======     =======
        Net income (loss) per common share............  $ (0.34)    $ (0.20)    $  0.20
                                                        =======     =======     =======
</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.
 
                                       20
<PAGE>   22
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
     The net assets of discontinued operations are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                   AS OF DECEMBER 31,
                                                                  --------------------
                                                                    1996        1995
                                                                  --------     -------
        <S>                                                       <C>          <C>
        Current assets..........................................  $  6,115     $11,159
        Plant and equipment, net................................     2,266       2,285
        Goodwill, net of amortization and other assets..........    16,530      24,014
        Current liabilities.....................................    (1,801)     (3,410)
        Other long-term liabilities.............................      (651)       (975)
        Deferral of E-Group gain................................        --      (5,522)
        Provision for estimated loss on disposal of discontinued
          operations............................................   (10,822)     (2,000)
                                                                  --------     -------
                  Net assets of discontinued operations.........  $ 11,637     $25,551
                                                                  ========     =======
</TABLE>
 
NOTE 3 SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURE
 
     Supplemental cash flow information for the years ended December 31, 1996,
1995, and 1994, are summarized as follows:
 
<TABLE>
<CAPTION>
                                                          FOR THE YEAR ENDED DECEMBER
                                                                      31,
                                                         ------------------------------
                                                          1996        1995        1994
                                                         ------     --------     ------
        <S>                                              <C>        <C>          <C>
        Interest paid (including interest related to
          discontinued operations)...................    $  376     $  1,207     $  342
                                                         ======      =======     ======
        Income taxes paid............................    $2,636     $  1,559     $1,727
                                                         ======      =======     ======
        Business acquisition, net of cash acquired:
          Working capital, other than cash
             acquired................................    $   --     $   (644)    $   --
          Plant and equipment........................        --       (1,314)        --
          Purchase price in excess of the net assets
             acquired................................        --      (17,230)        --
          Other assets...............................        --       (1,183)        --
          Noncurrent 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 $11.75 million to repay the
outstanding principal and interest on a bank term loan of $4.1 million and
repaid the remaining $7.65 million 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 at December 31, 1996, and 1995:
 
<TABLE>
<CAPTION>
                                                                    1996        1995
                                                                   -------     -------
        <S>                                                        <C>         <C>
        Raw materials and supplies...............................  $ 5,891     $10,306
        Work in process..........................................    3,748      10,454
        Finished goods...........................................    8,912       8,485
                                                                   -------     -------
                                                                   $18,551     $29,245
                                                                   =======     =======
</TABLE>
 
                                       21
<PAGE>   23
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
     Property, plant, and equipment consisted of the following at December 31,
1996, and 1995:
 
<TABLE>
<CAPTION>
                                                                    1996        1995
                                                                  --------     -------
        <S>                                                       <C>          <C>
        Land....................................................  $     12     $    12
        Buildings and improvements..............................     4,683       4,828
        Machinery and equipment.................................    20,549      16,597
        Furniture and fixtures..................................     3,429       2,689
                                                                  --------     -------
                                                                    28,673      24,128
        Less accumulated depreciation...........................   (12,699)     (9,165)
                                                                  --------     -------
                                                                  $ 15,974     $14,963
                                                                  ========     =======
</TABLE>
 
     Accounts payable and accrued liabilities consisted of the following at
December 31, 1996, and 1995:
 
<TABLE>
<CAPTION>
                                                                    1996        1995
                                                                  --------     -------
        <S>                                                       <C>          <C>
        Accounts payable........................................  $  6,700     $ 9,204
        Employee compensation...................................     3,810       4,576
        Federal, local, foreign, and other taxes................     2,759       4,279
        Other accrued liabilities...............................     3,782       2,875
        Accrued severance costs.................................       247       1,708
                                                                   -------     -------
                                                                  $ 17,298     $22,642
                                                                   =======     =======
</TABLE>
 
     In July 1996, management assessed Valor's Hong Kong operations and cost
structure. Based on its assessment, management initiated a fixed cost reduction
program. This cost reduction program eliminated a significant portion of Valor
Hong Kong's fixed costs without decreasing production capacity. Due to the cost
reduction program, the Company recorded a charge of approximately $1.9 million
during 1996. The cost reduction charge represents employee severance costs,
property lease costs, and the write off of certain assets.
 
