<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
                            ------------------------
 
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                      FOR THE YEAR ENDED DECEMBER 31, 1998
 
                         COMMISSION FILE NUMBER 1-11471
                              BELL INDUSTRIES LOGO
                            ------------------------
 
<TABLE>
<S>                                            <C>
                 CALIFORNIA                                     95-2039211
        (STATE OR OTHER JURISDICTION                         (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
 
         2201 EAST EL SEGUNDO BLVD.                             90245-4608
           EL SEGUNDO, CALIFORNIA                               (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 563-2300
                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
                COMMON STOCK                              NEW YORK STOCK EXCHANGE
                                                          PACIFIC STOCK EXCHANGE
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                     None.
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, 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.
                               NOT APPLICABLE [X]
 
     As of March 10, 1999, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was: $103,087,000, which includes 1,675,710
shares held by Steel Partners II, L.P. (and other parties who have jointly filed
a Schedule 13D with respect to the Company's common stock), a shareholder the
Company believes is not an affiliate.
 
     As of March 10, 1999, the number of shares outstanding of the Registrant's
class of common stock was: 9,608,315.
 
                       DOCUMENT INCORPORATED BY REFERENCE
 
 Proxy Statement for the 1999 Annual
               Meeting
    of Shareholders, June 1, 1999.                       PART III
--------------------------------------------------------------------------------
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<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
     Bell Industries, Inc.'s ("Bell" or the "Company") operations include
computer systems integration; distribution of aftermarket products for
recreational vehicles, motorcycles, snowmobiles and powerboats; and specialty
electronics manufacturing. In January 1999 and September 1998, Bell sold its
Electronics Distribution Group ("EDG") to Arrow Electronics, Inc. ("Arrow") and
Graphics Imaging Group ("Graphics") to PrimeSource Corporation. For the year
ended December 31, 1998, EDG and Graphics had sales of $470.4 million and $99.6
million. Excluding discontinued operations, Bell employed approximately 725
people at December 31, 1998.
 
SYSTEMS INTEGRATION GROUP
 
     The Systems Integration Group ("SIG") (1998 sales of $149.2 million), is a
full service value-added computer integrator in the Midwestern and Eastern
United States. SIG operates from facilities in Indiana, Maryland, Ohio,
Kentucky, Virginia and Wisconsin.
 
     SIG sells services and products designed to manage personal computer
network infrastructures for large and small organizations. It provides solutions
for its customers' needs by combining a comprehensive offering of value-added
services with its expertise in sourcing and distributing microcomputers, network
products, computer peripherals and software.
 
     SIG's suppliers include: Compaq, IBM, Hewlett-Packard and Sun Microsystems
for personal computers; Microsoft, Lotus, Novell and Oracle for software; and
Cisco, 3Com, Bay Networks, Tangram, and Seagate for network-related products. It
has a customer base ranging in size from two-person partnerships to large
corporations. SIG serves the commercial and the educational markets with its
products and services. SIG has over 5,000 active customers, with three customers
(all Fortune 500 companies) accounting for approximately 20% of 1998 revenues.
 
     Although there are no dominant competitors in SIG's market due to
fragmentation of the industry, SIG faces significant competition from companies
such as Pomeroy Computer Resources, Compucom Systems and AlphaNet Solutions,
some of whom have greater financial and marketing resources than SIG.
 
RECREATIONAL PRODUCTS
 
     The Recreational Products Group ("RPG") (1998 sales of $47.1 million), is a
distributor of replacement parts and accessories for recreational and other
leisure-time vehicles. RPG supplies these products in the upper Midwestern
United States to service departments of dealers and retail stores selling
recreational vehicles, mobile homes, snowmobiles, motorcycles and powerboats.
RPG also sells to independent repair facilities. RPG operates distribution and
administration facilities in Germantown, Wisconsin; St. Paul, Minnesota; and
Grand Rapids, Michigan, and maintains a sales office in Brainerd, Minnesota.
 
     The group supplies more than 9,000 recreational vehicle-related products,
as well as over 9,500 marine items, 10,000 motorcycle items, and 7,000
snowmobile items. Major product lines distributed by the group include Bieffe
Helmets, Dunlop, Nordyne, NGK, and Whirlpool. RPG has over 4,800 current
customers, none of which accounts for over 5% of its annual sales.
 
     RPG has significant market share in the distribution of recreational
vehicle replacement parts and accessories in the upper Midwestern United States.
Management believes RPG is the only distributor in this region to serve the full
range of recreational vehicle markets.
 
     RPG faces significant competition from national and regional distributors
of after-market products for recreational vehicles, motorcycles, snowmobiles,
and powerboats.
 
                                        1
<PAGE>   3
 
ELECTRONICS MANUFACTURING
 
  J. W. Miller Division
 
     The J.W. Miller Division ("JWM") of Bell, located in Gardena, California
(1998 sales of $7.6 million), manufacturers and distributes over 5,000 different
radio frequency ("RF") standard and surface mount magnetic products in a full
line of material. JWM's RF magnetic products include inductors, coils and
chokes, among others. These products are used extensively in all types of
circuitry found in electronic applications including computer, medical and
telecommunications equipment.
 
     JWM's products are sold through national and regional distributors directly
and manufacturer's representatives located throughout North America. JWM has a
large and diverse customer base, with its ten largest customers representing 56%
of its total sales. Approximately 20% of JWM sales are to EDG for resale to the
end-user. The Company cannot predict whether the sale of EDG to Arrow will have
a material effect on JWM's sales to EDG in the long term, either positively or
adversely. Substantially all of JWM's sales are derived from customers located
in North America.
 
  Precision Metalcraft Division
 
     Bell's Precision Metalcraft Division ("PMD"), located in Mountain View,
California (1998 sales of $8.6 million), is a manufacturer of high quality,
precision and surface mount, metal stamped parts. Its products are sold to
original equipment manufacturers and contract manufacturers in a variety of
industries including electronic components, computers and related peripheral
equipment.
 
DISCONTINUED OPERATIONS
 
  Electronics Distribution
 
     In January 1999, Bell completed the sale of its Electronics Distribution
Group to Arrow. Under Bell's ownership, EDG sold electronic components to
approximately 10,000 customers in North America, including: semiconductors
(Dallas Semiconductor, IBM Microelectronics, Maxim, Microchip, NEC, Samsung,
Sharp, ST Microelectronics); passive components (Aromat, AVX, Bourns, Murata,
Vishay); connectors (Berg); and board-level products. EDG also provided
value-added services including: kitting, turnkey; SMART (automated replenishment
system); assembly of custom cables; harnesses and connectors; contract
purchasing; and direct programming of chips. EDG was based in El Segundo,
California and marketed electronic components from more than 30 sales facilities
located throughout the United States and Canada to a broad base of customers and
markets. At December 31, 1998, EDG employed approximately 750 people.
 
  Graphics Imaging
 
     In September 1998, Bell completed the sale of its Graphics Imaging Group to
PrimeSource Corporation. Graphics distributed graphics and electronic imaging
supplies and equipment throughout the upper Midwest and Western United States to
the advertising and printing industries. Major product lines distributed by
Graphics included film, plates, chemicals and other printing supplies from Agfa,
DuPont, Eastman Kodak, Imation, Konica, and Western Litho as well as prepress
and related electronic imaging equipment from Agfa, Apple, Howtek, Integraph,
and Screen.
 
                                        2
<PAGE>   4
 
ITEM 2. PROPERTIES
 
     At December 31, 1998, the Company leased 63 facilities, including 42
facilities related to EDG, containing approximately 536,000 square feet and
owned eight facilities, containing an aggregate of approximately 566,000 square
feet. In connection with the sale of EDG, the 42 EDG leases were assumed, and
one owned property was purchased by Arrow. The facilities utilized by each of
the Company's business segments are set forth in the following table:
 
<TABLE>
<CAPTION>
                                                    AREA IN SQUARE FEET
                                                   (NUMBER OF LOCATIONS)
                                              --------------------------------
                                                  OWNED             LEASED
                                              --------------    --------------
<S>                                           <C>        <C>    <C>        <C>
Systems Integration.........................                    108,000    (12)
Recreational Products.......................   67,000     (1)   146,000     (3)
Electronics Manufacturing...................   40,000     (2)    18,000     (3)
Corporate...................................   52,000     (1)    31,000     (2)
Discontinued operations.....................  407,000     (4)   233,000    (43)
                                              -------    ---    -------    ---
                                              566,000     (8)   536,000    (63)
                                              =======    ===    =======    ===
</TABLE>
 
     For the most part, the Company's facilities are fully utilized, although
excess capacity exists from time to time, based on product mix and demand.
Management believes that these properties are in good condition and suitable for
their present use.
 
     The Company intends to sell certain real estate assets. These real estate
assets have an aggregate net book value of approximately $12 million and consist
of the Company's corporate office and properties used by the Recreational
Products Group (one property), the Electronics Manufacturing Group (one
property) and the discontinued Electronics Distribution and Graphic Imaging
Groups (three properties).
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company is involved in litigation which is incidental to its current
and discontinued businesses. The resolution of this litigation is not expected
to have a material effect on the Company's financial position.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     A Special Meeting of Shareholders of Bell Industries was held on January
26, 1999 to vote on the proposed sale of EDG to Arrow. Shareholders voted
6,316,176 shares in favor of the proposal; 65,051 shares against the proposal;
and 15,298 shares abstained. The proposal was approved.
 
