<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)
[x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE 
      ACT OF 1934

      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       or

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

      For the transition period from __________ to __________

                         Commission File Number 0-26742

                                GT BICYCLES, INC.
           (Exact name of the registrant as specified in its charter)

           Delaware                                              04-3210830
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                2001 East Dyer Road, Santa Ana, California 92705
                    (Address of principal executive offices)

                                 (714) 481-7100
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                 Not Applicable

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    Common Stock, par value $0.001 per share

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

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

As of March 17, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the Registrant was approximately $39,724,000
based on the closing sales price of $6.13 per share of the Common Stock as of
such date, as reported by The Nasdaq National Market.

As of March 17, 1998, there were 9,828,801 shares of the registrant's Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed in
connection with the solicitation of proxies for its 1998 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12, and 13 of Part
III hereof.
<PAGE>   2
                                     PART I


ITEM 1.  BUSINESS

GENERAL

GT Bicycles, Inc. (the "Company" or "GT Bicycles") is a leading designer,
manufacturer and marketer of mid- to premium-priced mountain and juvenile BMX
bicycles sold under the Company's brand names. The Company's wholly-owned
Riteway Products and Caratti distribution network ("distribution network") is a
leading distributor of the Company's bicycles, parts and accessories, as well as
parts and accessories of other manufacturers, to independent bicycle dealers.
The Company currently offers 127 bicycle models, including 30 mountain bicycle
models, 65 juvenile BMX bicycle models, and 32 road and specialty bicycle
models. In addition to the Company's broad line of bicycle models, the
distribution network offers over 4,500 different parts and accessories, ranging
from bicycle frames and componentry to helmets, locks and apparel. The Company's
distribution network also provides responsive customer service and dealer
support, prompt delivery, high order fill-rates, timely warranty service, dealer
training, a comprehensive parts and accessory catalog and thorough product and
market knowledge. Accordingly, the Company believes that its distribution
network provides national purchasing power, financial stability and integrated
inventory management, together with the service of a regional distributor.

The Company was incorporated on August 6, 1993 and had no operations for the
period August 6, 1993 to November 12, 1993. On November 12, 1993, the Company
acquired all of the outstanding common stock of GT Bicycles California, Inc. and
subsidiaries (collectively, the "Predecessor") in a purchase of common stock.
The Company's name was changed from GT Holdings, Inc. to GT Bicycles, Inc. and
the Predecessor's name was changed from GT Bicycles, Inc. to GT Bicycles
California, Inc. on August 11, 1995. The Company has eleven operating
subsidiaries: GT Bicycles California, Inc., GT BMX Products, Inc., Riteway
Distributors, Inc., Riteway Distributors Central, Inc., Riteway Products East,
Inc., Riteway Products North Central, Inc., Riteway Products Japan K.K.
("Riteway Japan"), Riteway Products France S.A.R.L. ("Riteway France"), Caratti
Sport Limited ("Caratti") in the United Kingdom, Riteway Products Canada, Ltd.
("Riteway Canada") and Innovations in Composites, Inc. ("Innovations in 
Composites").

The Company's current headquarters and principal place of business are located
at 2001 East Dyer Road, Santa Ana, California 92705, and its telephone number is
(714) 481-7100.

BACKGROUND

The Company was founded in 1979 by Gary Turner and Richard Long, who were early
innovators in the design, manufacture and sale of juvenile BMX bicycle frames
and forks using advanced designs and materials, including lightweight chromoly.
In 1981 the Company began assembling and selling complete juvenile BMX bicycles
to independent bicycle dealers, and in 1984 the Company responded to an emerging
industry trend by introducing its first adult mountain bicycle. In 1987, in
order to provide vertically integrated distribution of its products to
independent bicycle dealers, the Company acquired Riteway Distributors, Inc., a
California distributor of bicycles, parts and accessories. During the years from
1989 through 1995, the Company purchased three additional domestic distributors,
resulting in full vertical distribution coverage of the continental United
States. In 1996, the Company formed a distributor in Japan and purchased
distributors in France and the United Kingdom, and in 1997, the Company formed a
distributor in Canada. The Company's distribution companies provide a regional
focus to the independent bicycle dealers they serve.

PRODUCTS

The Company currently offers a broad line of adult and juvenile bicycling
products in several categories, including: mountain bicycles, juvenile BMX
bicycles, road and specialty bicycles, and parts and accessories. Within each
category the Company strives to continually improve its existing products and
introduce new products that feature some of the most technically sophisticated
materials and componentry in the industry. Bicycles offered by the Company are
sold exclusively under the Company's various brand names, and parts and
accessories are sold under the brand names of the Company and third parties. In
1997, sales of bicycles represented approximately 71% of the Company's net
sales, and sales of parts and accessories represented approximately 29%.


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The Company's bicycles for the 1998 model year are distributed in the three
major bicycle categories as follows:

<TABLE>
<CAPTION>
                                                 NUMBER OF
     CATEGORY                                    1998 BICYCLE MODELS
     ---------------------------------------------------------------
<S>                                              <C>
     Mountain Bicycle Models:
     ------------------------
         GT Full Suspension                         11
         GT Aluminum                                 8
         GT Chromoly Steel                          10
         Titanium                                    1
                                                 -----
                  Total                             30
                                                 -----

     Juvenile BMX Bicycle Models:
     ----------------------------
         GT                                         25
         Dyno                                       18
         Powerlite                                  14
         Robinson                                    8
                                                 -----
                  Total                             65
                                                 -----

     Road and Specialty Bicycle Models:
     ----------------------------------
         Road                                       11
         Streamline                                  6
         Cruisers                                    8
         Cross/hybrid                                2
         Tandem                                      2
         Harley-Davidson                             1
         Charger Electric-Assist                     2
                                                 -----
                  Total                             32
                                                 -----

         Total Bicycle Models                      127
                                                 =====

</TABLE>

The Company also markets a full line of bicycle parts, including frames, forks,
handlebars, pedals, seats, cranks, derailleurs and freewheels, as well as
bicycle accessories such as pumps, lights, helmets, locks, cyclometers, racks
and bicycle apparel. Some of the parts and accessories are designed and
manufactured by the Company, and the others are manufactured and supplied by
third parties. Parts and accessories designed and manufactured by the Company
are offered and sold under the Company's GT, Dyno, Robinson, Powerlite and Cycle
Design brand names. All parts and accessories are offered to independent bicycle
dealers through the Company's distribution network. In addition, the Company has
an exclusive marketing relationship with Innovations in Composites, a
majority-owned subsidiary, to sell and distribute three-spoke, hollow-composite
wheels which use an innovative patented long-carbon composite technology under
the Company's Spin brand name, together with other bicycle products that may be
developed by the Company utilizing this technology. This technology enables
products manufactured with composite materials to be aerodynamically shaped and
manufactured in volume, while providing superior strength-to-weight ratios and
product rigidity.

The Company has an exclusive licensing agreement with Harley-Davidson Motor
Company to manufacture and market a Harley-Davidson bicycle and certain
Harley-Davidson parts and accessories. The Company has also entered into a
partnership with a third party to manufacture and market electric-assist
bicycles under the Charger brand name. Distribution of the Harley-Davidson and
Charger products began during 1997.

RESEARCH AND PRODUCT DEVELOPMENT

GT Bicycles seeks to differentiate its products by offering bicycles with the
latest technology, innovative designs and advanced components and accessories.
The Company's experienced product development team works with the Company's
sales and manufacturing departments, distribution network and Team GT racing
teams to improve existing products and to develop new product ideas. The
Company's product development activities are performed at the Company's Santa
Ana, California facilities and at its research and development facility located
in Longmont, Colorado. The Company utilizes 


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computer-aided design tools and structural analysis programs to enhance its
product development efforts. In addition, the Company maintains a stress and
destructive testing laboratory at its Colorado facility to collect data and test
designs prior to commercial introduction. Research and product development
expenditures in fiscal years 1997, 1996 and 1995 were approximately $2,574,000,
$1,844,000 and $1,596,000, respectively.

The Company manufactures bicycles using many materials, including
chromoly-steel, aluminum, titanium and, most recently, thermoplastics and
composites. In comparison with other materials, the Company believes that
thermoplastic and composite materials offer superior strength-to-weight ratios
while retaining rigidity and can be aerodynamically shaped in volume
manufacturing.

Under an agreement with USA Cycling, the Company was selected as the exclusive
"Official Bicycle Manufacturer" of road and track bicycles for members of the
United States Cycling Team for a period of four years which was extended for
another four years through the year 2000. In connection with this agreement, the
Company cooperated in the development and production of bicycles used by members
of the United States Cycling Team at the 1996 Olympic Games in Atlanta, Georgia.
This development effort, known as Project '96, focused on, among other things,
the development of superior lightweight, responsive and aerodynamic equipment.
The Company believes that its participation in Project '96 has enhanced its
internal research and product development efforts and brand name recognition.

SALES AND DISTRIBUTION

The Company's products are primarily sold through its distribution network to
independent bicycle dealers throughout the world. In 1987, the Company began
acquiring distribution companies to provide a vertically integrated national
distribution network. This network, doing business as Riteway Products and
Caratti, distributes the Company's brand name bicycles and a broad range of
parts and accessories. The Company's distribution network consists of eight
subsidiaries -- located in New York, Wisconsin, Missouri, California, Canada,
Japan, France and the United Kingdom (Caratti) -- which employ commissioned
field sales representatives, telemarketers and customer service representatives.
Each wholly-owned distributor operates on an independent basis with respect to
inventory maintenance, sales order and invoice processing, credit management,
customer service and local cooperative advertising. Historically, the
distribution network has focused its efforts on the sale and distribution of
bicycles, parts and accessories, while GT Bicycles has focused on the design,
engineering, manufacture and marketing of selected categories of bicycles and
components.

In the United States, the Company sells products to over 4,000 of an estimated
6,800 independent bicycle dealers, using a sales force of approximately 60 field
representatives and telemarketers. The Company sells parts and accessories and
its juvenile BMX bicycles on a non-exclusive basis to independent bicycle
dealers meeting its financial and other criteria. The Company believes that
selling these products on a non-exclusive basis differentiates the Company from
many of its competitors and provides greater market access for the Company's
products. The Company grants exclusive marketing areas for its GT all terra
mountain bicycles to independent bicycle dealers in exchange for their agreement
to minimum unit purchase commitments. The Company performs demographic,
geographic and financial analyses when selecting its authorized independent
bicycle dealers and provides initial training and ongoing promotional
assistance. The Company intends to selectively expand the number of authorized
mountain bicycle dealers to include additional dealers which meet the Company's
standards of high quality service and customer support and agree to certain
product commitments.

GT Bicycles currently distributes bicycle products internationally through 52
independent distributors who supply 69 countries and through its four
subsidiaries: Riteway Canada, Riteway Japan, Riteway France and Caratti (in the
United Kingdom). The Company sells to its independent international distributors
directly from its Santa Ana, California facility. In addition, large orders are
shipped in containers directly to these distributors from the Company's Taiwan
and People's Republic of China suppliers. The Company believes that there are
opportunities for expanded sales in foreign markets and intends to increase its
sales and marketing efforts in these markets.

MARKETING

The Company promotes and maintains its leading brand names through focused
promotional efforts such as sponsorship of professional juvenile BMX and
mountain bicycle racing teams; national, regional and local bicycle races;
cooperative advertising programs with independent bicycle dealers; and
participation in most major trade shows. The Company's marketing department
oversees the conception, development and implementation of all aspects of the
advertising, marketing and sales promotion of the Company's products.


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GT Bicycles conducts national and international marketing and advertising
programs through a variety of media, including industry periodicals, newspaper
and other print advertisements, television and radio. The Company focuses on
high-profile advertising opportunities that feature its products and Team GT
racing team riders in national cycling magazines and national bicycle television
programs. In early 1998, the Company began producing a syndicated juvenile BMX
bicycle program, entitled "Crank", for the Fox Sports Network. Each of the
Company's independent international distributors is required to conduct and
coordinate marketing and advertising efforts with the Company in its respective
territory. The Company maintains a marketing office in Belgium to coordinate the
marketing efforts of its various independent European distributors. In addition,
the Company and its independent international distributors participate in the
major international industry trade shows.

The Company also focuses advertising and marketing efforts on a "grass-roots"
sponsorship campaign for various national, regional and local races and
organizations. The Company believes that providing financial and technical
support for local and regional organizations and events is a key factor in
maintaining brand name recognition and customer loyalty.

The Company believes that dealer support programs are key factors for marketing
success. The Company provides its independent bicycle dealers with on-site
product presentations and monthly dealer mailings that feature the Company's
latest products and team riders. The Company also maintains a cooperative
advertising program for its authorized independent bicycle dealers and provides
assistance with local advertising and promotional programs.

In addition to its sponsorship of independent teams such as the United States
Cycling Team, United States Triathlon Team, Team Saturn and Team Shaklee, the
Company also supports and promotes its own Team GT racing and demonstration
teams which have been very successful in their respective cycling categories.
The Company currently supports a GT mountain bicycle racing team, three BMX
racing teams and a number of Freestyle demonstration riders. The Company's
freestyle demonstration riders perform at varying venues such as NBA Basketball
half-time shows, state fairs, school assemblies, trade shows and corporate
events.

MANUFACTURING, ASSEMBLY AND SOURCING

The Company's manufacturing strategy is to use a combination of internal
manufacturing for its higher-end products and outsourcing for its higher-volume,
lower-cost products in order to maximize flexibility and engineering expertise
while minimizing capital commitments. The Company manufacturers many of its
premium-priced mountain, juvenile BMX and road bicycles, as well as some of its
mid-priced juvenile BMX bicycles, at the Company's Santa Ana, California
facility. The Company believes that its internal manufacturing capabilities
have allowed it to increase its production flexibility, improve its product
development and engineering processes, enhance its reputation for product
quality and innovation and increase profit margins. The Company outsources the
remaining majority of its production requirements according to its
specifications and manufacturing standards which allows the Company to avoid the
costs and capital requirements attendant to full-scale manufacturing. The
Company currently purchases bicycles from six foreign manufacturers. Although
the Company has established relationships with its principal suppliers and
manufacturing sources, it has no long-term contracts with these suppliers and
competes with other companies for their production capacities. The Company's
relationships with its suppliers are primarily based on the length of time such
companies have supplied the Company. In the event of a delay or disruption in
the supply of bicycles, parts and accessories, the Company believes that it
could arrange for alternative bicycle manufacturing sources within a reasonable
time period on terms that would not be materially different from those currently
available to the Company. Accordingly, the Company does not believe that the
loss of any single source supplier would have material adverse effect on the
Company's business. However, the future success of the Company will depend on
its ability to maintain close relationships with its current suppliers and to
develop long-term relationships with other suppliers that satisfy the Company's
requirements for price, quality and flexibility in scheduling production. See
"Certain Factors That May Affect the Company's Business and Future Results."

The Company's manufacturing operations consist of the forming and welding of the
bicycle frame and fork components for its premium-priced mountain, juvenile BMX
and road bicycles and the assembly of the bicycle frame, fork, components and
accessories. The Company also assembles bicycles from frames supplied by
independent suppliers. The Company's remaining bicycles are manufactured to the
Company's specifications by independent factories, most of which are located in
Taiwan. The Company monitors its manufacturing process and tests its
manufactured products to assure quality and reliability. The Company also tests
externally sourced components and employs field engineers and independent
representatives to oversee the manufacturing operations of the Company's foreign
suppliers to assure compliance with the Company's quality control standards. The
Company's sourcing strategy is to independently develop innovative product
designs and specifications and to require adherence to strict quality standards
by its suppliers. In 


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addition, the Company maintains a stress and destructive testing laboratory in
its Longmont, Colorado facility to aid it in the design of reliable, high
quality products. The Company's parts and accessories are currently manufactured
by various third parties, most of whom are located in Taiwan and Japan. A
substantial majority of the Company's multi-speed bicycles contain componentry
(e.g., derailleurs, brakes and cranks) that is supplied on a purchase order
basis by a Japanese manufacturer which has a leading position worldwide for the
supply of such parts.