NOTE 5 CREDIT AGREEMENTS
 
     The Company has a $7.5 million line of credit agreement with a bank.
Interest on outstanding borrowings currently accrues at the bank's prime rate of
interest plus one and one-quarter percent (9.50% at December 31, 1996). The
facility is secured by the Company's domestic accounts receivable, inventory,
and equipment; and borrowings are limited to the balance of eligible accounts
receivable. Based on eligible accounts receivable at December 31, 1996, the
entire $7.5 million of the facility was available for borrowing. At December 31,
1996 and 1995, there were approximately $4.9 and $3.2 million, respectively, of
outstanding borrowings under this agreement. The credit agreement expires on
June 30, 1997. In the event that the Promptus transactions are not closed by
June 30, 1997, and/or the Company's future financial results are not
satisfactory to the bank, the bank may not renew or extend the current line of
credit agreement beyond June 30,1997 and the Company may be required to seek
alternative bank financing. There can be no assurance that the Promptus
transactions will be closed or that the Company's financial results for the
first quarter of 1997 will be satisfactory to the bank. Although management
believes it will be able to identify an asset-based lender to replace the line
of credit, if necessary, there can be no assurance that alternative financing
will be available to the Company in sufficient amounts, if at all, and, if
available, there can be no assurance that the related terms and conditions will
be acceptable to the Company. Failure of the Company to obtain such alternative
financing, if needed, would have a material and adverse effect on the Company.
 
     The credit agreement contains certain minimum quarterly profitability,
minimum net-worth, and various financial-ratio requirements. As of December 31,
1996, the Company was in violation of a certain financial covenant which has
been waived by the bank.
 
     The Company had a foreign credit facility with a foreign bank for
approximately $2.2 million. Outstanding borrowings at December 31, 1995 were
approximately $1.0 million. This credit facility was repaid during 1996 and the
agreement was not renewed.
 
                                       22
<PAGE>   24
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
NOTE 6 INCOME TAXES
 
     The components of the provision (benefit) for income taxes from continuing
operations for the years ended December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                            1996        1995      1994
                                                           -------     ------     -----
        <S>                                                <C>         <C>        <C>
        Federal -- current...............................  $(2,988)    $ (358)    $(963)
        Deferred.........................................    1,264       (762)      120
        Foreign -- current...............................    2,031      1,714       884
        Deferred.........................................   (1,156)        71       393
        State and Local..................................     (201)      (159)     (170)
                                                           -------     ------     -----
                                                           $(1,050)    $  506     $ 264
                                                           =======     ======     =====
</TABLE>
 
     The components of the income-tax provision were based on the sources of
income (loss) from continuing operations before taxes and minority interest for
the years ended December 31 as follows:
 
<TABLE>
<CAPTION>
                                                         1996        1995        1994
                                                       --------     -------     -------
        <S>                                            <C>          <C>         <C>
        United States................................  $(10,310)    $(2,289)    $(2,433)
        Foreign......................................     1,609       8,985       6,132
                                                       --------     -------     -------
                                                       $ (8,701)    $ 6,696     $ 3,699
                                                       ========     =======     =======
</TABLE>
 
     The components of the current, net deferred, tax asset at December 31 were
as follows:
 
<TABLE>
<CAPTION>
                                                                      1996       1995
                                                                     ------     ------
        <S>                                                          <C>        <C>
        Accelerated depreciation...................................  $   51     $   34
        Vacation pay and accrued compensation......................     532        736
        Reserves...................................................     674        575
        NOL, capital loss, R and D credit carryovers...............     866      1,908
        Other......................................................      90        255
                                                                     ------     ------
                                                                      2,213      3,508
        Valuation reserve, primarily related to capital loss
          carryforwards............................................    (651)      (682)
                                                                     ------     ------
                                                                     $1,562     $2,826
                                                                     ======     ======
</TABLE>
 
