<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                       ----------------------------------

                                    FORM 20-F

[ ]     Registration Statement Pursuant to Section 12(b) or (g) of the
        Securities Exchange Act of 1934

                                       OR

[X]     Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934

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

For the Fiscal Year Ended:                               Commission File Number:
    December 31, 1997                                            0-16673
                       ----------------------------------

                            NAM TAI ELECTRONICS, INC.
             (Exact name of registrant as specified in its charter)

                             British Virgin Islands
                 (Jurisdiction of incorporation or organization)

                             Unit 9, 15/F., Tower 1
                      China Hong Kong City, 33 Canton Road
                             TST, Kowloon, Hong Kong
                    (Address of principal executive offices)

 Securities registered or to be registered pursuant to Section 12(b) of the Act:
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Shares, $0.01 par value per share
                         Common Share Purchase Warrants

        Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: NONE

        As of December 31, 1997, there were 11,220,023 Common Shares of the
registrant outstanding.

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

        Indicate by check mark which financial statement item the registrant has
elected to follow:

                          Item 17. [ ]        Item 18.  [X]

                            Exhibit Index on Page 57


<PAGE>   2
                                TABLE OF CONTENTS


<TABLE>
<S>                                                                                                      <C>
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION ...................................................        2
PART I
     Item 1. Description of Business .............................................................        3
     Item 2. Properties ..........................................................................       20
     Item 3. Legal Proceedings ...................................................................       21
     Item 4. Control of the Company ..............................................................       22
     Item 5. Nature of Trading Market ............................................................       23
     Item 6. Exchange Controls and Other Limitations Affecting Security Holders ..................       24
     Item 7. Taxation ............................................................................       24
     Item 8. Selected Financial Data .............................................................       25
     Item 9. Management's Discussion and Analysis of Results of Operations and Financial condition       26
     Item 10. Directors and Executive Officers of the Company ....................................       36
     Item 11. Compensation of Directors and Officers .............................................       37
     Item 12. Options to Purchase Securities from the Company or its Subsidiaries ................       37
     Item 13. Interest of Management in Certain Transactions .....................................       37
PART II
     Item 14. Description of Securities to be Registered .........................................       38
PART III
     Item 15. Defaults Upon Senior Securities ....................................................       38
     Item 16. Changes in Securities and Changes in Security For the Company's Securities..........       38
PART IV
     Items 17 and 18. Financial Statements .......................................................       38
     Item 19. Financial Statements and Exhibits ..................................................       57

SIGNATURES .......................................................................................       58

Consent of Independent Accountants (to incorporation of their report on Financial Statements
  into the Company's Registration Statement on Forms F-3 and S-8) ................................       59
</TABLE>


        This Annual Report on Form 20-F contains forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled Risk Factors
under Item 1 - Description of Business.

        Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.

                 FINANCIAL STATEMENTS AND CURRENCY PRESENTATION

        The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
See "Report of Independent Accountants" included elsewhere herein. The Company
publishes its financial statements in United States dollars for the following
reasons: (i) the Company is incorporated in the British Virgin Islands where the
currency is the United States dollar; (ii) the Company conducts the majority of
its business transactions in United States dollars; and (iii) the exchange rate
between the Hong Kong dollar and the United States dollar has been fixed at
approximately 7.80 Hong Kong dollars to $1.00 since 1983. See Note 1(f) of Notes
to Consolidated Financial Statements appearing in Item 18. of this Report.


                                      - 2 -

<PAGE>   3
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

        Nam Tai Electronics, Inc. (which together with its subsidiaries is
hereafter referred to as the "Company" or "Nam Tai") was incorporated as a
limited liability International Business Company under the laws of the British
Virgin Islands in August 1987. The Company's corporate administrative matters
are conducted in the British Virgin Islands through its registered agent, McW.
Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British
Virgin Islands. The Company's principal executive offices are located in Hong
Kong at Unit 9, 15/F., Tower 1, China Hong Kong City, 33 Canton Road, TST,
Kowloon, Hong Kong.

        As an International Business Company, the Company is prohibited from
doing business with persons resident in the British Virgin Islands, owning real
estate in the British Virgin Islands, or acting as a bank or insurance company.
The Company does not believe these restrictions materially affect its
operations.

        Nam Tai was incorporated in the British Virgin Islands principally to
facilitate trading in its shares. The government of Hong Kong imposes stamp duty
on the transfer of shares equal to 0.3% of the value of the transaction. There
is no such stamp duty imposed by the British Virgin Islands. The Company was
organized in this manner to avoid any such requirements for the collection of
stamp duties for share transactions.

COMPANY OVERVIEW

        Nam Tai is an independent provider of high quality manufacturing
services to original equipment manufacturers ("OEMs") in the consumer
electronics industry. All of the Company's manufacturing operations are based in
China. Nam Tai assists OEMs in the design and development of products and
furnishes full turnkey manufacturing services to its OEM customers utilizing
advanced processes such as chip on board ("COB"), multichip modulators ("MCM"),
surface mount technology ("SMT"), tape automated bonding ("TAB"), outer lead
bonding ("OLB") and anistropic conductive film ("ACF") heat seal technologies.
The Company provides hardware and software design, plastic molding, component
purchasing, assembly into finished products or electronic subassemblies,
post-assembly testing and shipping. The Company manufactures a broad line of
finished products for its OEM customers, including personal organizers,
linguistic products, calculators, integrated circuit ("IC") or smart card
readers (referred to as "IC card readers"). It also manufactures electronic
components and subassemblies for printed circuit boards ("PCBs"). These products
include large scale integrated circuits ("LSI") bonded on PCBs that are used in
the manufacture of products such as electronic toys, and subassemblies for
liquid crystal display ("LCD") modules that are in turn used in the manufacture
of communications, camera and computer products. In addition, Nam Tai provides
OEMs with silk screening services for plastic parts, polyvinyl chloride ("PVC")
products and metal parts.

        The Company moved its manufacturing facilities to China in 1980 and
finally moved to Shenzhen, China in 1987 to take advantage of lower overhead
costs and competitive labor rates and to position itself to achieve low-cost,
high volume manufacturing. The location of Nam Tai's factory in Shenzhen is
about 30 miles from Hong Kong, providing the Company with close access to Hong
Kong's infrastructure of communication and banking. This also facilitates
transportation of the Company's products out of China through the port of Hong
Kong.

        The Company emphasizes high responsiveness to the needs of OEM customers
through the development and volume production of increasingly sophisticated and
specialized products. The Company seeks to build long-term relationships with
its customers through high quality standards (supported by ISO 9001
Certification) , competitive pricing, strong research and development support,
advanced assembly processes and high volume manufacturing, and with key
suppliers through volume purchasing and reliable forecasting of component
purchases. The Company believes that the potential for increased manufacturing
outsourcing by Japanese and U.S. OEMs in China is substantial and that it is in
a position to take advantage of this because of its expanded production capacity
and experience. Management

                                      - 3 -

<PAGE>   4
believes Nam Tai's record of providing timely delivery in volume of
high-quality, high technology, low-cost products builds close customer
relationships and positions the Company to receive orders for more complex
products. As the Company grows, management will seek to maintain a low cost
structure, reduce overhead where possible and continuously strive to improve its
manufacturing quality and processes.

THE COMPANY'S SUBSIDIARIES

        The Company is a holding company for Nam Tai Electronic & Electrical
Products Limited and its subsidiaries, and Nam Tai Electronics (Canada) Ltd. The
chart below illustrates the organizational structure of the Company and its
principal operating subsidiaries.


<TABLE>
<S>                  <C>                  <C>                       <C>
                           Nam Tai
                      Electronics, Inc.
                      (A British Virgin
                    Islands International
                      Business Company)
                              /
             ------------------------------------------------------------------
            /                                                                  /
          100%                                                               100%
         Nam Tai                                                            Nam Tai
        Electronics                                                      Electronic &
      (Canada) Ltd.                                                Electrical Products Ltd.---------------75%
(A Canadian Federal                                                    (A Hong Kong                        /
        Company)                                                      Limited Liability                    /
                                                                           Company)                        /
                                                    --------------------------/---------------             /
                                                    /                                        /             /
                                                  100%                                      100%           /
                                           Zastron Plastic &                         Namtai Electronic     /
                                            Metal Products                          (Shenzhen) Co. Ltd.    /
                                            (Shenzhen) Ltd.                         (A Limited Liability   /
                                          (A Limited Liability                       of China Foreign      /
                                           of China Foreign                          Operation)            /
                                              Operation)                                      /            /
                                                                                              -------------/
                                                                                              /
                                                                                             25%
                                                                                          Shenzhen
                                                                                       Namtek Co., Ltd.
                                                                                     (A Limited Liability
                                                                                       of China Foreign
                                                                                          Operation)
</TABLE>


                                      - 4 -


<PAGE>   5
Nam Tai Electronic & Electrical Products Limited

        Nam Tai Electronic & Electrical Products Limited ("NTE&E") was
incorporated in November 1983 and became the holding company for Namtai
Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen)
Ltd. in 1992. Marketing and customer relations are handled from NTEE as well as
management operations.

Namtai Electronic (Shenzhen) Co. Ltd.

        Namtai Electronic (Shenzhen) Co. Ltd. ("NTES") was established as Baoan
(Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with
limited liability pursuant to the relevant laws of China. The equity of NTES was
owned 70% by NTE&E and 30% by a Chinese Governmental agency. During 1992, the
joint venture was dissolved and the company changed its name to NTES. As part of
such termination, the company returned to the Chinese Governmental agency its
real property and investment, and NTES became a wholly owned subsidiary of
NTE&E.

        NTES is the principal manufacturing arm of the Company and is engaged in
manufacturing and assembling the Company's electronic products in China.

Zastron Plastic & Metal Products (Shenzhen) Ltd.

        Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was
organized in March 1992 as a limited liability company pursuant to the relevant
laws of China. Zastron is principally engaged in silk screening metal and PVC
products, much of which are used in products manufactured by the Company's
manufacturing subsidiary. Zastron also provides silk screening of products for
other unrelated companies.

Shenzhen Namtek Co., Ltd.

        Shenzhen Namtek Co., Ltd. ("Namtek") was organized in December 1995 as a
limited liability company pursuant to the relevant laws of China. Namtek
commenced operations in early 1996 developing and commercializing software for
the consumer electronics industry, particularly for the customers of the Company
and for products manufactured or to be manufactured by Nam Tai. Namtek employs
approximately 20 software engineers and provides the facilities and expertise to
assist in new product development and research, enabling Nam Tai to offer its
customers enhanced software design and development services.

Nam Tai Electronics (Canada) Ltd.

        Nam Tai Electronics (Canada) Ltd. ("NT Canada") was incorporated in
August 1989 under the Canada Business Corporations Act. NT Canada currently
provides finance, administrative and investor relations services to the Company
from its offices in Vancouver, British Columbia, Canada.


RISK FACTORS

        The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to shareholders. The Private Securities Reform Act of 1995 contains a safe
harbor for forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements:



                                      - 5 -

<PAGE>   6
       POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN
                              CHINA AND HONG KONG

        Internal Political and Other Risks. The Company's single manufacturing
complex is located in China. As a result, the Company's operations and assets
are subject to significant political, economic, legal and other uncertainties
associated with doing business in China. Changes in policies by the Chinese
government resulting in changes in laws, regulations, or the interpretation
thereof, confiscatory taxation, restrictions on imports and sources of supply,
import duties, corruption, currency revaluations or the expropriation of private
enterprise could materially and adversely affect the Company. Over the past
several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. There can be no assurance that the Chinese government will
continue to pursue such policies, that such policies will be successful if
pursued, that such policies will not be significantly altered from time to time
or that business operations in China would not become subject to the risk of
nationalization, which could result in the total loss of investment in that
country. Economic development may be limited as well by the imposition of
austerity measures intended to reduce inflation or reform money losing state-
owned enterprises, the inadequate development of infrastructure and the
potential unavailability of adequate power, water supplies, transportation,
communications, raw materials and parts or the deterioration of the general
political, economic or social environment in China, any of which could have a
material adverse effect on the Company's business. The Company maintains its own
electrical generator, water treatment and water storage facilities at the
factory site to address certain of these concerns. If for any reason the Company
were required to move its manufacturing operations outside of China, the
Company's profitability would be substantially impaired, its competitiveness and
market position would be materially jeopardized and there can be no assurance
that the Company could continue its operations.

        Uncertain Legal System and Application of Laws. The legal system of
China relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive system
of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may not be possible to obtain swift and
equitable enforcement of that law.

        Current Dependence on Single Factory Complex. The Company's products are
manufactured exclusively at its complex located in Baoan County, Shenzhen,
China. The Company does not own the land underlying its factory complex. It
occupies the site under agreements with the local Chinese government. In the
case of its original facility, the lease agreement covers an aggregate of
approximately 150,000 square feet of factory space and expires in August 2007.
In the case of the newer facility, the Company is entitled to use the land upon
which it is situated until 2044. These agreements and the operations of the
Company's Shenzhen factories are dependent on the Company's relationship with
the local government. The Company's operations and prospects would be materially
and adversely affected by the failure of the local government to honor these
agreements. In the event of a dispute, enforcement of these agreements could be
difficult in China. Moreover, firefighting and disaster relief or assistance in
China is primitive by Western standards. Material damage to, or the loss of, the
Company's factory complex due to fire, severe weather, flood, or other act of
God or cause, even if covered by insurance, would have a material adverse effect
on the Company's financial condition, business and prospects.

        Possible Changes and Uncertainties in Economic Policies. As part of its
economic reform, China has designated certain areas, including Shenzhen where
the Company's manufacturing complex is located, as Special Economic Zones.
Foreign enterprises in these areas benefit from greater economic autonomy and
more favorable tax treatment than enterprises in other parts of China. Changes
in the policies or laws governing special Economic Zones could have a material
adverse effect on the Company. Moreover, economic reforms and growth in China
have been more successful in certain provinces than others, and the continuation
or increase of such disparities could affect the political or social stability
of China.


                                      - 6 -


<PAGE>   7
        Inherent Risks of Business in China. Conducting business in China is
inherently risky. Corruption, extortion, bribery, pay-offs, theft, and other
fraudulent practices are common in China. The Company has attempted to implement
safeguards to prevent losses from such practices, but there can be no assurance
that despite these safeguards the Company will not suffer losses relating to
such practices.

        MFN Status. China currently enjoys most favored nation ("MFN") trade
status, which provides China with the trading privileges generally available to
trading partners of the United States. The United States annually reconsiders
the renewal of China's MFN status. Various interest groups continue to urge that
the United States not renew MFN for China and there can no assurance that
controversies will not arise that threaten the status quo involving trade
between the United States and China or that the United States will not revoke or
refuse to renew China's MFN status. In any of such eventualities, the business
of the Company could be adversely affected, by among other things, causing the
Company's products in the United States to become more expensive, which could
result in a reduction in the demand for the Company's products by customers in
the United States. Trade friction between the United States and China, whether
or not actually affecting Nam Tai's business, could also adversely affect the
prevailing market price of the Company's Common Shares and Warrants.

        Southeast Asia Economic Problems. Several countries in Southeast Asia,
including Korea, Thailand and Indonesia, have experienced a significant
devaluation of their currencies and decline in the value of their capital
markets. In addition, these countries have experienced a number of bank failures
and consolidations. Because virtually all of the Company's products are sold
into developed countries not experiencing these declines, the Company does not
believe that the declines in Southeast Asia will affect the demand for the
Company's products. Moreover, because most of the Company's products are paid
for in U.S. dollars, the Company believes that it is less susceptible to the
effects of a devaluation in the Hong Kong dollar or Chinese renminbi if either
or both were to occur despite assurances to the contrary by the Chinese
government. A devaluation in the renminbi could, however, adversely affect the
Company's borrowing costs. Moreover, the decline in the currencies of other
Southeast Asian countries could render the Company's products less competitive
if competitors located in these countries are able to manufacture competitive
products at a lower effective cost. While the Company's two principal
competitors also manufacture from China and therefore, the Company believes, are
in the same position as Nam Tai vis-a-vis Southeast Asia's economic problems,
there can be no assurance as to the ability of the Company's products to
continue to compete with products of other competitors from other Southeast
Asian countries suffering devaluations of their currencies or that currency or
other effects of the decline in Southeast Asia will not have a material adverse
effect on the Company's business, financial condition, results of operations or
market price of its securities.

        Relations Between China and Taiwan. Relations between China and Taiwan
have been unresolved since Taiwan was established in 1949. The general election
in Taiwan in 1996 heightened tensions between them. Although not directly a
threat to Nam Tai, peaceful and normal relations between China and its neighbors
reduces the potential for events which could have an adverse impact on the
Company's business.

        Operations in Hong Kong. The Company's executive and sales office, and
several of its customers and suppliers are located in Hong Kong, formerly a
British Crown Colony. Sovereignty over Hong Kong was transferred effective July
1, 1997 to China. The Company prepared for this transition in Hong Kong by
increasing the role and capability of its personnel in China to manage a number
of responsibilities previously managed through the Hong Kong office. Certain
other responsibilities have been transferred to the Company's office in
Vancouver, British Columbia, Canada. While the Company does not believe that the
transfer of sovereignty over Hong Kong to China will have a material adverse
effect on the Company's business, there can be no assurance as to the continued
stability of political, economic or commercial conditions in Hong Kong, and any
instability could have an adverse impact on the Company's business.


                                      -7-


<PAGE>   8
        The Hong Kong dollar and the United States dollars have been fixed at
approximately 7.80 Hong Kong dollars to $1.00 since 1983. The Chinese government
has expressed its intention to maintain the stability of the Hong Kong currency
after the sovereignty of Hong Kong was transferred to China. There can be no
assurance that this will continue and the Company could face increased currency
risks if the current exchange rate mechanism is changed. See "Exchange Rate
Fluctuations."

        CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY

        Sales to four major customers, Texas Instruments Incorporated, Sharp
Corporation, Nintendo, Inc. (which orders through Sharp Corporation) and Seiko
Instruments Inc. aggregated approximately 89.3%, 90.3% and 92.3% of the
Company's total net sales during the years ended December 31, 1997, 1996 and
1995. Sales to each of these customers as a percentage of the Company's total
net sales during the years ended December 31, 1997, 1996 and 1995 are set forth
in Item 1. Description of Business -- Customers and Marketing. The Company's
sales transactions to all its OEM customers are based on purchase orders
received by the Company from time to time. Except for these purchase orders, the
terms of which in a few cases are supplemented by basic agreements dependent
upon the receipt of purchase orders, the Company has no written agreements with
its OEM customers. Although management believes that any one of its OEM
customers could be replaced eventually, the loss of any one of its major
customers could have a material adverse effect on the Company's business.

        Virtually all of the Company's sales are to customers in the electronics
industry, which is subject to rapid technological change and product
obsolescence. The factors affecting the electronics industry in general, or any
of the Company's major customers or competitors in particular, could have a
material adverse effect on the Company's results of operations.