The Company's products are manufactured according to plans that reflect
management's estimates of product sales based on recent sales results, current
economic conditions, customer orders and prior experience with manufacturing
sources. In order to be able to quickly fill orders from bicycle dealers, the
Company's wholly-owned distributors maintain significant inventories. The
average lead-time from the commitment to purchase products through production
and shipment ranges from approximately 90 to 120 days in the case of bicycles,
parts and accessories. The Company believes that the close relationships with
its principal manufacturing sources allow it to introduce innovative product
designs and alter production in response to the market demand for its products.
See "Certain Factors That May Affect the Company's Business and Future Results."

PRODUCT RECALLS

According to regulations promulgated by the Consumer Product Safety Commission
("CPSC"), the Company, as a manufacturer of consumer goods, is required to
advise the CPSC of defects in its products that could create a substantial risk
of injury to consumers. The CPSC also has the authority to require a
manufacturer or supplier to recall a product, which may involve product repair,
replacement or refunds. Alternatively, the Company can elect to do a voluntary
recall in cooperation with the CPSC. The recalls identified below are voluntary.

In December 1997, the Company's Riteway subsidiaries voluntarily initiated a
product recall in cooperation with the CPSC involving approximately 4,500 Cycle
Design Tag-A-Long bicycle tandem trailers manufactured by another entity and
distributed by Riteway. In late 1997, the Company became aware that a bolt on
the U-joint on two trailers had failed, resulting in the separation of the
trailer from the mother bicycle. The Company worked with the manufacturer and
redesigned the hardware utilizing significantly stronger bolts. The Company has
made public press announcements to make consumers aware of the recall, and has
instituted a program whereby independent bicycle dealers are instructed to
contact affected consumers and retrofit the trailers with replacement bolts. To
date, approximately 1,200 trailers have been retrofitted at an immaterial cost.
The Company has not received claims for any significant injuries related to the
Tag-a-Long, but there can be no assurance that such claims will not be received
in the future.

In March 1998, the Company voluntarily initiated a product recall which involves
approximately 10,000 aluminum juvenile BMX bicycles and frames manufactured and
sold during the years 1995 to 1998. The recall, which is being conducted in
cooperation with the CPSC, includes certain GT Speed Series and Robinson
bicycles and frames. The problem involves cracking in the frames when the
bicycles are subjected to the jumps and other stresses of today's more
aggressive BMX riding. The Company has discontinued the use of these frames and
has designed a significantly stronger frame for use on these BMX bicycles. The
Company has made public press announcements in order to make consumers aware of
the recall, and has also instituted a program whereby independent bicycle
dealers are instructed to contact affected consumers (as required by their
dealer agreements) and install upgraded replacement frames provided by the
Company. It is not possible to predict the actual number of frames which will be
returned, but of those returns which are to be received, it is expected that
over 80% will occur within the next six months and any remaining returns will
occur within two years. The Company has not received any 


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significant claims for injuries or other damages related to the affected frames,
but there can be no assurance that such claims will not be received in the
future.

The Company does not believe that the aggregate cost of the aforementioned
recalls will have a material adverse effect on  its results of operations,
financial condition or liquidity. Although the Company has a limited history of
involvement in product recalls, the Company may be involved in additional
product recalls in the future which could have a material adverse effect on the
Company's business, results of operations, financial condition and liquidity.
See "Certain Factors That May Affect the Company's Business and Future Results."

INTELLECTUAL PROPERTY

In the course of its business, the Company employs various trademarks, trade
names and service marks, including its logos, in the packaging and advertising
of its products. The Company believes the strength of its service marks,
trademarks and trade names are of considerable value and importance to its
business and intends to continue to protect and promote its marks as
appropriate. The loss of any significant mark could have a material adverse
effect on the Company. The Company is the owner of numerous domestic and
international registrations and applications.

The Company currently holds a number of United States patents. Although the
Company believes that such patents are useful in maintaining the Company's
competitive position, it considers other factors such as the Company's
reputation for technology, innovation, quality products, customer service,
dealer support, brand name recognition and distribution network to be its
primary competitive advantages. It is the practice of the Company to require its
employees involved in research and product development activities to execute
confidentiality and invention assignment agreements.

EMPLOYEES

At December 31, 1997, the Company had 775 full-time and part-time employees. The
Company believes that its relations with its employees are good, and has never
suffered a material work stoppage or slowdown.

In March 1996, the warehouse employees at the Company's facility in St. Louis,
Missouri voted for representation by the Teamster's union. During negotiations
with the Company in September 1997, the Teamsters called a strike, and five of
the Company's employees participated in that strike. In February 1998, another
vote by the warehouse employees resulted in the decertification of the Teamsters
union at the St. Louis location. All of the Company's employees are now
non-union.

REGULATION

The Company is subject to Federal, state and local regulations concerning
consumer products, bicycles, the environment and occupational safety and health.
In general, the Company has not experienced difficulty complying with such
regulations. The Company believes that its facilities are in material compliance
with applicable environmental laws, and since inception, the Company has had no
material claims involving environmental matters.

CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS

FORWARD-LOOKING STATEMENTS. THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO
TIME MAKE ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS ARE UNCERTAIN AND MAY
BE IMPACTED BY THE FOLLOWING FACTORS: IN PARTICULAR, CERTAIN RISKS AND
UNCERTAINTIES THAT MAY IMPACT THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS
WITH RESPECT TO REVENUES, EXPENSES AND OPERATING RESULTS INCLUDE, WITHOUT
LIMITATION, CYCLES OF DEALER ORDERS, GENERAL ECONOMIC CONDITIONS AND CHANGING
CONSUMER TRENDS, TECHNOLOGICAL ADVANCES AND THE NUMBER AND TIMING OF NEW PRODUCT
INTRODUCTIONS, SHIPMENTS OF PRODUCTS AND COMPONENTRY FROM FOREIGN SUPPLIERS, THE
TIMING OF OPERATING AND ADVERTISING EXPENDITURES AND CHANGES IN THE MIX OF
PRODUCTS ORDERED BY INDEPENDENT BICYCLE DEALERS. AS A RESULT, THE ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.


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BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S OPERATING
RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED AN INDICATOR OF
FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE
RESULTS OR TRENDS IN FUTURE PERIODS.

ECONOMIC CONDITIONS; UNCERTAINTY OF GROWTH. The Company's business is subject to
economic cycles and changing consumer trends. Purchases of discretionary
sporting goods tend to decline in periods of economic uncertainty. Any
significant decline in general economic conditions or continued uncertainties
regarding future economic prospects that affect consumer spending could have a
material adverse effect on the Company's business, results of operations,
financial condition and liquidity. While in the past ten years, there has been a
renewed public interest in bicycling and fitness activities, in the last two
years, there has been a decline in the demand for adult bicycles domestically.
There can be no assurance that the public interest in bicycling and fitness
activities will continue, or that the Company will continue to grow or be able
to sustain the level of bicycle sales that it historically has achieved. Any
general decline in the size of the bicycle market or in a segment of the bicycle
market in which the Company competes, whether from general economic conditions,
a decrease in the popularity of bicycling or otherwise, could have a material
adverse effect on the Company's business, results of operations, financial
condition and liquidity.

TECHNOLOGICAL ADVANCEMENTS AND NEW PRODUCT INTRODUCTIONS. The bicycle industry,
in recent years, has been characterized by significant technological advances
and frequent new product introductions. The Company believes that the frequent
introduction of new, innovative bicycles, parts and accessories by the Company
that respond timely to changing consumer demands and trends will be critical to
its future success. In the past, the Company generally has been successful in
the introduction of its bicycles, parts and accessories. No assurance can be
given, however, that the Company will be able to continue to design and
manufacture products that will achieve commercial success.

QUARTERLY FLUCTUATIONS AND SEASONALITY. Operating results fluctuate on a
quarterly basis due to a variety of factors, including the cycles of dealer
orders, shipment of products from foreign suppliers, the number and timing of
new product introductions, the timing of operating and advertising expenditures
and changes in the mix of products ordered by dealers. Typically, the Company's
operating expenses are higher in the third quarter primarily due to annual
introductions of new bicycle models and participation in annual industry trade
shows. In addition, the Company's business has seasonal elements based on
bicycle model years, weather, the year-end shopping season and other factors.
The Company believes that factors such as fluctuations in the quarterly
operating results could cause the price of the common stock to fluctuate
substantially.

SUBSTANTIAL LEVERAGE; LIQUIDITY. As of December 31, 1997, the Company's total
indebtedness was approximately $97.3 million, and there was approximately $3.6
million available under its revolving credit facilities for future borrowings.
The revolving credit facility in the current amount of $80.7 million and a term
loan of $11.7 million become due and payable on June 30, 1998. In addition, the
availability of the revolving credit facility will be reduced from $80.0 million
to $60.0 million on May 1, 1998. As of December 31, 1997, the Company had
stockholders' equity of approximately $61.4 million. The Company's high degree
of leverage could have important consequences, including (i) a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service and will not be available for other purposes; (ii) the Company's ability
to obtain additional debt financing in the future for working capital may be
limited; (iii) the Company may be more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; and (iv)
the Company's ability to refinance its revolving credit facility and its term
loan due and payable on June 30, 1998 may be adversely affected. The Company
anticipates that it will be required to seek a continuation of the $80.0 million
of availability under its revolving credit facility from its senior secured
lender, which is scheduled to be reduced from $80.0 million to $60.0 million on
May 1, 1998. The Company is negotiating with its existing senior secured lender
and other lenders regarding longer-term financing or the refinancing of its
revolving credit and term loan facilities. However, there can be no assurance
that the Company will be able to obtain a continuation of the $80.0 million of
availability under its revolving credit facility or other financing on
acceptable terms, or at all. The failure to obtain a continuation or other
acceptable financing would have a material adverse affect on the Company's
business, results of operations, financial condition and liquidity.

COMPETITION. The market for bicycles, parts and accessories, both in the United
States and internationally, is highly competitive. In all of its product
categories, the Company competes with other manufacturers and distributors, some
of which have well-recognized brand names and substantial financial,
technological, distribution, advertising and marketing resources. In addition,
there are several bicycle manufacturers and component suppliers with substantial
resources that do not currently compete directly with the Company, but which
could pose significant competition to the Company in the future. There can be no
assurance that the Company will be able to compete successfully in the future.

DEPENDENCE ON CERTAIN SUPPLIERS. As is common in the industry, a substantial
majority of the Company's multi-speed bicycles contain componentry supplied on a
purchase order basis by one Japanese manufacturer. Although such supplier has
not indicated any intention to limit or reduce sales of parts to the Company, if
it were to do so, the Company's business, 


                                       8
<PAGE>   9
results of operations, financial condition and liquidity could be adversely
affected. In addition, the Company purchases substantially all of its bicycles
that are manufactured overseas from a limited group of manufacturers, which
varies from year to year. The Company has no long-term contracts with these
suppliers and competes with other companies for their production capacities.
Although the Company has established relationships with its principal suppliers
and manufacturing sources, the Company's future success will depend on its
ability to maintain such relationships and to develop relationships with new
suppliers and manufacturing sources for the production and sale of bicycles,
parts and accessories. In the event of a delay or disruption in the supply of
bicycles, parts and accessories, the Company believes that suitable alternative
suppliers could be obtained, although the transition to other suppliers could
result in significant production delays. Any significant delay or disruption in
the supply of bicycles, parts and accessories could have a material adverse
effect on the Company's business, results of operations, financial condition and
liquidity.

INVENTORY RISKS. The market for bicycles, parts and accessories is subject to
the risk of changing consumer trends. As a result of the necessary lead times
involved in purchasing products from their suppliers, the Company's Riteway
distributors maintain significant inventories so that they can promptly fill
orders from bicycle dealers. Accordingly, in the event that a particular bicycle
model or accessory does not achieve widespread consumer acceptance, the Company
may be required to take significant price markdowns, which could have a material
adverse effect on the Company's business, results of operations, financial
condition and liquidity.

PRODUCT LIABILITY. Because of the nature of the Company's business, the Company
at any particular time is a defendant in a number of product liability lawsuits
and expects that this will continue to be the case in the future. These lawsuits
generally seek damages, sometimes in substantial amounts, for personal injuries
allegedly sustained as a result of defects in the Company's products. In
addition, from time to time, the Company may make recalls of certain of its
products in cooperation with the Consumer Products Safety Commission. Such
product recalls and any potential product defects related thereto may also
result in claims for personal injury. Although the Company maintains product
liability insurance, due to the uncertainty as to the nature and extent of
manufacturers' and distributors' liability for personal injuries, there can be
no assurance that the product liability insurance maintained by the Company is
or will be adequate to cover product liability claims or that the applicable
insurer will be solvent at the time of any covered loss. In addition, due to
deductibles, self-retention levels and aggregate coverage amounts applicable
under the Company's insurance policies, the Company will bear responsibility for
a significant portion, if not all, of the defense costs (which include
attorneys' fees and expenses incurred in the defense of any claim) and the
related payments to satisfy any judgments associated with any claim asserted
against the Company in excess of any applicable coverage. The successful
assertion or settlement of an uninsured claim, the settlement of a significant
number of insured claims or a claim exceeding the Company's insurance coverage
could have a material adverse effect on the Company's business, results of
operations, financial condition and liquidity. In addition, there can be no
assurance that insurance will remain available, or if available, will not be
prohibitively expensive.


                                       9
<PAGE>   10
ITEM 2.    PROPERTIES

The following chart sets forth all of the facilities leased by the Company and
each distribution subsidiary:

<TABLE>
<CAPTION>
                                                                           APPROXIMATE        DATE OF TERMINATION
           PURPOSE                          LOCATION                      SQUARE FOOTAGE            OF LEASE
-----------------------------------------------------------------------------------------------------------------
<S>                                         <C>                           <C>                 <C>
GT Corporate Headquarters, Assembly,
     Manufacturing, Research and Product
     Development, and Riteway West
      Distribution                          Santa Ana, California             355,000            January 31, 2007

GT Bicycles Research and Development
     and Manufacturing                      Longmont, Colorado*                 5,600                     Monthly

GT Bicycles Special Projects                Boulder, Colorado*                    350                     Monthly

GT Bicycles Administrative Office           Hasselt, Belgium                      250                     Monthly

Riteway Central Distribution                St. Louis, Missouri                86,500              April 30, 2001

Riteway Central Distribution                Jacksonville, Florida              40,000               July 31, 1999

Riteway East Distribution                   Cheektowaga, New York              84,000            January 15, 2011

Riteway North Central Distribution          Sheboygan, Wisconsin               50,000                July 9, 2000

Riteway Japan Distribution                  Tokyo, Japan                        1,400            January 28, 1999

Riteway Japan Distribution                  Saitama, Japan                     10,800               June 30, 1999

Riteway France Distribution                 Nancy, France                      23,000              March 31, 2005

Caratti Distribution                        Bristol, United Kingdom            40,000               July 29, 1998

Caratti Distribution                        Bristol, United Kingdom             1,200                May 20, 2001

Caratti Distribution                        Cheltenham, United Kingdom          2,000               June 21, 1999
</TABLE>

* The Company plans to consolidate its Colorado operations into a
recently-constructed, Company-owned facility by May 1998. The facility consists
of a 30,000 square-foot building on three acres of land in Longmont, Colorado.
Because the facility is larger than needed for the current level of operations,
the Company plans to sublease 15,000 square feet to an independent entity on a
short-term basis.

The Company believes that its present facilities are adequate to meet its
anticipated needs for the next 12 months and suitable space will be available on
reasonable terms, if needed, to accommodate expansion.

ITEM 3.  LEGAL PROCEEDINGS

Because of the nature of the Company's business, the Company at any particular
time is a defendant in a number of product liability lawsuits and expects that
this will continue to be the case in the future. These lawsuits generally seek
damages, sometimes in substantial amounts, for personal injuries allegedly
sustained as a result of defects in the Company's products. Although the Company
maintains product liability insurance, due to the uncertainty as to the nature
and extent of manufacturers' and distributors' liability for personal injuries,
there is no assurance that the product liability insurance maintained by the
Company is or will be adequate to cover product liability claims or that the
applicable insurer will be solvent at the time of any covered loss. In addition,
due to deductibles, self-retention levels and aggregate coverage amounts
applicable under the Company's insurance policies, the Company will bear
responsibility for a significant portion, if not all, 


                                       10
<PAGE>   11
of the defense costs (which include attorney fees and expenses incurred in the
defense of any claims) and the related payments to satisfy any judgments
associated with any claim asserted against the Company in excess of any
applicable coverage. The successful assertion or settlement of an uninsured
claim, the settlement of a significant number of insured claims or a claim
exceeding the Company's insurance coverage could have a material adverse effect
on the Company's business, results of operations, financial condition and
liquidity. In addition, there can be no assurance that insurance will remain
available, or if available, will not be prohibitively expensive.