     The component of the non-current, deferred, income tax liability at
December 31, 1996, and 1995, is as follows:
 
<TABLE>
<CAPTION>
                                                                      1996      1995
                                                                      ----     ------
        <S>                                                           <C>      <C>
        Accelerated depreciation on foreign assets..................  $ --     $1,156
                                                                      ====     ======
</TABLE>
 
     A reconciliation of the federal income tax provision at the statutory rate
to the effective rate for continuing operations for the years ended December 31
is as follows:
 
<TABLE>
<CAPTION>
                                                          1996        1995        1994
                                                         -------     -------     ------
        <S>                                              <C>         <C>         <C>
        Statutory federal tax on income before income
          taxes and minority interest..................  $(2,958)    $ 1,719     $1,211
        Effect of foreign losses with no tax benefit...       --          --        (82)
        State income taxes, net of federal benefit.....     (201)       (191)      (154)
        Differences between U.S. and foreign tax
          rates........................................      986      (1,050)      (771)
        Nondeductible expenses.........................      748          28        141
        Other..........................................      375          --        (81)
                                                         -------     -------     ------
                                                         $(1,050)    $   506     $  264
                                                         =======     =======     ======
</TABLE>
 
                                       23
<PAGE>   25
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
     Income tax provision is not recorded for U.S. Federal income taxes on 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 U.S. taxes have not been provided are approximately
$47,185, which would result in a related tax liability of approximately $10,310,
if such earnings were repatriated.
 
NOTE 7 COMMITMENTS AND CONTINGENCIES
 
     The Company leases machinery and equipment, computer equipment, and office
furniture and conducts certain operations in leased facilities, which 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 the operating lease agreements are as
follows:
 
<TABLE>
                <S>                                                   <C>
                YEAR ENDED DECEMBER 31,
                1997................................................  $ 2,346
                1998................................................    1,615
                1999................................................    1,360
                2000................................................    1,049
                2001................................................      856
                Thereafter..........................................      306
                                                                       ------
                                                                      $ 7,532
                                                                       ======
</TABLE>
 
     Rental expense amounted to $2,879, $3,280, and $3,852 in 1996, 1995, and
1994, 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. On November 12, 1996, the court approved a
Stipulation of Settlement with prejudice and all claims were released. The
settlement amount paid by the Company was $400 in 1996.
 
     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 affect on the Company's consolidated financial
position or results of operations.
 
     Contingent Purchase of the Promptus Minority Interest -- Concurrent with
the Promptus acquisition, the Company and the minority shareholders of Promptus
entered into an agreement to govern the contingent purchase of the remaining 28%
of the outstanding capital stock of Promptus. Under the agreement, beginning in
January 1997 and each year thereafter through January 1999, the minority
shareholders of Promptus have the right, but not the obligation, to require the
Company to acquire the remaining shares in predefined percentage increments; and
the Company has the right, but not the obligation, to purchase the remaining
shares. The price to be paid is based upon a predetermined formula using a
combination of forecasted and actual results of Promptus for the period January
1, 1997, through December 31, 1999. The percentage increment established for the
first mutual put/call option in January 1997 may not exceed 30% of the minority
shares. In December 1996, the Company and the minority shareholders agreed to
amend the existing agreement to postpone the first mutual put/call option until
the resolution of the Promptus divestiture. In connection with Promptus's
purchase of 100% of the Promptus shares held by the Company (see Note 2), the
agreement governing the contingent purchase will be terminated, and the Company
will have no future obligation with respect to the contingent purchase of any
outstanding capital stock of Promptus. However, if the Promptus transactions are
not consummated, then the above agreement is still in effect and the Company and
minority shareholders will be required to agree upon a Promptus forecast from
January 1997 through
 
                                       24
<PAGE>   26
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
December 1999. In the event the two parties can not agree upon a forecast for
this three year period, the terms of the agreement require the matter to be
decided upon by an arbitrator. Due to the pending close of the Promptus
transactions, no accounting recognition has been provided for this contingency
in the accompanying consolidated financial statements. If the Promptus
divestiture does not occur, the put/call obligation could have a material and
adverse effect on the Company.
 