        POTENTIAL FLUCTUATIONS IN OPERATING RESULTS

        The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect net sales,
gross profit and profitability. This could result from any one or a combination
of factors such as, but not limited to, the cancellation or postponement or
orders, the timing and amount of significant orders from the Company's largest
customers, customers' announcement and introduction of new products or new
generations of products, evolutions in the life cycles of customers' products,
the Company's timing of expenditures in anticipation of future orders,
effectiveness in managing manufacturing processes, changes in cost and
availability of components, mix of orders filled, adverse effects to the
Company's financial statements resulting from, or necessitated by, possible
future acquisitions, and changes or anticipated changes in economic conditions.
The volume and timing of orders received during a quarter are difficult to
forecast. The Company's customers from time to time encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if customers do not control
inventories effectively, they may reduce or postpone shipments of orders.

        The Company's expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, operating results could be materially adversely affected. In
addition, the Company's operating results are affected by seasonality during the
third quarter in anticipation of the Christmas buying season and in the first
quarter resulting from both the closing of the Company's factory in China for
one-half of a month for the Chinese New Year holidays and the general reduction
in sales following the holiday season. See Item 9. Management's Discussion and
Analysis of Financial Condition and Results of Operations. The market segments
served by the Company are also subject to economic cycles and have in the past
experienced, and are likely in the future to experience, recessionary periods. A
recessionary period affecting the industry segments served by the Company could
have a material adverse effect on the Company's results of operations. Results
of operations in any period should not be considered indicative of results to be
expected in any future period, and fluctuations in operating results may also
result in fluctuations in the market price of the Company's Common Shares.


                                      -8-


<PAGE>   9
        TECHNOLOGICAL CHANGES AND PROCESS DEVELOPMENT

        The market for the Company's manufacturing services is characterized by
rapidly changing technology and continuing process development. The Company is
continually evaluating the advantages and feasibility of new manufacturing
processes, such as COB, MCM, SMT, TAB, OLB and ACF. The Company believes that
its future success may depend upon its ability to develop and market
manufacturing services which meet changing customer needs, maintain
technological leadership and successfully anticipate or respond to technological
changes in manufacturing processes on a cost-effective and timely basis. There
can be no assurance that the Company's process development efforts will continue
to prove successful.

        RISKS FROM POSSIBLE ACQUISITIONS

        An important element of the Company's strategy is to review acquisition
prospects that would complement the Company's existing products and services,
augment its market coverage and sales ability or enhance its technological
capabilities. While the Company has no current agreements or understandings with
respect to any acquisitions, the Company may acquire businesses, products or
technologies in the future. Future acquisitions by the Company could result in
accounting charges, potentially dilutive issuance of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
effect the Company's business, financial condition and results of operations
and/or the price of the Company's Common Shares.

        Acquisitions entail numerous risks, including the assimilation of the
acquired operations, technologies and products, diversion of management's
attention to other business concerns, risks of entering markets in which the
Company has no or limited prior experience, and potential loss of key employees
of acquired organizations. Management has no experience in assimilating acquired
organizations. There can be no assurance as to the ability of the Company to
successfully integrate the products, technologies or personnel of any business
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.


        EXCHANGE RATE FLUCTUATIONS

        The Company sells most of its products in United States dollars and
Japanese yen and pays expenses in United States dollars, Japanese yen, Hong Kong
dollars, Canadian dollars and Chinese renminbi. The Company is subject to a
variety of risks associated with changes among the relative value of the United
States dollar, Japanese yen, Hong Kong dollar, Canadian dollar and Chinese
renminbi, but management believes the most significant exchange risk results
from material purchases made in Japanese yen. Approximately 23%, 28%, and 33% of
Nam Tai's material costs have been in yen during the years ended December 31,
1997, 1996 and 1995. Sales made in yen accounted for approximately 6.3% of sales
for the year ended December 31, 1997, 15% of sales for 1996 and 18% of sales for
1995. The net currency exposure has increased as a result of decreased sales in
yen not being fully offset by the decrease in material purchases in yen.

        Based on oral agreements with its customers which are customary in the
industry, the Company believes its customers will accept an increase in the
selling price of manufactured products if the exchange rate of the Japanese yen
appreciates beyond a range of 5% to 10% although such customers may also request
a decrease in selling price in the event of a depreciation of the Japanese yen.
Based on close working relationships with its principal customers, and because
management believes similar oral agreements exist between these OEMs and their
other suppliers, the Company believes the oral nature of these agreements will
not prevent its OEMs from honoring them. However, there can be no assurance that
such agreements will be honored, and the refusal to honor such an agreement in
the event of a severe adverse fluctuation of the Japanese yen at a time when
sales made in yen are insufficient to cover material purchases in yen would
materially and adversely affect the Company's operations.


                                      -9-


<PAGE>   10
        Although only 12.5% of the Company's expenses were in Chinese renminbi
in 1997, the appreciation of the renminbi against the U.S. dollar increases the
expenses of the Company when translated into U.S. dollars. While there has been
recent pressure on the Chinese government to devalue the renminbi against the
U.S. dollar, there can be no assurances that the renminbi will not increase
significantly in value relative to the U.S. dollar in the future.

        Approximately 1.1% and 38.4%, respectively, of the Company's revenues
and expenses are in Hong Kong dollars. The Hong Kong dollar is currently pegged
to the U.S. dollar.

        At the end of 1997 and early 1998, in light of the currency turmoil
experienced by many other Southeast Asian countries, there has been increasing
pressure for a devaluation of the currencies of Hong Kong and China. While the
Governments of Hong Kong and China have indicated they will support their
currencies, possible devaluations may occur. Although the Company expects that
it may initially benefit from such devaluations through their effect of reducing
expenses when translated into U.S. dollars, such benefits could be outweighed if
it causes a destabilizing downturn in China's economy, creates serious domestic
problems in China, increases the Company's borrowing costs in Hong Kong or
creates other problems adversely affecting the Company's business.

        From time to time, the Company attempts to hedge its currency exchange
risk. The Company's financial results have been affected in the past due to
hedging activities and currency fluctuations, resulting in total foreign
exchange gains of approximately $500,000 in 1997, $20,000 in 1996 and $52,000 in
1995. During 1997 and 1996, Nam Tai recorded no gain or loss from hedging
transactions. In 1995 hedging activities resulted in foreign exchange gains of
$52,000. The Company continually reviews its hedging strategy but there can be
no assurance that Nam Tai will not suffer losses in the future as a result of
currency hedging. As of December 31, 1997 the Company was not maintaining a
hedge position in any currency.

        COMPETITION

        Competition in the contract electronic manufacturing industry is
intense. The Company's primary competitors in the manufacture of its principal
product lines of calculators, personal organizers and linguistic products, are
Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co.
Ltd., both of which have moved manufacturing operations that are competitive
with those of the Company to China. While an OEM may prefer its approved
suppliers, management believes that OEMs tend to order from several suppliers in
order to lessen dependence on any one of them. Certain competitors may have
substantially greater technical, financial and marketing resources than the
Company.

        DEPENDENCE ON KEY PERSONNEL

        The Company depends to a large extent on the abilities and continued
participation of Mr. M. K. Koo, its Chairman of the Board, and Mr. Tadao
Murakami, its Vice-Chairman and Chief Executive Officer who is in charge of the
Company's day-to-day manufacturing and marketing operations in China. The loss
of the services of Mr. Koo or Mr. Murakami could have a material adverse effect
on the Company's business.

        ENFORCEABILITY OF CIVIL LIABILITIES

        The Company is a holding corporation organized as an International
Business Company under the laws of the British Virgin Islands and its principal
operating subsidiary is organized under the laws of Hong Kong, where the
Company's principal executive offices are also located. It may be difficult for
investors to enforce judgments against the Company obtained in the United States
based on actions predicated upon civil liability provisions of Federal
securities laws. In addition, all of the Company's officers and most of its
directors reside outside the United States and nearly all of the assets of these
persons and of the Company are located outside of the United States. As a
result, it may not be possible for investors to effect service of process within
the United States upon such persons, or to enforce against the Company or such
persons judgments predicated upon the liability provisions of U.S. securities
laws. The Company has been advised by its Hong Kong counsel and its British
Virgin Islands counsel that there is substantial doubt as to the enforceability
against the Company or any of its directors and officers located outside the
United States in original


                                      -10-


<PAGE>   11
actions or in actions for enforcement of judgments of U.S. courts of liabilities
predicated on the civil liability provisions of Federal securities laws.

        CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN
ISLANDS

        The Company is organized under the laws of the British Virgin Islands.
Pursuant to the Company's Memorandum and Articles of Association and pursuant to
the laws of the British Virgin Islands, the Board of Directors may amend the
Company's Memorandum and Articles of Association without shareholder approval.
This includes, but is not limited to, amendments increasing or reducing the
authorized capital stock of the Company and increasing or reducing the par value
of its shares. In addition, the Board of Directors may approve certain
fundamental corporate transactions, including reorganizations, certain mergers
or consolidations and the sale or transfer of assets, without shareholder
approval. The ability of the Company to amend its Memorandum and Articles of
Association without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of Nam Tai without any further
action by the shareholders including, but not limited to, a tender offer to
purchase the Common Shares at a premium above current market prices.

        Under U.S. law, management, directors and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders which are obviously unreasonable may be declared null and void. The
British Virgin Islands law protecting the interests of minority shareholders
differs from, and may not be as protective of shareholders as, the law
protecting minority shareholders in jurisdictions in the United States. While
British Virgin Islands law does permit a shareholder of a British Virgin Islands
company to sue its directors derivatively, and to sue Nam Tai and its directors
for his or her benefit and the benefit of others similarly situated, the
circumstances in which any such action may be brought and the procedures and
defenses that may be available in respect of any such action may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those rights of shareholders in a company incorporated in a jurisdiction
within the United States. Moreover, lawsuits brought in the British Virgin
Islands appear, from the Company's experience, to take longer to reach interim
or final resolution.

        RISKS OF INTERNATIONAL SALES

        The products of the Company are sold in the United States and
internationally, principally in Japan, Europe and Hong Kong. International sales
may be subject to political and economic risks, including political instability,
currency controls and exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Changes in tariffs or other trade
policies could adversely affect the Company's customers or suppliers or decrease
the cost of products for Nam Tai's competitors relative to such costs for the
Company.

        RISKS OF YEAR 2000 ISSUES

        Many existing computer programs, including some programs used by the
Company, use only two digits to identify a year in the date field. These
programs were designed without considering the impact of the upcoming change in
the century. If not corrected, these computer applications and systems could
fail or create erroneous results by, at, or after the year 2000. Based on the
Company's investigation to date, management does not anticipate that the Company
will incur material operating expenses or be required to incur material costs to
be year 2000 compliant. To the extent the Company's systems are not fully year
2000 compliant, there can be no assurance that potential systems interruptions
or the cost necessary to update software would not have a material adverse
effect on the Company's business, financial condition, results or operations and
business prospects. In addition, in the event that the Company's significant
customers and suppliers do not successfully and timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.


                                      -11-


<PAGE>   12
        EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER

        The Company is a foreign private issuer within the meaning of rules
promulgated under the Exchange Act. As such, and though its Common Shares and
Warrants are registered under Section 12(g) of the Exchange Act, it is exempt
from certain provisions of the Exchange Act applicable to United States public
companies including: the rules under the Exchange Act requiring the filing with
the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations with respect to a security registered under the
Exchange Act; and the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and establishing
insider liability for profits realized from any "short-swing" trading
transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's
equity securities within six months or less). Because of the exemptions under
the Exchange Act applicable to foreign private issuers, shareholders of the
Company are not afforded the same protections or information generally available
to investors in public companies organized in the United States.

        VOLATILITY OF MARKET PRICE OF COMPANY'S SECURITIES

        The markets for equity securities have been volatile and the price of
the Company's Common Shares has been and could continue to be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
news announcements, trading volume, sales of Common Shares by officers,
directors and principal shareholders of the Company, general market trends both
domestically and internationally, currency movements and other factors. These
same factors can be expected to affect the market price of the Company's
Warrants that were publicly issued in late November 1997. Certain events, such
as the issuance of Common Shares upon the exercise of the Warrants or other
outstanding stock options or warrants of the Company could also adversely affect
the prevailing market prices of the Company's securities.


                                      -12-


<PAGE>   13
PRODUCTS

        The following table sets forth the percentage of net sales of each of
the Company's product lines for the years ended December 31, 1997, 1996 and
1995.


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                     ---------------------------
               PRODUCT LINE                           1997      1996       1995
--------------------------------------------         -----      -----      -----
<S>                                                  <C>        <C>        <C>
Electronic calculators                                 52%        35%        30%
Personal organizers and linguistic products            25         36         47
Subassemblies, components and other products           22         28         22
Silk screening                                          1          1          1
                                                     -----      -----      -----
                                                      100%       100%       100%
                                                     =====      =====      =====
</TABLE>


Electronic Calculators

        The Company manufactures a wide range of electronic calculators with a
variety of features. These include calculators designed for different uses,
including mini card, scientific, desk top, hand held, graphical and printer
calculators.

Personal Organizers and Linguistic Products

        The Company produces various types of electronic personal organizers,
particularly telephone directories and business card organizers with scheduler,
clock, memo pad and calculator functions. The linguistic products manufactured
by Nam Tai include electronic spell checkers, dictionaries and language
translators, including some models with voice functions. Linguistic products
generally include a built-in calculator.

Subassemblies, Components and Other Products

        In 1994, the Company began manufacturing and delivering subassemblies
consisting of LSIs bonded on PCBs utilizing advanced technological processes.
These products are used to manufacture components which are incorporated into
such products as electronic toys and games. In 1995, the Company expanded its
subassembly manufacturing business into LCD modules. These subassemblies display
information as part of such products as portable telephones, portable computers
and facsimile machines, and employ the same bonding technologies as are used for
the LSI bonded PCBs. In 1995, the Company delivered a sample run of IC card
balance readers and in 1996 began volume shipments of these products. These
readers are hand-held devices used to check information contained on the IC
cards which are being developed for use by certain major banks in Europe and
North America as an alternative to the use of cash. In 1996, the Company again
expanded the component products it offers by completing development and shipping
control panel modules for microwave ovens. These products are incorporated into
microwave ovens manufactured by a division of Sharp Corporation, which,
management believes, is a leading manufacturer of microwave ovens worldwide.

        In 1997, the Company began producing LCD modules for use in cellular
(mobile) phones for Epson Precision (HK) Ltd. In 1997, the Company also began
using ACF technology in the manufacture of LCD modules and advanced dictionaries
with personal organizers. This new technology is a fine pitch heat sealing
process for the connection of Tape Carrier Package ("TCP") onto the LCD with
Anistropic Conductive Film in between using TAB processing.


                                      -13-


<PAGE>   14
Silk Screening Services

        Through Zastron, the Company provides manufacturing and silk screening
services to customers for plastic parts, PVC products and metal parts. This
service is also supplied to other firms for incorporation into their finished
products.

MANUFACTURING

Quality Control

        The Company maintains strict quality control programs for its products,
including the use of total quality management ("TQM") systems. All incoming raw
materials and components are checked by the Company's quality control personnel.
During the production stage, Nam Tai's quality control personnel check all work
in process at several points in the production process. Finally, after the
assembly stage, the Company conducts random testing of finished products. In
addition, the Company provides office space at its China manufacturing facility
for representatives of its major customers to permit them to monitor production
of their products and to provide direct access to the Company's manufacturing
personnel. Manufactured products have a low level of product defect, as required
by the Company's OEM customers. When requested, Nam Tai provides a limited
warranty of six months to one year for products it manufactures. To date, claims
under the Company's warranty program have been negligible.

        The Company's Hong Kong and China subsidiaries have maintained ISO 9002
Certification since December 1993 and ISO 9001 Certification since February
1996. The "ISO," or International Organization for Standardization, is a
Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. ISO 9000, which was the
first quality system standard to gain worldwide recognition, requires a company
gather, analyze, document, monitor and make improvements where needed. The
Company's receipt of ISO 9001 Certification demonstrates that the Company's
manufacturing operations meet the most demanding of the established world
standards.

        Management believes sophisticated customers are increasingly requiring
their manufacturers to be ISO 9000 certified, and manufacturers that are not so
qualified are increasingly looking to certified manufacturers like Nam Tai
rather than undertaking the expensive and time-consuming process of qualifying
their own operations.

         In late 1997 the Company received confirmation that for a third
consecutive year it has been awarded the prestigious Texas Instruments Supplier
Excellence Award. The award recognizes suppliers who have achieved World class
performance in the following categories, Product Quality, Quality management,
continuous on-time delivery of products to support customer needs, cycle times,
leadership product pricing and value, customer service, technology, and
environmental leadership. To qualify for the award the first time requires very
high scores in each of the categories. To receive the award in subsequent years
requires continuous improvement over the high scores required for the first
year.

Component Parts and Suppliers

        The Company purchases over 300 different component parts from more than
50 major suppliers and is not dependent upon any single supplier for any key
component. The Company purchases components for its electronic products from
suppliers in Japan and elsewhere. Orders for components are based on forecasts
that Nam Tai receives from its OEM customers, which reflect anticipated
shipments during the production cycle for a particular model.

        The major component parts purchased by the Company are ICs or "chips",
LCDs, solar cells, printer heads and batteries. The Company purchases both stock
"off the shelf" chips and custom chips, the latter being the most expensive
component parts purchased by Nam Tai. At the present time, the Company purchases
most of its chips from Toshiba Corporation, Sharp Corporation and certain of
their affiliates, although there are many additional suppliers from which the
Company could purchase chips.


                                      -14-


<PAGE>   15
        LCDs are readily available from many manufacturers and the Company
currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation.
PCBs and other circuit boards are purchased from circuit board manufacturers in
Hong Kong, China and solar cells are purchased from Matsushita Battery
Industrial Company Ltd. Batteries are standard "off the shelf" items, generally
purchased in Hong Kong from agents of Japanese manufacturers. Certain components
may be subject to limited allocation by certain of Nam Tai's suppliers. Although
such shortages and allocations have not had a material adverse effect on the
Company's results of operations, there can be no assurance that any future
allocation or shortages would not have such an effect.

        In an effort to assure an adequate supply of competitively priced
plastic components, the Company maintains an investment position in a Hong Kong
supplier of plastic parts, Deswell Industries, Inc. ("Deswell") (see "Formation
of Strategic Alliance").

CUSTOMERS AND MARKETING

General

        Approximate percentages of net sales to customers by geographic area,
based upon location of product delivery, are set forth below for the periods
indicated:


<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                          -------------------------------------------
GEOGRAPHIC AREAS                             1997            1996             1995
                                          ---------        ---------        ---------
<S>                                       <C>              <C>              <C>
North America                                    49%              34%              30%
Japan                                            23               28               34
Europe                                           15               12               13
Hong Kong                                         7               18               17
Other                                             6                8                6
                                          ---------        ---------        ---------
                                                100%             100%             100%
                                          =========        =========        =========
</TABLE>


        The Company's Hong Kong based management personnel and sales staff are
responsible for marketing products to existing customers as well as potential
new customers. Five of the Company's major customers have done business with the
Company for six years or more, and management believes Nam Tai has a stable
relationship with all of its customers. The Company places great emphasis on
providing quality service to its customers and has, as a result, limited the
number of companies for which it manufactures in an effort to ensure quality
service.