The Company has no material pending legal proceedings, other than routine
litigation incidental to its business including the aforementioned product
liability lawsuits.

ITEM 4.  SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.


                                       11
<PAGE>   12
                                     PART II


ITEM 5.  MARKET VALUE OF THE REGISTRANT'S COMMON STOCK

The Company's Common Stock is traded on the over-the-counter market (The Nasdaq
National Market) under the symbol GTBX. The following table sets forth, for the
periods indicated, the range of high and low closing sales prices for the
Company's Common Stock.

<TABLE>
<CAPTION>
                                     HIGH                 LOW
                                   --------             --------
<S>                                <C>                  <C>
            Fiscal 1997:
            1st Quarter            $ 14.500             $  8.000
            2nd Quarter            $ 10.250             $  7.750
            3rd Quarter            $  8.625             $  7.375
            4th Quarter            $  8.000             $  5.656

            Fiscal 1996:
            1st Quarter            $ 10.875             $  7.750
            2nd Quarter            $ 16.375             $  9.375
            3rd Quarter            $ 15.750             $ 10.125
            4th Quarter            $ 14.375             $ 11.500
</TABLE>

There were approximately 316 security holders of record as of March 17, 1998.
The Company has not paid dividends and intends to retain earnings for use in the
business for the foreseeable future.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains certain selected consolidated financial data and is
qualified by, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."


                                       12
<PAGE>   13
<TABLE>
<CAPTION>
                                                                                                                      THE
                                                                       THE COMPANY                                PREDECESSOR (1)
                                             -----------------------------------------------------------------     ---------
                                                                                                    NOVEMBER 12,  JANUARY 1,
                                            YEAR ENDED    YEAR ENDED    YEAR ENDED    YEAR ENDED      THROUGH       THROUGH
                                            DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  NOVEMBER 11,
                                               1997          1996          1995          1994          1993          1993
                                             ---------     ---------     ---------     ---------     ---------     ---------
                                                                   (in thousands, except per share data)
<S>                                         <C>           <C>           <C>           <C>           <C>           <C>
RESULTS OF OPERATIONS:
Net sales ...............................    $ 216,214     $ 208,351     $ 168,933     $ 145,749     $  20,498     $ 103,250
Cost of sales ...........................      156,349       149,147       124,524       107,690        17,061        78,165
                                             ---------     ---------     ---------     ---------     ---------     ---------
Gross profit ............................       59,865        59,204        44,409        38,059         3,437        25,085
Selling, general and administrative                                                                               
   expenses .............................       48,083        38,450        28,429        25,962         3,491        17,427
Amortization of intangibles and deferred                                                                          
   financing costs ......................        1,002           739         3,313         5,107           419            67
Nonrecurring charge .....................           --            --         4,708            --            --            --
                                             ---------     ---------     ---------     ---------     ---------     ---------
Operating income (loss) .................       10,780        20,015         7,959         6,990          (473)        7,591
Life insurance proceeds, net ............           --        (1,276)           --            --            --            --
Interest expense ........................        5,586         3,828         6,070         5,233           673         1,374
                                             ---------     ---------     ---------     ---------     ---------     ---------
Income (loss) before taxes and                                                                                    
   extraordinary expense ................        5,194        17,463         1,889         1,757        (1,146)        6,217
Provision (benefit) for income taxes.....        2,044         5,887         1,027           875          (430)        2,532
                                             ---------     ---------     ---------     ---------     ---------     ---------
Income (loss) before extraordinary item .        3,150        11,576           862           882          (716)        3,685
Extraordinary loss from early                                                                                     
   extinguishment of item ...............                         --        (1,146)           --            --            --    
                                             ---------     ---------     ---------     ---------     ---------     ---------
Net income (loss) .......................    $   3,150     $  11,576     $    (284)    $     882     $    (716)    $   3,685
                                             =========     =========     =========     =========     =========     =========
                                                                                                                  
Earnings (Loss) per Share (2) (3):                                                                                
   Basic:                                                                                                         
   Income before extraordinary item .....    $     .32      $    1.18    $    0.12     $    0.13                  
   Extraordinary item ...................           --            --         (0.16)           --                  
                                             ---------      ---------    ---------     ---------                 
   Net income (loss) ....................    $     .32      $    1.18    $   (0.04)    $    0.13                  
                                             =========      =========    =========     =========                  
                                                                                                                  
   Diluted:                                                                                                       
   Income before extraordinary item .....          .32      $    1.17    $    0.12     $    0.12                  
   Extraordinary item ...................           --            --         (0.16)           --                  
                                             ---------      ---------    ---------     ---------                  
   Net income (loss) ....................         0.32      $    1.17    $   (0.04)    $    0.12                  
                                             =========      =========    =========     =========                  

<CAPTION>
                                                 DECEMBER 31,
                             ----------------------------------------------------
                               1997       1996       1995       1994       1993
                             --------   --------   --------   --------   --------
                                                (in thousands)
<S>                          <C>        <C>        <C>        <C>        <C>
FINANCIAL POSITION:
Working capital ..........   $ 28,702   $107,392   $ 72,789   $ 50,526   $ 40,694
Total assets .............    176,281    156,181     96,693     86,252     77,689
Total debt and capital
   lease obligations......     98,190     78,676     40,429     67,368     60,543
Total stockholders' equity     61,403     59,153     46,712      6,780      5,898
</TABLE>

----------
(1)  Effective November 12, 1993, the Company acquired the Predecessor in a
     leveraged acquisition. The acquisition was accounted for as a purchase
     resulting in a new basis for the assets acquired.

(2)  Earnings per share for the Company for the period November 12, 1993 through
     December 31, 1993 is not presented due to the non-comparable period
     presented. Earnings per share for the Predecessor for the period January 1,
     1993 through November 11, 1993 is not presented due to the non-comparable
     capital structure.

(3)  In 1997, the Company adopted Statement of Financial Accounting Standards 
     No. 128, "Earnings per Share", which changes the presentation of earnings 
     per share data. Prior year data has been restated to conform with the new 
     standard.  See Note 2 to Consolidated Financial Statements.


                                       13
<PAGE>   14
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

The discussion and analysis set forth below contains trend analysis and other
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of many factors,
including but not limited to the following: cycles of dealer orders, general
economic conditions and changing consumer trends, technological advances and the
number and timing of new product introductions, shipments of products and
componentry from foreign suppliers, the timing of operating and advertising
expenditures and changes in the mix of products ordered by independent bicycle
dealers. See "Item 1. Business Certain Factors That May Affect the Company's
Business and Future Results."

OVERVIEW

The Company's gross margins in any period are affected by factors, including but
not limited to the type and mix of products sold and by the breakdown between
domestic and international sales. Mountain bicycles, which represent the largest
portion of the Company's net sales, are characterized generally by relatively
lower gross margins than juvenile BMX bicycles and parts and accessories sold by
the Company. Gross margins on sales to independent international distributors
are generally lower than gross margins on sales through the Company's
distribution network. However, the majority of independent international sales
are shipped directly to distributors in containers from the Company's suppliers
in Taiwan and the People's Republic of China and, therefore, the Company incurs
significantly less distribution and other expenses with regard to such sales.

1997 RELOCATION OF THE COMPANY'S SOUTHERN CALIFORNIA FACILITIES. In May 1997,
the Company consolidated its southern California manufacturing, distribution,
administrative, and research and development facilities, which had previously
been located in several buildings, to the present facility located on Dyer Road
in Santa Ana, California. In connection with the relocation, the Company
incurred aggregate expenses of approximately $1.0 million, including moving
costs and the write-off of abandoned leasehold improvements at the former
locations. This amount was charged to selling, general and administrative
expenses during the first half of 1997.

1996 LIFE INSURANCE PROCEEDS, NET OF GUARANTEED SEVERANCE PAYMENTS. Included in
net income for the year ended December 31, 1996, were net life insurance
proceeds of approximately $1.3 million received by the Company following the
death of its former President and Chief Executive Officer, Richard Long, in July
1996. The net proceeds consisted of a $2.0 million insurance settlement less
guaranteed payments owed to Richard Long's family of approximately $0.7 million.
See Note 14 of Notes to Consolidated Financial Statements.

1995 NONRECURRING CHARGE AND EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
DEBT. Concurrent with closing of the Company's initial public offering ("IPO")
on October 18, 1995, certain covenants not to compete from the 1993
reorganization were terminated resulting in a nonrecurring charge of
approximately $4.7 million. The Company also used approximately $37.0 million of
the proceeds from the IPO to retire debt which resulted in the accelerated
amortization of related deferred financing costs and a debenture discount
totaling approximately $1.1 million, net of taxes. This item has been accounted
for as an extraordinary loss from early extinguishment of debt in the 1995
Consolidated Financial Statements. See Notes 6 and 13 of Notes to Consolidated
Financial Statements.


                                       14
<PAGE>   15
RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations data
as a percentage of net sales, for the periods indicated:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                           ------------------------
                                                           1997     1996      1995
                                                           -----    -----     -----
<S>                                                        <C>      <C>       <C>   
Net sales ..............................................   100.0%   100.0%    100.0%
Cost of sales ..........................................    72.3     71.6      73.7
                                                           -----    -----     -----
Gross profit ...........................................    27.7     28.4      26.3
Selling, general and administrative expenses ...........    22.2     18.4      16.8
Amortization of intangibles and deferred financing costs     0.5      0.4       2.0
Nonrecurring charge ....................................      --       --       2.8
                                                           -----    -----     -----
Operating income .......................................     5.0      9.6       4.7
Life insurance proceeds, net ...........................      --     (0.6)       --
Interest expense .......................................     2.6      1.8       3.6
                                                           -----    -----     -----
Income before taxes and extraordinary item .............     2.4      8.4       1.1
Provision for income taxes .............................     0.9      2.8       0.6
                                                           -----    -----     -----
Income before extraordinary item .......................     1.5      5.6       0.5
Extraordinary loss from early extinguishment of debt ...      --       --       0.7
                                                           -----    -----     -----
Net income (loss) ......................................     1.5%     5.6%     (0.2)%
                                                           =====    =====     =====
</TABLE>

COMPARISON OF 1997 TO 1996

Net Sales. Net sales for 1997 increased by $7.9 million, or 3.8%, to $216.2
million. The increase was attributable to a $10.3 million increase in foreign
sales, offset by a $2.4 million decrease in domestic sales. The increase in
foreign sales was comprised of a $6.2 million increase in sales of bicycles and
a $4.1 million increase in sales of parts and accessories, and primarily
resulted from the addition and growth of the Company's subsidiaries in the
United Kingdom, France, Japan and Canada, which were purchased or formed during
1996 and 1997. The decrease in domestic sales was comprised of a $1.8 million
decrease in sales of bicycles and a $0.6 million decrease in sales of parts and
accessories. The decrease in bicycle sales was due to lower sales of adult
mountain bicycles, partially offset by higher sales of juvenile bicycles and
specialty bicycles (including the Company's new lines of cruiser,
Harley-Davidson and Charger electric-assist bicycles).

Gross Profit. Gross profit, as a percentage of net sales, was 27.7% in 1997 and
28.4% in 1996. This decrease was primarily attributable to manufacturing
inefficiencies incurred during and following the relocation of the Company's
Santa Ana facility.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $9.6 million, or 25.1% and represented
22.2% of sales in 1997 versus 18.4% of sales in 1996. This increase was
primarily due to the increased selling, marketing and administrative expenses
associated with the new Company-owned distributors in the United Kingdom,
France, Japan and Canada. The remainder of the increase was principally related
to: higher selling and marketing expenses incurred to promote brand equity,
higher product development expenses, and the cost of relocating the Company's
southern California facilities, as discussed above.

Amortization of Intangibles and Deferred Financing Costs. Amortization of
intangibles increased by $0.3 million in 1997, principally due to the inclusion
of a full year's amortization of the goodwill resulting from the 1996
acquisition of Caratti and Riteway France.

Life Insurance Proceeds, net. Included in 1996 net income were net life
insurance proceeds of $1.3 million that the Company received following the death
of its former President and Chief Executive Officer, as discussed above. There
was no such item in 1997.

Interest Expense. Interest expense in 1997 increased by $1.8 million, or 45.9%.
The increase was principally related to the higher level of average borrowings
needed to fund the Company's 1996 acquisition of Caratti and Riteway France,
support the growth of the Company's foreign operations, and fund capital
expenditures. In addition, the Company incurred a higher average interest rate
on its bank credit facility during 1997.


                                       15
<PAGE>   16
Provision for Income Taxes. The Company's effective tax rate was 39.4% in 1997
as compared to 33.7% in 1996. The 5.7% increase principally relates to a 3.9%
benefit received during 1996 in connection with the non-taxable life insurance
proceeds discussed above. The remaining 1.8% increase arose primarily due to the
effect of non-deductible goodwill amortization being absorbed over lower pretax
income in 1997.

COMPARISON OF 1996 TO 1995

Net Sales. Net sales for 1996 increased by $39.4 million, or 23.3%, to $208.4
million. The increase in net sales was attributable to a $5.8 million and $17.9
million increase in domestic and foreign sales of bicycles, respectively, and a
$8.6 million and $7.1 million increase in domestic and foreign sales of parts
and accessories, respectively. The increase in domestic net sales was primarily
attributable to a general increase in the demand for the Company's juvenile
bicycles, parts and accessories. The increase in foreign net sales was primarily
attributable to the inclusion of the Company's new distributors in Japan, France
and the United Kingdom in its results of operations as well as a general
increase in sales to independent international distributors.

Gross Profit. Gross profit, as a percentage of net sales, was 28.4% in 1996 and
26.3% in 1995. This increase was attributable to a change in product mix, which
included an increase in sales of higher margin juvenile bicycles and parts and
accessories, coupled with higher gross profit margins in all bicycle product
categories which were the result of improved manufacturing efficiencies and
sourcing.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 increased by $10.0 million, or 35.2%, and
increased as a percentage of net sales from 16.8% to 18.4%. This increase was
primarily due to increased administrative costs as a result of the addition of
the new foreign distributors in Japan, France and the United Kingdom, the
inclusion of a full year of administrative costs for Riteway North Central,
Inc., which was purchased in July 1995, and additional personnel costs and
associated overhead required to support the increased revenues of the Company.

Amortization of Intangibles and Deferred Financing Costs. Amortization of
intangibles and deferred financing costs decreased by $2.6 million in 1996 and
decreased as a percentage of net sales from 2.0% to 0.4%. The decrease was
primarily attributable to the termination of certain covenants not to compete
and the accelerated amortization of related deferred financing costs in
connection with the Company's IPO in October 1995, as discussed above. This
decrease was partially offset by the increased amortization of goodwill from the
acquisition of Caratti in July 1996.

Nonrecurring Charge. The nonrecurring charge in 1995 represents a charge taken
by the Company in October 1995 for the termination of certain covenants not to
compete, as discussed above. There was no such charge in 1996.

Life Insurance Proceeds, net. Included in the net income for 1996 were net life
insurance proceeds of $1.3 million that the Company received following the death
of its former President and Chief Executive Officer, as discussed above. There
was no such item in 1995.

Interest Expense. Interest expense decreased by $2.2 million in 1996 and
decreased as a percentage of sales from 3.6% to 1.8%. The decrease was
attributable to a reduction in debt as proceeds from the IPO were used to retire
a portion of the Company's debt as well as decreased short-term interest rates
under the Company's new revolving credit facility which was obtained in November
1995. This decrease was partially offset by increased interest expense on
additional borrowings in 1996 which were incurred to fund acquisitions and the
expansion of the Company's domestic and foreign operations.

Provision for Income Taxes. The Company's effective tax rate was 33.7% in 1996
as compared to 54.4% in 1995. The Company's effective tax rate in 1996 has been
affected by the non-deductibility of the amortization of goodwill and the
non-taxable life insurance proceeds received. The Company's effective tax rate
in 1995 has been affected by the non-deductibility of the amortization of
goodwill and the tax effect of the extraordinary loss from early extinguishment
of debt.