NOTE 8 STOCKHOLDERS' EQUITY
 
     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 at
the rate of $35.00 per share, per year and are payable quarterly. The dividend
payment for the fourth quarter of 1996 was not paid as of December 31, 1996;
however, such dividend was accrued and included in the consolidated balance
sheet as of December 31, 1996 under the caption "Accounts payable, accrued and
other liabilities". The preferred shares have a liquidation preference of $1,000
per share and a par value of $1.00 per share.
 
NOTE 9 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
percent, while non-employee director options are exercisable in full at the date
of grant. The options have terms of six to ten years. In May 1996, the Company's
Board of Directors offered the right to all existing employee stock option
holders (at the holders sole option) to cancel the holder's then outstanding
stock option grant in exchange for a replacement grant for one-half of the
number of shares underlying the original stock option grant at the then fair
market value of $7.983 per share. All of the terms of the replacement grant
remain unchanged from the original stock option grants, including the vesting
provisions, except the employee must remain in the employ of the Company on May
14, 1997 and the replacement grant may not be exercised before such date. If the
repriced stock option grant is exercised within the first year, the number of
shares issuable and price per share revert back to the original stock option
grant. These repriced options are included in the stock option activity table
below as forfeitures and grants during the year ended December 31, 1996.
 
     The following table summarizes stock option activity for the year ended
December 31:
 
<TABLE>
<CAPTION>
                                                                         1996
                                                              ---------------------------
                                                               SHARES      WTD AVE. PRICE
                                                              --------     --------------
        <S>                                                   <C>          <C>
        Outstanding at beginning of year....................   810,250         $18.74
        Granted.............................................   786,500         $ 6.86
        Exercised...........................................        --         $   --
        Forfeited...........................................  (770,500)        $17.40
                                                              --------         ------
        Outstanding at the end of the year..................   826,250         $ 8.69
                                                              ========         ======
        Number of shares exercisable at the end of the
          year..............................................   231,250         $13.66
                                                              ========         ======
        Weighted average fair value of options granted......     $5.27
                                                              ========
</TABLE>
 
     The outstanding options expire at various dates through December 2006. At
December 31, 1996, there were 308,050 shares available for future grant under
all plans.
 
                                       25
<PAGE>   27
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
     The Company has adopted Statement of Financial Accounting Standards 123
"Accounting For Stock-Based Compensation" ("SFAS 123") and has elected to
continue to account for stock options granted under Accounting Principles Board
Opinion No. 25, which recognizes compensation cost based upon the intrinsic
value of the equity award. No compensation expense has been recognized in the
consolidated statement of operations for any equity awards granted during 1994
through 1996.
 
     The following pro forma net income (loss) and pro forma earnings (loss) per
share had the Company elected to account for equity awards under 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 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 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>
                                                                     1996        1995
                                                                   --------     -------
        <S>                                                        <C>          <C>
        Net Income (loss)
          As Reported..........................................    $(21,471)    $ 1,946
                                                                   ========      ======
          Pro Forma............................................    $(21,777)    $ 1,838
                                                                   ========      ======
        Primary EPS
          As Reported..........................................      $(2.42)     $ 0.18
                                                                     ======       =====
          Pro Forma............................................      $(2.46)     $ 0.17
                                                                     ======       =====
</TABLE>
 
NOTE 10 EMPLOYEE BENEFIT PLANS
 
     The Company has a domestic, 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 available to substantially all domestic employees. Under
the plan, participating employees may defer between 1% to 15% of their pre-tax
compensation. The Company contributes fifty cents for each dollar contributed by
the employee, with a maximum Company contribution 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,
governed by the laws of the country in which they are established. These foreign
plans generally include a salary deferral element and Company matching
contribution. Company contributions under all plans in the aggregate were $389,
$324, and $363 in 1996, 1995, and 1994, respectively. There were no amounts paid
relating to the employer, profit-sharing provision during 1996, 1995, and 1994.
 