                                      -15-


<PAGE>   16
Major Customers

        The Company's OEM customers include the following entities. The OEM
customers either market Nam Tai's products under their own brand name or, where
no brand name is shown, incorporate the Company's products into their products:


<TABLE>
<CAPTION>
                                      BRAND                                              CUSTOMER
CUSTOMER                              NAME          PRODUCT                              SINCE
--------                              ----          -------                              -----
<S>                                   <C>           <C>                                  <C>
Canon, Inc.                           Canon         Personal organizers and calculators   1988

Casio Computer (Hong Kong) Limited    Casio         Aluminum panels and PVC wallets       1994

Epson Precision (HK) Ltd.             _____         LCD Modules for cellular (mobile)     1997
                                                    phones

Matsushita Battery Industrial Co. Ltd._____         IC card readers                       1994

Nintendo, Inc. (through Sharp Corp.)  _____         Bonding on PCBs                       1994

Optrex Corporation                    _____         Assemblies for LCD modules            1994

Premier Precision Ltd.                Citizen       Silk screening and aluminum panel     1993

Sanyo Electric (H. K.) Ltd.           Sanyo, Casio  Silk screening                        1988

Seiko Instruments Inc.                Seiko, SII    Personal organizers and linguistic    1991
                                                    products

Sharp Corporation                     Sharp         Personal organizers, calculators and  1989
                                                    control panel modules

Texas Instruments Incorporated        Texas         Personal organizers and calculators   1989
                                      Instruments
</TABLE>


        At any given time, different customers account for a significant portion
of Nam Tai's business. Percentages of total sales to customer vary from year to
year and may fluctuate depending on the timing of production cycles for
particular products. Sales to four major customers, Texas Instruments
Incorporated, Sharp Corporation, Nintendo, Inc. (which orders through Sharp
Corporation) and Seiko Instruments Inc., aggregated approximately 89%, 90% and
92% of the Company's total net sales during the years ended December 31, 1997,
1996 and 1995, respectively, as follows:


<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31
                                                       -----------------------------------------------
                      CUSTOMER                               1997            1996             1995
                                                       --------------   -------------    -------------
<S>                                                    <C>              <C>              <C>
Texas Instruments Incorporated                              38.0%           22.3%            13.2%
Sharp Corporation                                           35.3            38.4             47.9
Seiko Instruments Inc.                                       9.7            13.5             13.2
Nintendo, Inc. (through Sharp Corporation)                   6.3            16.1             18.0
                                                       --------------   -------------    -------------
                                                            89.3%           90.3%            92.3%
                                                       ==============   =============    =============
</TABLE>


                                      -16-


<PAGE>   17
        A number of products are made for its major customers such that the
Company is not necessarily dependent on a single product for one customer.
Although management believes any one of the Company's customers could be
replaced with time, the loss of any one of its major customers, particularly one
or more of its top four customers, could have a material adverse effect on the
Company's business. While each of the companies listed above is expected to
continue to be a significant customer, the Company continually tries to lessen
its dependence on large customers through efforts to diversify its customer and
product base. There can be no assurance, however, that such efforts will prove
successful.

        The Company's sales to all of its OEM customers are based on purchase
orders. Except for these purchase orders, the terms of which in a few cases are
supplemented by basic agreements dependent upon the receipt of purchase orders,
Nam Tai has no written agreements with its OEM customers. Normally, the Company
receives letters of credit to cover the next three months of orders and all the
molds, tooling and development charges (including software design) are charged
to the account of OEM customers prior to production. Some customers require COD
terms and request the Company to bear the cost of molds, tooling and development
charges.

        Many of Nam Tai's customers have a relationship which extends for a
number of years and consequently the Company believes its relations with these
customers are good. The Company encourages cooperation and communication with
its most important customers. In particular, senior management includes a team
of Japanese professionals who provide technical experience and work closely with
both the Company's Japanese component suppliers and its Japanese customers.
Management also believes the risk of a sudden withdrawal by any of its major
customers is diminished by: (i) the lengthy production cycle, typically over
three years for each model, which is required to produce the products sold to
customers; (ii) the fact that production cycles may begin while other products
for the same customers are in progress; and (iii) the investment in molds,
tooling and development charges (including software design) which is borne by
some of the OEM customers.

        Sales are predominately denominated in either U.S. dollars or Japanese
yen, and in many cases are covered by standard letters of credit.

Production Scheduling

        Including the development and production periods the typical cycle for a
product to be manufactured and sold to an OEM customer is three to four years.
Initially an OEM customer gathers data from its sales personnel on products for
which there is market interest, including features and unit costs. The OEM then
contacts the Company, and possibly other prospective manufacturers, with
forecasted total production quantities and design specifications or renderings.
From that information, the Company in turn contacts its suppliers and determines
estimated component costs. The Company later advises the OEM of the development
costs, charges (including molds, tooling and development costs such as software
design) and unit cost based on the forecasted production quantities desired
during the expected production cycle. Once the Company and the OEM customer
agree to the Company's quotation for the development costs and the unit cost,
the Company begins the product development. This development period lasts
approximately less than one year, longer if software design is included. During
this time the Company completes all molds, tooling and software required to
manufacture the product with the development costs reimbursed by the customer.
Recently, some of the customers have started to request the Company to bear
responsibility for paying development charges. Upon completion of the molds,
tooling and software, the Company produces samples of the product for the
customer's quality testing, and, once approved, commences mass production of the
product.

        The production period usually lasts approximately 18 to 30 months.
Typically, more advanced products have longer production runs. If total
production quantities change, the OEM customer often provides six months notice
before discontinuing orders for a product. At any point in time the Company is
in different stages of the development and production periods for the various
models it has under development or in production for OEM customers.

        The Company's production is based on forecasts received from OEM
customers covering the next six month period, the first three months of which
are scheduled shipments. These forecasts are reviewed and adjusted, where


                                      -17-


<PAGE>   18
necessary, at the beginning of each month with confirmed orders covering the
first three months. In many cases, confirmed orders are supported by letters of
credit and may not be canceled once confirmed without the customer becoming
responsible for all costs of the remaining components included in inventory for
that order. For the year ended December 31, 1996, the Company elected to
write-off the cost of certain components included in raw material inventory in
the amount of $415,000. These components were not likely to be used in
connection with future production, and due to the passage of time, could not be
charged to customers who would have otherwise been responsible for the cost.
During the years ended December 31, 1997 and 1995 the Company did not suffer a
material loss resulting from the cancellation of an OEM customer confirmed
order.

Transportation

        Since the Company sells its products F.O.B. Hong Kong, its customers are
responsible for the transportation of finished products from Hong Kong to their
final destination. Transportation of components and finished products to and
from Shenzhen is by truck. Component parts purchased from Japan are generally
shipped by air. To date, the Company has not been materially affected by any
transportation problems.


Marketing Plans for China

        The Company has Chinese government approval to sell up to 30% of the
products manufactured and 10% of the parts manufactured by the Company in China.
The Company does not have any immediate plans to re-enter the China market and
make domestic sales, however; the Company continually evaluates economic and
other factors in China to determine whether doing so would be favorable to its
operating results. Recently, the Company applied to the Chinese Government to
cancel this approval.

Formation of Strategic Alliance

        The Company strives to maintain stable sources for quality components it
uses in its manufacturing operations. Suppliers of these components have from
time to time, in periods of short supply, limited allocation of their production
among their customers. The Company believes the formation of strategic alliances
with certain of its suppliers assists the Company to satisfy its OEM customers'
needs for timely delivery of high-quality products and permits Nam Tai to have
greater control over the quality of its suppliers' components.

        Consistent with this strategy, in December 1994, the Company invested
$3,931,000 for approximately 14% of Deswell's then outstanding capital stock. In
July 1995, Deswell completed an initial public offering of its securities in the
United States and the Company's investment was diluted to approximately 10.5% of
Deswell's outstanding shares as at December 31, 1995. In July 1996, the Company
exercised warrants to purchase an additional 12,000 shares of Deswell for
$119,000. As at December 31, 1996, this investment was shown at cost and was
approximately 87% of the market value of Deswell common shares as reported on
The Nasdaq National Market. In 1997, the market price of the Deswell shares rose
substantially on The Nasdaq National Market and the Company elected to sell a
portion of its investment in Deswell, reducing its stake in Deswell to
approximately 2% of its shares reported outstanding at December 31, 1997. The
Company realized a gain of approximately $5.5 million on sales of 390,000
shares. The Company plans to continue to maintain a close working relationship
with Deswell.

TECHNOLOGY DEVELOPMENT

        Between 1984 and 1994, the Company spent an average of approximately
$360,000 per annum on research and development, chiefly to advance manufacturing
technology. During the later half of this period Nam Tai concentrated on its OEM
business and expenditures fell below the average by the end of the period. At
that time the major responsibility of the Company's product design personnel was
limited to the production to the satisfaction of and in accordance with the
specifications provided by OEM customers.


                                      -18-


<PAGE>   19
        Since 1995, the Company has placed increased emphasis on research and
development which provides greater service to OEM customers and assists in
design and development of future products. Research and development expenses
increased significantly to $1,909,000 in 1997 from $950,000 and $945,000 in 1996
and 1995, respectively as some of the Company's customers have requested the
Company to bear responsibility for development charges. Namtek, the Company's
software development subsidiary which began operations in early 1996, accounted
for approximately 14% and 40% of the research and development expenses in 1997
and 1996 respectively and these expenses were substantially recovered from fees
paid by third parties.

COMPETITION

        Competition in the contract electronic manufacturing industry is intense
with numerous other companies in the contract electronic manufacturing industry.
For Nam Tai competition has been limited by OEMs to a small number of companies
who satisfy the requirements to become approved suppliers. The Company's primary
competitors in the manufacture of its principal product lines of calculators,
personal organizers and linguistic products, are Kinpo Electronics, Inc.
(formerly Cal-Comp Electronics, Inc.) and Inventec Co. Ltd., Taiwanese Companies
manufacturing in China. While an OEM may prefer its approved suppliers,
management believes OEMs tend to order from several suppliers in order to lessen
dependence on any one of them. Competition for OEM sales is based primarily on
unit price, product quality and availability, promptness of service, reputation
for reliability and OEM confidence in the manufacturer. The Company believes it
competes favorably in each of these areas.

EMPLOYEES

        At December 31, 1997, Nam Tai employed approximately 2,020 persons on a
full-time basis, of which 1,984 were working in China, 27 in Hong Kong, and nine
in Canada. Of these, approximately 1,756 were engaged in manufacturing, 203 were
engaged in clerical, research and development and marketing positions, and the
balance in supporting jobs such as security, janitorial, food and medical
services. The Company is not a party to any material labor contract or
collective bargaining agreement. The Company has experienced no significant
labor stoppages and believes relations with its employees are satisfactory. The
nature of its arrangement with its manufacturing employees is such that it can
increase or reduce staffing levels without significant difficulty, cost or
penalty.

        The Company maintains an employee incentive compensation program in
China whereby a regular bonus is paid to employees on the employee's return to
work following the Chinese New Year holiday. Management believes this method has
contributed to low employee turnover in the factory.

PATENTS, LICENSES AND TRADEMARKS

        The Company has no patents, licenses, franchises, concessions or royalty
agreements that are material to its business as a whole. Due to rapid
technological change in the products manufactured, the Company does not believe
the absence of patents has had or will have a material impact on its business.

        The Company has obtained trademark registrations in Hong Kong for the
mark "FORTEC" and "SANTRON" in connection with electronic calculators. The
Company has registered the trademark "NAMTAI" in connection with electronic
calculators in Hong Kong, China, the United States, and Canada.


                                      -19-


<PAGE>   20
ITEM 2. PROPERTIES

British Virgin Islands

        As of January 17, 1997, the registered office of the Company was
transferred to McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British
Virgin Islands. Only corporate administrative matters are conducted at this
office, through Nam Tai's registered agent, McW. Todman & Co. The Company
neither owns nor leases property in the British Virgin Islands.

Hong Kong

        In February 1997, the Company leased new premises at Unit 9, 15/F.,
Tower 1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong for a
term of three years. Rental is approximately $17,900 per month for the first two
years, and will be renegotiated in the third year. The Company moved its
principle executive and marketing offices into these new premises in late March
1997.

        The Company owns a residential flat in Hong Kong which was purchased for
total consideration of $1,850,000. This property houses the Vice-Chairman and
Chief Executive Officer of the Company and forms part of his overall
compensation. See Item 11. Compensation of Directors and Officers.

        At the beginning of the year, the Company owned approximately ten acres
of land in Hong Kong which it planned to sell. This land has been held since
1984 and is carried on the books of the Company at its cost of approximately
$523,000. Throughout 1997 the Company disposed of approximately six acres of its
land holdings for net proceeds or $5,750,000 realizing a gain of $5,548,000. The
remaining land which the Company plans to sell continues to be carried on the
books of the Company at its cost of approximately $220,000.

Shenzhen, China

        Nam Tai's manufacturing complex is located in Baoan County, Shenzhen,
China. It includes the original facility and Phase I of the factory expansion
which was completed in May 1996.

        The original facility consists of 150,000 square feet of manufacturing
space under a 15 year lease expiring in 2007. The rental rate is approximately
$38,400 per month due to increase by 20% in August 2002.

        Phase I of the complex expansion is located on 286,600 square feet of
leasehold land adjacent to the original facility. The lease for this land was
purchased for approximately $2,450,000 in 1994 and has a term of 50 years.
Construction of the approximately 437,000 square feet new facility began in
early 1995 and portions were completed in August 1995 to house new factory
employees needed to expand production at that time. Nam Tai's Phase I complex
expansion was completed on schedule in May 1996. The expanded new facility
consists of 160,000 additional square feet of manufacturing space, 39,000 square
feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of
full service cafeteria and recreation facilities and a swimming pool. The total
cost of the new factory complex, excluding land, was approximately $21,800,000.
In 1997, the Company expended approximately $430,000 on factory improvements.

        The Company also has a 26,000 square foot facility in Shenzhen, located
approximately one mile from the manufacturing complex. This contains 28
apartment units which the Company uses to house certain of its factory managers
who are married and have families. The Company purchased this building for
approximately $1,000,000, paying the final instalment in June 1993.

        During 1992, the Company purchased the development rights to a further
parcel of leasehold land in Baoan County, Shenzhen, China. The purchase price
was approximately $343,000. The land area consists of approximately 70,000
square feet of land in a developed area of commercial buildings and residences.
The purchase of the leasehold land provides Nam Tai with the right to use the
land for fifty years. The Company reviewed the construction of a high rise
office building to house its corporate headquarters and subsequently decided to
concentrate on its core contract


                                      -20-


<PAGE>   21
manufacturing business. In January 1997, Nam Tai entered into a Land Development
Agreement with Shenzhen Baoheng (Group) Co. Ltd. which resulted in the sale of
the property for approximately $320,000 with the final payment being received in
January 1998.

Canada

        On November 1, 1995, Nam Tai Canada moved its corporate office to new
leased premises in Vancouver, British Columbia. The Company entered into a lease
for 2,637 square feet of office space at an annual rental of $26,000.
The lease expires in August 1998.

        In 1995, the Company completed construction of a building in Burnaby,
British Columbia, in which it intended to house both manufacturing operations
and its Canadian administration and finance office. The two-story building
consisted of approximately 7,000 square feet of office space and 8,000 square
feet of manufacturing space. Construction was completed in mid 1995 at a cost of
approximately $2,400,000, including the cost of land. The prospects for
manufacturing were re-evaluated and the property was sold in May 1997 for
approximately $1,791,000 resulting in a loss of approximately $558,000.

General

        The Company believes its existing manufacturing and office facilities
are adequate for the operation of its business for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not party to any legal proceedings other than routine
litigation incidental to its business and there are no material legal
proceedings pending with respect to the property of the Company, other than as
described below.

        In September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced
an action against the Company seeking an injunction prohibiting the Company from
proceeding with a rights offering which was contemplated at that time.
Tele-Art's application was based on claims that Nam Tai may have violated
British Virgin Islands and United States law. Among other claims, Tele-Art
asserted that the Company's rights offering was part of a scheme to enrich
directors and management of Nam Tai and dilute the interest of minority
shareholders. Within four days, a temporary injunction obtained by Tele-Art was
discharged, permitting the Company to proceed with, and complete, its rights and
standby offerings in October 1993. Tele-Art is pursuing claims in the British
Virgin Islands against Nam Tai for damages. In November 1993, Tele-Art applied
to the Court to include the Company's directors in the proceedings, and in March
1994 the application was granted. In May 1996, the Court ordered the parties to
make discovery by exchanging lists of documents and to-date this exchange has
not occurred. The Company continues to believe that Tele-Art's claims are
without merit and plans to continue to vigorously defend against them as well as
to seek from Tele-Art and its agents compensation for the damage caused by the
injunction and the proceedings that were brought to obtain it.

        In June 1997 Nam Tai Electronics, Inc. filed a petition with the High
Court of Justice in the British Virgin Islands for the winding up of Tele-Art
Inc. on account of an unpaid judgment debt owing to Nam Tai. A stay on the
winding up proceedings, granted on July 29, 1997, was removed on March 10, 1998.
A date of May 28, 1998 has been fixed for the hearing of the petition. The
judgment debt is not related to other litigation ongoing between the parties in
the British Virgin Islands.


                                      -21-


<PAGE>   22
ITEM 4. CONTROL OF THE COMPANY

        The Company is not directly owned or controlled by another corporation
or by any foreign government. The following table sets forth, as of March 1,
1998, the beneficial ownership of the Company's Common Shares by each person
known by the Company to own beneficially more than 10% of the Common Shares of
the Company outstanding as of such date and by the officers and directors of the
Company as a group.


<TABLE>
<CAPTION>
                                    NUMBER OF
IDENTITY OF                        COMMON SHARES              PERCENT OF
PERSONS OR GROUPS                BENEFICIALLY OWNED             CLASS
-----------------                ------------------           ----------
<S>                              <C>                          <C>
M. K. Koo                          4,330,988(1)                  35.3%
Officers and directors as a        5,159,237(2)                  41.4%
group (six persons)
</TABLE>


        (1)     Includes outstanding shares which are owned by Mr. Koo, 26,667
                shares issuable to Mr. Koo upon exercise of options exercisable
                within 60 days of December 31, 1997 and 926,850 shares issuable
                to Mr. Koo upon exercise of Warrants exercisable within 60 days
                of December 31, 1997 and 293,332 Common Shares and 93,332
                Warrants registered to Mars Yue Koo, Mr. Koo's son, as to which
                Mr. Koo disclaims beneficial ownership.

        (2)     Includes shares owned, an aggregate up to 26,667 shares issuable
                to officers upon exercise of employee options exercisable within
                60 days of December 31, 1997, and 1,219,276 shares issuable to
                officers and directors as a group upon exercise of Warrants
                exercisable within 60 days of December 31, 1997.


                                      -22-


<PAGE>   23
ITEM 5. NATURE OF TRADING MARKET

COMMON SHARES

        The Company's authorized capital consists of 20,000,000 Common Shares,
$0.01 par value per share. The Company's Common Shares are traded on The Nasdaq
National Market under the symbol "NTAIF".