                                       16
<PAGE>   17
QUARTERLY COMPARISONS

The following table sets forth certain quarterly consolidated statements of
operations data for the periods presented and such data as a percentage of net
sales. This quarterly information is unaudited and has been prepared on the same
basis as the annual consolidated financial statements and, in management's
opinion, reflects all adjustments consisting only of normal recurring
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results for
any future period.

<TABLE>
<CAPTION>
                                                                       QUARTER ENDED
                              -----------------------------------------------------------------------------------------------------
                               MAR. 31,     JUNE 30,     SEPT. 30,    DEC. 31,     MAR. 31,     JUNE 30,     SEPT. 30,    DEC. 31,
                                 1996         1996         1996         1996         1997         1997         1997         1997
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF                                                                                               
OPERATIONS DATA:                                                                                                         
Net sales ..................  $   48,850   $   44,114   $   52,435   $   62,952   $   51,170   $   50,769   $   56,444   $   57,831
Cost of sales ..............      36,310       30,921       37,041       44,875       37,395       36,972       40,525       41,457
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Gross profit ...............      12,540       13,193       15,394       18,077       13,775       13,797       15,919       16,374
Selling, general and                                                                                                     
   administrative expenses .       7,992        8,644       10,645       11,169       10,762       11,684       13,168       12,469
Amortization of intangibles 
   and deferred financing 
   costs ...................         135          136          243          225          233          264          260          245
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Operating income ...........       4,413        4,413        4,506        6,683        2,780        1,849        2,491        3,660
Life insurance proceeds, net          --           --       (1,276)          --           --           --                        --
Interest expense ...........         730          737        1,047        1,314        1,386        1,405        1,352        1,443
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                                                                         
Income before taxes ........       3,683        3,676        4,735        5,369        1,394          444        1,139        2,217
Provision for income taxes .       1,473        1,471        1,095        1,848          578          160          461          845
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                                                                         
Net income .................  $    2,210   $    2,205   $    3,640   $    3,521   $      816   $      284   $      678   $    1,372
                              ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
                                                                                                                         
Earnings per share:                                                                                                      
Basic ......................  $      .23   $      .23   $      .37   $      .36   $      .07   $      .04   $      .07   $      .14
                              ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
Diluted ....................  $      .22   $      .22   $      .37   $      .35   $      .07   $      .04   $      .07   $      .14
                              ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
                                                                                                                         
                                                                                                                         
PERCENTAGE OF NET SALES:                                                                                                 
Net sales ..................       100.0%       100.0%       100.0%       100.0%       100.0%       100.0%       100.0%       100.0%
Cost of sales ..............        74.3         70.1         70.6         71.3         73.1         72.8         71.8         71.7
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Gross profit ...............        25.7         29.9         29.4         28.7         26.9         27.2         28.2         28.3
Selling, general and                                                                                                     
   administrative expenses .        16.4         19.6         20.3         17.7         21.0         23.0         23.3         21.6
Amortization of intangibles 
   and deferred financing  
   costs ...................         0.3          0.3          0.5          0.4          0.5          0.5          0.5          0.4
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Operating income ...........         9.0         10.0          8.6         10.6          5.4          3.7          4.4          6.3
Life insurance proceeds, net          --           --         (2.4)          --           --           --           --           --
Interest expense ...........         1.5          1.7          2.0          2.1          2.7          2.8          2.4          2.5
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                                                                         
Income before taxes ........         7.5          8.3          9.0          8.5          2.7          0.9          2.0          3.8
Provision for income taxes .         3.0          3.3          2.1          2.9          1.1          0.3          0.8          1.4
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                                                                         
Net income .................         4.5%         5.0%         6.9%         5.6%         1.6%         0.6%         1.2%         2.4%
                              ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

Operating results fluctuate on a quarterly basis due to a variety of factors,
including the cycles of dealer orders, shipment of products from foreign
suppliers, the number and timing of new product introductions, the timing of
operating and advertising expenditures and changes in the mix of products
ordered by dealers. Typically, the Company's operating expenses are higher in
the third quarter primarily due to annual introductions of new bicycle models
and participation in annual industry trade shows. In addition, the Company's
business has seasonal elements based upon bicycle model years, weather, the
year-end shopping season and other factors. The Company believes that factors
such as fluctuations in the quarterly operating results could cause the price of
the common stock to fluctuate substantially. See "Business - Certain Factors 
That May Affect the Company's Business and Future Results."


                                       17
<PAGE>   18
INFLATION AND FOREIGN CURRENCY EXCHANGE

Inflation has not had a significant impact on the Company's operating results to
date. While a majority of the Company's payments for components and bicycles
purchased from foreign vendors and payments to the Company for its international
sales are made in U.S. dollars, a portion of payments made to vendors are made
in currencies other than the U.S. dollar. Currency fluctuations may adversely
affect prices paid by the Company for bicycle products. The Company from time to
time has entered into short-term, forward exchange contracts to hedge the impact
of foreign currency fluctuations on a small portion of specific purchase
commitments denominated in foreign currencies. See Note 2 of Notes to
Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company finances its operating cash needs primarily from bank and vendor
credit and cash generated from operations. In November 1995, the Company entered
into a domestic credit agreement, as most-recently amended in March 1998, with a
bank that provides for a domestic revolving credit facility and a domestic term
loan. The Company also entered into separate credit agreements with the same
bank to provide separate revolving credit facilities to Riteway Japan, Riteway
France and Caratti. These credit agreements expire on June 30, 1998. The Company
is currently in negotiations with the bank and other potential lenders to obtain
a longer-term financing structure or secure replacement financing.

The credit agreements require the Company to maintain certain financial
ratios and other covenants, which, among other things, restrict other
indebtedness, capital expenditures and certain investments. As of December 31,
1997, the Company was in violation of certain financial covenants, for which the
bank has issued a waiver. In addition, the credit agreement was amended in
October 1997 to require the Company to obtain $30,000,000 of unsecured financing
by February 28, 1998; however, such requirement was waived in January 1998.

The total amount of credit available under the domestic revolving credit
facility for advances and letters of credit is limited to the lesser of (a)
$80.0 million through April 30, 1998 and $60.0 million thereafter or (b) the
Company's borrowing base associated with accounts receivable and inventories, as
defined by the agreement, plus an additional $15.0 million available through
April 30, 1998. The borrowing base is reduced each month by $3.0 million and
$3.5 million for Riteway Japan and Riteway France, respectively, which
represents the credit facilities extended by the bank to these locations. At
December 31, 1997, the Company had $65.5 million outstanding under the domestic
revolving credit facility, which incurs interest at the either the bank's
Reference Rate, LIBOR, or Offshore rate plus an applicable margin (as defined by
the agreement). See Note 6 of Notes to Consolidated Financial Statements.

The domestic term loan obtained in August 1996 of $17.0 million is payable in
equal quarterly installments of $1.1 million and matures on the earlier of
September 2000 or the expiration of the domestic revolving credit facility. The
domestic term loan was made up of two disbursements: (1) $14.0 million for the
purchase of Caratti, and (2) $3.0 million for the repayment of Caratti's prior
bank debt. At December 31, 1997, the Company had $11.7 million in principal
outstanding under the domestic term loan which incurs interest at the bank's
Reference Rate (as defined by the agreement) or other miscellaneous rates. See
Note 6 of Notes to Consolidated Financial Statements.

The Riteway Japan credit facility consists of a $3.0 million revolving credit
facility with interest on borrowings payable monthly at the bank's base rate
plus the applicable margin. The Riteway France credit facility consists of a
$3.5 million revolving credit facility with interest on borrowings payable
monthly at the bank's base rate plus the applicable margin. The Caratti credit
facility consists of a multicurrency revolving credit facility, a multicurrency
overdraft facility and a multicurrency facility for the issuance of irrevocable
commercial letters of credit in an aggregate amount equal to the lesser of $10.0
million (or its equivalent from time to time in optional currencies, as defined
by the agreement) or Caratti's borrowing base associated with accounts
receivable and inventories, as defined by the agreement. The amount individually
available under the irrevocable commercial letters of credit is $1.5 million (or
its equivalent from time to time in optional currencies, as defined by the
agreement). The overdraft facility is repayable on demand by the bank. Interest
on borrowings under the multicurrency revolving credit facility is payable
monthly at the sum of the MLA Cost (as defined by the agreement), the applicable
margin, and LIBOR (as defined by the agreement). Interest on the multicurrency
overdraft facility is payable monthly at the bank's prevailing base rate plus
the applicable margin. At December 31, 1997, the amounts outstanding on the
Riteway Japan, Riteway France and Caratti facilities were $1.8 million, $3.3
million and $10.1 million, respectively. See Note 6 of Notes to Consolidated
Financial Statements.


                                       18
<PAGE>   19
The Company obtained additional long-term financing in September 1997 through an
Industrial Development Bond program sponsored by the state of California. The
$5.0 million borrowing, plus interest at 5.87% per annum, is payable in monthly
installments of $65,000 through October 2005. The proceeds of the borrowing must
be used for capital expenditures at the Company's Santa Ana facility. Unused
funds are held in an interest-bearing trust account at a bank. At December 31,
1997, approximately $1.5 million had been disbursed for capital expenditures and
$3.5 million remained available for future disbursements.

The Company's operating activities used cash of $5.3 million in 1997, $14.5
million in 1996 and $8.8 million in 1995. The lower cash outflow in 1997
resulted principally from a smaller increase in trade receivables and inventory
than had occurred in the prior two years, when the Company was experiencing a
more rapid expansion of its business. As is normal industry practice, the
Company maintains relatively high levels of receivables during the winter months
in connection with its credit policies. In addition, the Company's inventory
levels have increased over the past several years as the international
subsidiaries have expanded and the domestic product line has broadened.

The Company's investing activities used cash of $13.6 million in 1997, $17.7
million in 1996 and $4.0 million in 1995. Investing activities were primarily
comprised of capital expenditures at the Company's new Santa Ana facility and a
new research and manufacturing facility in Colorado, along with $3.6 million of
cash held in trust for future capital expenditures at the Santa Ana facility. In
1996, investment activities were primarily comprised of the acquisition of
Caratti and Riteway France. The Company's financing activities resulted in net
cash inflows of $19.5 million in 1997, $32.1 million in 1996 and $12.7 million
in 1995. Additional bank borrowings provided the majority of the financing in
1997 and 1996, while the Company's IPO provided the principal financing in 1995.

The Company anticipates that it will continue to rely on bank and vendor credit
and cash generated from operations in order to finance inventory and accounts
receivable. The Company further anticipates that it will be required to seek a
continuation of the $80.0 million of availability under its revolving credit
facility from its senior secured lender, which is scheduled to be reduced from
$80.0 million to $60.0 million on May 1, 1998. The Company is in the process of
seeking a longer-term financing structure with its existing senior secured
lender and additional and/or replacement financing from other lenders. While the
Company is negotiating with its bank and other potential lenders, there can be
no assurance that the Company will be able to obtain a continuation of the $80.0
million of availability under its revolving credit facility or any other such
financing on similar or acceptable terms, if at all. The Company anticipates
that its average cost of borrowing will be higher in 1998 than it was in 1997.
The failure to obtain any such continuation or any such financing would have a
material adverse effect on the Company's business, results of operations,
financial condition and liquidity. Assuming that the Company is able to obtain
such financing, the Company believes that cash from operations, its bank and
vendor credit and its existing working capital will be sufficient to satisfy the
Company's anticipated working capital and capital expenditure requirements
through the next 12 months. See "Business - Certain Factors That May Affect the
Company's Business and Future Results - Substantial Leverage; Liquidity".

NEW ACCOUNTING PRONOUNCEMENTS

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This
statement replaces the previously-reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is very similar to the previously-reported primary earnings
per share in that it includes the effect of the additional common shares which
would have been outstanding if dilutive stock options had been exercised. All
earnings per share amounts have been restated to conform to the SFAS No. 128
requirements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS No. 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS No.
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or liquidity.




                                       19
<PAGE>   20
YEAR 2000 COMPLIANCE

The Company has performed a preliminary examination of its major software
applications to determine whether each system is prepared to accommodate the
year 2000. This examination included a review of program code which is
maintained by the Company as well as obtaining confirmation from outside
software vendors that their products are year 2000 compliant. The Company
believes that, based on its current examination, the year 2000 will not have a
material adverse impact on the Company's operations and that the costs to
accommodate the year 2000 will not be material. However, there can be no
assurance that software incompatibility with the year 2000 on the part of the
Company or any of its significant suppliers will not cause an interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. By the end of 1998,
the Company plans to complete an extensive assessment of the readiness of its
software applications with respect to year 2000 issues and any related
accommodation costs.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data of the Company required by this
Item are set forth at the pages indicated at Item 14(a)(1) and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

Not applicable.


                                       20
<PAGE>   21
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required hereunder is incorporated by reference from the
sections entitled "Nominees" and "Other Executive Officers" of the Company's
Proxy Statement filed in connection with its 1998 Annual Meeting of
Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required hereunder is incorporated by reference from the
sections entitled "Executive Compensation" of the Company's Proxy Statement
filed in connection with its 1998 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required hereunder is incorporated by reference from the
sections entitled "Security Ownership of Management and Certain Beneficial
Owners" of the Company's Proxy Statement filed in connection with its 1998
Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required hereunder is incorporated by reference from the
sections entitled "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" of the Company's Proxy Statement filed in
connection with its 1998 Annual Meeting of Stockholders.


                                       21
<PAGE>   22
                                     PART IV


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

(a)(1)   Financial Statements

<TABLE>
<CAPTION>
         Index to Financial Statements                                            Page No.
<S>                                                                               <C>
         Independent Auditors' Report...........................................    F-1
         Consolidated Balance Sheets............................................    F-2
         Consolidated Statements of Operations..................................    F-3
         Consolidated Statements of Stockholders' Equity........................    F-4
         Consolidated Statements of Cash Flows..................................    F-5
         Notes to Consolidated Financial Statements.............................    F-6
</TABLE>

(a)(2)   Financial Statement Schedules

<TABLE>
<CAPTION>
         Index to Financial Statement Schedules                                   Page No.
<S>                                                                               <C>
         Independent Auditors' Report on Financial Statement Schedule...........    F-22
         Schedule II - Valuation and Qualifying Accounts........................    F-23
</TABLE>

         All other schedules are omitted because they are not required or the
         required information is included in the financial statements or notes
         thereto.


                                       22
<PAGE>   23
(a)(3)   Exhibits

         Index to Exhibits

<TABLE>
<CAPTION>
Exhibit No.       Description                                                               Location
-----------       -----------                                                               --------
<S>               <C>                                                                       <C>
   3.4            Amended and Restated Certificate of Incorporation                            (1)

   3.6            Restated Bylaws of the Company                                               (1)

   3.7            Specimen Certificate of Common Stock.                                        (1)

   10.1           Form of Indemnification Agreement between the officers and                   (1)
                  directors and the Company.

   10.2           Sponsorship Agreement between the U.S. Cycling Federation and GT             (1)
                  Bicycles, California, Inc. (the "Predecessor"), dated January
                  19, 1993.

   10.3           Employment Agreement between the Predecessor and Michael Haynes,             (1)
                  dated September 27, 1993.

   10.4           Employment Agreement between the Predecessor and William                     (1)
                  Duehring, dated September 27, 1993.

   10.5           Employment Agreement between the Predecessor and William                     (1)
                  Galloway, dated September 27, 1993.

   10.7           Employment Agreement between the Predecessor and Gary Turner,                (1)
                  dated September 27, 1993.

   10.15          Amendment and Restatement of Stockholders Agreement among the                (1)
                  Company, Bain Capital Fund IV, L.P., Bain Capital Fund IV-B,
                  L.P., BCIP Associates, BCIP Trust Associates, L.P., Jackson
                  National Life Insurance Company, Richard W. Long, Gary Turner,
                  Michael Haynes, William Galloway and William Duehring, dated
                  November 12, 1993 and Amendment thereto dated September 28, 1995.

   10.18          Standard Industrial/Commercial Single-Tenant Lease between The               (1)
                  Equitable Life Assurance Society of the United States and the
                  Predecessor for the property located at 3100 West Segerstrom
                  Avenue, Santa Ana, California, dated June 3, 1993.

   10.19          Lease by and between Parkway Associates, L.P., a Wisconsin                   (1)
                  limited partnership, and Riteway North, for the property located
                  at 2932 Behrens Parkway, Sheboygan, Wisconsin, dated July 10,
                  1995.