     The Company had no other programs that required payment by the Company of
post-retirement benefits to current or retired employees.
 
NOTE 11 SEGMENT INFORMATION AND MAJOR CUSTOMERS
 
     In 1996, two customers, when combined, represented approximately 30% of the
Company's sales or approximately 20% and 10%, individually. In 1995, two
customers, when combined, represented approximately 30% of the Company's sales
or approximately 16% and 14%, individually. In 1994, one customer represented
approximately 22% of the Company's sales.
 
     Export sales amounted to $908, $3,048, and $6,751 in 1996, 1995, and 1994,
respectively, principally to customers in North America.
 
                                       26
<PAGE>   28
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
     The Company operates in one industry segment through its Valor operations.
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 OEM's for local area networks and wide area
networks.
 
     Valor operates predominately in the United States, the PRC, the
Philippines, Hong Kong, and Germany. 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 United States' assets consist of operating assets
and goodwill, net of amortization.
 
GEOGRAPHIC SEGMENTS
 
<TABLE>
<CAPTION>
                                                                              ADJUSTMENTS
                                                      PACIFIC                     AND
                                   UNITED STATES        RIM        EUROPE     ELIMINATIONS     CONSOLIDATED
                                   -------------     ---------    --------    ------------     ------------
                                                            (DOLLARS IN THOUSANDS)
<S>                                <C>               <C>          <C>         <C>              <C>
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
                                      ========        ========     =======      ========         ========
YEAR ENDED DECEMBER 31, 1994
Sales to unaffiliated
  customers......................    $  72,262       $  16,051    $ 14,926      $     --         $103,239
Transfers between geographic
  segments.......................       11,654          75,473          --       (87,127)              --
                                      --------        --------     -------      --------         --------
     Total sales.................    $  83,916       $  91,524    $ 14,926      $(87,127)        $103,239
                                      --------        --------     -------      --------         --------
Income before income taxes and
  minority interest..............    $  (2,433)      $   4,728    $  1,404      $     --         $  3,699
                                      --------        --------     -------      --------         --------
          Identifiable assets....    $  60,218       $  35,956    $  3,774      $     --         $ 99,948
                                      ========        ========     =======      ========         ========
</TABLE>
 
NOTE 12  SUBSEQUENT EVENT
 
     Subordinated Promissory Note -- In February 1997, the Company entered into
a Note Purchase Agreement (the "Note") with Telemetrix PLC ("TMX", the Company's
majority shareholder) and a Common Stock Purchase Warrant Agreement (the
"Warrant") whereby the Company received a $2.5 million loan which is
subordinated to a bank and secured by Valor's U.S. based fixed assets. The loan
accrues
 
                                       27
<PAGE>   29
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
interest at the prime rate plus 4% per annum and is payable in four equal
semi-annual installments of $650,000 plus accrued interest commencing in August
1997 and ending February 1999. If the Company's interest in Promptus is not sold
before February 1998, the interest rate on the Note will increase to Prime plus
6%. In connection with the Note, the Company issued to TMX a Warrant for 250,000
shares of the Company's common stock at an exercise price of $6.00 per share.
The Warrant is exercisable as of the date of required shareholder approval to
amend the Company's Certificate of Incorporation to increase the number of
authorized Common Stock and terminates 30 days after the Note is paid in full.
 