        The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the quarters in the two
year period ended December 31, 1997.


<TABLE>
<CAPTION>
QUARTER ENDED                       HIGH      LOW
                                    ----      ---
<S>                                 <C>      <C>
December 31, 1997                   27.88    14.00

September 30, 1997                  31.63    16.75

June 30, 1997                       16.63     9.63

March 30, 1997                      11.88     8.13

December 31, 1996                   10.63     7.25

September 30, 1996                  11.50     8.63

June 30, 1996                       13.88    10.50

March 31, 1996                      13.13     9.25
</TABLE>


        Of the 11,220,023 Common Shares of the Company outstanding as of
December 31, 1997, approximately 7,953,000 are held by approximately 1,100
holders of record in the United States.

         On December 12, 1996, the Company listed its shares on the Toronto
Stock Exchange under the symbol "NMT." Pursuant to the Company's voluntary
application to delist its Common Shares from the Toronto Stock Exchange, the
Common Shares were delisted effective at the close of business on September 30,
1997.

WARRANTS

         In November 1997, the Company completed a rights and standby offerings
(the "1997 Offerings") selling 2,267,917 and 729,212 units at $17.00 and $16.75
respectively. Each Unit consisted of one Common Share and one Warrant. The
Common Shares and the Warrants included in the Units were separately
transferable immediately.

         Each Warrant is exercisable to purchase one Common Share at a price of
$20.40 per share at any time until November 24, 2000. The Warrants are
redeemable by the Company at $0.05 per Warrant on 30 days' written notice
provided the closing sale price of the Common Shares for 20 consecutive trading
days within the 30-day period preceding the date of the notice of redemption
equals or exceeds $25.50. In the event the Company exercises the right to redeem
the Warrants, a holder will be forced either to sell or exercise the Warrants
within 30 days of the notice of redemption, or accept the redemption price.


                                      -23-


<PAGE>   24
        The Company's Warrants are traded on The Nasdaq National Market under
the symbol "NTAWF".

        The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market for the quarter ended December 31, 1997.


<TABLE>
<CAPTION>
QUARTER ENDED                                      HIGH           Low
-------------                                      ----          ----
<S>                                                <C>           <C>
December 31, 1997                                  4.00          2.50
</TABLE>


        Of the 2,997,129 Warrants of the Company outstanding as of December 31,
1997, approximately 2,684,000 are held by approximately 125 holders of record in
the United States.

ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

        There are no exchange control restrictions on payments of dividends on
the Company's Common Shares or on the conduct of the Company's operations in
Hong Kong, where the Company's principal executive offices are located or the
British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in
which the Company conducts operations may have various exchange controls.
Dividend distribution and repatriation by Nam Tai's subsidiaries in China are
regulated by Chinese laws and regulations. To date these controls have not had a
material impact on the Company's financial results as sales to customers are
generally made in Hong Kong.

        There are no material British Virgin Islands laws which impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest, or other payments to nonresident holders of the Nam Tai's securities.
British Virgin Islands law and the Company's Memorandum and Articles of
Association impose no limitations on the right of nonresident or foreign owners
to hold or vote such securities of the Company.

ITEM 7. TAXATION

        No reciprocal tax treaty regarding withholding tax exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to individuals
and gains realized on the sale or disposition of shares are not subject to tax
as long as the recipient is not a resident of the British Virgin Islands. The
Company is not obligated to withhold any tax for payments of dividends and
shareholders receive gross dividends irrespective of their residential or
national status.


                                      -24-


<PAGE>   25
ITEM 8. SELECTED FINANCIAL DATA

        The selected financial information set forth below is derived from
consolidated financial statements of the Company. The selected information is
qualified in its entirety by reference to, and should be read in conjunction
with, such consolidated financial statements, related notes and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" under
Item 9. in this report.


                         SELECTED FINANCIAL INFORMATION
              (In thousands of U.S. dollars except per share data)


<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                          --------------------------------------------------------------------
                                            1997           1996           1995           1994          1993
                                          --------       --------       --------       --------       --------
<S>                                       <C>            <C>            <C>            <C>            <C>
Income Statement Data(3)
Net sales                                 $132,854       $108,234       $121,240       $ 96,564       $ 70,844

Gross margin                                34,724         22,185         23,152         17,223         14,098

Net income                                  30,839          9,416         11,419          8,099          5,197

Dividends paid                                 786            243            120             65             --

Per share amounts
Basic earnings per share(1)               $   3.70       $   1.17       $   1.42       $   1.17       $   0.90

Diluted earnings per share(2)             $   3.68       $   1.16       $   1.40       $   1.09       $   0.87

Dividend paid                                 0.10           0.03          0.015           0.01             --

Balance Sheet Data(3)
Current assets                            $133,022       $ 46,609       $ 47,011       $ 45,520       $ 31,247

Property, plant and equipment - net         32,442         36,487         27,635         14,624          7,396

Total assets                               167,788         88,391         79,281         66,287         39,530

Current liabilities                         19,552         21,401         19,108         17,838         10,644

Non-current liabilities                         --             --             --             --            609

Shareholders' equity                       148,236         66,990         60,173         48,449         28,162
</TABLE>

-----------

(1) For purposes of calculating basic earnings per share, the weighted average
number of common shares outstanding for the years ended December 31, 1997, 1996,
1995, 1994 and 1993 were 8,324,320, 8,040,497, 8,018,252, 6,934,098 and
5,717,551 respectively.

(2) For purposes of calculating fully diluted earnings per share, the weighted
average number of common shares outstanding for the years ended December 31,
1997, 1996, 1995, 1994 and 1993 were 8,391,290, 8,142,131, 8,171,750, 7,459,570,
and 5,976,136, respectively.

(3) Assets and liabilities are translated into United States dollars using the
appropriate rates of exchange at the balance sheet date. Income and expenses are
translated at the average exchange rate in effect during the year.


                                      -25-


<PAGE>   26
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

        This section contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the section of this Report entitled Item 1.
Description of Business - "Risk Factors". This section should be read in
conjunction with the Company's Consolidated Financial Statements included
elsewhere herein.

RESULTS OF OPERATIONS

General

        The Company derives its revenues principally from manufacturing consumer
electronic products and subassemblies for OEM customers in the electronics
industry. The Company manufactures a broad line of finished products for its OEM
customers, including personal organizers, linguistic products, calculators and
IC card readers. In addition, it manufactures electronic components and
subassemblies.

        During each of the years ended December 31, 1997, 1996 and 1995, sales
to OEM customers accounted for 99% of total net sales. Management believes sales
of personal organizers, linguistic products and calculators to its OEM customers
will continue to be an important line of business for the Company for the next
several years, although Nam Tai is also considering expanding into the
production of communication products in the future. In 1997 calculator sales
increased as a proportion of total sales. Sales of personal organizers,
linguistic products, subassemblies and components and other products declined
marginally. Management expects these products, particularly LCD modules and IC
card readers, to contribute to an increasing proportion of total revenue in the
future. See Item 1. Description of Business -- Customers and Marketing.

        The consumer electronics industry is very competitive and the Company is
continuously under pressure to lower the selling price and therefore reduce the
gross profit margin of its existing product lines. In response to these
pressures, the Company seeks to upgrade its technology and human resources in
order to be capable of manufacturing more advanced and specialized products with
higher unit margins. It also strives to improve customer relations and quality.
The Company believes there is less competition in more advanced and specialized
products due to the complexity involved in manufacturing and the lower number of
direct competitors.

        Since the Company moved its manufacturing operations to China in 1987,
Nam Tai has derived substantially all of its operating income from its China
operations. The Company plans to continue increasing the scope of its operations
and investment in China.

        Under current British Virgin Islands law, Nam Tai is not subject to tax
on its income. Most of the Company's operating profits accrue in China, where
its effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on
assessable profits is currently 16.5% in 1997. The Company receives tax credits
in China related to its reinvestment of profits on China operations, which
reduces the overall tax payable by the Company. See Note 8. of Notes to
Consolidated Financial Statements.

        The Company values its inventory at the lower of cost and market value.
Until March 1997, the Company used a standard cost system to value its
inventory, which is purchased in U.S. dollars, Japanese yen and Hong Kong
dollars. Under this system, the Company revalued its inventory at the end of
each quarter based upon actual costs and the resulting standard cost revaluation
flowed through cost of sales when the inventory was sold. Since March 1997, the
Company has used a cost system which is effectively an actual cost system.


                                      -26-


<PAGE>   27
        The first quarter is typically the Company's slowest sales period
because the Company's factories are closed for two weeks for the Chinese New
Year holidays as is customary in China. The following table sets forth certain
selected operating data for the quarters indicated. This information has been
derived from the unaudited consolidated financial statements of the Company
which, in the opinion of management, contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such
information. These operating results are not necessarily indicative of results
for any future period and results may fluctuate significantly from quarter to
quarter in the future.


<TABLE>
<CAPTION>
                                   FIRST        SECOND         THIRD        FOURTH
                                  QUARTER       QUARTER       QUARTER       QUARTER
                                  -------       -------       -------       -------
                               (In thousands of U.S. dollars except per share data)
                               ----------------------------------------------------
<S>                            <C>             <C>           <C>           <C>
1997
Summary of operations
Net sales                        $31,152       $40,444       $31,245       $30,013
Gross profit                       7,246        12,594         7,536         7,348
Income from operations             3,630         8,005         3,878         3,503
Net income                         5,570         7,763         8,751         8,755
Basic earnings per share         $  0.71       $  0.98       $  1.07       $  0.93
Diluted earnings per share       $  0.71       $  0.97       $  1.06       $  0.93

1996
Summary of operations
Net sales                        $25,357       $24,885       $28,005       $29,987
Gross profit                       5,036         4,907         6,344         5,898
Income from operations             2,007         1,201         2,893         2,432
Net income                         2,333         1,409         3,318         2,356
Basic earnings per share         $  0.29       $  0.17       $  0.41       $  0.30
Diluted earnings per share       $  0.29       $  0.17       $  0.41       $  0.30

1995
Summary of operations
Net sales                        $22,443       $30,065       $35,514       $33,218
Gross profit                       4,256         5,987         6,967         5,942
Income from operations             1,609         2,880         3,736         2,541
Net income                         1,556         3,210         4,637         2,016
Basic earnings per share         $  0.19       $  0.40       $  0.58       $  0.25
Diluted earnings per share       $  0.19       $  0.40       $  0.56       $  0.25
</TABLE>


                                      -27-


<PAGE>   28
        The following table presents selected consolidated financial information
stated as a percentage of net sales for the years ended December 31, 1997, 1996
and 1995:


<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                        -----------------------------------
                                                          1997         1996          1995
                                                        --------     --------      --------
<S>                                                     <C>          <C>           <C>
Net sales                                                  100.0%       100.0%        100.0%
Cost of sales........................................       73.9         79.5          80.9
                                                        --------     --------      --------
Gross profit.........................................       26.1         20.5          19.1
                                                        --------     --------      --------
Costs and expenses:
     Selling, general and administrative expenses....       10.4         11.7           9.4
     Research and development  expenses..............        1.4          0.9           0.8
                                                        --------     --------      --------
                                                            11.8         12.6          10.2
                                                        --------     --------      --------
Income from operations...............................       14.3          7.9           8.9
  Profit (loss) on disposal of fixed assets..........        3.3         (0.1)            0
  Other income - net.................................        5.8          1.1           0.2
  Interest expense...................................        0.0         (0.1)         (0.2)
                                                        --------     --------      --------
Income from consolidated companies
  before income taxes and minority interests.........       23.4          8.8           8.9
                                                        --------     --------      --------
Net income...........................................       23.2%         8.7%          9.4%
                                                        ========     ========      ========
</TABLE>


Year ended December 31, 1997 Compared to Year ended December 31, 1996

        Nam Tai's sales increased by 23% to $132,854,000 for the year ended
December 31, 1997 compared to $108,234,000 for the year ended December 31, 1996
primarily due to increased sales to Texas Instruments Incorporated and Sharp
Corporation.

        The Company's gross profit increased to $34,724,000 for the year ended
December 31, 1997 from $22,185,000 for 1996. The principal reason for the
increase in gross profit was the increase in sales. Also contributing to the
increase in gross profit were improved gross profit margins.

        Nam Tai's gross profit margin improved to 26.1% in 1997 from 20.5% in
1996. The major reasons for the increase in profit margin were (i) the
production of new, higher margin products, (ii) improvements in quality control
which resulted in the reduction of the scrap rate, (iii) lower cost of raw
materials and components, in part the result of the weakness of the Japanese yen
in relation to the U.S. dollar which benefitted the Company as it purchases a
substantial volume of components from Japanese companies which are paid for in
Japanese yen, and (iv) changes in materials used in production to reduce
manufacturing costs.

        Selling, general and administrative expenses increased by 8.6% to
$13,799,000 or 10.4% of sales in the year ended December 31, 1997 from
$12,702,000 or 11.7% of sales for the year ended December 31, 1996. The increase
in absolute dollars principally reflected additional staff and costs required to
provide services to the Company as a result


                                      -28-


<PAGE>   29
of the growth in sales. The decrease in such expenses as a percent of sales was
the result of efficiencies obtained in general administrative expenses as the
Company handled a greater level of activity with available resources.

        Research and development expenses increased to $1,909,000 in 1997 from
$950,000 in 1996 as some of the Company's customers have requested the Company
to bear responsibility for paying development charges. Namtek, the Company's
software-development subsidiary which began operations in early 1996, accounted
for approximately 14% of the research and development expenses in 1997 and 40%
of the research and development expenses in 1996. These expenses were
substantially recovered from fees paid by third parties.

        Loss on disposal of property, plant and equipment was $1,198,000 for the
year ended December 31, 1997 as compared to $123,000 for the year ended December
31, 1996. The loss in 1997 related to the sale of certain of the Company's real
property in Burnaby, British Columbia, Canada and the write-off of equipment.
See the discussion regarding this sale under Liquidity and Capital Resources
below.

        Gain on disposal of property, plant and equipment was $5,548,000 for the
year ended December 31, 1997 as compared to nil for the year ended December 31,
1996. The gain in 1997 principally related to the sale of a portion of the
Company's land holdings in Hong Kong. See the discussion regarding this sale
under Liquidity and Capital Resources below.

        Other income (net) increased to $7,791,000 for the year ended December
31, 1997 from $1,253,000 for the year ended December 31, 1996. This income
consisted of profit on the disposal of investments of $5,488,000, interest
income of $1,847,000 on the Company's cash balances, foreign exchange gains of
$500,000 and miscellaneous income of $650,000 net of bank charges of $343,000
and donations of $351,000.

        Interest expense decreased to $39,000 for the year ended December 31,
1997 from $89,000 for the year ended December 31, 1996 as a result of the
reduction in the Company's utilization of trade credit facilities under its
banking arrangements.

        Income from continuing operations before income tax was $31,118,000 for
the year ended December 31, 1997 as compared to $9,574,000 for the year ended
December 31, 1996. The increase of 225% was primarily due to increased 1997
sales, improved profit margins, and gains on the disposal of investments and
gains of the disposal of fixed assets.

        The income tax expense of $279,000 for the year ended December 31, 1997
compares to an expense of $158,000 for the prior year. The income tax expense in
1997 relates to income taxes on Hong Kong operations and is comparable to 1996
income taxes paid with respect to Hong Kong operations. In 1995, the Company
reversed a provision of $705,000 against income taxes owing from China
operations following receipt of a refund of 1994 income taxes on China
operations. The refund in 1995 from 1994 China income taxes resulted in an
overall recovery of total income taxes paid for 1995. As a result of expected
refunds of income taxes attributable to China operations, the Company made no
provision for such income taxes in 1997, 1996 or 1995. The refund of 1995 income
taxes on China operations was received in 1996 and the refund of 1996 and 1997
income taxes is expected in 1998.

        Net income increased by 228% to $30,839,000 (or 23.2% of sales) for the
year ended December 31, 1997 compared to $9,416,000 (or 8.7% of sales) for the
year ended December 31, 1996. This resulted in diluted earnings per share for
the year ended December 31, 1997 of $3.68 ($3.70 basic) compared to diluted
earnings per share of $1.16 ($1.17 basic) for the year ended December 31, 1996.
The increase in net income and earnings per share is the result of (i) increase
in sales; (ii) higher operating margins; (iii) increases in other income; and
(iv) gains from the disposal of fixed assets.

        The weighted average number of common shares outstanding increased to
8,390,290 for the year ended December 31, 1997 from 8,142,131 for the year ended
December 31, 1996, reflecting the repurchase of 1,000 shares through the
facilities of the Toronto Stock Exchange, the issuance of 386,667 common shares
upon exercise of stock options granted under the Company's stock option plan and
issuance by the Company of 2,997,129 common shares in its 1997 Offerings of
units, which was completed at the end of November 1997. In the 1997 Offerings,
the Company sold a total of 2,997,129 units, each unit consisting of one common
share and one common share purchase warrant.


                                      -29-


<PAGE>   30
Each warrant is exercisable to purchase one common share at a price of $20.40
per share until November 24, 2000. The warrants are redeemable by the Company at
any time at $0.05 per warrant if the average closing sale price of the common
shares for 20 consecutive trading days within 30-day period preceding the date
the notice is given equals or exceeds $25.50 per share.

        On September 9, 1996 Nam Tai announced a repurchase program in
accordance with SEC Rule 10b-18 which was continued on January 10, 1997 through
the facilities of the Toronto Stock Exchange until terminated on May 1, 1997. In
total, from September 9, 1996 to May 1, 1997, 274,500 shares were repurchased,
1,000 of which were repurchased in 1997, at an average price of $9.49 per share.

        On January 13, 1998, the Company announced its intention to repurchase
up to 1,000,000 common shares over the next three months from time to time at
prevailing market prices in accordance with Rule 10b-18. As of March 13, 1998
Nam Tai purchased 251,698 shares at an average price of $15.75.

Year ended December 31, 1996 Compared to Year ended December 31, 1995

        Nam Tai's sales declined by 11% to $108,234,000 for the year ended
December 31, 1996 compared to $121,240,000 for the year ended December 31, 1995.
A reduction in orders from certain OEM customers, particularly Sharp
Corporation, caused the decline in sales. Management believes the reduction in
orders was the result of forecasts of year-end sales levels by certain of the
Company's OEM customers which had caused them to place extensive orders with the
Company for production during the third and fourth quarters of 1995. Lower than
expected year-end 1995 sales by these OEM customers caused them to curtail
orders for production in 1996. The decline in orders from Sharp Corporation
during 1996 did not offset a substantial increase in sales to certain other OEM
customers, particularly Texas Instruments Incorporated.

        The Company's gross profit decreased to $22,185,000 for the year ended
December 31, 1996 from $23,152,000 for 1995. The principal reason for the
decrease in gross profit was the decrease in sales. Also contributing to the
decrease in gross profit was an increase in the cost of sales resulting from a
net write-off of $415,000 of inventory. During the course of the audit of its
financial statements for the year ended December 31, 1996, the Company confirmed
that certain components included in its raw material inventory were not likely
to be used in connection with future production, and due to the passage of time,
could not be charged to customers who would have otherwise been responsible for
the reimbursement of cost. After consulting with its auditors, the Company
elected to write-off the cost of such inventory.