   10.20          Standard Industrial/Commercial Multi-Tenant Lease between                    (1)
                  Gates-Warner and the Company, for the property located at 1303
                  East Warner Avenue, Santa Ana, California, dated May 30, 1995.
</TABLE>


                                       23
<PAGE>   24
<TABLE>
<S>               <C>                                                                       <C>
   10.21          Standard Industrial/Commercial Multi-Tenant Lease between Yale               (1)
                  Street Associates and the Predecessor for the property located
                  at 2330 South Yale Street, Santa Ana, California, dated October
                  14, 1994.

   10.24          Lease Agreement by and between Herbert O. Jones and Virginia F.              (1)
                  Jones and the Predecessor for the property located at 711 1st
                  Avenue, Longmont, Colorado, dated September 1, 1992.

   10.27          Incentive Stock Option, Nonqualified Stock Option and Restricted             (1)
                  Stock Purchase Plan 1993.

   10.28          Form of Incentive Option Agreement.                                          (1)

   10.29          GT Bicycles, Inc. Profit Sharing Plan (Amended and Restated),                (1)
                  dated January 1, 1989.

   10.30          First Amendment to GT Bicycles, Inc. Profit Sharing Plan, dated              (1)
                  January 1, 1989.

   10.31          Termination Agreement between Richard W. Long, Gary Turner,                  (1)
                  Michael Haynes, William Galloway and William Duehring and the
                  Company, dated August 11, 1995.

   10.32          Distributorship Agreement for Shimano Standard Bicycle                       (1)
                  Components, Shimano XTR(R) and Dura-Ace(R) Bicycle Components by
                  and between Shimano Inc. and Riteway Products dated July 1, 1995.

   10.33          GT Bicycles, Inc. 1995 Employee Stock Purchase Plan.                         (1)

   10.40          Lease Agreement between 25 Dewberry Lane, Inc. and the Company               (1)
                  for the property located at 25 Dewberry Lane, Cheektowaga, New
                  York, dated November 7, 1995.

   10.41          Lease Agreement by and between Stone Mountain Industrial Park,               (2)
                  Inc. and GT Bicycles, Inc. for property located at 8291 Forshee
                  Drive, Westside Industrial Park, Jacksonville, Florida, dated
                  May 2, 1996.

   10.42          Second Amended and Restated Credit Agreement (Receivables and                (3)
                  Inventory) among the Company, GT Bicycles California, Inc.,
                  Riteway Products East, Inc., Riteway Products North Central,
                  Inc., Riteway Distributors Central, Inc., Riteway Distributors,
                  Inc. and Bank of America, N.T. and S.A., dated August 12, 1996.

   10.43          Agreement for the sale and purchase of the whole of the issued               (4)
                  share capital of Caratti Sport Limited, dated July 3, 1996,
                  between the Company and Mark Brinley Aldo Edwards, Sarah Edwards
                  and Philip Brinley Antonio Edwards.

   10.44          Amendment No. 1 to Employment Agreement between the Company and              (5)
                  Michael Haynes, dated November 12, 1996.

   10.45          Amendment No. 1 to Employment Agreement between the Company and              (5)
                  William Duehring, dated November 12, 1996.
</TABLE>


                                       24
<PAGE>   25
<TABLE>
<S>               <C>                                                                       <C>
   10.46          Employment Agreement between the Company and Robert C. Ippolito,             (5)
                  dated June 10, 1996.

   10.47          Employment Agreement between the Company and Charles Cimitile,               (5)
                  dated November 7, 1996.

   10.48          Fourth Amendment to Second Amended and Restated Credit Agreement             (6)
                  (Receivables and Inventory) among the Company, GT Bicycles
                  California, Inc., Riteway Products East, Inc., Riteway Products
                  North Central, Inc., Riteway Distributors Central, Inc., Riteway
                  Distributors, Inc. and Bank of America, N.T. and S.A., dated
                  February 13, 1997.

   10.49          Lease agreement by and between Zeno Table Company and GT Bicycles,           (6)
                  Inc. for property located at 2001 East Dyer Road, Santa Ana,
                  California, dated January 3, 1997.

   10.50          Fifth Amendment to Second Amended and Restated Credit Agreement              (7)
                  (Receivables and Inventory) among the Company, GT Bicycles
                  California, Inc., Riteway Products East, Inc., Riteway Products
                  North Central, Inc., Riteway Distributors Central, Inc., Riteway
                  Distributors, Inc. and Bank of America, N.T. and S.A., dated
                  March 14, 1997.

   10.51          Sixth Amendment to Second Amended and Restated Credit Agreement              (8)
                  (Receivables and Inventory) among the Company, GT Bicycles
                  California, Inc., Riteway Products East, Inc., Riteway Products
                  North Central, Inc., Riteway Distributors Central, Inc., Riteway
                  Distributors, Inc. and Bank of America, N.T. and S.A., dated
                  August 15, 1997.

   10.52          Seventh Amendment to Second Amended and Restated Credit Agreement            (8)
                  (Receivables and Inventory) among the Company, GT Bicycles California,
                  Inc., Riteway Products East, Inc., Riteway Products North Central,
                  Inc., Riteway Distributors Central, Inc., Riteway Distributors, Inc.
                  and Bank of America, N.T. and S.A., dated September 11, 1997.

   10.53          Eighth Amendment to Second Amended and Restated Credit Agreement             (8)
                  (Receivables and Inventory) among the Company, GT Bicycles
                  California, Inc., Riteway Products East, Inc., Riteway Products
                  North Central, Inc., Riteway Distributors Central, Inc., Riteway
                  Distributors, Inc. and Bank of America, N.T. and S.A., dated October 
                  23, 1997.

   10.54          Ninth Amendment to Second Amended and Restated Credit Agreement              *
                  (Receivables and Inventory); Waiver among the Company, GT Bicycles
                  California, Inc., Riteway Products East, Inc., Riteway Products
                  North Central, Inc., Riteway Distributors Central, Inc., Riteway
                  Distributors, Inc. and Bank of America, N.T. and S.A., dated 
                  November 18, 1997.

   10.55          Loan Agreement Among GE Capital Public Finance, Inc., as Lender,             *
                  California Economic Development Financing Authority, as Issuer, and
                  GT Bicycles, Inc. as Borrower, dated as of September 1, 1997.

   10.56          Tenth Amendment to Second Amended and Restated Credit Agreement              *
                  (Receivables and Inventory) among the Company, GT Bicycles California,
                  Inc., Riteway Products East, Inc., Riteway Products North Central,
                  Inc., Riteway Distributors Central, Inc., Riteway Distributors, Inc.
                  and Bank of America, N.T. and S.A., dated February 4, 1998.

   10.57          Eleventh Amendment to Second Amended and Restated Credit Agreement           *
                  (Receivables and Inventory); Waiver among the Company, GT Bicycles
                  California, Inc., Riteway Products East, Inc., Riteway Products North
                  Central, Inc., Riteway Distributors Central, Inc., Riteway Distributors, 
                  Inc. and Bank of America N.T. and S.A., dated February 27, 1998.

   10.58          Twelfth Amendment to Second Amended and Restated Credit Agreement            *
                  (Receivables and Inventory) among the Company, GT Bicycles California,
                  Inc., Riteway Products East, Inc., Riteway Products North Central, Inc.,
                  Riteway Distributors Central, Inc., Riteway Distributors, Inc., and Bank 
                  of America, N.T. and S.A., dated March 26, 1998.
</TABLE>


                                       25
<PAGE>   26
<TABLE>
<S>               <C>                                                                       <C>
   21.1           Subsidiaries of the Registrant.                                              *

   23.1           Consent of KPMG Peat Marwick LLP.                                            *

   24.1           Power of Attorney (included on the Signature Page of this Annual
                  Report on Form 10K).

   27.1           Amended and Restated Financial Data Schedules - 1996                         *

   27.2           Financial Data Schedule                                                      *

</TABLE>

        Executive Compensation Plans and Arrangements

<TABLE>
<CAPTION>
Exhibit No.       Description                                                               Location
-----------       -----------                                                               --------
<S>               <C>                                                                       <C>
   10.1           Form of Indemnification Agreement between the officers and                   (1)
                  directors and the Company.

   10.3           Employment Agreement between the Predecessor and Michael Haynes,             (1)
                  dated September 27, 1993.

   10.4           Employment Agreement between the Predecessor and William                     (1)
                  Duehring, dated September 27, 1993.

   10.5           Employment Agreement between the Predecessor and William                     (1)
                  Galloway, dated September 27, 1993.

   10.7           Employment Agreement between the Predecessor and Gary Turner,                (1)
                  dated September 27, 1993.

   10.27          Incentive Stock Option, Nonqualified Stock Option and Restricted             (1)
                  Stock Purchase Plan 1993.

   10.28          Form of Incentive Option Agreement.                                          (1)

   10.29          GT Bicycles, Inc. Profit Sharing Plan (Amended and Restated),                (1)
                  dated January 1, 1989.

   10.30          First Amendment to GT Bicycles, Inc. Profit Sharing Plan, dated              (1)
                  January 1, 1989.

   10.33          GT Bicycles, Inc. 1995 Employee Stock Purchase Plan.                         (1)

   10.44          Amendment No. 1 to Employment Agreement between the Company and              (5)
                  Michael Haynes, dated November 12, 1996.

   10.45          Amendment No. 1 to Employment Agreement between the Company and              (5)
                  William Duehring, dated November 12, 1996.

   10.46          Employment Agreement between the Company and Robert C. Ippolito,             (5)
                  dated June 10, 1996.

   10.47          Employment Agreement between the Company and Charles Cimitile,               (5)
                  dated November 7, 1996.
</TABLE>


                                       26
<PAGE>   27
      * Filed herewith.

      (1) Incorporated by reference to the referenced exhibit number to the
          Company's Registration Statement on Form S-1, Reg. No. 33-95802.

      (2) Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended June 30, 1996.

      (3) Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1996.

      (4) Incorporated by reference to the Company's Current Report on Form 8-K
          dated July 3, 1996.

      (5) Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1996.

      (6) Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended March 31, 1997.

      (7) Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended June 30, 1997.

      (8) Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1997.



(b)   Reports on Form 8-K

      During the second quarter of 1997, the Company filed a Form 8-K, dated
      April 3, 1997, regarding the Company not meeting analysts' estimates for
      sales and net income for the quarter ended March 31, 1997.

This Form 10-K includes references to registered trademarks and brand names of
the Company and of manufacturers whose products are sold by the Company. The
Company's principal trademarks and brand names include GT(R), GT Bicycles(R), GT
all terra(R), Dyno(R), Powerlite(R), Auburn(R), Robinson(R), Crestline(R), Cycle
Design(R), GT Triple Triangle Design(R), Groove Tube(R) and Spin(R).


                                       27
<PAGE>   28
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Santa Ana,
State of California, on April 6, 1998.

                                    GT BICYCLES,  INC.


                                    By: /s/ Michael C. Haynes
                                        ----------------------------------
                                        Michael C. Haynes
                                        President, Chief Executive Officer
                                        and Director


We, the undersigned directors and officers of GT Bicycles, Inc., do hereby
constitute and appoint Michael C. Haynes our true and lawful attorney and agent,
with full powers of substitution to do any and all acts and things in our name
and behalf in our capacities as directors and officers and to execute any and
all instruments for us and in our names in the capacities indicated below, which
said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
hereto; and we do hereby ratify and confirm all that said attorney and agent,
shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


/s/ Michael C. Haynes      President, Chief Executive Officer    April 6, 1998
-----------------------
Michael C. Haynes          and Director
                           (Principal Executive Officer)

/s/ Charles Cimitile       Vice President, Finance and           April 6, 1998
-----------------------
Charles Cimitile           Chief Financial Officer
                           (Principal Financial and Principal
                           Accounting Officer)

/s/ William K. Duehring    Chief Operating Officer and           April 6, 1998
-----------------------
William K. Duehring        Director

/s/ Robert C. Gay          Director                              April 6, 1998
-----------------------
Robert C. Gay

/s/ Joseph J. Pretlow      Director                              April 6, 1998
-----------------------
Joseph J. Pretlow

/s/ Geoffrey S. Rehnert    Director                              April 6, 1998
-----------------------
Geoffrey S. Rehnert


                                       28
<PAGE>   29
                          INDEPENDENT AUDITORS' REPORT




The Board of Directors
GT Bicycles, Inc.:

We have audited the consolidated balance sheets of GT Bicycles, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GT Bicycles, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.


                                    KPMG PEAT MARWICK LLP


Orange County, California
February 25, 1998


                                      F-1

<PAGE>   30
                       GT BICYCLES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                               -------------------------------
ASSETS (NOTE 6)                                                                     1997              1996
                                                                               -------------     -------------
<S>                                                                            <C>               <C>
Current assets:
       Cash and cash equivalents                                               $     588,000     $          --
       Trade accounts receivable, net of allowances of $2,334,000 and
           $1,634,000 at December 31, 1997 and 1996, respectively                 52,418,000        51,843,000
       Inventories (note 3)                                                       80,985,000        74,328,000
       Prepaid expenses and other current assets                                   3,098,000         1,980,000
       Deferred income taxes (note 8)                                              1,646,000         1,915,000
                                                                               -------------     -------------
              Total current assets                                               138,735,000       130,066,000

Property, plant and equipment, net (notes 4 and 9)                                12,833,000         5,023,000
Goodwill and other intangibles, net (notes 2, 5 and 11)                           19,920,000        19,388,000
Other assets (note 11)                                                             1,161,000         1,704,000
Restricted cash (note 6)                                                           3,607,000                --
Deferred income taxes (note 8)                                                        25,000                --
                                                                               -------------     -------------
                                                                               $ 176,281,000     $ 156,181,000
                                                                               =============     =============



LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Current portion of long-term debt (note 6)                              $  92,883,000     $   4,250,000
       Current portion of capital lease obligations (note 9)                         462,000           376,000
       Accounts payable                                                           11,915,000        12,468,000
       Accrued liabilities                                                         4,310,000         4,519,000
       Income taxes payable                                                          463,000         1,061,000
                                                                               -------------     -------------
           Total current liabilities                                             110,033,000        22,674,000
       Long-term debt, net of current portion (note 6)                             4,438,000        73,421,000
       Capital lease obligations, net of current portion (note 9)                    407,000           629,000
       Deferred income taxes (note 8)                                                     --            92,000
       Other liabilities                                                                  --           212,000
                                                                               -------------     -------------
           Total liabilities                                                     114,878,000        97,028,000
                                                                               -------------     -------------

Stockholders' equity (notes 6 and 7):
       Preferred stock, $0.001 par value, 5,000,000 shares authorized, none
           issued                                                                         --                --
       Common stock, $0.001 par value, 20,000,000 shares authorized,
           9,821,000 and 9,781,000 shares issued and outstanding
           at December 31, 1997 and 1996, respectively                                10,000            10,000
       Additional paid-in-capital                                                 47,182,000        46,916,000
       Retained earnings                                                          14,608,000        11,458,000
       Foreign currency translation adjustment                                      (397,000)          769,000
                                                                               -------------     -------------
           Total stockholders' equity                                             61,403,000        59,153,000

Commitments and contingencies (note 9) 
                                                                               -------------     -------------
                                                                               $ 176,281,000     $ 156,181,000
                                                                               =============     =============
</TABLE>

         See accompanying notes to be consolidated financial statements.