NOTE 13  QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     The Company's condensed quarterly results from operations for the years
ended December 31, 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                            FIRST    SECOND     THIRD     FOURTH
                                                           QUARTER   QUARTER   QUARTER   QUARTER     TOTAL
                                                           -------   -------   -------   --------   --------
<S>                                                        <C>       <C>       <C>       <C>        <C>
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 income
  taxes and minority interest............................     (855)   (2,935)   (4,291)      (620)    (8,701)
Provision (benefit) for 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 (loss)...........................................  $(1,638)  $(2,765)  $(5,127)  $(11,941)  $(21,471)
                                                           =======   =======   =======    =======   ========
Net income (loss) per share -- primary and fully diluted:
Income (loss) from continuing operations.................  $ (0.07)  $ (0.26)  $ (0.47)  $  (0.08)  $  (0.88)
Income (loss) from discontinued operations...............    (0.12)    (0.06)    (0.10)     (0.06)     (0.34)
Loss on disposal of discontinued operations..............       --        --        --      (1.20)     (1.20)
                                                           -------   -------   -------    -------   --------
    Net (loss) per common share..........................  $ (0.19)  $ (0.32)  $ (0.57)  $  (1.34)  $  (2.42)
                                                           =======   =======   =======    =======   ========
1995
Sales....................................................  $24,094   $29,356   $31,370   $ 30,016   $114,836
                                                           -------   -------   -------    -------   --------
Gross profit.............................................    6,478     8,723     9,564      7,342     32,107
                                                           -------   -------   -------    -------   --------
Income (loss) from continuing operations before income
  taxes and minority interest............................      276     2,554     3,695        170      6,696
Provision (benefit) for income taxes.....................      (81)      367       591       (371)       506
Minority interest in subsidiary..........................       12        38        16         --         66
                                                           -------   -------   -------    -------   --------
Income (loss) from continuing operations.................      346     2,149     3,088        541      6,124
                                                           -------   -------   -------    -------   --------
Income (loss) from discontinued operations, net of income
  taxes..................................................     (154)     (172)     (241)    (1,610)    (2,178)
Loss on disposal of discontinued operations, net of
  income taxes...........................................       --        --        --     (2,000)    (2,000)
                                                           -------   -------   -------    -------   --------
    Net income (loss)....................................      191     1,977     2,847     (3,069)     1,946
                                                           =======   =======   =======    =======   ========
Net income (loss) per share -- primary and fully diluted:
Income (loss) from continuing operations.................  $  0.03   $  0.20   $  0.28   $   0.06   $   0.56
Income (loss) from discontinued operations...............    (0.01)    (0.02)    (0.02)     (0.19)     (0.20)
Loss on disposal of discontinued operations, net of
  income taxes...........................................       --        --        --      (0.22)     (0.18)
                                                           -------   -------   -------    -------   --------
    Net income (loss) per common share...................  $  0.02   $  0.18   $  0.26   $  (0.35)  $   0.18
                                                           =======   =======   =======    =======   ========
</TABLE>
 
                                       28
<PAGE>   30
 
                             CORPORATE INFORMATION
 
OFFICERS
 
ALBERT J. HUGO-MARTINEZ
President and Chief Executive Officer
 
BRUCE C. MYERS
Vice President -- Finance
Chief Financial Officer, Secretary
and Treasurer
 
DIRECTORS
 
KEN E. MAUD
Chairman of the Board -- GTI Corporation
Chairman -- Peek plc
 
TIMOTHY M. CURTIS*
Chief Executive -- Telemetrix plc
 
EDMUND B. FITZGERALD*
Professor, Managing Director --
Woodmont Associates
 
ALBERT J. HUGO-MARTINEZ
President and Chief Executive
Officer -- GTI Corporation
 
ROBERT E. VENTER*
Chief Executive --
Power Technologies Limited
Director -- Telemetrix plc

CORPORATE OFFICES
 
9715 Business Park Avenue
San Diego, California 92131-1642
(619) 537-2500
 
INDEPENDENT PUBLIC
ACCOUNTANTS
 
ARTHUR ANDERSEN LLP
 
TRANSFER AGENT
 
CHEMICAL MELLON
SHAREHOLDER
SERVICES, L.L.C.
 
GENERAL COUNSEL
 
BAKER & McKENZIE

PRODUCT
DEVELOPMENT &
MANUFACTURING
LOCATIONS
 
San Diego, California
 
Kowloon, Hong Kong
 
Cobuyao, Laguna
Philippines
 
PRIMARY SALES AND
DISTRIBUTION LOCATIONS
 
San Diego, California
 
Kowloon, Hong Kong
 
Munich, Germany
 
---------------
 
* Member of the Audit Committee of the Board of Directors
 
                                       29