                                        3
<PAGE>   5
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The Executive Officers of the Registrant are as follows:
 
<TABLE>
<CAPTION>
                                                                                YEAR FIRST
          NAME             AGE                    POSITION                     NAMED OFFICER
          ----             ---                    --------                     -------------
<S>                        <C>   <C>                                           <C>
Tracy A. Edwards.........  42    President and Chief Executive
                                 Officer(1)(2)                                     1991
Christopher G. Ferry.....  40    Senior Vice President(3)                          1999
Russell A. Doll..........  37    Vice President and Chief Financial
                                 Officer(4)                                        1998
Charles S. Troy..........  55    Vice President(5)                                 1997
</TABLE>
 
---------------
(1) Mr. Edwards was appointed President and Chief Executive Officer in February
    1999. Since January 1998, he served as Executive Vice President -- Finance
    and Operations, and Chief Financial Officer. Prior to January 1998, Mr.
    Edwards was Vice President and Chief Financial Officer.
 
(2) Also serves as a member of the Board of Directors.
 
(3) Mr. Ferry was appointed Senior Vice President in February 1999. For the five
    years prior to that date, he served as Vice President of the Company's
    Systems Integration Group.
 
(4) Mr. Doll was appointed Vice President and Chief Financial Officer in
    February 1999. Since April 1998, he served as Vice President -- Finance.
    From November 1994 to April 1998, Mr. Doll was employed as Vice President
    and Chief Financial Officer of Predelivery Service Corporation, a former
    subsidiary of Ford Motor Company. Prior to that date, he served as a Senior
    Manager with Price Waterhouse LLP.
 
(5) Mr. Troy was employed as President and Chief Executive Officer of E & S
    Management Corporation, a regional property management firm, for the five
    years prior to his appointment as Vice President.
 
(6) The list of Executive Officers does not include officers who will be leaving
    the Company in 1999 after the transition of certain EDG support systems to
    Arrow. These officers are D.J. Hough, Senior Vice President and Chief
    Information Officer; Peter A. Resnick, Vice President and Controller; and
    Stephen A. Weeks, Vice President and Treasurer.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
     Bell's common stock (ticker symbol BI) is listed on the New York and
Pacific Stock Exchanges. The following table shows the high, low and closing
market prices for the Company's common stock during the eight most recent
quarters.
 
<TABLE>
<CAPTION>
                                                                       QUARTER ENDED
                                                          ----------------------------------------
                                                          MAR. 31    JUN. 30    SEP. 30    DEC. 31
                                                          -------    -------    -------    -------
<S>                                                       <C>        <C>        <C>        <C>
Year ended December 31, 1998
  High..................................................  $14.25     $14.06     $12.38     $11.38
  Low...................................................   12.38      10.88       9.00       9.13
  Close.................................................   14.13      11.38      11.94      11.38
Year ended December 31, 1997
  High..................................................  $20.00     $16.75     $18.38     $18.75
  Low...................................................   14.58      13.13      15.50      12.00
  Close.................................................   15.00      15.63      16.88      13.75
</TABLE>
 
     Share prices in the table above were adjusted to give effect to a 20% stock
dividend declared in May 1997.
 
     Approximate number of record holders of common stock as of March 1, 1999:
1,200.
 
                                        4
<PAGE>   6
 
ITEM 6.SELECTED FINANCIAL DATA
       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                    SIX MONTHS      YEAR
                                                YEAR ENDED DECEMBER 31,               ENDED        ENDED
                                       -----------------------------------------   DECEMBER 31,   JUNE 30,
                                         1998       1997       1996       1995       1994(4)        1994
                                       --------   --------   --------   --------   ------------   --------
<S>                                    <C>        <C>        <C>        <C>        <C>            <C>
OPERATING RESULTS
Net sales............................  $212,468   $194,641   $178,708   $144,879     $ 66,651     $106,149
Income (loss) from continuing
  operations, before extraordinary
  loss(1)............................  $(13,189)  $ (6,135)  $     66   $   (815)    $ (2,044)    $(14,164)
Income from discontinued
  operations.........................  $  7,275   $ 16,216   $ 15,861   $ 15,786     $  7,663     $ 23,239
Loss on sale of discontinued
  operations.........................  $(56,849)
Net income (loss)(3).................  $(62,763)  $  9,406   $ 15,927   $ 14,971     $  5,619     $  9,075
FINANCIAL POSITION
Working capital......................  $ 84,957   $208,012   $132,856   $136,227     $116,118     $107,455
Total assets.........................  $270,759   $431,233   $241,310   $233,882     $200,367     $184,713
Long-term liabilities................  $  8,319   $178,825   $ 30,584   $ 43,490     $ 40,936     $ 39,972
Shareholders' equity.................  $ 90,455   $151,352   $138,461   $117,569     $101,770     $ 95,553
SHARE AND PER SHARE DATA(2)
BASIC
Income (loss) from continuing
  operations, before extraordinary
  loss(1)............................  $  (1.40)  $   (.67)  $    .01   $   (.09)    $   (.24)    $  (1.66)
Income from discontinued
  operations.........................  $    .77   $   1.77   $   1.79   $   1.83     $    .90     $   2.72
Loss on sale of discontinued
  operations.........................  $  (6.04)
Net income (loss)(3).................  $  (6.67)  $   1.03   $   1.80   $   1.74     $    .66     $   1.06
Weighted average common
  shares(000's)......................     9,411      9,157      8,853      8,626        8,565        8,529
DILUTED
Income (loss) from continuing
  operations, before extraordinary
  loss(1)............................  $  (1.40)  $   (.67)  $    .01   $   (.09)    $   (.24)    $  (1.66)
Income from discontinued
  operations.........................  $    .77   $   1.77   $   1.74   $   1.83     $    .90     $   2.72
Loss on sale of discontinued
  operations.........................  $  (6.04)
Net income (loss)(3).................  $  (6.67)  $   1.03   $   1.75   $   1.74     $    .66     $   1.06
Weighted average common
  shares(000's)......................     9,411      9,157      9,109      8,626        8,565        8,529
OTHER PER SHARE DATA
Shareholders' equity.................  $   9.49   $  16.23   $  15.35   $  13.53     $  11.83     $  11.19
Market price -- high.................  $  14.25   $  20.00   $  18.45   $  20.34     $  17.29     $  14.22
Market price -- low..................  $   9.00   $  12.00   $  12.50   $  14.08     $  11.91     $   9.63
FINANCIAL RATIOS
Current ratio........................       1.5        3.1        2.8        2.9          3.0          3.2
Long-term liabilities to total
  capitalization.....................       8.4%      54.2%      18.1%      27.0%        28.7%        29.5%
</TABLE>
 
---------------
(1) Includes before-tax business system and corporate resizing charges ($9,900)
    in 1998, and before-tax gain on sale of division ($3,050) and before-tax
    provision for lease commitment ($2,800) in 1995.
 
(2) Share and per share data have been adjusted to give effect to a 20% stock
    dividend declared in May 1997, 5% stock dividends declared in May 1996 and
    1995, and October 1994.
 
(3) Includes loss on early retirement of debt ($675) in 1997.
 
(4) During the six months ended December 31, 1994, the Company changed its year
    end from June 30 to December 31.
 
                                        5
<PAGE>   7
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION
 
                             RESULTS OF OPERATIONS
 
     This analysis contains forward looking comments which are based on current
trends. Actual results in the future may differ materially.
 
     Results of operations by business segment were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
     Net sales
       Systems Integration.........................  $149,158    $124,680    $112,953
       Recreational Products.......................    47,070      46,234      43,704
       Electronics Manufacturing...................    16,240      23,727      22,051
                                                     --------    --------    --------
                                                     $212,468    $194,641    $178,708
                                                     ========    ========    ========
     Operating income (loss)
       Systems Integration.........................  $  6,604    $  5,933    $  5,692
       Recreational Products.......................     3,289       2,880       3,380
       Electronics Manufacturing...................     1,790       4,230       3,613
       Business system and corporate resizing
          charges..................................    (9,900)
       Corporate costs.............................   (10,430)    (11,536)     (8,899)
                                                     --------    --------    --------
                                                       (8,647)      1,507       3,786
     Interest expense..............................   (12,038)    (12,309)     (3,673)
     Income tax provision (benefit)................    (7,496)     (4,667)         47
                                                     --------    --------    --------
     Income (loss) from continuing operations
       before extraordinary loss...................  $(13,189)   $ (6,135)   $     66
                                                     ========    ========    ========
</TABLE>
 
     A summary of comparative operating results data follows:
 
<TABLE>
<S>                                                  <C>         <C>         <C>
     Net sales.....................................     100.0%      100.0%      100.0%
       Cost of products sold.......................     (80.1)      (77.5)      (76.6)
       Selling and administrative..................     (17.2)      (19.3)      (18.8)
       Depreciation and amortization...............      (2.0)       (2.5)       (2.4)
       Business system and corporate resizing
          charges..................................      (4.7)
       Interest....................................      (5.7)       (6.3)       (2.1)
                                                     --------    --------    --------
     Income (loss) from continuing operations
       before extraordinary loss...................      (9.7)%      (5.6)%        .1%
                                                     ========    ========    ========
</TABLE>
 
1998 COMPARED WITH 1997
 
     Net sales for 1998 increased 9% to $212.5 million from $194.6 million in
1997. The operating loss was $8.6 million compared with operating income of $1.5
million in the prior year. Pretax loss from continuing operations was $20.7
million, compared with a pretax loss of $10.8 million for the prior year.
Results of operations for 1998 include special charges of $9.9 million.
Operating results from continuing operations for 1998 and 1997 exclude the
results of the discontinued EDG and Graphics businesses and, however, include
the corporate costs and interest expense associated with maintaining these
businesses.
 
     In October 1998, the Company agreed to sell its Electronics Distribution
Group ("EDG") for approximately $185 million in cash and the assumption of
substantially all of the liabilities of EDG, resulting in a pretax loss of
approximately $57.6 million ($58.6 million after tax, or $6.23 per share). The
sale was approved by the Company's shareholders and closed in January 1999. The
final purchase price is subject to certain post closing adjustments which are
not expected to be material.
 