                                       F-2
<PAGE>   31
                       GT BICYCLES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                             ------------------------------------------------
                                                                  1997             1996              1995
                                                             -------------    -------------     -------------
<S>                                                          <C>              <C>               <C>          
Net sales                                                    $ 216,214,000    $ 208,351,000     $ 168,933,000
Cost of sales                                                  156,349,000      149,147,000       124,524,000
                                                             -------------    -------------     -------------

          Gross profit                                          59,865,000       59,204,000        44,409,000

Selling, general and administrative expenses                    48,083,000       38,450,000        28,429,000
Amortization of intangibles and deferred financing costs         1,002,000          739,000         3,313,000
Nonrecurring charge (note 13)                                           --               --         4,708,000
                                                             -------------    -------------     -------------

Operating income                                                10,780,000       20,015,000         7,959,000

Life insurance proceeds, net of guaranteed severance
     payments of $724,000 (note 14)                                     --       (1,276,000)               --
Interest expense (note 6)                                        5,586,000        3,828,000         6,070,000
                                                             -------------    -------------     -------------

Income before taxes and extraordinary item                       5,194,000       17,463,000         1,889,000

Provision for income taxes (note 8)                              2,044,000        5,887,000         1,027,000
                                                             -------------    -------------     -------------

Income before extraordinary item                                 3,150,000       11,576,000           862,000

Extraordinary loss from early extinguishment of
     debt, net of income tax benefit of $978,000 (note 6)               --               --        (1,146,000)
                                                             -------------    -------------     -------------

Net income (loss)                                            $   3,150,000    $  11,576,000     $    (284,000)
                                                             =============    =============     =============

Earnings (loss) per share:
          Basic:
          Income before extraordinary item                   $        0.32    $        1.18     $        0.12
          Extraordinary item                                            --               --             (0.16)
                                                             -------------    -------------     -------------
          Net income (loss)                                  $        0.32    $        1.18     $       (0.04)
                                                             =============    =============     =============

          Diluted:
          Income before extraordinary item                   $        0.32    $        1.17     $        0.12
          Extraordinary item                                            --               --             (0.16)
                                                             -------------    -------------     -------------
          Net income (loss)                                  $        0.32    $        1.17     $       (0.04)
                                                             =============    =============     =============


Weighted average common and common equivalent shares:
          Basic                                                  9,804,000        9,772,000         7,256,000
                                                             =============    =============     =============
          Diluted                                                9,918,000        9,932,000         7,403,000
                                                             =============    =============     =============
</TABLE>

         See accompanying notes to be consolidated financial statements.


                                      F-3
<PAGE>   32
                       GT BICYCLES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                               
<TABLE>
<CAPTION>
                                                                                    RETAINED       FOREIGN
                                                 COMMON STOCK       ADDITIONAL      EARNINGS       CURRENCY         TOTAL
                                            ---------------------     PAID-IN     (ACCUMULATED    TRANSLATION    STOCKHOLDERS'
                                              SHARES      AMOUNT      CAPITAL       DEFICIT)      ADJUSTMENT        EQUITY
                                            ----------    -------   -----------   ------------    -----------    ------------
<S>                                         <C>          <C>        <C>           <C>             <C>            <C>         
Balance, December 31, 1994                   6,600,000    $ 7,000   $ 6,607,000   $    166,000    $        --    $  6,780,000

Cancellation of shares (note 7)               (277,000)        --            --             --             --              --
Exercise of warrants (note 7)                  292,000         --            --             --             --              --
Issuance of common stock, net of offering
     costs                                   3,150,000      3,000    40,213,000             --             --      40,216,000
     (note 7)
Net loss                                            --         --            --       (284,000)            --        (284,000)
                                            ----------    -------   -----------   ------------    -----------    ------------

Balance, December 31, 1995                   9,765,000     10,000    46,820,000       (118,000)            --      46,712,000

Exercise of options (note 7)                    11,000         --        34,000             --             --          34,000
Issuance of common stock for employee
     stock purchase plan (note 7)                5,000         --        62,000             --             --          62,000
Net income                                          --         --            --     11,576,000             --      11,576,000
Foreign currency translation adjustment             --         --            --             --        769,000         769,000
                                            ----------    -------   -----------   ------------    -----------    ------------

Balance, December 31, 1996                   9,781,000     10,000    46,916,000     11,458,000        769,000      59,153,000

Exercise of options (note 7)                    16,000         --        58,000             --             --          58,000
Issuance of common stock for employee
     stock purchase plan (note 7)               24,000         --       208,000             --             --         208,000
Net income                                          --         --            --      3,150,000             --       3,150,000
Foreign currency translation adjustment             --         --            --             --     (1,166,000)     (1,166,000)
                                            ----------    -------   -----------   ------------    -----------    ------------

Balance, December 31, 1997                   9,821,000    $10,000   $47,182,000   $ 14,608,000    $  (397,000)   $ 61,403,000
                                            ==========    =======   ===========   ============    ===========    ============
</TABLE>

         See accompanying notes to be consolidated financial statements.


                                      F-4
<PAGE>   33
                       GT BICYCLES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                    ----------------------------------------------
                                                                                        1997             1996             1995
                                                                                    ------------     ------------     ------------
<S>                                                                                 <C>              <C>              <C>
Cash flows from operating activities:
    Net income (loss)                                                               $  3,150,000     $ 11,576,000     $   (284,000)
    Adjustments to reconcile net income (loss) to net
       cash used in operating activities:
       Depreciation and amortization                                                   2,772,000        1,595,000        4,084,000
       Write-off of covenant not to compete                                                   --               --        4,708,000
       Extraordinary loss from early extinguishment of debt                                   --               --        2,124,000
       Provisions for discounts and losses on accounts receivable                      1,334,000          589,000          343,000
       Deferred income taxes, net                                                        152,000         (265,000)         526,000
       Foreign currency translation gain (loss)                                       (1,166,000)         769,000               --
    Changes in assets and liabilities:
       Trade accounts receivable                                                      (1,909,000)     (11,406,000)      (9,974,000)
       Inventories                                                                    (6,657,000)     (18,996,000)      (6,002,000)
       Income taxes payable                                                             (598,000)       1,776,000       (1,309,000)
       Prepaid expenses and other assets                                              (1,404,000)        (966,000)        (726,000)
       Accounts payable                                                                 (553,000)         434,000       (2,403,000)
       Accrued liabilities                                                              (209,000)         211,000           92,000
       Other liabilities                                                                (212,000)         212,000               --
                                                                                    ------------     ------------     ------------
            Net cash used in operating activities                                     (5,300,000)     (14,471,000)      (8,821,000)
                                                                                    ------------     ------------     ------------

Cash flows from investing activities:
    Purchases of property, plant and equipment                                        (9,606,000)      (2,408,000)        (694,000)
    Write-off of leasehold improvements                                                  279,000               --               --
    Restricted cash from industrial development bonds                                 (3,607,000)              --               --
    Investments in unconsolidated affiliates                                            (110,000)        (500,000)              --
    Purchase of Riteway Products North Central, Inc.                                          --               --       (3,267,000)
    Purchase of Caratti Sport Limited                                                         --      (13,428,000)              --
    Purchase of Riteway Products France S.A.R.L                                         (587,000)      (1,323,000)              --
                                                                                    ------------     ------------     ------------
            Net cash used in investing activities                                    (13,631,000)     (17,659,000)      (3,961,000)
                                                                                    ------------     ------------     ------------

Cash flows from financing activities:
    Net borrowings under lines of credit                                              18,947,000       16,236,000        9,660,000
    Borrowings from term loan                                                                 --       17,000,000      (37,000,000)
    Repayments of term loan                                                           (4,250,000)      (1,063,000)              --
    Borrowings from industrial development bonds                                       5,000,000               --               --
    Repayments of industrial development bonds                                          (112,000)              --               --
    Proceeds from issuance of common stock and warrants                                  266,000           96,000       40,216,000
    Principal payments on capital lease obligations                                     (332,000)        (139,000)        (167,000)
                                                                                    ------------     ------------     ------------
            Net cash provided by financing activities                                 19,519,000       32,130,000       12,709,000
                                                                                    ------------     ------------     ------------

Net increase (decrease) in cash and cash equivalents                                     588,000               --          (73,000)
Cash and cash equivalents at beginning of year                                                --               --           73,000
                                                                                    ------------     ------------     ------------
Cash and cash equivalents at end of year                                            $    588,000     $         --     $         --
                                                                                    ============     ============     ============

Supplemental disclosure of cash flow information:
Cash paid during the year for:
       Interest                                                                     $  5,599,000     $  3,692,000     $  6,248,000
                                                                                    ============     ============     ============
       Income taxes                                                                 $  2,490,000     $  4,447,000     $    969,000
                                                                                    ============     ============     ============


Supplemental disclosures:
    Purchase of Riteway Products North Central, Inc. 
       Inventories                                                                  $         --     $         --     $  2,217,000
       Property, plant and equipment                                                          --               --           77,000
       Goodwill                                                                               --               --          323,000
       Covenant not to compete                                                                --               --          650,000
                                                                                    ------------     ------------     ------------
          Net cash used to acquire business                                         $         --     $         --     $  3,267,000
                                                                                    ============     ============     ============

    Purchase of Caratti Sport Limited
       Working capital, other than cash                                             $         --     $  9,194,000     $         --
       Property, plant and equipment                                                          --          433,000               --
       Goodwill                                                                               --        9,871,000               --
       Long-term debt                                                                         --       (5,888,000)              --
       Noncurrent liabilities                                                                 --         (182,000)              --
                                                                                    ------------     ------------     ------------
          Net cash used to acquire business                                         $         --     $ 13,428,000     $         --
                                                                                    ============     ============     ============

    Purchase of Riteway Products France S.A.R.L 
       Inventories                                                                  $         --     $  1,201,000     $         --
       Property, plant and equipment                                                          --           54,000               --
       Goodwill and other assets                                                         587,000           68,000               --
                                                                                    ------------     ------------     ------------
          Net cash used to acquire business                                         $    587,000     $  1,323,000     $         --
                                                                                    ============     ============     ============

    Purchase of equipment under capital lease obligations                           $    196,000     $    143,000     $         --
                                                                                    ============     ============     ============
</TABLE>

         See accompanying notes to be consolidated financial statements.


                                      F-5
<PAGE>   34
                       GT BICYCLES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BUSINESS

Description of the Company

GT Bicycles, Inc. (the "Company") is a leading designer, manufacturer and
marketer of mid- to premium-priced mountain and juvenile BMX bicycles sold under
the Company's brand names. The Company's Riteway Products and Caratti
distribution network is a leading distributor of the Company's bicycles, parts
and accessories, as well as parts and accessories of other manufacturers to
independent bicycle dealers.

The name of the Company was changed from GT Holdings, Inc. to GT Bicycles, Inc.
on August 11, 1995. The Company consummated an initial public offering ("IPO")
of its common stock in October 1995.

Substantial Leverage and Liquidity

As of December 31, 1997, the Company's total indebtedness was approximately
$97.3 million, and there was approximately $3.6 million available under its
revolving credit facilities for future borrowings. The revolving credit facility
in the current amount of $80.7 million and a term loan of $11.7 million become
due and payable on June 30, 1998. In addition, the availability of the revolving
credit facility will be reduced from $80.0 million to $60.0 million on May 1,
1998. As of December 31, 1997, the Company had stockholders' equity of
approximately $61.4 million. The Company's high degree of leverage could have
important consequences, including (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital may be limited; (iii) the
Company may be more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (iv) the Company's ability to
refinance its revolving credit facility and its term loan due and payable on
June 30, 1998 may be adversely affected. The Company anticipates that it will be
required to seek a continuation of the $80.0 million of availability under its
revolving credit facility from its senior secured lender, which is scheduled to
be reduced from $80.0 million to $60.0 million on May 1, 1998. The Company is
negotiating with its existing senior secured lender and other lenders regarding
longer-term financing or the refinancing of its revolving credit and term loan
facilities. However, there can be no assurance that the Company will be able to
obtain a continuation of the $80.0 million of availability under its revolving
credit facility or other financing on acceptable terms, or at all. The failure
to obtain a continuation or other acceptable financing would have a material
adverse affect on the Company's business, results of operations, financial
condition and liquidity.

Dependence on Foreign Suppliers

The Company's business is highly dependent on products manufactured by foreign
suppliers located primarily in Taiwan and Japan and to a lesser extent the
People's Republic of China. The Company's business is subject to the risks
generally associated with doing business abroad, including, but not limited to,
delays in shipment, foreign governmental regulation, adverse fluctuations in
foreign exchange rates, difficulties in collecting receivables, embargoes,
tariffs, exchange controls, trade disputes, changes in economic conditions and
political turmoil in the countries in which the Company's manufacturing sources
are located. The Company cannot predict the effect that such factors will have
on its business arrangements with foreign suppliers or manufacturing sources.
Any significant delay or disruption in supply of bicycles or bicycle parts and
accessories could have a material adverse effect on the Company's financial
condition, results of operations and liquidity.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company include the wholly-owned
subsidiaries, GT Bicycles California, Inc., GT BMX Products, Inc., Riteway
Distributors, Inc., Riteway Distributors Central, Inc., Riteway Products East,
Inc., Riteway Products North Central, Inc., Riteway Products Japan K.K.
("Riteway Japan"), Riteway Products France S.A.R.L. ("Riteway France") and
Caratti Sport Limited ("Caratti") in the United Kingdom, as well as the
majority-owned subsidiaries, Innovations in Composites, Inc. ("Innovations") and
Riteway Products Canada Limited ("Riteway Canada"). Investments in affiliates,
for which the Company has an ownership interest of at least 20% but not
exceeding 50%, are recorded under the equity method of accounting.

Riteway Products North Central, Inc., Riteway France, and Caratti were acquired
in July 1995, April 1996, and July 1996, respectively, and have been accounted
for under the purchase method of accounting. Accordingly, the purchase price of
each entity was allocated to the assets acquired based on their estimated fair
values. The excess of the purchase price over the fair market values of the net
assets acquired has been recorded as goodwill. Riteway Japan was formed in March
1996 as a wholly-owned subsidiary of the Company. Riteway Canada was formed in
September 1997 as an 85%-owned subsidiary of the Company.

The Company held a 45% ownership interest in Innovations from 1993 through June
1997. In July 1997, the Company increased its ownership level in Innovations to
57% through the purchase of additional common shares. At that date, the Company
changed its method of accounting for Innovations from the equity method to
consolidation (see note 11).

The interest of minority shareholders in the equity of Innovations and Riteway
Canada is included in accrued liabilities on the accompanying balance sheet and
their interest in the earnings of these entities is included in selling, general
and administrative expenses on the accompanying statement of operations. Such
amounts were not material in fiscal 1997.

All significant intercompany balances and transactions have been eliminated in
consolidation.

                                      F-6
<PAGE>   35
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Foreign Currency Translation

The Company uses the local currency of the respective country as the functional
currency for its overseas operations. Accordingly, assets and liabilities
outside the United States are translated into dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at the
weighted average exchange rates prevailing during the period. The cumulative
translation gain or loss is included as an adjustment to stockholders' equity.
There were no significant foreign currency transaction gains or losses in the
periods presented.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers
all highly-liquid investments with original maturities of three months or less
to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market ("net realizable value").
Cost is determined using the average cost method, which approximates the
first-in, first-out (FIFO) method.

Revenue Recognition

Revenue is recognized and estimated warranty expenses are accrued upon product
shipment.

The Company contracts with independent overseas manufacturers for the production
of certain goods ordered by its international distributors and, in most cases,
arranges for the shipment of the goods directly to these international
distributors. All sales orders by international distributors are placed directly
with the Company. The Company recognizes revenue for these transactions at the
time of shipment of goods from the contract manufacturer. For sales transactions
with certain international distributors, the Company arranges for a portion of
the total sales price to be billed directly by the contract manufacturer. The
Company includes in net sales and cost of sales the amount billed by the
contract manufacturer and the amount paid by the Company for the goods,
respectively. The portion billed by the contract manufacturer for these
transactions is generally secured by an irrevocable letter of credit opened by
the international distributor. In other cases, the contract manufacturer may
grant credit to the international distributor and the Company guarantees
payments for the goods.

Research and Product Development Costs

Research and product development costs are expensed as incurred. Selling,
general and administrative expenses of the Company include research and product
development expenses of approximately $2,574,000, $1,844,000 and $1,596,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

Advertising and Promotion Costs

Advertising costs and promotion costs are expensed as incurred or the first time
the promotional event/advertising takes place. Selling, general and
administrative expenses of the Company include advertising and promotion costs
of approximately $4,879,000, $3,914,000 and $2,685,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. The cost of additions and
improvements are capitalized, while maintenance and repairs are expensed as
incurred. Depreciation is computed on the straight-line method over the


                                      F-7
<PAGE>   36
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


estimated useful lives of the related assets (ranging from 5 to 7 years). 
Assets held under capital leases and leasehold improvements are amortized over 
the lesser of the estimated useful lives of the assets or the related lease 
terms.