        Despite the reduction in sales and additions to costs of sales, Nam
Tai's gross profit margin improved to 20.5% in 1996 from 19.1% in 1995. This was
principally because of lower component costs and efficiencies implemented to
reduce manufacturing costs. Lower component costs were attributable to the
general decline in the cost of certain components as well as the decline in the
value of the yen relative to the U.S. dollar. The latter benefitted the Company
as it purchases a substantial volume of components from Japanese companies which
are paid in yen.

        Selling, general and administrative expenses increased by 11.0% to
$12,702,000 or 11.7% of sales in the year ended December 31, 1996 from
$11,441,000 or 9.4% of sales for the year ended December 31, 1995. The increase
in absolute dollars was principally the result of costs associated with the
addition of management personnel to the Company's operations in China, Hong Kong
and Canada, plus certain one-time expenses relating to the opening of Phase I of
the Company's the new factory.

        Research and development expenses increased marginally to $950,000 in
1996 from $945,000 in 1995. Namtek, the Company's software-development
subsidiary which began operations in early 1996, accounted for approximately 40%
of the research and development expenses in 1996. These expenses were
substantially recovered from fees paid by third parties.

        Loss on disposal of property plant and equipment was $123,000 in the
year ended December 31, 1996 as compared to zero for the year ended December 31,
1995. The loss in 1996 principally related to $120,000 of leasehold improvements
Nam Tai had made to its former principal executive offices in Hong Kong under a
lease which was


                                      -30-


<PAGE>   31
prematurely terminated as of the end of 1996. See the discussion regarding this
lease, its termination and Nam Tai's relocation of its principal executive
offices in Hong Kong to new premises under Item 9. Liquidity and Capital
Resources below.

        Other income (net) increased to $1,253,000 for the year ended December
31, 1996 from $225,000 for the year ended December 31, 1995. This income
consisted chiefly of interest income of $1,092,000 on the Company's cash
balances and $294,000 of income from dividends paid by Deswell to the Company as
a shareholder. In 1995, other income was reduced as a result of fourth quarter
charges totaling $936,000 in regard to a provision for the Company's
compensation for loss of office arrangement and a one-time bonus to workers.

        Interest expense decreased to $89,000 for the year ended December 31,
1996 from $161,000 for the year ended December 31, 1995 as a result of the
reduction in the Company's utilization of trade credit facilities under its
banking arrangements.

        Income from continuing operations before income tax was $9,574,000 for
the year ended December 31, 1996 as compared to $10,830,000 for the year ended
December 31, 1995. The decrease of 11.6% was primarily due to decreased 1996
sales.

        The income tax expense of $158,000 for the year ended December 31, 1996
compares to a recovery of $589,000 for the prior year. The income tax expense in
1996 relates to income taxes on Hong Kong operations and is comparable to 1995
income taxes paid with respect to Hong Kong operations. In 1995, the Company
reversed a provision of $705,000 against income taxes owing from China
operations following receipt of a refund of 1994 income taxes on China
operations. The refund in 1995 of 1994 China income taxes resulted in an overall
recovery of total income taxes paid for 1995. As a result of expected refunds of
income taxes attributable to China operations, the Company made no provision for
such income taxes in either 1996 or 1995. The refund of 1995 income taxes on
China operations was received in 1996 and the refund of 1996 income taxes from
such operations is expected in 1998.

        Net income decreased by 17.5% to $9,416,000 (or 8.7% of sales) for the
year ended December 31, 1996 compared to $11,419,000 (or 9.4% of sales) for the
year ended December 31, 1995. This resulted in diluted earnings per share for
the year ended December 31, 1996 of $1.16 ($1.17 basic) compared to diluted
earnings per share of $1.40 ($1.42 basic) for the year ended December 31, 1995.
The decrease in net income and earnings per share was in line with the decrease
in sales taking into consideration the higher operating margins.

        The weighted average number of common shares outstanding decreased to
8,142,131 for the year ended December 31, 1996 from 8,171,750 for the year ended
December 31, 1995, reflecting the repurchase by the Company of 273,500 shares
through its share repurchase program in effect from September 11, 1996 to
December 4, 1996.

LIQUIDITY AND CAPITAL RESOURCES

        Current assets increased to $133,022,000 for the year ended December 31,
1997 compared to $46,609,000 for the year ended December 31, 1996. Cash and cash
equivalents, consisting of cash and short term term deposits, increased to
$102,411,000 for the year ended December 31, 1997 versus $17,741,000 for the
year ended December 31, 1996. The principal reasons for the increase in cash and
cash equivalents were: (i) proceeds from the 1997 Offerings; (ii) proceeds from
the sale of land holdings; (iii) cash received from the proceeds of the sale of
a portion of the Company's equity interest in Deswell; (iv) increased interest
income; and (v) increased cash generated from operations resulting from
increased sales and higher profit margins. Accounts receivable at December 31,
1997 increased by 2.4% from the level at December 31, 1996, as a result of
increased sales in 1997. Inventories at December 31, 1997 decreased by 6.4% from
levels at December 31, 1996, reflecting an inventory turnover period of 37 days
in 1997 versus 45 days for 1996.

        Current assets remained relatively stationary at $46,609,000 for the
year ended December 31, 1996 compared to $47,011,000 for the year ended December
31, 1995. Cash and cash equivalents consisting of cash and short term term
deposits, were also relatively stationary at $17,741,000 for the year ended
December 31, 1996 versus $17,362,000 for the year ended December 31, 1995.
Accounts receivable at December 31, 1996 decreased by 6.3% from the level at
December 31, 1995, essentially corresponding to the decrease in sales during
1996. Inventories at December 31, 1996


                                      -31-


<PAGE>   32
increased by 0.8% from levels at December 31, 1995, reflecting an inventory
turnover period of 45 days in 1996 versus 37 days for 1995. The increase in the
inventory turnover was principally the result of Nam Tai's transfer of
responsibility for accounts payable on China deliveries from the Hong Kong
office to personnel at the Company's China factory complex.

        In December 1994, the Company invested $3,931,000 for approximately 14%
of Deswell's then outstanding capital stock. In July 1995, Deswell completed an
initial public offering of its securities in the United States and the Company's
investment was diluted to approximately 10.5% of Deswell's outstanding shares as
at December 31, 1995. In July 1996, the Company exercised warrants to purchase
an additional 12,000 shares of Deswell for $119,000. As at December 31, 1996,
this investment was shown at cost and was approximately 87% of the market value
of Deswell common shares as reported on The Nasdaq National Market at December
31, 1996. In 1997, the market price of the Deswell shares rose substantially on
The Nasdaq National Market and the Company elected to sell a portion of its
investment in Deswell, reducing its stake in Deswell to below 2% of its shares
reported outstanding at December 31, 1997. The Company realized a gain of
approximately $5.5 million on sales of 390,000 shares.

        The decrease in property, plant and equipment -- net to $32,442,000 as
at December 31, 1997 from $36,487,000 as at December 31, 1996 principally
reflects the expenditures of $2,648,000 on new equipment, improvements to the
factory of approximately $430,000 and depreciation of $4,331,000 during 1997.
New equipment purchased in 1997 included three new systems for SMT, 14 sets of
ACF equipment, six sets of fine pitch heat seal machines, and 30 sets of heat
seal machines. In accordance with an expansion schedule, Nam Tai intends to
establish production lines and purchase additional equipment through 1998 as
required by growth in its business. The increase in property, plant and
equipment - net to $36,487,000 for the year ended December 31, 1996 from
$27,635,000 for the year ended December 31, 1995 principally reflects the
expenditure of capital on new plant facilities. A total of $9,904,000 was
expended finalizing the construction of the new manufacturing facility,
resulting in a total expenditure, excluding land and production equipment, of
$21,812,000. In addition, $1,100,000 of new production equipment costs were
incurred during 1996.

        At December 31, 1997, 14.7% and 26.7% of the Company's identifiable
assets were located in Hong Kong and China, respectively, as compared to 28% and
51%, respectively, at December 31, 1996. In 1996, the Company implemented a new
policy of holding surplus funds in Canada. Consequently, cash and cash
equivalents consisting of cash and short term term deposits and representing
93.2% of the total cash and cash equivalents of $102,411,000 was held by the
Company in Canada at December 31, 1997. At December 31, 1996 54% of the
$17,741,000 cash and cash equivalents total was held in Canada. As a result,
identifiable assets in Canada represented 58.6% of total assets at December 31,
1997 compared to 21% of total assets at December 31, 1996.

        In the past, the Company used short-term bank borrowing to assist in
meeting its working capital requirements and to provide funds for investment in
property, plant and equipment. Short-term bank borrowing totaled $273,000 as at
December 31, 1995. During 1997 and 1996, the Company's capital requirements were
financed from internally generated funds and short-term borrowing were reduced
to nil at December 31, 1997 and 1996 respectively. The Company had working
capital of $113,470,000, and $25,208,000 as of December 31, 1997 and 1996
respectively.

        At December 31, 1997, Nam Tai had in place general banking facilities
with four financial institutions aggregating $43,200,000. Such facilities, which
are subject to annual review, permit the Company to obtain overdrafts, lines of
credit for forward exchange contracts, letters of credit, import facilities,
trust receipt financing, shipping guarantees and working capital, as well as
fixed loans. As at December 31, 1997, the Company had utilized approximately
$3,318,000 under such general credit facilities and had available unused credit
facilities of $39,882,000. Interest on notes payable averaged 6.6% per annum
during the year ended December 31, 1997. During the year ended December 31,
1997, the Company paid a total of $39,000 in interest on indebtedness.

        Accounts payable increased by 8.4% to $17,551,000 for the year ended
December 31, 1997 from $16,184,000 for the year ended December 31, 1996,
principally as a result of increases in purchases to support the growth in
sales.

        The Company had no long term debt during either 1997 or 1996.


                                      -32-


<PAGE>   33
        Cash flow from operations for 1997 included net income of $30,839,000
and depreciation of $4,331,000. The net cash decrease due to changes in working
capital (excluding cash and bank borrowings) was $3,629,000.

        During 1997, the Company's net investment activities provided
$12,523,000. This principally includes $3,602,000 invested in equipment and
plant upgrading, proceeds of $7,541,000 from the sale land in Hong Kong and the
Burnaby factory, and proceeds from the sale of Deswell shares of $8,717,000.

        Net cash provided by financing activities was approximately $50,442,000
in 1997. Financing activities during 1997 included the issuances of Common
Shares upon exercise of stock options, share repurchases in 1997, payment of
dividends, and the issuance of 2,997,129 shares and warrants in the 1997
Offerings which was completed at the end of November 1997.

        The Company believes there are no material restrictions (including
foreign exchange controls) on the ability of Nam Tai's non-China subsidiaries to
transfer funds to the Company in the form of cash dividends, loans, advances, or
product/material purchases. With respect to the Company's China subsidiaries,
there are restrictions on the payment of dividends and the removal of dividends
from China due to the Company's reinvestment program for tax purposes. In the
event that dividends are paid by the Company's China subsidiaries, they would
reduce the amount available for the reinvestment program and accordingly taxes
would be payable on the profits not reinvested. The Company believes such
restrictions will not have a material effect on the Company's liquidity or cash
flow.

        In 1994, the Company resumed paying annual dividends, paying
shareholders aggregate dividends of $65,000 ($0.01 per share) in 1994, $120,000
(0.015 per share) in 1995, $243,000 ($0.03 per share) in 1996 and $786,000
($0.10 per share) in 1997. On March 23, 1998 the Company announced that it was
increasing the annual dividend to $0.28 per share to be paid on a quarterly
basis commencing with the first quarter 1998 dividend of $0.07 per share. It is
the current policy of Nam Tai to determine the actual annual amount of future
dividends based upon the Company's growth during the preceding year. Future
dividends will be in the form of cash or stock or a combination of both. There
can be no assurance that any dividend on the Common Shares will be declared, or
if declared, what the amounts of dividends will be or whether such dividends,
once declared, will continue for any future period.

IMPACT OF INFLATION

        Inflation in China and Hong Kong are estimated at 0.8% and 5.7%
respectively. The Company believes inflation has not had a material effect on
its past business. The Company has generally been able to increase the price of
its products in order to keep pace with inflation. The Company believes
increases in labor costs, which represent the most significant component of the
Company's production costs (other than material costs), will not materially
affect its business because of the Company's utilization of less expensive labor
through its operations in China. Labor and overhead expenses related to Nam
Tai's Chinese factory amounted to 10.9% of the Company's total expenses before
operating income during the year ended December 31, 1997 and 8.7% during the
year ended December 31, 1996, the increase principally resulting from the
expansion of the facility.

EXCHANGE RATES

        The Company sells a majority of its products in U.S. dollars and pays
for its material components in Japanese yen, U.S. dollars and Hong Kong dollars.
It pays labor costs and overhead expenses in renminbi, the currency of China
(the basic unit of which is the yuan), Hong Kong dollars and Canadian dollars.
The exchange rate of the Hong Kong dollar to the United States dollar has been
fixed by the Hong Kong government since 1983 at approximately HK$7.80 to $1.00
through the currency issuing banks in Hong Kong and accordingly has not in the
past presented a currency exchange risk.

        At the end of 1997 and early 1998, in light of the currency turmoil
experienced by many other Southeast Asian countries, there has been increasing
pressure for a devaluation of the currencies of Hong Kong and China. While the
Governments of Hong Kong and China have indicated they will support their
currencies, possible devaluations may occur. While the Company expects that it
may initially benefit from such devaluations through their effect of reducing


                                      -33-


<PAGE>   34
expenses when translated into U.S. dollars, such benefits could be outweighed if
it causes a destabilizing downturn in China's economy, creates serious domestic
problems in China, increases the Company's borrowing costs in Hong Kong or
creates other problems adversely affecting the Company's business.

        Canadian operations are relatively small with the percentage of expense
in Canadian dollars representing 1.4% of the total expenses for the year ended
December 31, 1997.

        Management believes the Company's most significant foreign exchange risk
results from material purchases made in Japanese yen. Approximately 23%, 28% and
33% of Nam Tai's material costs have been in Japanese yen during the years ended
December 31, 1997, 1996 and 1995, respectively. Sales made in yen account for
approximately 6.3% of sales for the year ended December 31, 1997, 15% of sales
for 1996 and 18% of sales for 1995. The net currency exposure has increased as a
result of decreased sales in yen not being fully offset by the decrease in
material purchases in yen. The Company also believes its customers will accept
an increase in the selling price of manufactured products if the exchange rate
of the yen appreciates beyond a range of 5% to 10% although such customers may
also request a decrease in selling price in the event of a depreciation of the
Japanese yen. The Company's belief is based on oral agreements with its
principal customers which management believes are customary between OEMs and
their suppliers. However, there can be no assurance that such agreements will be
honored, and the refusal to honor such an agreement in the event of a severe
fluctuation of the yen at a time when sales made in yen are insufficient to
cover material purchases in yen would materially and adversely affect the
Company's operations.

        Effective January 1, 1994, China adopted a floating currency system
whereby the official exchange rate equaled the market rate. Since the market and
official renminbi rates were unified, the value of the renminbi against the
dollar has been stable. This is in spite of significant inflation during 1994
and 1995 which placed devaluation pressure on the renminbi. The Chinese
Government took steps to restrict credit to counteract these pressures, which
taken together with the net inflow of capital into China, resulted in stability
of the currency against the United States dollar.

        The Company believes because its Chinese operations presently are
confined to manufacturing products for export, any devaluation of the renminbi
would benefit Nam Tai by reducing its costs in China provided that action or
other economic pressures do not lead to fundamental changes in the present
economic climate in China.

        Foreign exchange transactions involving the renminbi take place through
the Bank of China or other institutions authorized to buy and sell foreign
exchange or at an approved foreign exchange adjustment center (known as a "swap
center"). In the past, when exchanging Hong Kong dollars for Chinese renminbi,
the Company used a swap center to obtain the best possible rate. When
translating the Chinese company account into U.S. dollars, the Company uses the
same exchange rate as quoted by the Bank of China. Since January 1, 1994, when
China adopted a floating currency system (whereby the official rate is equal to
the market rate), swap centers and banks in China offer essentially the same
market rates, facilitating the exchange of Hong Kong dollars for renminbi. The
adoption of a floating currency system has had no material impact on the
Company.

        On April 1, 1996, new regulations on foreign exchange were implemented
by the government of China. Trade-related foreign exchange receipts and
disbursements are generally not subject to restriction in accordance with the
provisions on settling, selling or buying foreign exchange. Capital account
foreign exchange receipts and disbursements are subject to control, and
organizations in China are restricted in foreign currency transactions which
must take place through designated banks.

        Beginning on November 30, 1996, the Chinese renmimbi has become fully
convertible under the current accounts. There are now no restrictions on
trade-related foreign exchange receipts and disbursements in China.

        The Company may elect to hedge its currency exchange risk when it judges
such action may be required. In an attempt to lower the costs of expenditures in
foreign currencies, management will periodically enter into forward contracts to
buy or sell foreign currency(ies) against the U.S. dollar through one of its
banks. A buy contract allows Nam Tai to buy a targeted currency at a fixed price
for up to one year, but which the Company will normally books forward six
months. Conversely, a sale contract allows the Company to sell the currency at a
fixed price during the contract


                                      -34-


<PAGE>   35
period. The type of contract and currency the Company enters into depends on
whether management believes the currency will rise or fall against the dollar in
the succeeding period. Nam Tai will enter into buy forward contracts if it
appears the currency will rise, and sell forward contracts if it appears the
currency will fall against the dollar. If there is a fluctuation in the two
currencies a gain or loss occurs between the buy forward exchange rate and the
sell forward exchange rate. The Company enters into foreign currency contracts
in order to manage foreign exchange exposures. However, since the foreign
currency contracts are not intended to hedge identifiable foreign currency
commitments, as required by generally accepted accounting principles, the
contracts are marked to the market with any realized and unrealized gains or
losses recorded as other income (loss) - net.

        As at December 31, 1997 and December 31, 1996, the Company had no open
forward contracts while at December 31, 1995 there were open forward contracts
amounting to $60,000. During 1997 and 1996, Nam Tai recorded no gain or loss
from hedging transactions. During 1995 the Company realized a gain of $52,000
from hedging activities. These exchange gains were caused by the difference
between the buy forward rate and sell forward rate for exchange contracts
between the foreign currencies entered into by the Company. The Company is
continuing to review its hedging strategy and there can be no assurance that Nam
Tai will not suffer losses in the future as a result of currency hedging.

YEAR 2000 ISSUE

        Many existing computer programs, including some programs used by the
Company, use only two digits to identify a year in the date field. These
programs were designed without considering the impact of the upcoming change in
the century. If not corrected, these computer applications and systems could
fail or create erroneous results by, at, or after the year 2000. Based on the
Company's investigation to date, management does not anticipate that the Company
will incur material operating expenses or be required to incur material costs to
be year 2000 compliant. To the extent the Company's systems are not fully year
2000 compliant, there can be no assurance that potential systems interruptions
or the cost necessary to update software would not have a material adverse
effect on the Company's business, financial condition, results or operations and
business prospects. In addition, in the event that the Company's significant
customers and suppliers do not successfully and timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.