                                        6
<PAGE>   8
 
     In September 1998, the Company completed the sale of its Graphics Imaging
Group ("Graphics") for a net purchase price of $41.4 million, resulting in a
pretax gain of $3.0 million ($1.7 million after-tax, or $.19 per share).
 
     During the third quarter of 1998, the Company recorded special pretax
charges totaling $13.8 million. The charges included $8.0 million to write-off
the investment and provide for related commitments for the discontinuance of the
use and development of a business system. The Company also charged $3.0 million
to discontinued operations for business system costs associated with Graphics.
The business system was part of a company-wide project, which was initially
implemented as the business system for Graphics and was planned for
implementation in essentially all the Company's businesses. In light of the sale
of Graphics and the then planned sale of EDG, the Company did not believe the
cost to implement, maintain and further develop the system for the remaining
businesses could be justified. Additionally, the Company provided $5.8 million
for employee separation and related exit costs to resize EDG ($3.9 million) and
corporate operations ($1.9 million). Under the resizing program, the Company
reduced its work force by approximately 85 employees primarily in management and
support positions. Substantially all of the costs relating to the resizing
program were paid during 1998. Following the sale of EDG, the Company initiated
a program to restructure its operations to significantly reduce its corporate
costs. Management expects those annual savings to be approximately $7 million to
$8 million.
 
     Sales of the Systems Integration Group increased 20% to $149.2 million as
operating income increased 11% to $6.6 million. Increased sales and operating
income reflected increased sales of microcomputer and network systems and
increased service revenue associated with the deployment of these systems
products.
 
     Recreational Products Group sales for the year increased 2% to $47.1
million as operating income increased 14% to $3.3 million. Increased sales and
operating income are primarily attributed to the Company's expansion to Michigan
partially offset by the negative effect of warmer weather conditions on winter
product shipments during the third quarter of 1998.
 
     Sales of the Electronics Manufacturing Group decreased 32% to $16.2 million
as operating income decreased 58% to $1.8 million. Reduced sales and operating
income reflected the end of the product life cycle for a significant customer
product line and the impact of off-shore competitive pricing pressures on
electronic components manufactured by the group.
 
     As a percentage of sales, cost of products sold for 1998 increased to 80.1%
from 77.5% in 1997. Higher cost of products sold, as a percentage of sales,
reflects competitive pricing pressures particularly within the Company's Systems
Integration and Electronics Manufacturing Groups. Selling and administrative
expenses as a percentage of sales decreased to 17.2% from 19.3% reflecting
ongoing cost containment efforts and resizing programs. In 1998, the Company
recorded a 36.2% tax benefit compared to a 43.2% tax benefit for 1997.
 
1997 COMPARED WITH 1996
 
     Net sales for 1997 increased 9% to $194.6 million from $178.7 million in
1996, while operating income was $1.5 million compared to $3.8 million in the
prior year. The pretax loss from continuing operations was $10.8 million,
compared with pretax income of $0.1 million for the prior year. Operating
results from continuing operations for 1997 and 1996 exclude the results of the
discontinued EDG and Graphics businesses and, however, include corporate costs
and interest expense associated with maintaining these businesses.
 
     In the first quarter of 1997 the Company completed the acquisition of
Milgray Electronics, Inc. In connection with the acquisition, the Company
recorded a special before-tax charge of $4.1 million for costs associated with
the integration of Milgray, including provision for severance costs, related
exit costs, and costs related to supplier terminations. In addition, the Company
recorded an extraordinary charge of $675,000 ($.07 per share), net of taxes,
relating to the early retirement of senior notes, which were replaced under the
Company's credit facility.
 
                                        7
<PAGE>   9
 
     Sales of the Systems Integration Group increased 10% to $124.7 million as
operating income increased 4% to $5.9 million. Increased sales and operating
income reflected increased sales of microcomputer and network systems and
increased service revenue associated with the deployment of these systems
products.
 
     Recreational Products Group sales for the year increased 6% to $46.2
million as operating income decreased 15% to $2.9 million. Growth in sales and
the reduction to operating income reflected the Group's expansion in Michigan
and associated start up costs.
 
     Sales of the Electronics Manufacturing Group increased 8% to $23.7 million
as operating income increased 17% to $4.2 million primarily as a result of
increased demand for electronic components and precision metal stampings
produced by the Group.
 
                              FINANCIAL CONDITION
 
     Selected financial condition data are set forth in the following table
(dollars in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                  -------------------
                                                   1998        1997
                                                  -------    --------
<S>                                               <C>        <C>
Cash and cash equivalents.......................  $ 6,699    $  5,377
Working capital.................................  $84,957    $208,012
Current ratio...................................    1.5:1       3.1:1
Long-term liabilities to total capitalization...        8%         54%
Shareholders' equity per share..................  $  9.49    $  16.23
Days' sales in receivables......................       58          53
Days' sales in inventories......................       40          93
</TABLE>
 
     Net cash provided by operating activities was $31.7 million in 1998 while
cash used in operating activities was $3.1 million in 1997. The Company's net
loss for 1998 was primarily attributable to the disposal of EDG and special
charges which included non-cash items such as a significant write off of
goodwill. Increased cash flows resulted from working capital reductions,
primarily increased accounts payable and other accrued liabilities. Operating
cash flows were used to reduce borrowings under the Company's line of credit and
to fund property additions. In 1998, investing cash flows included proceeds from
the sale of Graphics which were used to reduce borrowings under the Company's
line of credit.
 
     Operating cash flows in 1997 were impacted by increased investment in
working capital. In 1997, financing cash flows included bank borrowings used to
fund the acquisition of Milgray and the retirement of the Company's 9.7% Senior
Notes, including approximately $1 million in make-whole premiums. Property
additions included investment in the Company's information systems, completion
of its national service center in El Segundo, California as well as improvements
to the electronics distribution center. The acquisition of the 265,000 square
foot distribution center, located in Ontario, California, was financed through
the assumption of Industrial Revenue Bonds due in 2015. The distribution center
and related bonds were recorded at their estimated fair market values of $6.2
million.
 
     In 1998, the Company's Board of Directors approved a plan to dispose of
certain real estate assets. The real estate assets and related improvements have
an aggregate net book value of $12 million.
 
     Subsequent to year end, and in connection with the sale of the Electronics
Distribution Group, the Company used a portion of the net proceeds from the sale
to pay off its indebtedness under its credit facility. In addition, the Company
expects to use the balance of the net proceeds from the sale of EDG and its real
estate assets to fund sale-related costs, taxes, and to make a cash distribution
to shareholders of approximately $7 per share, or approximately $68 million,
during 1999. The amount of the distribution may be adjusted as a result of the
final timing and determination of the net proceeds from these transactions.
 
     The Company believes that sufficient cash resources exist to support
requirements for the operations and commitments through available cash, bank
borrowings and cash generated from operations. The Company has
 
                                        8
<PAGE>   10
 
preliminary approval from its primary lender for a new line of credit in the
amount of $20 million to finance working capital needs to operate and grow its
ongoing businesses and expects the line to be in place in the second quarter of
1999. Management believes that is has access to additional financing as
required.
 
     In 1997, the Company initiated a project to ensure all its business systems
as well as non-informational systems, such as HVAC systems, building security,
elevators, phone systems and other related systems are Year 2000 compliant. The
Year 2000 project encompasses three major phases: Inventory -- taking stock of
the various applications and systems in use by the Company;
Assessment -- analyzing the exposure of Year 2000 issues in the various
applications and systems; and Renovation -- taking action to correct Year 2000
deficiencies noted in the assessment phases. The Company anticipates achieving
Year 2000 compliance by converting certain of its business systems to Year 2000
hardware and software platforms and by reprogramming other business systems. To
date, the Inventory and Assessment phases of critical systems and support
functions are complete and renovation is underway. Implementation of Year 2000
compliant business systems has begun and is anticipated to be completed in the
second and third quarters of 1999. As a contingency plan, the Company has
completed the reprogramming of significant existing business systems for Year
2000 compliance in the event that new business systems are not operational by
2000. The Company does not have any other contingency plans at this time. In
addition, the Company has identified and prioritized and is communicating with
its material suppliers and third party providers ("Material Third Parties") to
determine their Year 2000 status and any probable impact on Bell. Bell will
continue to track and evaluate its long-term relationship with Material Third
Parties based on the responses it receives and on information learned from other
sources. If any of Bell's Material Third Parties are not Year 2000 ready and
their non-compliance causes a material disruption to any of their respective
businesses, Bell's business could be materially adversely affected. Bell will
continue to evaluate the nature of these risks, but at this time Bell is unable
to determine the probability that any such risk will occur, or if it does occur,
what the nature, length or other effects, if any, it may have on Bell. If a
significant number of Material Third Parties experience failures in their
computer systems or operations due to not being Year 2000 complaint, it could
affect Bell's ability to process transactions or otherwise engage in similar
normal business activities. While this risk is outside of Bell's control, Bell
has instituted the program mentioned above to identify Material Third Parties
and to address any non-compliance issues. The estimated cost of the Year 2000
has not been and is not expected to be material to the Company's financial
position or results of operations. Although Bell believes its business systems
will be Year 2000 compliant on or before December 31, 1999, the Company makes no
assurances regarding the success of this program, or that third party systems
will be Year 2000 compliant. The Company cannot be assured that failure to
achieve Year 2000 compliance will not have a material impact on the Company's
business.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not applicable.
 
                                        9
<PAGE>   11
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Financial Statements:
  Report of Independent Accountants.........................   11
  Consolidated Statement of Operations for the three years
     ended December 31, 1998................................   12
  Consolidated Balance Sheet at December 31, 1998 and
     1997...................................................   13
  Consolidated Statement of Shareholders' Equity for the
     three years ended December 31, 1998....................   14
  Consolidated Statement of Cash Flows for the three years
     ended December 31, 1998................................   15
  Notes to Consolidated Financial Statements................   16
  Financial Statement Schedule:
     Schedule II -- Valuation and Qualifying Accounts.......   26
</TABLE>
 
     The financial data included in the financial statement schedule should be
read in conjunction with the consolidated financial statements. All other
schedules have been omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
 
                                       10
<PAGE>   12
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Shareholders of Bell Industries, Inc.
 