Intangible Assets

Intangible assets at December 31, 1997 and 1996 consist of goodwill relating to
various acquisitions, covenants not to compete from the acquisition of Riteway
Products North Central, Inc., and trademarks, patents and other items (see note
5). Amortization of intangibles is recorded on a straight-line basis over the
following periods: 25 years for goodwill, the contractual term of five years for
covenants not to compete, and the respective lives ranging from 5 to 25 years
for other intangibles.

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews identifiable intangibles and goodwill for
impairment whenever events or circumstances indicate the carrying amount may not
be recoverable based upon a comparison of the asset carrying value to the
expected future cash flows (undiscounted and without interest charges).

Income Taxes

The Company accounts for income taxes under the provisions of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.

Forward Exchange Contracts

The Company from time to time enters into short-term, forward exchange contracts
to hedge the impact of foreign currency fluctuations on specific purchase
commitments denominated in foreign currencies. The gains and losses on these
contracts are included in the value of the assets which they were intended to
hedge. At December 31, 1997 and 1996, the Company had forward exchange contracts
outstanding, with maturities of five months or less, to exchange foreign
currencies for approximately $2,200,000 and $3,300,000, respectively.

Use of Estimates

Company management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.

Earnings (Loss) per Share

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This
statement replaces the previously-reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is very similar to the previously-reported primary earnings
per share in that it includes the effect of the additional common shares which
would have been outstanding if dilutive stock options had been exercised. All
earnings per share amounts have been restated to conform to the SFAS No. 128
requirements.


                                      F-8
<PAGE>   37
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


The following table summarizes the calculation of basic and diluted earnings
per share before extraordinary item:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                     -----------------------------------------------
                                                          1997              1996            1995
                                                     --------------    --------------    -----------
<S>                                                  <C>               <C>               <C>
Numerator:
   Basic and diluted earnings per share --
     income before extraordinary item                $    3,150,000    $   11,576,000    $   862,000
                                                     ==============    ==============    ===========

Denominator:
  Basic earnings per share -- weighted
      average number of common shares                     9,804,000         9,772,000      7,256,000
      outstanding during the year
  Incremental common shares attributable to
      assumed exercise of outstanding stock
      options                                               114,000           160,000        147,000
                                                     --------------    --------------    -----------
   Denominator for diluted earnings per
      share                                               9,918,000         9,932,000      7,403,000
                                                     ==============    ==============    ===========

Basic earnings per share                             $          .32    $         1.18    $       .12
                                                     ==============    ==============    ===========
Diluted earnings per share                           $          .32    $         1.17    $       .12
                                                     ==============    ==============    ===========
</TABLE>

The calculations of earnings per share before extraordinary item excluded the
effect of the assumed exercise of the following numbers of outstanding common
stock options because their effect was antidilutive: 106,000 in 1997, 2,000 in
1996 and 6,000 in 1995.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates fair value because of the
short-term maturity of these financial instruments. The carrying amount reported
for debt approximates fair value because for each borrowing either (i) the
underlying instrument is a variable note that reprices frequently or (ii) 
interest rates have not changed significantly since the inception of the 
borrowing. The carrying value of the Company's forward exchange contracts 
approximates fair value because of the short-term maturities of these financial
instruments.

Accounting for Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company accounts for
stock-based employee compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The Company provides the pro forma net income, pro forma
earnings per share, and stock based compensation plan disclosure requirements
set forth in SFAS No. 123 (see note 7).

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS No. 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS No.
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon 


                                      F-9
<PAGE>   38
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


adoption of SFAS No. 130 and SFAS No. 131, respectively. Application of the
Statements' requirements is not expected to have a material impact on the
Company's consolidated financial position, results of operations or liquidity.


Reclassifications

Certain prior year amounts have been reclassified to conform with the fiscal
1997 presentation.


(3) INVENTORIES

A summary of the components of inventories follows:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,      DECEMBER 31,
                                                      1997              1996
                                                   -----------       -----------
<S>                                                <C>               <C>        
Raw materials                                      $   678,000       $    95,000
Work in process                                      3,124,000         3,659,000
Finished goods and component parts                  77,183,000        70,574,000
                                                   -----------       -----------
                                                   $80,985,000       $74,328,000
                                                   ===========       ===========
</TABLE>

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost, consist of the following:

<TABLE>
<CAPTION>
                                                  DECEMBER 31,     DECEMBER 31,
                                                      1997             1996
                                                  ------------     ------------
<S>                                               <C>              <C>         
Land                                              $    208,000     $         --
Leasehold improvements                               3,421,000          538,000
Machinery and equipment                              5,130,000        2,321,000
Computer equipment                                   3,727,000        2,441,000
Vehicles                                             1,665,000        1,208,000
Office furniture and equipment                       1,836,000        1,201,000
Construction in progress - Colorado facility         1,024,000               --
                                                  ------------     ------------
                                                    17,011,000        7,709,000
Less accumulated depreciation and amortization      (4,178,000)      (2,686,000)
                                                  ------------     ------------
                                                  $ 12,833,000     $  5,023,000
                                                  ============     ============
</TABLE>


                                      F-10
<PAGE>   39
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(5) INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,        DECEMBER 31,
                                                  1997                 1996
                                               ------------        ------------
<S>                                            <C>                 <C>         
Goodwill                                       $ 21,794,000        $ 20,315,000
Covenants not to compete                            650,000             650,000
Trademarks, patents and other                       244,000             189,000
                                               ------------        ------------
                                                 22,688,000          21,154,000
Less accumulated amortization                    (2,768,000)         (1,766,000)
                                               ------------        ------------
                                               $ 19,920,000        $ 19,388,000
                                               ============        ============
</TABLE>


                                      F-11
<PAGE>   40
                       GT BICYCLES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(6)  LONG-TERM DEBT

Long-term debt is comprised of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,     DECEMBER 31,
                                                                1997             1996
                                                            ------------     ------------
<S>                                                         <C>              <C>
Domestic revolving credit facility, secured by the
assets of the Company, due June 30, 1998. Interest is
payable monthly at various interest rates described
below (weighted average rate of 8.17% and 6.84% at
December 31, 1997 and 1996, respectively)                   $ 65,490,000     $ 51,617,000

Domestic term loan, secured by the assets of the
Company, due quarterly through June 30, 1998. 
Interest is payable monthly at various interest rates
described below (weighted average rate of 8.09% and
7.55% at December 31, 1997 and 1996, respectively)            11,688,000       15,938,000

Riteway Japan revolving credit facility, secured by the
assets of the Company, due June 30, 1998. Interest is
payable monthly at rate described below (weighted
average rate of 1.97% and 1.92% at December 31, 1997 and
1996, respectively)                                            1,761,000        2,236,000

Riteway France revolving credit facility, secured by the
assets of the Company, due June 30, 1998. Interest is
payable monthly at rate described below (weighted
average rate of 4.38% and 4.31% at December 31, 1997 and
1996, respectively)                                            3,280,000        3,431,000

Caratti revolving credit facility, secured by the assets
of Caratti, due June 30, 1998. Interest is payable
monthly at rate described below (weighted average rate
of 8.25% and 7.35% at December 31, 1997 and 1996,
respectively)                                                 10,149,000        4,449,000

Industrial Development Bonds payable, secured by certain
property and equipment, due monthly through October 31,
2005. Interest is payable monthly at a rate of 5.87% per
annum                                                          4,888,000               --

Promissory note, secured by common shares of
Innovations, due June 30, 2000. Interest is payable
quarterly at a rate of 10.00% per annum                           65,000               --
                                                            ------------     ------------
                                                              97,321,000       77,671,000
Less current portion of debt                                 (92,883,000)      (4,250,000)
                                                            ------------     ------------
                                                            $  4,438,000     $ 73,421,000
                                                            ============     ============
</TABLE>


                                      F-12
<PAGE>   41
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


At December 31, 1997, future minimum principal payments on long-term debt were
as follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                                  <C>        
1998                                                                 $92,883,000
1999                                                                     541,000
2000                                                                     639,000
2001                                                                     609,000
2002                                                                     645,000
Thereafter                                                             2,004,000
                                                                     ===========
                                                                     $97,321,000
                                                                     ===========
</TABLE>

In November 1995, the Company entered into a domestic credit agreement, as most
recently-amended in March 1998, with a bank that provides for a domestic
revolving credit facility and a domestic term loan. The Company also entered
into separate credit agreements with the same bank to provide separate credit
facilities to Riteway Japan, Riteway France and Caratti. These credit agreements
expire on June 30, 1998. Although the Company is negotiating with the bank to
obtain a longer-term financing structure, there can be no assurance that the
Company will be able to obtain such financing. Accordingly, the outstanding
balances of the revolving credit facilities and the term loan have been
classified in current liabilities at December 31, 1997 (see note 1).

The credit agreements require the Company to maintain certain financial ratios
and other covenants, which, among other things, restrict other indebtedness,
capital expenditures and certain investments. At December 31, 1997, the Company
was in default of certain financial covenants for which the bank has issued a
waiver. In addition, the credit agreement was amended in October 1997 to require
the Company to obtain $30,000,000 of unsecured financing by February 28, 1998;
however, such requirement was waived by the bank in January 1998.

Domestic Revolving Credit Facility

The total amount of credit available under the domestic revolving credit
facility for advances and letters of credit is limited to the lesser of (a)
$80,000,000 through April 30, 1998 and $60,000,000 thereafter, or (b) the
Company's borrowing base associated with accounts receivable and inventories, as
defined by the agreement, plus an additional $15,000,000 available through April
30, 1998. The borrowing base is reduced each month by $3,000,000 and $3,500,000
for Riteway Japan and Riteway France, respectively, which represents the credit
facilities extended by the bank to these locations. The amount individually
available under commercial and standby letters of credit is $15,000,000. The
Company has the option to pay interest on borrowings under the domestic
revolving credit facility at the bank's Reference Rate plus the applicable
margin (as defined by the agreement), the LIBOR Rate plus the applicable margin
(as defined by the agreement), the Offshore Rate plus the applicable margin (as
defined by the agreement) or a combination thereof. The Company must pay a
commitment fee on a quarterly basis equal to .25% (per annum) of the unused
amount of the credit up to the revolving credit limit. At December 31, 1997, the
Company had approximately $249,000 of commercial or standby letters of credit
outstanding.

Domestic Term Loan

The domestic term loan with an original amount of $17,000,000 is payable in
equal quarterly installments of $1,250,000 and matures on the earlier of
September 30, 2000 or the expiration of the domestic revolving credit facility.
The domestic term loan is made up of two disbursements: 1) $14,000,000 for the
purchase of Caratti, and 2) $3,000,000 for the repayment of Caratti's prior bank
debt. The Company has the option to pay interest on borrowings under the
domestic term loan at the bank's Reference Rate (as defined by the agreement),
the LIBOR Rate plus the applicable margin (as defined by the agreement), the
Offshore Rate plus the applicable margin (as defined by the agreement), or a
combination thereof.


                                      F-13
<PAGE>   42
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Riteway Japan Credit Facility

The Riteway Japan credit facility consists of a $3,000,000 revolving credit
facility. Interest on borrowings under the revolving credit facility is payable
monthly at the bank's base rate plus the applicable margin.

Riteway France Credit Facility

The Riteway France credit facility consists of a $3,500,000 revolving credit
facility. Interest on borrowings under the revolving credit facility is payable
monthly at the bank's base rate plus the applicable margin.

Caratti Credit Facility

The Caratti credit facility consists of a multicurrency revolving credit
facility, a multicurrency overdraft facility and a multicurrency facility for
the issuance of irrevocable commercial letters of credit in an aggregate amount
equal to the lesser of $10,000,000 (or its equivalent from time to time in
optional currencies, as defined by the agreement) or Caratti's borrowing base
associated with accounts receivable and inventories, as defined by the
agreement. The amount individually available under the irrevocable commercial
letters of credit is $1,500,000 (or its equivalent from time to time in optional
currencies, as defined by the agreement). The overdraft facility is repayable on
demand by the bank. Interest on borrowings under the multicurrency revolving
credit facility is payable monthly at the sum of the MLA Cost (as defined by the
agreement), the applicable margin, and LIBOR (as defined by the agreement).
Interest on the multicurrency overdraft facility is payable monthly at the
bank's prevailing base rate plus the applicable margin. Caratti must pay a
commitment fee on a quarterly basis equal to .25% (per annum) of the unused
amount of the credit up to $10,000,000. At December 31, 1997, the Company had no
commercial letters of credit outstanding.

Industrial Development Bonds

In September 1997, the Company consummated a $5,000,000 borrowing under a
California Economic Development Financing Authority program. Principal and
interest at a 5.87% per annum rate are payable in aggregate monthly installments
of $65,000 through October 2005. Use of the borrowed funds is restricted to the
purchase of qualifying leasehold improvements and production equipment at the
Company's Santa Ana facility. Pending disbursement for such capital
expenditures, the funds have been placed in an interest-bearing bank trust
account and are classified as restricted cash on the balance sheet. Through
December 31, 1997, approximately $1,455,000 had been drawn from the trust fund
to finance capital expenditures. The restricted cash balance at December 31,
1997 consists of the remaining $3,545,000 of borrowings plus $62,000 of interest
earned.

Extraordinary Loss from Early Extinguishment of Debt

In October 1995, the Company repaid all outstanding indebtedness under a senior
term loan and senior subordinated debenture with the proceeds from the IPO (see
note 7). In connection with the repayment of the senior term loan and senior
subordinated debenture, the Company incurred substantial charges relating to the
acceleration of the amortization of related deferred financing costs associated
with the senior term loan and the acceleration of the unamortized debenture
discount associated with the senior subordinated debenture. The costs related to
this transaction of approximately $1,146,000, net of tax benefits of
approximately $978,000, are reflected in the consolidated statement of
operations as an extraordinary loss from early extinguishment of debt for the
year ended December 31, 1995.

Under the terms of the senior subordinated debenture agreement, the Company
issued shares of its Class B common stock and warrants to purchase approximately
347,000 shares of its Class B common stock to the holders of the debenture. In
connection with the Company's IPO, some of these warrants were exercised and the
remaining warrants were canceled (see note 7).


                                      F-14
<PAGE>   43
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(7) STOCKHOLDERS' EQUITY

In October 1995, the Company completed its IPO, selling 3,150,000 shares of
common stock. The offering provided the Company with approximately $40,200,000
in proceeds, net of offering costs of approximately $800,000. The Company
utilized approximately $37,000,000 of the net proceeds to retire long-term debt.

In connection with the Company's IPO, the Company effected a recapitalization
whereby each share of Class A common stock and Class B common stock was
exchanged for one share of common stock. This recapitalization also reflects a
contribution to capital for the cancellation of approximately 277,000 shares of
Class A common stock by certain stockholders of the Company, the exercise of a
warrant to purchase approximately 292,000 shares of Class B common stock and the
cancellation of the remainder of the warrant to purchase approximately 56,000
shares of Class B common stock by a certain stockholder of the Company and an
11-for-1 stock split (see note 6).

In addition to the common stock, the Company is authorized to issue up to
5,000,000 shares of $.001 par value preferred stock, in one or more series and
to fix the rights, preferences and privileges thereof, including voting rights,
term of redemption, redemption prices, liquidation preferences, number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders. As of December 31, 1997 and 1996, there were no
shares of preferred stock outstanding.

At December 31, 1997, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25 in accounting for
its stock-based compensation plans; accordingly, no compensation cost has been
recognized for its stock option plan in the financial statements. Compensation
cost that has been charged against income for the employee stock purchase plan
was approximately $31,000 and $9,000 for the years ended December 31, 1997 and
1996, respectively. Had compensation cost for these plans been determined based
on the fair value at the grant dates consistent with the method of SFAS No. 123,
the Company's net income and earnings (loss) per share would have been reduced
to the pro forma amounts indicated as follows:

<TABLE>
<CAPTION>
                                                       1997             1996               1995
                                                  --------------   --------------     --------------
<S>                                 <C>           <C>              <C>                <C>
Net income (loss)                   As reported   $    3,150,000   $   11,576,000     $     (284,000)
                                    Pro forma          2,646,000       11,386,000           (306,000)

Diluted earnings (loss) per share   As reported   $         0.32   $         1.17     $        (0.04)
                                    Pro forma               0.27             1.15              (0.04)
</TABLE>

The pro forma net income (loss) and earnings (loss) per share amounts reflect
only options granted in 1997, 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma amounts presented above because compensation cost is
reflected over the option's vesting period of four years and compensation cost
for options granted prior to January 1, 1995 is not considered.