NEW ACCOUNTING STANDARDS

        In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. The new
rule requires specific disclosure of both diluted earnings per share and
earnings per common share calculated without the dilutive impacts of outstanding
stock options or convertible securities. As disclosed in Note 1(e) of Notes to
Consolidated Financial Statements appearing in Item 18. of this Report, the
Company has adopted this method of accounting for earnings per share.


                                      -35-


<PAGE>   36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Management

        The directors and executive officers of the Company are as follows:


<TABLE>
<CAPTION>
Name                                          Position with Company
----                                          ---------------------
<S>                                           <C>
M. K. Koo                                     Chairman of the Board, Chief Financial Officer and
                                              Director
Tadao Murakami                                Chief Executive Officer, Vice-Chairman and Director
Hidekazu Amishima                             General Manager of NTES
Y.C. Chang                                    Vice General Manager of NTES
Charles Chu                                   Director
Stephen Seung                                 Director
</TABLE>


        M. K. KOO. Mr. Koo has served as Chairman of the Board and a Director of
Nam Tai and its predecessor companies since inception. Mr. Koo assumed the role
as Chief Financial Officer of the Company from April 1997 until January 1998 and
again in February 1998 and to date continues to serve in that position. The
Company is in the process of seeking to recruit a new Chief Financial Officer.
Mr. Koo also serves on the Company's audit committee. Mr. Koo received his
Bachelor of Laws degree from National Taiwan University in 1970.

        TADAO MURAKAMI. Mr. Murakami has served the Company in various executive
capacities since 1984. He became Secretary and a Director of the Company in
December 1989. From June 1989, he has been employed as the President of the
Company's Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as
President and in June 1995 became the Company's Chief Executive Officer. Mr.
Murakami assumed the position of Vice-Chairman in January 1996 and is in charge
of the manufacturing and marketing operations of the Company. Mr. Murakami
graduated from Japan Electronic Technology College in 1964.

        HIDEKAZU AMISHIMA. Mr. Amishima joined the Company in August 1996 as
Vice General Manager and assumed the responsibility for overseeing day-to-day
factory operations of the Company's Shenzhen, China manufacturing complex as
General Manager in November 1996. From 1964 until joining the Company, Mr.
Amishima was employed by Kanda Tsushin Industrial Co. Ltd., a Japanese
electronics manufacturer.

        Y.C. CHANG. Mr. Chang joined the Company in 1991 and assumed the
position of Assistant General Manager of Production before being promoted to
Vice General Manager of NTES in late 1997. Mr. Chang is in charge of production
at the Company's Shenzhen, China manufacturing facility. Prior to joining Nam
Tai he was Assistant Production Manager for Inventec Co. Ltd. and Production and
Quality Control Manager for Supercom Co. Ltd.

        CHARLES CHU. Mr. Chu originally served as Secretary and a Director of
the Company from August 1987 to September 1989. He was reappointed a Director in
December 1992. Since July 1988, Mr. Chu has been engaged in the private practice
of law in Hong Kong. Mr. Chu serves on Nam Tai's audit committee. Mr. Chu
received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from
the University of Hong Kong in 1980 and 1981, respectively.

        STEPHEN SEUNG. Mr. Seung was appointed a Director of Nam Tai in 1995.
Mr. Seung is an attorney and Certified Accountant and has been engaged in the
private practice of law in New York since 1981. Mr. Seung received a B.S. degree
in Engineering from the University of Minnesota in 1969, an M.S. degree in
Engineering from the University of California at Berkeley in 1971, an MBA degree
from New York University in 1973 and a J.D. degree from


                                      -36-


<PAGE>   37
New York Law School in 1979. Mr. Seung serves on Nam Tai's audit committee and
acts as Nam Tai's authorized agent in the United States.

        No family relationship exists among any of the named directors,
executive officers or key employees. No arrangement or understanding exists
between any such director or officer and any other persons pursuant to which any
director or executive officer was elected as a director or executive officer of
the Company. Directors of the Company are elected each year at its annual
meeting of shareholders and serve until their successors take office or until
their death, resignation or removal. Executive officers serve at the pleasure of
the Board of Directors of the Company.

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS

        The aggregate amount of compensation paid by Nam Tai and its
subsidiaries during the year ended December 31, 1997 to all directors and
officers as a group for services in all capacities was approximately $1,697,000.
The Company also provides additional compensation in the form of housing for its
Chief Executive Officer in Hong Kong.

        In August 1990, the Company fixed compensation for loss of office at
$500,000 for Mr. M. K. Koo and $300,000 for Mr. Tadao Murakami. The Company also
fixed the age of retirement for directors at age 65 years. At December 31, 1995,
the Company had accrued the entire $800,000. In March 1996, Mr. Koo agreed to
release the Company from its obligation to pay compensation for loss of office
in exchange for the Company's agreement to reduce the final purchase price of
the property purchased by Mr. Koo from the Company by $450,000. This agreement
was subsequently reversed in July 1997 when Mr. Koo agreed to pay the full
purchase price without applying the $450,000 discount. The amount owing in
respect of the purchase of the property was fully paid by Mr. Koo in August
1997. See Item 13. Interest of Management in Certain Transactions.

        Directors who are not employees of the Company nor any of its
subsidiaries are paid $1,000 per month for services as a director, $750 per
meeting attended in person, and $500 per meeting attended by telephone. In
addition they are reimbursed for all reasonable expenses incurred in connection
with services as a director.

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES

        At March 1, 1998, the Company had outstanding options to purchase an
aggregate of 53,333 Common Shares. These options were granted under the
Company's 1993 stock option plan on January 12, 1996 and vest, in equal annual
installments on January 12, 1998 and January 12, 1999 and are exercisable at
$10.50 per share (which was the fair market value on the date of grant) and
expire on January 11, 2001.

        At March 1, 1998, the Company had outstanding warrants to purchase an
aggregate of 3,127,129 Common Shares. Of these, 2,997,129 warrants which were
issued to the public in the 1997 Offering (the "Warrants") are exercisable to
purchase 2,997,129 Common Shares at $20.40 per share until November 24, 2000 and
130,000 warrants are exercisable beginning November 30, 1998 to purchase 130,000
Units (consisting of one Common Share and one Warrant) at $20.40 per Unit until
November 24, 2000.

ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

        In January 1995, Nam Tai entered into an arrangement with Mr. M. K. Koo,
Chairman of the Company, requiring him to purchase a residential property in
West Vancouver, British Columbia, Canada no later than December 31, 1995 at the
higher of book value or market value. At December 29, 1995, Mr. Koo purchased
the property for book value in the amount of $2,620,445 delivering to the
Company a promissory note due on December 31, 1997. In March 1996, Mr. Koo
agreed to release the Company from its obligation to pay $500,000 compensation
for loss of office in exchange for the Company's agreement to reduce the final
purchase price of the property purchased by Mr. Koo from the Company by
$450,000. This agreement was subsequently reversed in July 1997 when Mr. Koo
agreed to pay the full purchase price without the $450,000 discount. In August
1997, Mr. Koo paid the promissory note in full to the Company.

        It is the Company's policy that all future transactions between the
Company and any interested director or executive officer be approved by a
majority of the disinterested directors and on terms no more favorable than
would be available from an independent third party.


                                      -37-


<PAGE>   38
                                     PART II

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

         Not Applicable.

                                    PART III

ITEM 15. DEFAULTS UPON SENIOR SECURITIES

         Not Applicable.

ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S
         SECURITIES

         Not Applicable.

                                     PART IV

ITEM 17. FINANCIAL STATEMENTS

        Not Applicable.

ITEM 18. FINANCIAL STATEMENTS

        The following financial statements are filed as part of this Report:


<TABLE>
<CAPTION>
                                                                                Page No.
                                                                                --------
<S>                                                                             <C>
Report of Independent Accountants ..........................................       39

Consolidated Statements of Income for the years ended December 31, 1997,
  December 31, 1996 and December 31, 1995 ..................................       40

Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 ..       41

Consolidated Statement of Changes in Shareholders' Equity for the years
  ended December 31, 1997, December 31, 1996 and December 31, 1995 .........       42

Consolidated Statements of Cash Flows for the years ended December 31, 1997,
  December 31, 1996 and December 31, 1995 ..................................       43

Notes to Consolidated Financial Statements .................................       44
</TABLE>


        All other schedules for which provisions made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.


                                      -38-


<PAGE>   39

PRICE WATERHOUSE [LOGO]

REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NAM TAI ELECTRONICS, INC.


We have audited the accompanying consolidated balance sheets of Nam Tai
Electronics, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
related statements of income, shareholders' equity, and cash flows for each of
the three years ended December 31, 1997, 1996 and 1995. 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 auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Nam Tai Electronics, Inc. and
its subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1997, 1996 and 1995 in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 1(e) to the consolidated financial statements, the Company
changed its method of accounting for earnings per share in 1997.





/s/PRICE WATERHOUSE
----------------------
PRICE WATERHOUSE
Certified Public Accountants

HONG KONG
March 11, 1998


                                      -39-


<PAGE>   40
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. Dollars except share data)


<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                      -------------------------------------------
                                                        1997             1996             1995
                                                      ---------        ---------        ---------
<S>                                                   <C>              <C>              <C>
Net sales                                             $ 132,854        $ 108,234        $ 121,240
Cost of sales                                            98,130           86,049           98,088
                                                      ---------        ---------        ---------

 Gross profit                                            34,724           22,185           23,152
                                                      ---------        ---------        ---------

Costs and expenses
 Selling, general and
  administrative expenses                                13,799           12,702           11,441
 Research and development expenses                        1,909              950              945
                                                      ---------        ---------        ---------

                                                         15,708           13,652           12,386
                                                      =========        =========        =========

Income from operations                                   19,016            8,533           10,766

 Net gain/(loss) on disposal of property, plant
   and equipment                                          4,350             (123)               0
 Other income - net (Note 5)                              7,791            1,253              225
 Interest expense                                           (39)             (89)            (161)
                                                      ---------        ---------        ---------

Income from consolidated companies
 before income taxes                                     31,118            9,574           10,830

Income tax (expense) benefit (Note 8)                      (279)            (158)             589
                                                      ---------        ---------        ---------

Net income                                            $  30,839        $   9,416        $  11,419
                                                      =========        =========        =========



Basic earnings per share                              $    3.70        $    1.17        $    1.42
                                                      =========        =========        =========

Diluted earnings per share                            $    3.68        $    1.16        $    1.40
                                                      =========        =========        =========
</TABLE>


See accompanying notes to consolidated financial statements.


                                      -40-


<PAGE>   41
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars)


<TABLE>
<CAPTION>
                                                     As at December 31,
                                                 --------------------------
                                                   1997             1996
                                                 ---------        ---------
<S>                                              <C>              <C>
ASSETS

Current assets:
  Cash and cash equivalents (Note 12)            $ 102,411        $  17,741
  Accounts receivable, net                          16,985           16,589
  Inventories (Note 3)                               9,838           10,511
  Prepaid expenses and deposits                      3,788            1,768
                                                 ---------        ---------

      Total current assets                         133,022           46,609
                                                 ---------        ---------
Long term investments (Note 4)                         833            4,050
                                                 ---------        ---------

Property, plant and equipment, at cost              44,295           46,751
    Less: Accumulated depreciation and
     amortization                                  (11,853)         (10,264)
                                                 ---------        ---------

                                                    32,442           36,487
                                                 ---------        ---------
Other assets                                         1,491            1,245
                                                 ---------        ---------

Total assets                                     $ 167,788        $  88,391
                                                 =========        =========


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Notes payable                                  $   1,814        $   5,186
  Accounts payable and accrued expenses             17,551           16,184
  Income taxes payable                                 187               31
                                                 ---------        ---------

      Total current liabilities                     19,552           21,401
                                                 ---------        ---------
Shareholders' equity:
  Common shares (Note 13)                              112               78
  Additional paid-in capital                        80,044           28,572
  Stock option grants (Note 13(b))                       0              305
  Retained earnings                                 68,050           38,007
  Foreign currency translation adjustment               30               28
                                                 ---------        ---------

Total shareholders' equity                         148,236           66,990
                                                 =========        =========

Total liabilities and shareholders' equity       $ 167,788        $  88,391
                                                 =========        =========
</TABLE>


Commitments and contingencies (Note 11)

See accompanying notes to consolidated financial statements.


                                      -41-


<PAGE>   42
NAM TAI ELECTRONICS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars except shares outstanding)


<TABLE>
<CAPTION>
                                     Common Shares                                                        Foreign        Total
                                -------------------------    Additional      Stock                        Currency       Share-
                                   Shares                     Paid-in        Option        Retained      Translation    holders'
                                Outstanding     Amount        Capital        Grants        Earnings      Adjustment      Equity
                                -----------   -----------   -----------    -----------    -----------    -----------   -----------
<S>                             <C>           <C>           <C>            <C>            <C>            <C>           <C>
Balance at December 31, 1994      7,993,027   $        80   $    27,645    $      631    $    20,118     $       (25)  $    48,449

Shares issued on exercise
  of options                         70,150            --           537          (161)            --              --           376

Options cancelled                        --            --            --            (3)            --              --            (3)

Net income                               --            --            --            --         11,419              --        11,419

Dividends                                --            --            --            --           (120)             --          (120)

Foreign currency translation
  adjustments                            --            --            --            --             --              52            52
                                -----------   -----------   -----------    -----------    -----------   ------------   -----------

Balance at December 31, 1995      8,063,177   $        80   $    28,182   $       467    $    31,417    $         27   $    60,173

Share buy-back program             (273,500)           (3)           --            --         (2,583)             --        (2,586)

Shares issued on exercise
  of options                         47,550             1           390           (91)            --              --           300

Options cancelled                        --            --            --           (71)            --              --           (71)

Net income                               --            --            --            --          9,416              --         9,416

Dividends                                --            --            --            --           (243)             --          (243)

Foreign currency translation
  adjustments                            --            --            --            --             --               1             1
                                -----------   -----------   -----------   -----------    -----------    ------------   -----------

Balance at December 31, 1996      7,837,227   $        78   $    28,572   $       305    $    38,007    $         28   $    66,990


Share buy-back program               (1,000)           --            --            --            (10)             --           (10)

Shares issued on exercise
  of options                        386,667             4   $     3,802          (305)            --              --         3,501

Shares and warrants issued
  on rights offering              2,997,129            30        47,670            --             --              --        47,700

Net income                               --            --            --            --         30,839              --        30,839

Dividends                                --            --            --            --           (786)             --          (786)

Foreign currency translation
  adjustments                            --            --            --            --             --               2             2
                                -----------   -----------   -----------    ----------    -----------    ------------   -----------

Balance at December 31, 1997     11,220,023   $       112   $    80,044   $         0    $    68,050    $         30   $   148,236
                                ===========   ===========   ===========   ===========    ===========    ============   ===========
</TABLE>



See accompanying notes to consolidated financial statements.


                                      -42-


<PAGE>   43
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)



<TABLE>
<CAPTION>
                                                                                      Year ended December 31,
                                                                            -------------------------------------------
                                                                              1997             1996             1995
                                                                            ---------        ---------        ---------
<S>                                                                         <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                $  30,839        $   9,416        $  11,419
                                                                            ---------        ---------        ---------
Adjustments to reconcile net income to net cash provided by operating
 activities:
   Depreciation                                                                 4,331            2,675            2,560
   (Gain)/loss on disposal of property,
    plant and equipment                                                        (4,350)             123               --
   (Gain)/loss on disposal of long term investment                             (5,488)              --               --
   Changes in current assets and liabilities:
    (Increase) decrease in accounts receivable                                   (396)           1,110           (5,955)
    Decrease (Increase) in inventories                                            673              (86)          (1,338)
    (Increase) in prepayments and deposits                                     (2,020)            (243)            (517)
    (Decrease) in notes payable                                                (3,372)            (134)            (797)
    Increase in accounts payable and
     accrued expenses                                                           1,330            2,776            2,876
    Increase (decrease) in income taxes payable                                   156              (76)            (519)
                                                                            ---------        ---------        ---------
   Total adjustments                                                           (9,136)           6,145           (3,690)
                                                                            ---------        ---------        ---------
Net cash provided by operating activities                                      21,703           15,561            7,729
                                                                            ---------        ---------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from disposal of property,
  plant and equipment                                                           7,666               --               12
 Proceeds from disposal of long term investment                                 8,717               --               --
 Additions to property, plant and equipment                                    (3,602)         (11,650)         (13,696)
 Additions to other assets                                                       (246)            (541)            (379)
Purchase of long term investment                                                  (12)            (119)              --
                                                                            ---------        ---------        ---------

Net cash provided by (used in) investing activities                            12,523          (12,310)         (14,063)
                                                                            ---------        ---------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Share buy-back program                                                           (10)          (2,583)              --
(Decrease) in short-term bank loans and overdraft                                  --             (273)            (290)
 Additional shares issued, net                                                  3,501              226              373
 Proceeds from shares issued on rights offering, net                           47,700               --               --
 Dividends paid                                                                  (749)            (243)            (120)
                                                                            ---------        ---------        ---------

Net cash provided by (used in) financing activities                            50,442           (2,873)             (37)
                                                                            ---------        ---------        ---------
Foreign currency translation adjustments                                            2                1               52
                                                                            ---------        ---------        ---------
Net increase (decrease) in cash and cash equivalents                           84,670              379           (6,319)

Cash and cash equivalents at beginning of period                               17,741           17,362           23,681
                                                                            ---------        ---------        ---------

Cash and cash equivalents at end of period                                  $ 102,411        $  17,741        $  17,362
                                                                            =========        =========        =========

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:

Interest paid                                                               $      39        $      89        $     186
                                                                            =========        =========        =========

Income taxes paid                                                           $     123        $     234        $      47
                                                                            =========        =========        =========
</TABLE>


See accompanying notes to consolidated financial statements.


                                      -43-


<PAGE>   44
NAM TAI ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)

1    Summary of Significant Accounting Policies

     a      Basis of presentation

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

     b      Principles of consolidation

            The consolidated financial statements include the financial
            statements of Nam Tai Electronics, Inc. ("the Company") and all its
            subsidiaries. Intercompany accounts and transactions have been
            eliminated on consolidation. Minority interest is recognized in
            respect of earnings of less than wholly-owned subsidiaries. The
            details of the Company's subsidiaries are described in Note 9.

     c      Inventories

            Inventories are stated at the lower of cost and market value. Cost
            is determined on the first-in, first-out basis.

     d      Property, plant and equipment

            Property, plant and equipment are recorded at cost and include
            interest on funds borrowed to finance construction in Canada.
            Capitalized interest was nil, $12,650 and $12,650 for the years
            ended December 31, 1997, 1996 and 1995 respectively. The cost of
            major improvements and betterments is capitalized whereas the cost
            of maintenance and repairs is expensed in the year incurred.

            All land in Hong Kong is owned by the government which leases the
            land at public auction to nongovernmental entities. With the
            exception of those leases which expire after June 30, 1997 and
            before June 30, 2047 with no right of renewal, the Sino-British
            Joint Declaration extends the terms of all currently existing land
            leases for another 50 years beyond June 30, 1997. Thus, all of the
            Company's land leaseholds in Hong Kong are considered to be
            purchased long-term assets. The cost of such land leaseholds is
            amortized on the straight-line basis over the respective terms of
            the leases.