     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Bell Industries, Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
 
PRICEWATERHOUSECOOPERS LLP
 
Los Angeles, California
March 3, 1999
 
                                       11
<PAGE>   13
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $212,468    $194,641    $178,708
                                                             --------    --------    --------
Costs and expenses
  Cost of products sold....................................   170,244     150,755     136,898
  Selling and administrative...............................    36,547      37,553      33,668
  Depreciation and amortization............................     4,424       4,826       4,356
  Interest.................................................    12,038      12,309       3,673
  Business system and corporate resizing charges...........     9,900
                                                             --------    --------    --------
                                                              233,153     205,443     178,595
                                                             --------    --------    --------
Income (loss) from continuing operations before
  income taxes and extraordinary loss......................   (20,685)    (10,802)        113
Income tax provision (benefit).............................    (7,496)     (4,667)         47
                                                             --------    --------    --------
Income (loss) from continuing operations before
  extraordinary loss.......................................   (13,189)     (6,135)         66
Income from discontinued operations, net of tax............     7,275      16,216      15,861
Loss on sale of discontinued operations, net of tax........   (56,849)
Loss on early retirement of debt, net of tax...............                  (675)
                                                             --------    --------    --------
Net income (loss)..........................................  $(62,763)   $  9,406    $ 15,927
                                                             ========    ========    ========
SHARE AND PER SHARE DATA
BASIC
  Income (loss) from continuing operations before
     extraordinary loss....................................  $  (1.40)   $   (.67)   $    .01
  Income from discontinued operations......................       .77        1.77        1.79
  Loss on sale of discontinued operations..................     (6.04)
  Loss on early retirement of debt.........................                  (.07)
                                                             --------    --------    --------
  Net income (loss)........................................  $  (6.67)   $   1.03    $   1.80
                                                             ========    ========    ========
  Weighted average common shares...........................     9,411       9,157       8,852
                                                             ========    ========    ========
DILUTED
  Income (loss) from continuing operations before
     extraordinary loss....................................  $  (1.40)   $   (.67)   $    .01
  Income from discontinued operations......................       .77        1.77        1.74
  Loss on sale of discontinued operations..................     (6.04)
  Loss on early retirement of debt.........................                  (.07)
                                                             --------    --------    --------
  Net income (loss)........................................  $  (6.67)   $   1.03    $   1.75
                                                             ========    ========    ========
  Weighted average common shares...........................     9,411       9,157       9,109
                                                             ========    ========    ========
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements.
 
                                       12
<PAGE>   14
 
                           CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Current assets
  Cash and cash equivalents.................................  $  6,699    $  5,377
  Accounts receivable, less allowance for doubtful accounts
     of $484 and $2,673.....................................    31,340     120,900
  Inventories...............................................    18,461     173,801
  Prepaid expenses and other................................     8,566       8,990
  Net assets of discontinued operations.....................   179,830
  Real estate held for sale.................................    12,046
                                                              --------    --------
          Total current assets..............................   256,942     309,068
                                                              --------    --------
Properties, at cost
  Land......................................................        35       3,419
  Buildings and improvements................................     1,405      21,283
  Equipment.................................................    14,091      41,642
                                                              --------    --------
                                                                15,531      66,344
  Less accumulated depreciation.............................    (9,957)    (24,265)
                                                              --------    --------
          Total properties..................................     5,574      42,079
                                                              --------    --------
 
Goodwill, less accumulated amortization of $1,340 and
  $9,344....................................................     1,468      72,758
Other assets................................................     6,775       7,328
                                                              --------    --------
                                                              $270,759    $431,233
                                                              ========    ========
 
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable..........................................  $ 27,778    $ 67,121
  Accrued payroll...........................................     4,228       9,265
  Accrued liabilities.......................................    30,979      17,170
  Current portion of long-term debt.........................   109,000       7,500
                                                              --------    --------
          Total current liabilities.........................   171,985     101,056
                                                              --------    --------
Long-term debt..............................................               172,330
 
Deferred compensation and other.............................     8,319       6,495
Shareholders' equity
  Preferred stock
     Authorized -- 1,000,000 shares
     Outstanding -- none
  Common stock
     Authorized -- 35,000,000 shares
     Outstanding -- 9,530,301 and 9,326,391 shares..........   102,276     100,410
  Reinvested earnings (deficit).............................   (11,821)     50,942
                                                              --------    --------
          Total shareholders' equity........................    90,455     151,352
                                                              --------    --------
Commitments and contingencies
                                                              $270,759    $431,233
                                                              ========    ========
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements.
 
                                       13
<PAGE>   15
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 COMMON STOCK         REINVESTED
                                                             ---------------------     EARNINGS
                                                              SHARES       AMOUNT     (DEFICIT)
                                                             ---------    --------    ----------
<S>                                                          <C>          <C>         <C>
Balance at December 31, 1995...............................  6,898,094    $ 63,056     $ 54,513
  Employee stock plans.....................................    115,525       1,933
  Net income...............................................                              15,927
  5% stock dividend........................................    351,510       7,645       (7,645)
  Purchases of businesses..................................    153,148       3,032
                                                             ---------    --------     --------
Balance at December 31, 1996...............................  7,518,277      75,666       62,795
  Employee stock plans.....................................    274,061       3,361
  Net income...............................................                               9,406
  20% stock dividend.......................................  1,522,821      21,259      (21,259)
  Exercise of warrants and other...........................     11,232         124
                                                             ---------    --------     --------
Balance at December 31, 1997...............................  9,326,391     100,410       50,942
  Employee stock plans.....................................    203,910       1,866
  Net loss.................................................                             (62,763)
                                                             ---------    --------     --------
Balance at December 31, 1998...............................  9,530,301    $102,276     $(11,821)
                                                             =========    ========     ========
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements.
 
                                       14
<PAGE>   16
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1998        1997         1996
                                                            --------    ---------    --------
<S>                                                         <C>         <C>          <C>
Cash flows from operating activities:
  Net income (loss).......................................  $(62,763)   $   9,406    $ 15,927
  Depreciation and amortization...........................     5,908        6,294       5,541
  Amortization of intangibles.............................     3,777        3,706         687
  Provision for losses on accounts receivable.............     1,566        2,138       1,235
  Loss on sale of discontinued operations.................    56,849
  Business system charge..................................     8,000
  Integration charge......................................                  4,100
  Loss on early retirement of debt........................                    675
  Changes in assets and liabilities, net of acquisitions
     and disposals:.......................................    18,378      (29,374)     14,061
                                                            --------    ---------    --------
          Net cash provided by (used in) operating
            activities....................................    31,715       (3,055)     37,451
                                                            --------    ---------    --------
Cash flows from investing activities:
  Purchases of properties.................................    (9,142)     (16,195)     (9,573)
  Net proceeds from sale of Graphics......................    41,372
  Purchases of businesses.................................               (100,404)    (10,815)
                                                            --------    ---------    --------
          Net cash provided by (used in) investing
            activities....................................    32,230     (116,599)    (20,388)
                                                            --------    ---------    --------
Cash flows from financing activities:
  Bank borrowings (payments), net.........................   (64,489)     137,852      (4,800)
  Employee stock plans and other..........................     1,866        3,485       1,933
  Payments on Senior Notes and capital leases.............                (25,633)     (6,918)
  Debt issuance costs.....................................                 (2,770)
                                                            --------    ---------    --------
          Net cash provided by (used in) financing
            activities....................................   (62,623)     112,934      (9,785)
                                                            --------    ---------    --------
 
Net increase (decrease) in cash and cash equivalents......     1,322       (6,720)      7,278
Cash and cash equivalents at beginning of year............     5,377       12,097       4,819
                                                            --------    ---------    --------
Cash and cash equivalents at end of year..................  $  6,699    $   5,377    $ 12,097
                                                            ========    =========    ========
Changes in assets and liabilities, net of acquisitions
  and disposals:
  Accounts receivable.....................................  $ (7,822)   $  (1,734)   $  2,634
  Inventories.............................................       261      (19,577)     22,917
  Accounts payable........................................     8,251       (3,173)     (5,259)
  Accrued liabilities and other...........................    17,688       (4,890)     (6,231)
                                                            --------    ---------    --------
          Net change......................................  $ 18,378    $ (29,374)   $ 14,061
                                                            ========    =========    ========
Supplemental cash flow information:
  Interest paid...........................................  $ 12,073    $  12,023    $  3,863
  Income taxes paid.......................................  $    176    $   3,762    $ 12,624
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements.
 
                                       15
<PAGE>   17
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
SUMMARY OF ACCOUNTING POLICIES
 
     Principles of consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned. All significant intercompany transactions have been eliminated.
 
     Statement of cash flows -- The Company considers all highly liquid
investments purchased with an original maturity date of three months or less to
be cash equivalents.
 
     Revenue recognition and receivables -- Prior to 1999, the Company was
primarily a national distributor of electronic components. In addition, the
Company distributed graphics and electronic imaging products throughout the
western and central United States. The businesses engaged in these activities
were sold in January 1999 and September 1998. The Company's continuing
operations include computer systems integration; distribution of aftermarket
products for recreational vehicles, motorcycles, snowmobiles and powerboats; and
two specialty manufacturing operations for the computer and electronics markets.
Sales are recognized and trade receivables are recorded when products are
shipped. Concentrations of credit risk with respect to trade receivables are
generally limited due to the large number and general dispersion of trade
accounts which constitute the Company's customer base. At December 31, 1998, the
Company had one customer which accounted for approximately 12% of accounts
receivable. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company estimates reserves for
potential credit losses and such losses have been within these estimates.
 