Stock Option Plan

During November 1993, the Company adopted the GT Bicycles, Inc. Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1993 (the
"Plan"). The Plan contains two components: a stock option component and a
restricted share purchase component. The purpose of the Plan is to provide
incentives to selected employees, officers and non-employee directors of the
Company for increased efforts and successful achievements on behalf of the
Company.

The Plan, as amended, provides for the granting of up to 1,000,000 shares of the
Company's common stock in the form of stock options or rights to purchase
restricted shares. Awards or offers under the Plan, vesting periods and the
exercise price of the options or the purchase price for restricted shares are
determined by the Board of Directors of the Company. However, the exercise price
of the shares of common stock covered by the incentive stock options 


                                      F-15
<PAGE>   44
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


shall not be less than the fair market value of such shares on the date the
incentive stock option was granted. Options granted under the Plan expire ten
years after the date of the grant. Offers to purchase restricted shares
terminate automatically if not accepted within ninety days. As of December 31,
1997, there were 286,989 shares available for grant.

Activity in the Plan is summarized as follows:

<TABLE>
<CAPTION>
                                                               WEIGHTED-AVERAGE
                                                    SHARES      EXERCISE PRICE
                                                   --------        --------
<S>                                                <C>         <C>     
Options outstanding at December 31, 1994            148,500        $   1.82
Granted                                              84,511           10.83
Exercised                                                --             N/A
Canceled                                                 --             N/A
                                                   --------        --------
Options outstanding at December 31, 1995            233,011            5.09
Granted                                             382,597           10.91
Exercised                                           (10,750)           3.20
Canceled                                            (49,597)          11.13
                                                   --------        --------
Options outstanding at December 31, 1996            555,261            8.60
Granted                                             171,000            6.88
Exercised                                           (15,750)           3.70
Canceled                                            (24,000)          10.36
                                                   --------        --------
Options outstanding at December 31, 1997            686,511        $   8.22
                                                   ========        ========
</TABLE>

The following table summarizes information about the options outstanding under
the Plan at December 31, 1997:

<TABLE>
<CAPTION>
                                                      WEIGHTED-
                      OPTIONS                          AVERAGE        OPTIONS
   RANGE OF        OUTSTANDING AT     WEIGHTED-       REMAINING    EXERCISABLE AT     WEIGHTED-
   EXERCISE         DECEMBER 31,       AVERAGE       CONTRACTUAL    DECEMBER 31,       AVERAGE   
    PRICES             1997         EXERCISE PRICE      LIFE           1997         EXERCISE PRICE
--------------     --------------   --------------   -----------   --------------   --------------
<S>                <C>              <C>              <C>           <C>              <C>   
        $ 1.82            129,500           $ 1.82   6.88 years       129,500          $ 1.82
$6.50 - $ 8.38            201,597             6.95   9.41 years        17,423            7.69
$9.12 - $14.00            355,414            11.27   8.66 years        95,332           11.24
                   --------------           ------                 --------------      ------ 
$1.82 - $14.00            686,511           $ 8.22   8.54 years       242,255          $ 5.95
                   ==============           ======                 ==============      ======
</TABLE>


                                      F-16
<PAGE>   45
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


The per share weighted-average fair value of stock options granted during 1997,
1996 and 1995 was $4.13, $7.58 and $6.17, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
                                 1997               1996               1995
                            --------------     --------------     --------------
<S>                         <C>                <C>               <C>
Expected life (years)              6                  6                 6
Risk-free interest rate            7%                 7%                7%
Volatility                        55%                50%               50%
Expected dividend yield           --                 --                --
</TABLE>

Employee Stock Purchase Plan

In September 1995, the Company's Employee Stock Purchase Plan (the "Purchase
Plan") was adopted by the Board of Directors, covering an aggregate of 300,000
shares of common stock. The Purchase Plan was implemented by three-month
offerings with purchases occurring at three-month intervals commencing on April
1, 1996. The Purchase Plan is administered by the Stock Option Committee of the
Board of Directors of the Company. Employees are eligible to participate if they
have been employed by the Company for at least one year. The Purchase Plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 15% of an employee's compensation. The price of the stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of common stock at the beginning of the three-month offering period or on the
applicable purchase date. No employee may purchase more than 1,000 shares in any
plan year. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment. The Board may at any time amend or terminate the Purchase Plan,
except that no such amendment or termination may adversely affect shares
previously granted under the Purchase Plan. The Purchase Plan terminates in
September 2005. As of December 31, 1997, an aggregate 29,066 shares had been
issued and 270,934 shares remain available for future issuance under the
Purchase Plan.

The per share weighted-average fair value of shares issued during 1997 and 1996
was $1.54 and $2.18, respectively, on the date of issuance using the Black
Scholes option-pricing model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                   1997                1996
                                               --------------     --------------
<S>                                            <C>                <C> 
Expected life (years)                              0.25                0.25
Risk-free interest rate                               7%                  7%
Volatility                                           55%                 50%
Expected dividend yield                              --                  --
</TABLE>


                                      F-17
<PAGE>   46
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(8) INCOME TAXES

The provisions for income taxes consist of the following:

<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                               -------------------------------------------------
                                  1997               1996               1995
                               -----------        -----------        -----------
<S>                            <C>                <C>                <C>
Current:
     Federal                   $ 1,132,000        $ 5,005,000        $   403,000
     State                         191,000            989,000             98,000
     Foreign                       569,000            158,000                 --
                               -----------        -----------        -----------
                                 1,892,000          6,152,000            501,000
                               -----------        -----------        -----------

Deferred:
     Federal                       270,000           (198,000)           386,000
     State                        (118,000)           (67,000)           140,000
     Foreign                            --                 --                 --
                               -----------        -----------        -----------
                                   152,000           (265,000)           526,000
                               -----------        -----------        -----------
                               $ 2,044,000        $ 5,887,000        $ 1,027,000
                               ===========        ===========        ===========
</TABLE>

The provisions for income taxes differ from the amounts computed by applying the
Federal statutory income tax rate to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                -------------------------------------------------
                                                   1997                1996              1995
                                                -----------        -----------        -----------
<S>                                             <C>                <C>                <C>  
Computed "expected" income tax provision               34.0%              34.0%              34.0%
State franchise taxes, net of Federal benefit           0.9                3.4                8.3
Goodwill amortization                                   5.4                1.2                7.1
Life insurance proceeds                                  --               (3.9)                --
Other                                                  (0.9)              (1.0)               5.0
                                                -----------        -----------        -----------
                                                       39.4%              33.7%              54.4%
                                                ===========        ===========        ===========
</TABLE>

The tax-effected temporary differences that give rise to significant portions of
the deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
                                                           1997            1996
                                                        -----------     -----------
<S>                                                     <C>             <C>
Deferred tax assets:
     Accounts receivable                                $   103,000     $   614,000
     Inventories                                          1,123,000         970,000
     Covenants not to compete                                94,000          56,000
     Accrued expenses                                       580,000         533,000
     Tax credit carryforwards, investments and other        271,000              --
                                                        -----------     -----------
          Total deferred tax assets                       2,171,000       2,173,000
                                                        -----------     -----------

Deferred tax liabilities:
     State taxes                                           (210,000)       (202,000)
     Goodwill                                                (9,000)         (6,000)
     Investments in affiliates                             (281,000)       (142,000)
                                                        -----------     -----------
          Total deferred tax liabilities                   (500,000)       (350,000)
                                                        -----------     -----------
          Net deferred tax asset                        $ 1,671,000     $ 1,823,000
                                                        ===========     ===========
</TABLE>


                                      F-18
<PAGE>   47
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Based upon the Company's historical pre-tax earnings, management believes it is
more likely than not that the Company will realize the benefit of the existing
deferred tax asset at December 31, 1997. Management believes the existing net
deductible temporary differences will reverse during periods in which the
Company generates net taxable income, however, there can be no assurance that
the Company will generate any earnings or any specific level of continuing
earnings in future years. Certain tax planning or other strategies will be
implemented, if necessary, to supplement income from operations to fully realize
recorded tax benefits.

The Company has not provided for U.S. Federal income and foreign withholding
taxes on its foreign subsidiaries' undistributed earnings as of December 31,
1997 because such earnings are intended to be reinvested indefinitely. If these
earnings are distributed in the future, foreign tax credits would become
available under U.S. law to reduce the effect on the Company's overall tax
liability.

The Company has received notice from the Internal Revenue Service that the
Company's 1995 and 1996 Federal income tax returns will be audited. In addition,
the Company's 1993 and 1994 California income tax returns are currently being
audited by the Franchise Tax Board. In the opinion of management, these
examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.

(9) COMMITMENTS AND CONTINGENCIES

Included in computer equipment in the accompanying balance sheet are the
following assets held under capital leases at December 31:

<TABLE>
<CAPTION>
                                                   1997                1996
                                                -----------         -----------
<S>                                             <C>                 <C>        
Computer equipment                              $ 1,325,000         $ 1,129,000
Less accumulated amortization                      (668,000)           (447,000)
                                                -----------         -----------
                                                $   657,000         $   682,000
                                                ===========         ===========
</TABLE>

The Company also leases certain office, manufacturing, warehouse and plant
facilities under noncancelable operating leases. Future minimum lease payments
on capital and operating leases at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                      CAPITAL         OPERATING
                                                    ------------     ------------
<S>                                                 <C>              <C>         
1998                                                $    465,000     $  2,909,000
1999                                                     430,000        2,651,000
2000                                                      54,000        2,281,000
2001                                                       8,000        2,044,000
2002                                                          --        1,941,000
Thereafter                                                    --       10,089,000
                                                    ------------     ------------
                                                         957,000       21,915,000
Less sublease income                                          --         (298,000)
                                                    ------------     ------------
     Total minimum lease payments                        957,000     $ 21,617,000
                                                                     ============
Less amount representing interest                        (88,000)
                                                    ------------
     Present value of net minimum lease payments         869,000
Less current portion                                    (462,000)
                                                    ------------
Long-term portion                                   $    407,000
                                                    ============
</TABLE>

Three of the operating leases included above are with partnerships in which
certain stockholders and employees of the Company have an ownership interest.
Management believes that all lease arrangements with related parties are at
arm's length terms. Related party rental expense included in the accompanying
consolidated statements of operations for the years ended December 31, 1997,
1996 and 1995 amounted to $802,000, $547,000 and $159,000, 


                                      F-19
<PAGE>   48
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


respectively. Total rent expense, net of sublease income, for the years ended
December 31, 1997, 1996 and 1995 amounted to $2,990,000, $2,116,000 and
$1,207,000, respectively.

The Company is obligated to pay annual management fees not to exceed $100,000
per annum to an affiliate of one the Company's significant stockholders.

From time to time, the Company enters into purchase commitments for the
procurement of certain bicycle components, parts and accessories. The Company
expects to use the items to be procured under purchase commitments outstanding
at December 31, 1997 in the normal course of business.

The Company is a defendant in various product liability claims. Management
believes that the allegations in most of the claims are substantially without
merit and that others may be settled or lost, resulting in expenses incurred by
the Company. Management has accrued an estimate of the Company's eventual
liability related to these claims. In the opinion of management, any defense,
judgment or settlement of these claims will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.

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

(10) EMPLOYEE BENEFITS

The Company has a profit sharing plan covering substantially all employees who
have worked for the Company at least 12 months. The Company's annual
contributions to the plan are determined at the discretion of the Board of
Directors. Plan contributions expensed by the Company totaled $250,000, $500,000
and $500,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

(11) INVESTMENTS IN AFFILIATES

As discussed in note 2, the Company held a 45% interest in Innovations, which
manufactures certain bicycle parts, from 1993 through June 1997. During that
period, the Company's investment was included in other assets on the balance
sheet. The Company increased its ownership level to 57% in July 1997, at which
time Innovations was consolidated into the Company's financial statements. The
Company's investment in Innovations was accounted for under the purchase method
and allocated to the assets acquired based on their estimated fair values. The
excess of the Company's investment over its share of the fair value of
Innovations' net assets was recorded as goodwill. Purchases by the Company from
Innovations (which represent most of the Innovations' sales in 1997 and all of
its sales in 1996 and 1995) were $460,000, $1,052,000 and $1,050,000 for the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995,
respectively.

Included in other assets in the accompanying balance sheet at December 31, 1997
and 1996 is the Company's 50% investment in a partnership which manufactures and
markets an electric-assist bicycle and the Company's 45% investment in a foreign
exporting company.


                                      F-20
<PAGE>   49
                       GT BICYCLES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(12) GEOGRAPHIC DATA

A summary of the Company's net sales, operating income and identifiable assets
by geographic area follows:

<TABLE>
<CAPTION>
                                  1997              1996               1995
                              -------------     -------------      -------------
<S>                           <C>               <C>                <C>
Net sales:
     United States            $ 140,517,000     $ 142,985,000      $ 128,603,000
     Europe                      53,069,000        47,498,000         24,689,000
     Other foreign               22,628,000        17,868,000         15,641,000
                              -------------     -------------      -------------
                              $ 216,214,000     $ 208,351,000      $ 168,933,000
                              =============     =============      =============

Operating income:
     United States            $   8,004,000     $  19,069,000      $   7,959,000
     Europe                       1,916,000         1,387,000                 --
     Other foreign                  860,000          (441,000)                --
                              -------------     -------------      -------------
                              $  10,780,000     $  20,015,000      $   7,959,000
                              =============     =============      =============

Identifiable assets:
     United States            $ 139,725,000     $ 138,214,000      $  96,693,000
     Europe                      29,274,000        15,876,000                 --
     Other foreign                7,282,000         2,091,000                 --
                              -------------     -------------      -------------
                              $ 176,281,000     $ 156,181,000      $  96,693,000
                              =============     =============      =============
</TABLE>

No single customer accounted for more than 10% of net sales for each year or 10%
of trade accounts receivable at the end of each year. Identifiable assets by
geographic area are those assets used by the Company in each location.

(13) NONRECURRING CHARGE

In connection with the Company's IPO in October 1995, certain covenants not to
compete were terminated. As a result, a nonrecurring charge of $4,708,000 was
recorded to eliminate the remaining unamortized value of the covenants not to
compete.

(14) LIFE INSURANCE PROCEEDS, NET OF GUARANTEED SEVERANCE PAYMENTS

Included in net income for the year ended December 31, 1996, were net life
insurance proceeds of $1,276,000 that the Company received following the death
of former President and Chief Executive Officer, Richard Long, in July 1996. The
net proceeds consisted of a $2,000,000 insurance settlement less guaranteed
payments owed to Richard Long's family of $724,000.


                                      F-21
<PAGE>   50
          INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE


The Board of Directors
GT Bicycles, Inc.:

Under date of February 25, 1998, we reported on the consolidated balance sheets
of GT Bicycles, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997, as
contained in the annual report on Form 10-K for the year ended December 31,
1997. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in Item 14(a)(2) of the Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

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


                                    KPMG PEAT MARWICK LLP


Orange County, California
February 25, 1998


                                      F-22
<PAGE>   51
                                                                     SCHEDULE II


                                GT BICYCLES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                              ADDITIONS
                                                        ----------------------
                                          BALANCE AT    CHARGED TO                               BALANCE AT
                                          BEGINNING     COSTS AND                                   END
DESCRIPTION                               OF PERIOD      EXPENSES     OTHER (1)   DEDUCTIONS     OF PERIOD
--------------------------------------    ----------    ----------    --------    ----------     ----------
<S>                                       <C>           <C>           <C>         <C>            <C>
Allowance for doubtful accounts

  For the year ended December 31, 1995(2) $  940,000    $  343,000    $     --    $ (106,000)    $1,177,000
                                          ==========    ==========    ========    ==========     ==========

  For the year ended December 31, 1996(2) $1,177,000    $  589,000    $254,000    $ (386,000)    $1,634,000
                                          ==========    ==========    ========    ==========     ==========

  For the year ended December 31, 1997    $1,634,000    $1,334,000    $     --    $ (634,000)    $2,334,000
                                          ==========    ==========    ========    ==========     ==========
</TABLE>

(1) Amount represents allowance for doubtful accounts established in connection
    with the acquisition of Caratti Sport Limited.

(2) Certain prior year amounts have been reclassified to conform with the 1997
    presentation.


                                      F-23