            All land in the PRC is owned by the government. The government in
            the PRC, according to PRC law, may sell the right to use the land
            for a specified period of time. Thus all of the Company's land
            purchases in the PRC are considered to be land leaseholds and are
            amortized on the straight line basis over the respective term of the
            right to use the land.

            Depreciation and amortization rates computed using the straight-line
            method are as follows:


<TABLE>
<CAPTION>
            Classification                                                              Rate
            --------------                                                              ----
<S>                                                                                    <C>
            Long-term leasehold buildings ...........................................  2%-4.5%
            Freehold buildings    ...................................................  3.3%-4%
            Furniture and fixtures...................................................  18%-25%
            Machinery and equipment..................................................  9%-25%
            Molds and tools       ...................................................  18%-25%
            Motor vehicles        ...................................................  18%-25%
            Leasehold improvements...................................................  18%-33%
</TABLE>


                                      -44-


<PAGE>   45
1    Summary of Significant Accounting Policies (cont'd)

     d      Property, plant and equipment (cont'd)

            In 1996, management reassessed the useful life of certain plant and
            equipment assets and changed their estimated useful life from four
            to five years effective January 1, 1996. As a result of this change,
            the 1997 and 1996 depreciation expenses were lower by $835,000 and
            $860,000 respectively, than they would have been had an estimated
            life of four years been used.

     e      Per share amounts

            In 1997, the Company adopted Statement of Financial Accounting
            Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128 requires
            that entities present basic and diluted per share amounts for income
            from continuing operations and net income on the face of the
            statement of income, regardless of the magnitude of their
            difference.

            Basic earnings per share is computed by dividing income available to
            common shareholders by the weighted average number of common shares
            outstanding during the period.

            Diluted earnings per share gives effect to all dilutive potential
            common shares outstanding during the period. The weighted average
            number of common shares outstanding is adjusted to include the
            number of additional common shares that would have been outstanding
            if the dilutive potential common shares had been issued.

            In computing the dilutive effect of potential common shares, the
            average stock price for the period is used in determining the number
            of treasury shares assumed to be purchased with the proceeds from
            exercise of warrants and options.

     f      Foreign currency translations

            The financial statements have been stated in United States dollars,
            the official currency used in the British Virgin Islands (the
            Company's place of incorporation). Although the operating facilities
            are located in Hong Kong and the PRC, the United States dollar is
            the currency of the primary economic environment in which the
            Company's consolidated operations are conducted. The exchange rate
            between the Hong Kong dollar and the United States dollar has been
            pegged (HK$7.80 to US$1.00) since October 1983.

            All transactions in currencies other than functional currencies
            during the year are translated at the exchange rates existing on the
            respective transaction dates. Related accounts payable or receivable
            existing at the balance sheet date denominated in currencies other
            than functional currencies are translated at the exchange rates
            existing on that date. Exchange differences arising are dealt with
            in the statement of income.

            The financial statements of all subsidiaries with functional
            currencies other than the United States dollar are translated in
            accordance with Statement of Financial Accounting Standards No. 52,
            "Foreign Currency Translation". With the exception of Namtai
            Electronic (Shenzhen) Co. Ltd. ("NTES"), Zastron Plastic & Metal
            Products (Shenzhen) Ltd. ("Zastron") and Shenzhen Namtek Co. Ltd.
            ("Namtek"), which are companies incorporated in the PRC, all assets
            and liabilities are translated at the rates of exchange ruling at
            the balance sheet date and all income and expense items are
            translated at the average rates of exchange over the year. Also with
            the exception of the abovenamed PRC companies, all exchange
            differences arising from translation of subsidiaries' financial
            statements are dealt with as a separate component of equity.


                                      -45-


<PAGE>   46
1    Summary of Significant Accounting Policies (cont'd)

     f      Foreign currency translations (cont'd)

            As NTES, Zastron and Namtek act as production centers for the
            Company, the Company controls their operations and the majority of
            their transactions are made in Hong Kong dollars. Therefore, the
            Hong Kong dollar has been determined to be the functional currency
            of NTES, Zastron and Namtek. Accordingly, all monetary assets and
            liabilities are translated at the rates of exchange ruling at the
            balance sheet date, non-monetary assets and liabilities are
            translated at the historical rate, all income and expense items are
            translated at the average rates of exchange over the year and all
            translation adjustments resulting from the conversion of NTES,
            Zastron and Namtek's financial statements to Hong Kong dollars are
            taken to the statement of income. Exchange rates used to translate
            and remeasure transactions and balances of NTES, Zastron and Namtek
            are the rates quoted by the Bank of China.

     g      Income taxes

            The Company provides for all taxes based on income whether due at
            year end or estimated to become due in future periods but based on
            profits earned to date. However, under the current tax legislation
            in the People's Republic of China ("PRC"), the Company has
            reasonable grounds to believe that income taxes paid in respect of
            any year would be refunded after the profits earned in that year are
            reinvested in the business by way of subscription for new shares.
            Accordingly, any PRC tax paid during the year is recorded as an
            amount receivable at year end when an application for reinvestment
            of profits has been filed and refund is expected. Deferred income
            taxes are provided to recognize the effect of the difference between
            the financial statement and income tax bases of measuring assets and
            liabilities.

     h      Staff retirement plan costs

            The Company's contributions to the staff retirement plan (Note 6)
            are charged to the statement of income as incurred.

     i      Deferred Compensation Arrangement costs

            For the years 1990 through 1994, the liability relating to the
            Deferred Compensation Arrangement (Note 7) was provided ratably over
            the future employment periods of the beneficiaries of the plan until
            their dates of retirement or earlier departure from the Company. At
            December 31, 1995, the remaining balance was fully provided for.
            Consequently, for the years ended December 31, 1997 and 1996, no
            further provision was made.

     j      Cash and cash equivalents

            Cash equivalents include certificates of deposit having a maturity
            date of three months or less upon acquisition.

     k      Currency contracts

            The Company enters into forward currency contracts in its management
            of foreign currency exposures. Since the forward currency contracts
            are not intended to hedge identifiable foreign currency commitments,
            generally accepted accounting principles require that the contracts
            are marked to market with the net realized or unrealized gains or
            losses recognized in other income. (Note 2).

     l      Long term investments

            Long term investments are stated at the lower of cost and market
            value.


                                      -46-


<PAGE>   47
1    Summary of Significant Accounting Policies (cont'd)

     m      Research and development costs

            Research and development costs relating to the development of new
            products and processes, including significant improvements and
            refinements to existing products are expensed as incurred. The
            amounts charged against income were $1,909,168, $949,941 and
            $945,333 for the years ended December 31, 1997, 1996 and 1995
            respectively.

     n      Stock options

            SFAS No. 123 allows companies which have stock-based compensation
            arrangements with employees to adopt a new fair-value basis of
            accounting for stock options and other equity instruments, or to
            continue to apply the existing accounting rules under Accounting
            Principles Board ("APB") Opinion No. 25, "Accounting for Stock
            Issued to Employees", but with additional financial statement
            disclosure. The Company plans to continue to account for stock-based
            compensation arrangements under APB Opinion No. 25 and provides
            additional disclosure to that effect in Note 13 (b).

2    Financial Instruments

     The Company's financial instruments that are exposed to concentrations of
     credit risk consist primarily of its cash equivalents, term deposits and
     trade receivables.

     The Company's cash and cash equivalents and term deposits are high-quality
     deposits placed with banking institutions with high credit ratings. This
     investment policy limits the Company's exposure to concentration of credit
     risk.

     The trade receivable balances largely represent amounts due from the
     Company's principal customers who are generally international organizations
     with high credit ratings. Letters of credit are the principal security
     obtained to support lines of credit or negotiated contracts from a
     customer. As a consequence, concentrations of credit risk are limited.

     All of the Company's significant financial instruments at December 31, 1997
     are reported in current assets or current liabilities in the consolidated
     balance sheet at carrying amounts which approximate their fair value.

     From time to time, the Company hedges its currency exchange risk, which
     primarily arises from materials purchased in currencies other than the
     United States dollar, through the purchase and sale of forward currency
     contracts. Such contracts typically allow the Company to buy or sell
     currency at a fixed price for up to one year, but the Company normally
     books forward six months. At December 31, 1997 and at December 31, 1996,
     there were no open forward currency contracts.

3    Inventories

     Inventories consist of (in thousands):


<TABLE>
<CAPTION>
                                                         As at December 31,
                                                   -----------------------------
                                                     1997                  1996
                                                   -------               -------
<S>                                                <C>                   <C>
Finished goods .....................               $ 1,241               $   576
Work-in-progress ...................                 1,399                 2,548
Raw materials ......................                 7,198                 7,387
                                                   -------               -------
                                                   $ 9,838               $10,511
                                                   =======               =======
</TABLE>


4    Long Term Investments

     In December 1994, the Company purchased 14.04% or 477,370 of the
     outstanding common shares of Deswell Investment Holdings Limited
     ("Deswell"), a supplier of plastic parts to the Company, for a total
     consideration of $3,931,284. In 1995, Deswell changed its name to Deswell
     Industries, Inc. and completed its initial public offering which reduced
     the Company's ownership to approximately 10.5% at December 31, 1995. In
     July 1996, the Company elected to exercise warrants which increased its
     holdings by 12,000 shares to 489,370 or 10.6% of the outstanding common
     shares of Deswell Industries, Inc. In February 1997, the Company elected to
     exercise warrants which increased its holdings by 1,152 shares to 490,522
     or 10.2% of the outstanding common shares of Deswell at March 31, 1997.

     During the year ended December 31, 1997, the Company sold 390,000 shares of
     Deswell  realizing a net gain of $5,487,675.


                                      -47-


<PAGE>   48
5    Other Income - Net

     Other income - net consists of (in thousands):


<TABLE>
<CAPTION>
                                                                           As at December 31,
                                                                --------------------------------------
                                                                  1997           1996            1995
                                                                --------       -------         -------
<S>                                                             <C>            <C>             <C>
     Foreign exchange gains...................................   $  500        $    20         $    52
     Interest income..........................................    1,847          1,092           1,548
     Bank charges.............................................     (343)          (406)           (490)
     Gain on disposal of investments..........................    5,488              -               -
     Offering costs written off...............................        -              -            (334)
     Full provision for Deferred Compensation
      Arrangement (Note 7)....................................        -              -            (560)
     Special bonus............................................        -              -            (376)
     Donations................................................     (351)
     Miscellaneous income ....................................      650            547             385
                                                                --------       -------         -------
                                                                $  7,791       $ 1,253         $   225
                                                                ========       =======         =======
</TABLE>


6    Staff Retirement Plan

     The Company maintains staff retirement plans (defined contribution pension
     plans) which cover certain of its employees. The cost of the Company's
     contributions amounted to $55,050, $92,399 and $80,545 for the years ended
     December 31, 1997, 1996 and 1995 respectively.

7    Deferred Compensation Arrangement

     In August 1990, the Company agreed to provide compensation in the event of
     loss of office, for whatever reason, for two officers. The amount of
     compensation to be ultimately provided is $500,000 for Mr. M. K. Koo, the
     Chairman of the Company and $300,000 for Mr. T. Murakami, the Vice Chairman
     and Chief Executive Officer of the Company. A provision of $40,000 was made
     in each of the years ended December 31, 1995 and 1994. At December 31,
     1995, the balance of the deferred compensation arrangement, which amounted
     to $560,000, was provided for. For the year ended December 31, 1996,
     pursuant to an agreement between Mr. Koo and the Company, Mr. Koo elected
     to apply an amount of $450,000 payable to him under the provision for
     compensation for loss of office against an amount receivable from him. In
     July 1997, Mr. Koo reversed the election and retained his right to receive
     the sum of $500,000 for the compensation of loss of office.(Note 10).

8    Income Taxes

     Under the current British Virgin Islands law, the Company's income is not
     subject to taxation. Subsidiaries, primarily operating in Hong Kong and the
     PRC, are subject to income taxes as described below.

     The provision for current income taxes of the subsidiaries operating in
     Hong Kong has been calculated by applying the current rate of taxation of
     16.5% (1996 and 1995: 16.5%) to the estimated taxable income earned in or
     derived from Hong Kong during the period.

     Deferred tax, where applicable, is provided under the liability method at
     the rate of 16.5% (1996 and 1995: 16.5%), being the effective Hong Kong
     statutory income tax rate applicable to the ensuing financial year, on the
     difference between the financial statement and income tax bases of
     measuring assets and liabilities.

     The basic corporate tax rate for Foreign Investment Enterprises ("FIE's")
     in the PRC, such as the Company's subsidiary companies NTES, Zastron and
     Namtek, is currently 33% (30% state tax and 3% local tax). However, because
     NTES, Zastron and Namtek are located in the designated Special Economic
     Zone ("SEZ") of Shenzhen and are involved in production operations, they
     qualify for a special reduced state tax rate of 15%.


                                      -48-


<PAGE>   49
     In addition, the local tax authorities in the Shenzhen SEZ are not
     currently assessing any local tax. Since NTES, Zastron and Namtek have
     agreed to operate for a minimum of ten years in the PRC, a two year tax
     holiday from the first profit making year is available, following which in
     the third through fifth years there is a 50% reduction to 7.5%. In any
     event, for FIE's such as NTES, Zastron and Namtek which export 70% or more
     of the production value of their products, a reduction in the tax rate is
     available; in all cases apart from years in which a tax holiday is
     available, there is an overall minimum tax rate of 10%. In 1990 and 1991,
     NTES qualified for a tax holiday; tax was payable at the rate of 7.5% on
     the assessable profits of NTES in 1992, 1993 and 1994, and 10% in 1995,
     1996 and 1997. In 1992 and 1993, Zastron qualified for a tax holiday; tax
     was payable at the rate of 7.5% on the assessable profits of Zastron in
     1994, 1995 and 1996 and 15% in 1997. In 1996 and 1997, Namtek qualified for
     a tax holiday.

     Notwithstanding the foregoing, an FIE whose foreign investor directly
     reinvests by way of subscription for new shares its share of profits
     obtained from that FIE in establishing or expanding an export-oriented or
     technologically advanced enterprise in the PRC for a minimum period of five
     years may obtain a refund of the taxes already paid on those profits. The
     Company has gained reasonable assurance through previous experience that
     when profits are reinvested, PRC taxes paid are refunded in full.

     NTES qualified for such refunds of its 1994 and 1995 taxes as a result of
     reinvesting its profits earned in those years. Zastron qualified for such
     refund of its 1994 and 1995 taxes as a result of reinvesting its profits in
     those years.

     The tax refunds received or receivable during the three years ended
     December 31, 1995, 1996 and 1997 were as follows (in thousands):


<TABLE>
<CAPTION>
                            Taxation                                   Date
              Company         Year          Paid       Refunded       Received
              -------         ----          ----       --------       --------
<S>                         <C>         <C>            <C>            <C>
              NTES            1994      $    714       $    714       Aug 1995
                              1995      $    919       $    919       Dec 1996
                              1996      $    835              -       Awaiting refund
                              1997      $  1,725              -       Application for reinvestment of
                                                                      profits in progress

              Zastron         1994      $     68       $     68       Aug 1995
                              1995      $     31       $     31       Aug 1997
                              1996      $      -              -
                              1997      $      2              -
</TABLE>


     The current and deferred components of the income tax (expense) benefit
     appearing in the statements of income are as follows (in thousands):


<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                        ---------------------------
                                                                         1997       1996      1995
                                                                        -----      -----      -----
<S>                                                                     <C>        <C>        <C>
            Current tax...............................................  $(279)     $(158)     $589
            Deferred tax..............................................      -          -         -
                                                                        -----      -----      ----
                                                                        $(279)     $(158)     $589
                                                                        =====      =====      ====
</TABLE>


     A reconciliation of the income tax (expense) benefit to the amount computed
     by applying the current tax rate to the income from continuing operations
     before taxes in the consolidated statements of income is as follows (in
     thousands except tax rate):


<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                  ----------------------------------
                                                                    1997          1996        1995
                                                                  --------       -------     -------
<S>                                                               <C>            <C>         <C>
     Profit before tax........................................... $ 31,118       $ 9,574     $10,830

     PRC minimum tax rate........................................     10.0%         10.0%       10.0%

     Income tax expense at PRC minimum
      tax rate on income from
      consolidated companies before
      income taxes ......................................         $ (3,112)      $  (957)    $(1,083)
</TABLE>


                                      -49-


<PAGE>   50

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                  ----------------------------------
                                                                    1997          1996        1995
                                                                  --------       -------     -------
<S>                                                               <C>            <C>         <C>
     Effect of difference between Hong Kong
      and PRC tax rates applied to Hong Kong
      income.................................................         (375)         (180)       (265)

     Effect of Canadian net (losses) profits for
      which no income tax (benefit) expense is required
      or (available) payable.....................................      811          (384)       (323)

     Effect of PRC tax concessions, giving rise to
      no PRC tax liability.......................................    1,712         1,034         974

     Reversal of subsidiary's tax provision......................        0             0         314
     Income tax refund...........................................        0             0         391
     Tax (expense)benefit arising from
     items which are not assessable
     for tax purposes:
      Gain on disposal of lands in Hong Kong.....................      899             0           0
     Other.......................................................     (214)          329         581
                                                                  --------       -------     -------
                                                                  $   (279)      $  (158)    $   589
                                                                  ========       =======     =======
</TABLE>


     No income tax arose in the United States of America in any of the periods
     presented.

     In prior years, the purchase cost of patents and trademarks and certain
     expenses incurred by a subsidiary, Nam Tai Supplies Ltd., were claimed as
     tax deductible expenses. The Hong Kong Inland Revenue Department ("IRD")
     has taken issue on the deductibility of these expenses and issued revised
     assessments to recover taxes of $995,000. In January 1994, the IRD
     petitioned the Hong Kong court to wind up the subsidiary for non-payment of
     assessed taxes. A winding up order was made on March 9, 1994, and the
     Official Receiver was appointed as liquidator. In 1995, the tax provision
     of $314,000 for this subsidiary was reversed as the subsidiary is in the
     process of liquidation pursuant to the winding up order and is insolvent.