     Inventories -- Inventories are stated at the lower of cost (determined
using weighted average and first-in, first-out methods) or market (net
realizable value).
 
     Properties, depreciation and amortization -- All properties are depreciated
using the straight-line method based upon estimated useful lives which range
from 25 to 40 years for buildings and 2 to 10 years for equipment. Leasehold
improvements are amortized over the shorter of their estimated service lives or
the term of the lease.
 
     Goodwill -- Cost in excess of the fair value of net assets of purchased
businesses (goodwill) is amortized using the straight-line method over 25 years.
The Company periodically evaluates the recorded value of its operating assets,
including goodwill, and recognizes impairments when the estimated future
undiscounted cash flows from the use of the assets are less than the recorded
value.
 
     Income taxes -- Provision is made for the tax effects of temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. In estimating deferred tax balances, the
Company considers all expected future events other than enactments of changes in
the tax law or rates.
 
     Stock option plans -- The Company measures and records compensation expense
relating to stock options as the excess, if any, between the market value of
shares on the date of option grant and the expected proceeds upon exercise. Such
expense is accrued ratably over the period to be benefited. The Company has
adopted the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") to disclose the
impact of compensation cost on earnings as determined under the fair value
method prescribed by SFAS No. 123.
 
     Per share data -- Basic earnings per share data are based upon the weighted
average number of common shares outstanding. Diluted earnings per share data are
based upon the weighted average number of common shares outstanding plus the
number of common shares potentially issuable for dilutive securities such as
stock options and warrants.
 
     Use of estimates -- Certain amounts and disclosures included in the
consolidated financial statements required the use of management estimates which
could differ from actual results.
 
                                       16
<PAGE>   18
 
DISCONTINUED OPERATIONS
 
     Sale of Graphics Imaging Group -- In September 1998, the Company sold
substantially all of the assets of its Graphics Imaging Group ("Graphics") for a
net price of approximately $41.4 million. The sale resulted in a gain of
approximately $3.0 million ($1.7 million after tax). The results of Graphics
have been classified with discontinued operations in the accompanying financial
statements. For the years ended December 31, 1998, 1997 and 1996, Graphics had
sales of $99.6 million, $156.3 million and $117.1 million and income of $1.9
million, $2.6 million and $2.1 million.
 
     Sale of Electronics Distribution Group -- In October 1998, the Company
agreed to sell its Electronics Distribution Group ("EDG") for approximately $185
million (assuming a net tangible investment of $155 million) in cash and the
assumption of substantially all of the liabilities of EDG, subject to post
closing adjustments. The sale was approved by the Company's shareholders and
closed in January 1999. The sale resulted in a loss of approximately $57.6
million ($58.6 million after tax), including employee separation costs ($10.1
million), business system commitments ($4.7 million), transaction costs ($3.0
million), and other exit costs ($4.1 million). The net assets of EDG at December
31, 1998 included the following:
 
<TABLE>
<S>                                                         <C>
Accounts receivable, net..................................  $ 57,524
Inventories...............................................   113,174
Prepaid expenses and other................................       682
Properties, net...........................................    17,514
Goodwill, net.............................................    65,292
Accounts payable and accrued liabilities..................   (38,664)
                                                            --------
                                                             215,522
Recorded amounts in excess of net realizable value........   (35,692)
                                                            --------
Net realizable value......................................  $179,830
                                                            ========
</TABLE>
 
     For the years ended December 31, 1998, 1997 and 1996, EDG had sales of
$470.4 million, $539.8 million and $327.4 million and income of $5.4 million,
$13.7 million and $13.8 million.
 
BUSINESS SYSTEM AND CORPORATE RESIZING CHARGES
 
     During the third quarter of 1998, the Company recorded special pretax
charges totaling $13.8 million. The charges consisted of $8.0 million to
write-off the investment and provide for related commitments for the
discontinuance of the use and development of a business system. The Company also
charged $3.0 million to discontinued operations for business system costs
associated with Graphics. Additionally, the Company provided $5.8 million for
employee separation and related exit costs to resize EDG ($3.9 million) and
corporate operations ($1.9 million). Under the resizing program, the Company
reduced its work force by approximately 85 employees primarily in management and
support positions. Substantially all costs relating to the resizing program were
paid during 1998.
 
REAL ESTATE HELD FOR SALE
 
     The Company's Board of Directors has approved a plan to dispose of certain
real estate assets. The real estate assets and related improvements have an
aggregate net book value of $12 million. The aggregate net book value of these
real estate assets has been classified as a current asset in the consolidated
balance sheet at December 31, 1998.
 
ACQUISITION OF MILGRAY ELECTRONICS
 
     In January 1997, the Company purchased the stock of Milgray Electronics,
Inc. ("Milgray"), a publicly traded distributor of electronics components, for
an aggregate purchase price of approximately $100 million.
 
     The fair value of non-cash assets acquired, including goodwill of $67
million, was approximately $167 million, and liabilities assumed totaled
approximately $67 million.
 
                                       17
<PAGE>   19
 
     In the first quarter of 1997, in conjunction with the acquisition, the
Company recorded a special before-tax charge totaling $4.1 million, for costs
associated with the integration of Milgray, including provisions for severance,
lease and related exit costs, and costs related to supplier terminations.
Substantially all amounts related to the integration were expended during 1997.
 
     The net assets and operating results of Milgray following the acquisition
have been included as a component of EDG.
 
LONG-TERM DEBT
 
     Long-term debt consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                                ---------------------
                                                  1998         1997
                                                ---------    --------
<S>                                             <C>          <C>
Bank borrowings...............................  $ 109,000    $173,500
Industrial Revenue Bonds......................                  6,330
Current portion...............................   (109,000)     (7,500)
                                                ---------    --------
                                                $      --    $172,330
                                                =========    ========
</TABLE>
 
     Concurrent with the acquisition of Milgray, the Company entered into a $250
million secured revolving credit facility to finance the purchase of Milgray,
retire existing debt of both companies and provide for ongoing working capital
requirements. The facility provided for interest at either the bank's reference
rate or LIBOR plus 1.50% (7.1% at December 31, 1998). The facility included a
$50 million term loan, payable quarterly over five years, and a revolving credit
line. The facility was subject to an annual commitment fee of .375% on the
unused line of credit.
 
     In January 1999, the company repaid all bank borrowings under the credit
facility with a portion of the proceeds from the sale of EDG. Accordingly,
outstanding borrowings at December 31, 1998 have been classified with current
liabilities. The Company has received preliminary approval from its primary
lender for a line of credit in the amount of $20 million to finance short-term
cash flow and working capital requirements.
 
     In connection with the placement of the $250 million credit facility, the
Company redeemed its outstanding 9.70% Senior Notes for $24.7 million, including
$1 million in make-whole premiums. The transaction resulted in an extraordinary
charge in 1997 of $675,000, net of income tax benefit of $419,000.
 
     In February 1997, in connection with the acquisition of a 265,000 square
foot distribution center in Ontario, California, the Company assumed $9 million
of variable rate (approximately 3.2% at December 31, 1998) Industrial Revenue
Bonds due in 2015. The bonds and related distribution center were recorded at an
estimated fair value of $6.2 million. In connection with the sale of EDG, the
distribution center and related bonds were included in the assets sold and
liabilities assumed.
 
     In May 1997, the Company entered into separate three-year interest rate
swap agreements with two banks in an aggregate notional amount of $50 million to
manage variable interest rate exposures. The Company agreed to exchange, at
quarterly intervals, the difference between the Company's variable pay rate of
90 day LIBOR with the banks' fixed pay rate of 6.6%. In connection with the sale
of EDG, the company terminated the agreements at a cost of $1.6 million. This
amount is included as a component of the loss on the sale of discontinued
operations.
 
COMMON STOCK
 
     In May 1997, the Board of Directors declared a 20% stock dividend payable
to shareholders of record on May 30, 1997. In May 1996, the Board of Directors
declared a 5% stock dividend payable to shareholders of record on May 24, 1996.
 
                                       18
<PAGE>   20
 
STOCK PLANS AND WARRANTS
 
     The Company's 1990 Stock Option and Incentive Plan (the "1990 Plan") and
1994 Stock Option Plan (the "1994 Plan") each authorized 500,000 shares of
common stock to be available for purchase by employees. At the 1997 Annual
Meeting, the shareholders approved an amendment to the 1994 Plan which
authorized an additional 500,000 shares of common stock. At the 1996 Annual
Meeting the shareholders approved the Non-Employee Director Stock Option Plan
(the "1996 Plan"), which authorized 150,000 shares of common stock to be
available for purchase by non-employee directors of the Company.
 
     Under the stock option plans, both incentive and nonqualified stock
options, stock appreciation rights and restricted stock may be granted. Options
outstanding under the plans generally have a maximum term of five years, vest
over four years and were issued at market value. During May 1997, the Company
repriced options granted from June 30, 1994 through January 15, 1997. The
repricing reduced the exercise price of previously issued options to $14.38
which represented the quoted market price on the date of the repricing.
Approximately 486,000 options were repriced. The repricing also includes a
provision that requires the stock price to be $1.00 above the original grant
price in order for the options to become exercisable. Weighted average exercise
prices at December 31, 1998 include the effect of the repricing.
 
        A summary of activity under the plans follows:
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED
                                                                        AVERAGE       FAIR
                                            AVAILABLE      SHARES      EXERCISE     VALUE OF
                                            FOR FUTURE      UNDER        PRICE       OPTION
                                              GRANT        OPTION      PER SHARE    PER SHARE
                                            ----------    ---------    ---------    ---------
<S>                                         <C>           <C>          <C>          <C>
Outstanding at December 31, 1995..........    493,094       569,610     $16.28
  Granted.................................   (161,500)      161,500      20.42        $6.55
  Exercised...............................                  (34,864)      7.88
  Canceled................................      9,439        (9,439)     19.30
  Adjustment for 5% stock dividend........     27,629        32,795
  Adoption of 1996 Plan...................    150,000
                                             --------     ---------
Outstanding at December 31, 1996..........    518,662       719,602      16.83
  Granted.................................   (533,000)      533,000      19.39        $8.64
  Exercised...............................                 (156,140)     10.72
  Canceled................................    100,272      (100,272)     17.57
  Adjustment for 20% stock dividend.......    149,165       168,886
  Amendment to 1994 Plan..................    500,000
                                             --------     ---------
Outstanding at December 31, 1997..........    735,099     1,165,076      14.32
  Granted.................................    (69,000)       69,000      13.51        $4.34
  Exercised...............................                  (56,829)      9.30
  Canceled................................    282,525      (282,525)     14.39
                                             --------     ---------
Outstanding at December 31, 1998..........    948,624       894,722     $14.55
                                             ========     =========
</TABLE>
 
          A summary of stock options outstanding at December 31, 1998 follows:
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED
                REMAINING                                               AVERAGE
               OPTION LIFE                   OPTIONS       OPTIONS     EXERCISE
                 IN YEARS                   OUTSTANDING   EXERCISABLE    PRICE
------------------------------------------   --------     ---------     ------
<S>                                         <C>           <C>          <C>          <C>
   1......................................    129,084       129,084     $13.22
   2......................................    109,308        65,584      14.38
   3......................................    147,930        79,659      14.39
   4......................................    445,400        54,812      15.03
   5......................................     63,000         3,000      13.69
                                             --------     ---------
                                              894,722       332,139     $14.03
                                             ========     =========
</TABLE>
 
                                       19
<PAGE>   21
 
     At December 31, 1997 and 1996, 294,888 and 204,436 options were exercisable
at weighted average exercise prices of $12.87 and $13.12, respectively.
 
     In January 1999, the Board of Directors granted 815,000 stock options
exercisable at $11.16 per share (market value at date of grant) to employees of
the continuing businesses.
 
     Under the Bell Industries Employees' Stock Purchase Plan (the "ESPP")
750,000 shares were authorized for future issuance to Bell employees. Eligible
employees may purchase Bell stock at 85% of market value through the ESPP at
various offering times during the year. Under the ESPP, the Company issued
147,081, 117,921, and 74,024 shares during 1998, 1997, and 1996. The weighted
average fair value per share of the purchase rights granted in 1998, 1997 and
1996 were $2.73, $3.90 and $4.28. At December 31, 1998, 557,510 shares were
available for future issuance under the ESPP.
 
     In 1993, the Company's previous senior noteholders received warrants to
purchase 258,320 shares of the Company's common stock, exercisable at any time
prior to February 1, 2001 at $9.40 per share. In 1998, no warrants were
exercised. In 1997, warrants representing 8,668 shares were exercised. At
December 31, 1998, warrants to purchase 249,652 shares remain outstanding.
 
     The Black-Scholes model was utilized for estimating the fair value of
stock-based grants using an assumed volatility of approximately 30% for 1998,
1997 and 1996 and an expected four year life for stock options, and an assumed
volatility of approximately 12% and an expected four month life for the ESPP.
The assumed risk free interest rate ranged between 4% and 5% for all plans.
Stock-based compensation costs determined under the fair value method would have
increased the net loss by $1.9 million ($.20 per share) in 1998, and decreased
the net income by $1.2 million ($.13 per share) in 1997, and $0.5 million ($.05
per share) in 1996.
 
INCOME TAXES
 
     The income tax provision (benefit) charged to continuing operations was as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                         1998       1997       1996
                                        -------    -------    -------
<S>                                     <C>        <C>        <C>
Current
  Federal.............................  $(3,729)   $(4,394)   $  (626)
  State...............................     (461)    (1,471)      (237)
Deferred
  Federal.............................   (3,078)     1,041        728
  State...............................     (228)       157        182
                                        -------    -------    -------
                                        $(7,496)   $(4,667)   $    47
                                        =======    =======    =======
</TABLE>
 
     A reconciliation of the federal statutory tax rate to the effective tax
rate follows:
 
<TABLE>
<CAPTION>
                                         1998       1997       1996
                                        -------    -------    -------
<S>                                     <C>        <C>        <C>
Federal statutory tax rate............    (34.0)%    (35.0)%     35.0%
State taxes, net of federal benefit...     (5.2)      (5.8)       5.8
Other, net............................      3.0       (2.4)       1.7
                                        -------    -------    -------
Effective tax rate....................    (36.2)%    (43.2)%     42.5%
                                        =======    =======    =======
</TABLE>
 
                                       20
<PAGE>   22
 
     The provision (benefit) for deferred income taxes is summarized as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                         1998       1997       1996
                                        -------    -------    -------
<S>                                     <C>        <C>        <C>
Business system and corporate
  resizing............................  $(4,315)   $    --    $    --
Receivables allowance.................     (219)      (303)        43
Inventory reserves....................      (14)       369        (16)
Employee benefit accruals.............     (243)       219        148
Depreciation..........................      388       (129)       395
Lease commitment provision............      315        870          8
Other.................................      782        172        332
                                        -------    -------    -------
                                        $(3,306)   $ 1,198    $   910
                                        =======    =======    =======
</TABLE>
 
     Deferred tax balances were composed of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                   ------------------
                                                    1998       1997
                                                   -------    -------
<S>                                                <C>        <C>
Deferred tax assets:
  Business system and corporate resizing.........  $ 4,257    $    --
  Receivables allowance..........................      596      1,404
  Inventory reserves.............................    1,567      3,210
  Employee benefit accruals......................    1,992      2,600
  Lease commitment provision.....................      471        696
  Discontinued operations........................      806      1,705
  Other..........................................                 665
                                                   -------    -------
                                                     9,689     10,280
Deferred tax liabilities:
  Depreciation...................................   (1,523)      (675)
  Other..........................................     (540)
                                                   -------    -------
Net deferred tax balances........................  $ 7,626    $ 9,605
                                                   =======    =======
</TABLE>
 
     Current deferred income tax benefits, included with prepaid expenses and
other, and noncurrent deferred income tax benefits, included with other assets,
were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                   ------------------
                                                    1998       1997
                                                   -------    -------
<S>                                                <C>        <C>
Current deferred income tax benefits
  Federal........................................  $ 7,083    $ 7,936
  State..........................................      343        506
Noncurrent deferred income tax benefits
  Federal........................................      175      1,036
  State..........................................       25        127
                                                   -------    -------
                                                   $ 7,626    $ 9,605
                                                   =======    =======
</TABLE>
 
EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
 
     The Company has a qualified, trusteed, savings and profit sharing plan for
eligible employees. Employees must contribute at least 1% of their annual
compensation to participate in the plan. The Company's contributions to the
plan, as determined by the Board of Directors, were $0.4 million in 1998, $0.9
million in 1997 and $1.1 million in 1996.
 
     The Company has deferred compensation plans available for certain
directors, officers and other key employees. Expense associated with the
deferred compensation element of these plans was $0.7 million in 1998, $0.7
million in 1997 and $0.6 million in 1996.
 
                                       21
<PAGE>   23
 
     The Company provides postretirement medical coverage for qualifying
employees who were employed prior to January 1, 1998. Annual costs and
accumulated and vested benefit obligations relating to postretirement medical
benefits were not significant.
 
COMMITMENTS AND CONTINGENCIES
 
     At December 31, 1998 the Company had operating leases on certain of its
facilities and equipment expiring in various years through 2004. Under certain
operating leases, the Company is required to pay property taxes and insurance.
Rent expense pertaining to operating leases for continuing operations was $4.8
million in 1998, $3.3 million in 1997 and $1.9 million in 1996. Amortization of
capitalized leases, which expired in 1997, amounted to $0.9 million in 1997 and
$1.7 million in 1996.
 
     Minimum annual rentals on operating leases, excluding leases assumed in
connection with the sale of EDG, for the five years subsequent to 1998 and
thereafter are as follows (in thousands):
 
<TABLE>
<S>                                  <C>
1999...............................  $ 6,116
2000...............................    1,762
2001...............................    1,398
2002...............................    1,394
2003...............................      786
Thereafter.........................      293
                                     -------
                                     $11,749
                                     =======
</TABLE>
 
     The Company is involved in litigation incidental to its business. The
resolution of this litigation is not expected to have a material effect on the
Company's financial position.
 
     In connection with the sale of EDG and the planned sales of certain real
estate, the Company expects to make a cash distribution to shareholders of
around $7.00 per share. The distribution is planned for 1999 and is subject to
the timing and completion of the real estate sales. The amount of the
distribution may be adjusted as a result of the final timing and determination
of net proceeds from the sale of EDG and the planned sales of real estate.
 
SHAREHOLDER RIGHTS PLAN
 
     On February 1, 1999, the Board of Directors adopted a Shareholder Rights
Plan (the "Plan"). Under the Plan, the Board declared a dividend of one
Preferred Share Purchase Right (the "Right") for each outstanding common share
of the Company.
 
     Generally, the Rights become exercisable in a specified period of time
after any person or group of affiliated persons becomes a holder of 18% or more
of the aggregate outstanding common stock. Once the Rights become exercisable
they entitle all other shareholders to purchase, by payment of a $17.25 exercise
price, one one-hundredth of a share of Series A Junior participating Preferred
Stock, subject to adjustment, with a value of twice the exercise price. In
addition, at any time after an 18% position is acquired and prior to the
acquisition of a 50% position, the Board of Directors may require, in whole or
in part, each outstanding Right (other than Rights held by the acquiring person
or group of affiliated persons) to be exchanged for one share of common stock or
one one-hundredth of a share of Series A Junior Participating Preferred Stock.
The Rights may be redeemed by the Company at a price of $0.01 per Right at
anytime prior to their expiration on May 31, 2001 unless extended or earlier
redeemed or exchanged.
 