9    Investment in Subsidiaries


<TABLE>
<CAPTION>
                                                                                       Percentage of
                                                                                         Ownership
                                                                                     ------------------
     Consolidated                               Country of        Principal          As at December 31,
     Subsidiaries                               Incorporation     Activity           1997          1996
     ------------                               -------------     ---------          ----          ----
<S>                                             <C>               <C>               <C>            <C>
     Nam Tai Electronic &
       Electrical Products
       Ltd.                                     Hong Kong         Trading            100%          100%

     Nam Tai Electronics
       (Canada) Ltd.                            Canada            Services           100%          100%

     Namtai Electronic (Shenzhen)
       Co. Ltd.                                 PRC               Manufacturing      100%          100%

     Zastron Plastic & Metal
        Products (Shenzhen) Ltd.                PRC               Manufacturing      100%          100%

     Shenzhen Namtek
       Co. Ltd.                                 PRC               Software
                                                                  Development        100%          100%
</TABLE>


     Retained earnings are not restricted as to the payment of dividends except
     to the extent dictated by prudent business practices. The Company believes
     that there are no material restrictions, including foreign exchange
     controls, on the ability of its non-PRC subsidiaries to transfer surplus
     funds to the Company in the form of cash dividends, loans, advances or
     purchases. With respect to the Company's PRC subsidiaries, there are
     restrictions on the purchase of materials by these companies, the payment
     of dividends and the removal of dividends from the PRC. In the event that
     dividends are paid by the Company's PRC subsidiaries, such dividends will
     reduce the amount of reinvested profits (Note 8) and accordingly, the
     refund of taxes paid will be reduced to the extent of tax applicable to
     profits not reinvested. However, the Company believes that such
     restrictions will not have a material effect on the group's liquidity or
     cash flows.


                                      -50-


<PAGE>   51
10   Related Party Transactions

     In June 1995, the Company completed the construction of a residential
     property pursuant to an agreement dated January 13, 1995. As the property
     had not been sold to a third party by December 31, 1995, Mr. M.K. Koo, the
     Chairman of the Company, purchased the property for book value of
     $2,620,000 being the higher of the market value and book value of the
     property as required by the contract. At December 31, 1995 this amount was
     included in accounts receivable. In March 1996, Mr. Koo elected to apply
     $450,000 available from his compensation for loss of office against the
     account receivable. The balance outstanding of the accounts receivable at
     December 31, 1996 amounting to $2,120,000 was repayable by Mr. Koo on or
     before December 31, 1997. In July 1997, Mr. Koo reversed his election and
     retained his rights to receive the sum of $500,000 for compensation for
     loss of office and agreed to pay the full purchase price of $2,620,000 for
     the property. This amount was paid by Mr. Koo in full in August 1997.

11   Commitments and Contingencies

     a      Pursuant to a land purchase and development agreement dated August
            17, 1992 between NTES and Baoan County City Development Foundation,
            NTES was required to construct a multi-purpose business building of
            seven floors or more in Baoan City, Shenzhen, PRC. At December 31,
            1997, the Company had invested $452,000 in land purchase cost and in
            capitalized design fees, net of accumulated amortisation of $36,000
            in respect of the land use right. In January 1998, the Company
            disposed of its interest in the property for $320,000, realizing a
            loss on disposal of $132,000. The loss on disposal has been
            accounted for in the statement of income for the year ended December
            31, 1997.

     b      Lease commitments

            At December 31, 1997, there were annual commitments under operating
            leases which relate to land and buildings as follows (in thousands):


<TABLE>
<CAPTION>
<S>                                                                   <C>
            - 1998 .................................................  $   808
            - 1999 .................................................      523
            - 2000 .................................................      443
            - 2001 .................................................      443
            - 2002 and thereafter...................................    2,731
                                                                      -------
                                                                      $ 4,948
                                                                      =======
</TABLE>


     c      The Company has been advised that Tele-Art, Inc., a shareholder of
            the Company, intends to pursue claims in a court in the British
            Virgin Islands for damages allegedly suffered as a result of the
            rights offering completed in 1993. Management believes that the
            claim is without merit and will vigorously defend it and believes
            that the outcome of the case will not have a significant effect on
            the financial statements.

12   Banking Facilities

     General banking facilities amounted to $43,200,000 at December 31, 1997,
     (December 31, 1996 - $49,200,000), with interest charged based on the Hong
     Kong prime rate for Hong Kong dollar transactions and banks' cost of funds
     rate for transactions in other currencies (effectively 9.50% and 1.625%,
     respectively at December 31, 1997).

     The total amount of banking facilities utilized as at December 31, 1997 was
     $3,318,000 (December 31, 1996: $7,629,000).

     The notes payable, which include trust receipts and shipping guarantees,
     may not agree to utilized banking facilities due to a timing difference
     between the Company receiving the goods and the bank issuing the trust
     receipt to cover financing of the purchase. The Company recognizes the
     outstanding letter of credit as a note payable when the goods are received,
     even though the bank may not have issued the trust receipt. However, this
     will not affect the total bank facility utilization, as an addition to
     trust receipts will be offset by a reduction in the same amount of
     outstanding letters of credit.


                                      -51-


<PAGE>   52

<TABLE>
<CAPTION>
                                                           As at December 31,
                                                         ----------------------
                                                          1997            1996
                                                         -------        -------
<S>                                                      <C>            <C>
Outstanding letters of credit ....................       $ 2,429        $ 3,688
Usance bills pending maturity ....................           889            619
Trust receipts and shipping guarantees ...........             0          3,322
                                                         -------        -------

Total banking facilities utilized ................         3,318          7,629

Less:
  Outstanding letters of credit ..................        (2,429)        (3,688)
Plus:
  Goods received but trust receipts not issued
    by the bank ..................................           925          1,245
                                                         -------        -------
Notes payable per balance sheets .................       $ 1,814        $ 5,186
                                                         =======        =======
</TABLE>


     The trust receipts normally have terms from 90 to 100 days. The interest
     rate for the above facilities is normally prime plus 3/4% for all
     currencies.

     In the third quarter of 1995, the Company's bankers agreed to release the
     charges on previously pledged assets and to provide banking facilities with
     only the corporate guarantee from Nam Tai Electronics, Inc., the parent
     company, and its undertaking not to pledge any assets to any banks without
     the prior consent of the Company's bankers. For the years 1996 and 1997,
     banking facilities bore the corporate guarantee of Nam Tai Electronics,
     Inc.

13   Common Shares

     a      Authorized shares

            In July 1994, the Board of Directors increased the number of
            authorized common shares to 20,000,000. The par value of each common
            share is $0.01.

     b      Stock options

            In August 1993, the Board of Directors approved a stock option plan
            which authorized the issuance of 300,000 vested options to key
            employees of the Company at an exercise price of $5.35. The options
            expire in September 1998. Because the option's exercise price was
            less than the market value of the Company's common shares on the
            date of grant, the Company recorded compensation expense of $690,000
            reflecting the excess of the fair value of the underlying stock over
            the exercise price. In December 1993 and January 1996, the option
            plan was amended and the maximum number of shares to be issued
            pursuant to the exercise of options granted was increased to 650,000
            and 1,000,000 respectively.

            A summary of stock option activity is as follows:


<TABLE>
<CAPTION>
                                                      Number of          Option Price
                                                       Options           Per Share
                                                       -------           ---------
<S>                                                   <C>                <C>
Outstanding at December 31, 1994 .........            615,250            $5.35 & $11.00
Reissued .................................             40,750            $11.00
Exercised ................................            (70,150)           $5.35
Cancelled ................................            (25,000)           $11.00
Reissued .................................             10,000            $11.375
                                                      -------

Outstanding at December 31, 1995 .........            570,850            $5.35 & $11.00
                                                                         & $11.375
Exercised ................................            (47,550)           $5.35 & $11.00
Granted ..................................            170,000            $ 10.50
Cancelled ................................           (156,000)           $5.35 & $11.00
                                                      -------
</TABLE>


                                      -52-


<PAGE>   53
<TABLE>
<CAPTION>
                                                      Number of          Option Price
                                                       Options           Per Share
                                                       -------           ---------
<S>                                                  <C>                <C>
Outstanding at December 31, 1996 .........            537,300            $5.35, $10.50,
                                                                         $11.00 &$11.375
Exercised ................................           (386,667)           $5.35, $10.50,
                                                                         $11.00 & $11.375
Granted ..................................                  0
Cancelled ................................            (97,300)           $5.35, $10.50,
                                                                                & $11.00
                                                      -------
Outstanding at December 31, 1997 .........             53,333            $10.50
                                                      =======
</TABLE>

            Had compensation cost for the Company's stock option plan been
            determined based on the fair value at the grant dates for awards
            under those plans consistent with the method of SFAS No. 123, the
            Company's net income and earnings per share would have been reduced
            to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                        1997           1996
                                                       ------         -----
<S>                                                    <C>            <C>
Net Income           As Reported ................      30,839         9,416
                     Pro forma ..................      30,583         9,081

Earnings per share   As Reported ................        3.68         1.16
                     Pro forma ..................        3.65         1.12
</TABLE>

            There were no stock options granted during the year. The weighted
            average fair value of options granted during 1996 was $4.52, using
            the Black-Scholes option-pricing model based on the following
            assumptions:

<TABLE>
<CAPTION>
                                                                 $11.00           $11.375     $10.50
                                                                 Options          Options     Options
                                                                 -------          -------     -------
<S>                                                              <C>              <C>         <C>
                      Risk-free interest rate                    6.0%             5.4%        5.3%
                      Expected life                              8/01/98          12/01/98    1/12/00
                      Expected volatility                        44.0%            49.0%       48.0%
                      Expected dividends                         .030             .030        .030
</TABLE>

     c      Share buy-back program

            During 1997, the Company bought back 1,000 common shares of its
            outstanding capital stock at an average price of $9.49 per share.

     d      Shares and warrants issued on rights offering

            On October 10, 1997, the Company distributed to each holder of its
            common shares nontransferable rights (the "Rights") to subscribe for
            one unit for every three common shares owned at that date (referred
            to as the "Rights Offering"). The subscription price was $17.00 per
            unit. Each unit consisted of one common share and one redeemable
            common share purchase warrant. Each warrant is exercisable to
            purchase one common share at a price of $20.40 per share at any time
            from the date of their issuance until November 24, 2000. The common
            shares and the warrants included in the units will be separately
            transferable immediately on issuance of the common shares. The
            warrants are redeemable by the Company at any time at $0.05 per
            warrant if the average closing sale price of the common shares for
            20 consecutive trading days within the 30-day period preceding the
            date the notice is given equals or exceeds $25.50 per share. The
            terms of the Rights Offering include an oversubscription privilege
            available to shareholders subject to certain conditions and a
            Standby Purchase Commitment made by the Standby Underwriters to the
            Rights Offering, subject to the terms and conditions of a Standby
            Underwriting Agreement made between the Company and the Standby
            Underwriters, and which includes purchase by the Standby
            Underwriters of Units not subscribed for by shareholders of the
            Company. Pursuant to the Rights Offering, 3,000,000, units were
            offered, with a subscription expiry date of November 24, 1997.

            During the period of the Rights Offering, shareholders of the
            Company exercised Rights to purchase a total of 2,267,917 units at
            $17.00 per unit and the Standby Underwriters purchased a total of
            729,212 units at a price of $16.75, being the lower of the
            subscription price per unit and the closing bid price per common
            share as reported on The Nasdaq National Market on the subscription
            expiry date, as provided for under the Standby Underwriting
            Agreement. Gross proceeds raised amounted to $50,768,890 and net
            proceeds raised after deduction of expenses associated with the
            Rights Offering amounted to $47,700,000.

                                      -53-
<PAGE>   54
14    Earnings Per Share

      The calculations of basic earnings per share and diluted earnings per
      share are in accordance with SFAS No. 128 and are computed as follows (in
      thousands except shares and per share amounts):


<TABLE>
<CAPTION>
                                                Year ended December 31, 1997
                                           -------------------------------------
                                                                         Per Share
                                            Income           Shares        Amount
                                           ---------       ---------       -----
<S>                                        <C>             <C>           <C>
Basic earnings per share
Income available to
  common shareholders ..............       $  30,839       8,324,320       $3.70

Effect of dilutive securities
Stock options ......................               0          66,970
                                           ---------       ---------

Diluted earnings per share
Income available to
  common shareholders ..............       $  30,839       8,391,290       $3.68
                                           =========       =========
</TABLE>


     Warrants to purchase 2,997,129 shares of common shares at $20.40 were
     outstanding at December 31, 1997 but were not included in the computation
     of diluted earnings per share because the redeemable price of the warrants
     was greater than the average market price of the common shares during the
     relevant period.


<TABLE>
<CAPTION>
                                               Year ended December 31, 1996
                                           -------------------------------------
                                                                         Per Share
                                             Income         Shares        Amount
                                           ---------       ---------       -----
<S>                                        <C>             <C>           <C>
Basic earnings per share
Income available to
  common shareholders ..............       $   9,416       8,040,497       $1.17

Effect of dilutive securities
Stock options ......................               0         101,634
                                           ---------       ---------

Diluted earnings per share
Income available to
  common shareholders ..............       $   9,416       8,142,131       $1.16
                                           =========       =========
</TABLE>



<TABLE>
<CAPTION>
                                                Year ended December 31, 1995
                                           -------------------------------------
                                                                        Per Share
                                            Income           Shares       Amount
                                           ---------       ---------       -----
<S>                                        <C>             <C>          <C>
Basic earnings per share
Income available to
  common shareholders ..............       $  11,419       8,018,252       $1.42

Effect of dilutive securities
Stock options ......................               0         153,498
                                           ---------       ---------

Diluted earnings per share
Income available to
  common shareholders ..............       $  11,419       8,171,750       $1.40
                                           =========       =========
</TABLE>


                                      -54-


<PAGE>   55
15   Business Segment Information

     The Company operates principally in the consumer electronic products
     industry. The following is a summary of sales, income from continuing
     operations, assets by geographic area, sales by geographic area and sales
     to major customers (in thousands):


<TABLE>
<CAPTION>
                                                             Year ended December 31,
                                                  -------------------------------------------
                                                     1997             1996             1995
                                                  ---------        ---------        ---------
<S>                                               <C>              <C>              <C>
Net sales from operations within Hong Kong:
   Unaffiliated customers                         $ 131,052        $ 105,170        $ 119,417
   Related parties                                       --               --               --
   Intersegment sales                                    --               --              353
                                                  ---------        ---------        ---------
                                                    131,052          105,170          119,770
  People's Republic of China:
   Unaffiliated customers                             1,802            3,064            1,445
   Intersegment sales                               123,115           95,669          112,804
                                                  ---------        ---------        ---------
                                                    124,917           98,733          114,249
  Canada:
   Unaffiliated customers                                --               --              378
Intersegment eliminations                          (123,115)         (95,669)        (113,157)
                                                  ---------        ---------        ---------

Total net sales                                   $ 132,854        $ 108,234        $ 121,240
                                                  =========        =========        =========

Income (loss) from operations within:
- People's Republic of China                         17,229           10,339           10,448
- Hong Kong                                           5,501            2,921            4,196
- Canada                                              8,109           (3,844)          (3,225)
                                                  ---------        ---------        ---------

Net income                                        $  30,839        $   9,416        $  11,419
                                                  =========        =========        =========


Identifiable assets by geographic area:
- People's Republic of China                         44,781           44,975           42,416
- Hong Kong                                          24,738           24,564           25,505
- Canada                                             98,269           18,852           11,360
                                                  ---------        ---------        ---------

  Total assets                                    $ 167,788        $  88,391        $  79,281
                                                  =========        =========        =========
</TABLE>


     Intersegment sales arise from the transfer of finished goods between
     subsidiary companies operating in different areas. These sales are
     generally at estimated market prices.


<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                                  -------------------------------------------
                                                       1997             1996             1995
                                                  ---------        ---------        ---------
<S>                                               <C>              <C>              <C>
Net sales to customers by geographic area:
 - North America                                  $  65,432        $  36,595        $  36,730
 - Japan                                             30,972           30,483           41,532
 - Europe                                            19,105           13,187           16,003
 - Hong Kong                                          9,835           19,404           20,544
 - Other                                              7,510            8,565            6,431
                                                  ---------        ---------        ---------

Total net sales                                   $ 132,854        $ 108,234        $ 121,240
                                                  =========        =========        =========

The Company had sales to four major customers as follows:

Customer
A                                                 $  50,510        $  24,138        $  16,022
B                                                    46,868           41,569           58,124
C                                                    12,851           14,642           15,962
D (through customer B)                                8,409           17,395           21,805
                                                  ---------        ---------        ---------

                                                  $ 118,638        $  97,744        $ 111,913
                                                  =========        =========        =========
</TABLE>


                                      -55-


<PAGE>   56
16    Comparative Amounts

      Certain comparative amounts have been reclassified to conform to the
      current year presentation.


                                      -56-


<PAGE>   57
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

        (a) Financial Statements.  See list under Item 18. of this Report.

        (b) Exhibits. The following documents are filed as exhibits herewith,
unless, otherwise specified and are incorporated herein by this reference:


<TABLE>
<CAPTION>
Exhibit
Number                                 Exhibit
------                                 -------
<S>      <C>
2.1      Letter of Agreement dated August 15, 1997 renewing existing facilities
         with Credit Commercial De France.

2.2      Letter of Agreement dated 9 January 1998 renewing banking facilities
         with The Hongkong and Shanghai Banking Corporation Limited.

2.3      Standby Underwriting Agreement, dated October 30, 1997 between Nam Tai
         Electronics, Inc. and Joseph Charles & Associates, Inc.

2.4      Representative's Warrant Agreement, dated December 2, 1997 between Nam
         Tai Electronics, Inc. and Joseph Charles & Associates, Inc.

2.5      Counsel's Warrant Agreement, dated December 2, 1997 between Nam Tai
         Electronics, Inc. and Freshman, Marantz, Orlanski, Cooper & Klein, a
         law corporation

2.6      Letter of Agreement dated August 29, 1996 revising banking facilities
         with The Sanwa Bank Limited Filed as Exhibit 2.5 to the Company's Form
         20-F for the fiscal year ended December 31, 1996 and hereby
         incorporated by reference.

2.7      Letter of Agreement dated September 18, 1996 making available credit
         facilities with Banque Worms Hong Kong Bank. - Filed as Exhibit 2.6 to
         the Company's Form 20-F for the fiscal year ended December 31, 1996 and
         hereby incorporated by reference.

2.8      Contract of Purchase and Sale dated December 29, 1995 with Mr. Koo
         regarding residential property in West Vancouver - Filed as Exhibit 2.8
         to the company's Form 20-F for the fiscal year ended December 31, 1995
         and hereby incorporated by reference.

3.1      Diagram of the Company's operating subsidiaries. See page 4 of this
         Report.
</TABLE>


                                      -57-


<PAGE>   58
                                   SIGNATURES

        Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned thereunto duly authorized.


                                            NAM TAI ELECTRONICS, INC.



Date:  March 27, 1998                       By: /s/ M. K. Koo
                                            ------------------------
                                            M. K. Koo
                                            Chairman of the Board


                                      -58-


<PAGE>   59
PRICE WATERHOUSE [LOGO]

CONSENT OF PRICE WATERHOUSE

We hereby consent to the incorporation of our report dated March 11, 1998
relating to the consolidated financial statements of Nam Tai Electronics, Inc.
(the "Company") appearing in this annual report on Form 20-F into (1) the
Registration Statement on Form S-8 of the Company (file no. 33-73954); (2) the
Registration Statement on Form S-8 of the Company (file no. 333-27761); and (3)
the Registration Statement on Form F-3 of the Company (file no. 333- 36135). We
hereby further consent to the reference to us under the heading "Experts" in the
Prospectus included as part of the aforementioned Registration Statement on Form
F-3 (file number 333-36135).


/s/ PRICE WATERHOUSE
----------------------------
PRICE WATERHOUSE
Certified Public Accountants

HONG KONG, March 27, 1998