                                       22
<PAGE>   24
 
BUSINESS SEGMENT AND RELATED INFORMATION
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 was effective for the
Company during 1998 and redefines the way the Company reports information about
its operating segments. The information for 1997 and 1996 has been restated to
conform with the 1998 presentation.
 
     The Company has three reportable business segments: Systems Integration, a
full service value-added computer integrator; Recreational Products, a
distributor of replacement parts and accessories for recreational and other
leisure-time vehicles; and Electronics Manufacturing, two specialty
manufacturers of high precision stamping and certain passive components. Each
operating segment offers unique products and services and have separate
management. The accounting policies of the segments are the same as described in
the Summary of Accounting Policies.
 
     Summarized financial information regarding the Company's continuing
reportable segments is shown in the following table (in thousands):
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Net sales
  Systems Integration..............................  $149,158    $124,680    $112,953
  Recreational Products............................    47,070      46,234      43,704
  Electronics Manufacturing........................    16,240      23,727      22,051
                                                     --------    --------    --------
                                                     $212,468    $194,641    $178,708
                                                     ========    ========    ========
Operating income (loss)
  Systems Integration..............................  $  6,604    $  5,933    $  5,692
  Recreational Products............................     3,289       2,880       3,380
  Electronics Manufacturing........................     1,790       4,230       3,613
  Business system and corporate resizing charges...    (9,900)
  Corporate costs..................................   (10,430)    (11,536)     (8,899)
                                                     --------    --------    --------
                                                       (8,647)      1,507       3,786
  Interest.........................................   (12,038)    (12,309)     (3,673)
                                                     --------    --------    --------
  Income (loss) from continuing operations before
     income taxes and extraordinary loss...........  $(20,685)   $(10,802)   $    113
                                                     ========    ========    ========
Depreciation and amortization
  Systems Integration..............................  $    788    $    593    $    514
  Recreational Products............................       216         232         225
  Electronics Manufacturing........................       528         574         542
  Corporate........................................     2,644       3,135       2,842
  Discontinued operations..........................     5,509       5,466       2,105
                                                     --------    --------    --------
                                                     $  9,685    $ 10,000    $  6,228
                                                     ========    ========    ========
Total assets
  Systems Integration..............................  $ 37,782    $ 26,538    $ 29,633
  Recreational Products............................    16,721      18,840      19,064
  Electronics Manufacturing........................     6,321       6,504       7,039
  Corporate........................................    30,105      32,280      27,431
  Discontinued operations..........................   179,830     347,071     158,143
                                                     --------    --------    --------
                                                     $270,759    $431,233    $241,310
                                                     ========    ========    ========
Capital expenditures
  Systems Integration..............................  $  1,152    $  1,072    $    655
  Recreational Products............................       137         212         467
  Electronics Manufacturing........................       302         595         630
  Corporate........................................     2,932       8,504       5,271
  Discontinued operations..........................     4,619       5,812       2,550
                                                     --------    --------    --------
                                                     $  9,142    $ 16,195    $  9,573
                                                     ========    ========    ========
</TABLE>
 
                                       23
<PAGE>   25
 
                        QUARTERLY RESULTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                                       ---------------------------------------
                                                       MAR. 31   JUN. 30   SEP. 30    DEC. 31
                                                       -------   -------   --------   --------
<S>                                                    <C>       <C>       <C>        <C>
YEAR ENDED DECEMBER 31, 1998
Net sales............................................  $44,857   $59,306   $ 56,672   $ 51,633
                                                       -------   -------   --------   --------
Costs and expenses
  Cost of products sold..............................   35,006    47,261     45,754     42,223
  Selling and administrative.........................    9,385     9,665      9,115      8,382
  Depreciation and amortization......................    1,309     1,299        910        906
  Interest...........................................    3,460     3,215      2,992      2,371
  Business system and corporate resizing charges.....                         9,900
                                                       -------   -------   --------   --------
                                                        49,160    61,440     68,671     53,882
                                                       -------   -------   --------   --------
Loss from continuing operations before income
  taxes..............................................   (4,303)   (2,134)   (11,999)    (2,249)
Income tax benefit...................................   (2,421)   (1,134)    (3,661)      (280)
                                                       -------   -------   --------   --------
Loss from continuing operations......................   (1,882)   (1,000)    (8,338)    (1,969)
Income (loss) from discontinued operations, net of
  tax................................................    4,323     2,911       (402)       443
Gain (loss) on sale of discontinued operations, net
  of tax.............................................                         1,748    (58,597)
                                                       -------   -------   --------   --------
Net income (loss)....................................  $ 2,441   $ 1,911   $ (6,992)  $(60,123)
                                                       =======   =======   ========   ========
SHARE AND PER SHARE DATA
BASIC
  Loss from continuing operations....................  $  (.20)  $  (.11)  $   (.88)  $   (.21)
  Income (loss) from discontinued operations.........      .46       .31       (.04)       .05
  Gain (loss) on sale of discontinued operations.....                           .18      (6.18)
                                                       -------   -------   --------   --------
  Net income (loss)..................................  $   .26   $   .20   $   (.74)  $  (6.34)
                                                       =======   =======   ========   ========
  Weighted average common shares.....................    9,330     9,383      9,442      9,488
                                                       =======   =======   ========   ========
DILUTED
  Loss from continuing operations....................  $  (.20)  $  (.11)  $   (.88)  $   (.21)
  Income (loss) from discontinued operations.........      .46       .31       (.04)       .05
  Gain (loss) on sale of discontinued operations.....                           .18      (6.18)
                                                       -------   -------   --------   --------
  Net income (loss)..................................  $   .26   $   .20   $   (.74)  $  (6.34)
                                                       =======   =======   ========   ========
  Weighted average common shares.....................    9,330     9,383      9,442      9,488
                                                       =======   =======   ========   ========
</TABLE>
 
                                       24
<PAGE>   26
 
                        QUARTERLY RESULTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                                       ---------------------------------------
                                                       MAR. 31   JUN. 30   SEP. 30    DEC. 31
                                                       -------   -------   --------   --------
<S>                                                    <C>       <C>       <C>        <C>
YEAR ENDED DECEMBER 31, 1997
Net sales............................................  $41,395   $57,526   $ 51,278   $ 44,442
                                                       -------   -------   --------   --------
Costs and expenses
  Cost of products sold..............................   31,971    45,546     39,141     34,097
  Selling and administrative.........................    9,005     9,284      9,768      9,496
  Depreciation and amortization......................    1,268     1,305      1,111      1,142
  Interest...........................................    2,681     2,908      3,221      3,499
                                                       -------   -------   --------   --------
                                                        44,925    59,043     53,241     48,234
                                                       -------   -------   --------   --------
Loss from continuing operations before income taxes
  and extraordinary loss.............................   (3,530)   (1,517)    (1,963)    (3,792)
Income tax benefit...................................   (1,566)     (568)      (801)    (1,732)
                                                       -------   -------   --------   --------
Loss from continuing operations before extraordinary
  loss...............................................   (1,964)     (949)    (1,162)    (2,060)
Income from discontinued operations, net of tax......    2,793     4,418      4,970      4,035
Loss on early retirement of debt, net of tax.........     (675)
                                                       -------   -------   --------   --------
Net income...........................................  $   154   $ 3,469   $  3,808   $  1,975
                                                       =======   =======   ========   ========
SHARE AND PER SHARE DATA
BASIC
  Loss from continuing operations before
     extraordinary loss..............................  $  (.22)  $  (.10)  $   (.12)  $   (.22)
  Income from discontinued operations................      .31       .48        .54        .43
  Loss on early retirement of debt...................     (.07)
                                                       -------   -------   --------   --------
  Net income.........................................  $   .02   $   .38   $    .42   $    .21
                                                       =======   =======   ========   ========
  Weighted average common shares.....................    9,069     9,113      9,171      9,274
                                                       =======   =======   ========   ========
DILUTED
  Loss from continuing operations before
     extraordinary loss..............................  $  (.22)  $  (.10)  $   (.12)  $   (.22)
  Income from discontinued operations................      .31       .48        .54        .43
  Loss on early retirement of debt...................     (.07)
                                                       -------   -------   --------   --------
  Net income.........................................  $   .02   $   .38   $    .42   $    .21
                                                       =======   =======   ========   ========
  Weighted average common shares.....................    9,069     9,113      9,171      9,274
                                                       =======   =======   ========   ========
</TABLE>
 
                                       25
<PAGE>   27
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                                  ---------    DEDUCTIONS
                                                                   CHARGE      ----------
                                                    BALANCE AT       TO         ACCOUNTS      BALANCE
                                                    BEGINNING     COSTS AND     CHARGED       AT END
                   DESCRIPTION                      OF PERIOD     EXPENSES        OFF        OF PERIOD
                   -----------                      ----------    ---------    ----------    ---------
<S>                                                 <C>           <C>          <C>           <C>
Allowance for doubtful accounts:
  Year ended December 31:
     1996.........................................    $1,472        1,235        1,081        $1,626
     1997.........................................    $1,626        2,138        1,091        $2,673
     1998.........................................    $2,673        1,566        3,755(1)     $  484
</TABLE>
 
---------------
(1) Amount includes balances related to the discontinued operations of EDG and
    Graphics.
 
                                       26
<PAGE>   28
 
ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     (a) Directors: The information required by Item 10 with respect to
directors appears in the Proxy Statement for the 1999 Annual Meeting of
Shareholders and is hereby incorporated by reference.
 
     (b) Executive Officers: The information required by Item 10 with respect to
Executive Officers appears in Part I of this Annual Report on Form 10-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by Item 11 appears in the Proxy Statement for the
1999 Annual Meeting of Shareholders and is hereby incorporated by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by Item 12 appears under "Election of Directors"
in the Proxy Statement for the 1999 Annual Meeting of Shareholders and is hereby
incorporated by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by Item 13 appears in the Proxy Statement for the
1999 Annual Meeting of Shareholders and is hereby incorporated by reference.
 
                                       27
<PAGE>   29
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
 
(a) 1. FINANCIAL STATEMENTS:
 
    The Consolidated Financial Statements and Report of Independent Accountants
    dated March 3, 1999 are included under Item 8 of this Annual Report on Form
    10-K.
 
     2. FINANCIAL STATEMENT SCHEDULE:
 
    The financial statement schedule listed in the Index to Financial Statements
    included under Item 8 is filed as part of this Annual Report on Form 10-K.
 
     3. EXHIBITS:
 
<TABLE>
      <C>      <C>  <S>
           2.       Agreement and Plan of Merger, dated as of November 26, 1996
                    among Registrant, ME Acquisitions, Inc., and Milgray
                    Electronics, Inc. is incorporated by reference to Exhibit
                    2.1 of the Form 8-K dated January 7, 1997.
           3.       The Restated Articles of Incorporation and Restated By-laws
                    are incorporated by reference to Exhibits 3.1 and 3.2,
                    respectively, to Registrant's Form 8-B dated March 22, 1995,
                    as amended.
           4.   a.  The Specimen of Registrant's Common Stock certificates is
                    incorporated by reference to Exhibit 5 to Amendment number 1
                    to Registrant's Form 8-B filed January 15, 1980.
                b.  Warrant Agreement dated September 15, 1993 including Form of
                    Warrant Certificate issued to the named Insurance Companies
                    included in the Note Purchase Agreement dated February 1,
                    1991, as amended, is incorporated by reference to Exhibit
                    4.e of the Form 10-K dated June 30, 1993.
          10.   a.  The Employment and Deferred Compensation Agreements dated
                    January 1, 1979 and the Amendment thereto dated August 6,
                    1979 concerning certain officers of Registrant are
                    incorporated by reference to Exhibits 9A, 9C and 9D to
                    Amendment number 1 to Registrant's Form 8-B dated November
                    19, 1979.
                b.  The 1990 Stock Option and Incentive Plan is incorporated by
                    reference to Exhibit A of Registrant's definitive Proxy
                    Statement (File No. 1-7899) filed in connection with the
                    Annual Meeting of Shareholders held October 29, 1990.
                c.  The 1993 Employees' Stock Purchase Plan is incorporated by
                    reference to Exhibit A of Registrant's definitive Proxy
                    Statement (File No. 1-7899) filed in connection with the
                    Annual Meeting of Shareholders held November 2, 1993.
                d.  The Amendment to Employment and Deferred Compensation
                    Agreement dated September 14, 1994 is incorporated by
                    reference to Exhibit (10) of the Registrant's Quarterly
                    Report on Form 10-Q dated September 30, 1994.
                e.  The Bell Industries, Inc. Directors' Retirement Plan for
                    Non-employees is incorporated by reference to Exhibit (99)
                    of the Registrant's Quarterly Report on Form 10-Q dated
                    September 30, 1994.
                f.  The 1994 Stock Option Plan is incorporated by reference to
                    Exhibit A of the Registrant's definitive Proxy Statement
                    (File No. 1-7899) filed in connection with the Annual
                    Meeting of Shareholders held on November 1, 1994.
                g.  Form of Severance Agreement between the Registrant and its
                    executive officers is incorporated by reference to Exhibit
                    10.9 to Registrant's Form 8-B dated March 22, 1995, as
                    amended.
                h.  Form of Indemnity Agreement between the Registrant and its
                    executive officers and directors is incorporated by
                    reference to Exhibit 10.10 to Registrant's Form 8-B dated
                    March 22, 1995, as amended.
                i.  The Amendment to Employment and Deferred Compensation
                    Agreement dated September 26, 1995 is incorporated by
                    reference to Exhibit 10.k to Registrant's Form 10-K dated
                    December 31, 1995.
</TABLE>
 
                                       28
<PAGE>   30
<TABLE>
      <C>      <C>  <S>
                j.  Non-Employee Directors' Stock Option Plan, as revised is,
                    incorporated by reference to Exhibit 10.l to Registrant's
                    Form 10-K dated December 31, 1995.
                k.  Form of Stock Option Agreement between the Registrant and
                    Non-employee Directors is incorporated by reference to
                    Exhibit 10.m to Registrant's Form 10-K dated December 31,
                    1995.
                l.  The Amendment to Employment and Deferred Compensation
                    Agreement between the Registrant and Theodore Williams dated
                    November 21, 1996 is incorporated by reference to Exhibit
                    10.n to Registrant's 10-K dated December 31, 1996.
                m.  Credit Agreement dated as of January 7, 1997 among
                    Registrant, Bell Ontario Holding, Inc., the Lenders listed
                    therein, and Union Bank of California, N.A., as agent (which
                    includes, among the Exhibits, Form of Company Security
                    Agreement, Form of Company Pledge Agreement, Form of
                    Subsidiary Security Agreement, Form of Subsidiary Guarantee
                    and Form of Subsidiary Pledge Agreement) is incorporated by
                    reference to Exhibit 10.1 to Registrant's Form 8-K dated
                    January 7, 1997.
                n.  Amendments No. 1, 2, 3 and 4 to the Credit Agreement dated
                    January 21, 1997, February 7, 1997, August 1, 1997 and
                    December 31, 1997 among Registrant Bell Ontario Holding,
                    Inc., the Lenders listed therein, and Union Bank of
                    California, N.A., as agent.
                o.  Severance Agreement dated as of January 20, 1997 between the
                    Registrant and Bruce M. Jaffe is incorporated by reference
                    and Exhibit 10.p to Registrant's Form 10-K dated December
                    31, 1996.
                p.  Amendment to the 1994 Stock Option Plan dated August 8, 1997
                    is incorporated by reference to Exhibit 99 to Registrant's
                    Form 10-Q dated June 30, 1997.
                q.  Post-effective Amendment No. 1 to the 1994 Stock Option Plan
                    dated August 12, 1997 is incorporated by reference to
                    Exhibit 4.1.1 to Registrant's Form S-8 dated August 12,
                    1997.
                r.  1997 Deferred Compensation Plan dated August 27, 1997 is
                    incorporated by reference to Registrant's Form S-8 dated
                    August 28, 1997.
                s.  The Employment Agreement between the Registrant and Tracy A.
                    Edwards, dated February 1, 1999 is filed herewith.
                t.  Form of Consulting Agreement between the Registrant and
                    Gordon Graham is filed herewith.
                u.  The Rights Agreement, dated February 1, 1999, by and between
                    Bell Industries, Inc. and Harris Trust Company of
                    California, as Rights Agent, is incorporated by reference to
                    Exhibit 1 to the Registrant's Form 8-A12B, dated February
                    25, 1999.
                v.  The Asset Purchase Agreement dated August 28, 1998 between
                    Bell Industries, Inc. and PrimeSource Corporation is
                    incorporated by reference to Exhibit 2.1 of the Registrant's
                    Form 8-K, event date September 14, 1998.
                w.  The Agreement of Purchase and Sale dated October 1, 1998
                    between Bell Industries, Inc. and Arrow Electronics, Inc. is
                    incorporated by reference to Exhibit 2.1 of the Registrant's
                    Form 8-K, event date October 1, 1998.
          21.       Subsidiaries of the Registrant.
          23.       Consent of Independent Accountants.
          27.       Financial Data Schedule.
</TABLE>
 
(b) REPORTS ON FORM 8-K:
 
     a) Form 8-K, event date: January 29, 1999, filed in connection with the
        sale of the Electronics Distribution Group.
 
                                       29
<PAGE>   31
 
                                   SIGNATURES
 
     Pursuant to the requirement 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.
 
                                          BELL INDUSTRIES, INC.
 
                                          By /s/ TRACY A. EDWARDS
                                            ------------------------------------
                                            Tracy A. Edwards
                                            President and Chief Executive
                                             Officer
Date: March 29, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 29, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated.
 
<TABLE>
<CAPTION>
                       SIGNATURE                                              TITLE
                       ---------                                              -----
<S>                                                         <C>
 
/s/ TRACY A. EDWARDS                                        President and Chief Executive Officer,
--------------------------------------------------------    Director
Tracy A. Edwards
 
/s/ GORDON GRAHAM                                           Co-Chairman of the Board
--------------------------------------------------------
Gordon Graham
 
/s/ THEODORE WILLIAMS                                       Co-Chairman of the Board
--------------------------------------------------------
Theodore Williams
 
/s/ JOHN J. COST                                            Director and Secretary
--------------------------------------------------------
John J. Cost
 
/s/ ANTHONY L. CRAIG                                        Director
--------------------------------------------------------
Anthony L. Craig
 
/s/ HERBERT S. DAVIDSON                                     Director
--------------------------------------------------------
Herbert S. Davidson
 
/s/ MILTON ROSENBERG                                        Director
--------------------------------------------------------
Milton Rosenberg
 
/s/ RUSSELL A. DOLL                                         Vice President and Chief Financial and
--------------------------------------------------------    Accounting Officer
Russell A. Doll
</TABLE>
 
                                       30
<PAGE>   32
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>                                                           <C>
       2.     Agreement and Plan of Merger dated as of November 26, 1996
              among Registrant, ME Acquisition, Inc. and Milgray
              Electronics, Inc............................................        (*)
       3.     Articles of incorporation and by-laws.......................        (*)
       4.     Instruments defining the rights of security holders,
              including indentures
              a.  Specimen of Registrant's Common Stock certificate.......        (*)
              b.  Warrant Agreement dated September 15, 1993 including
              Form of Warrant Certificate issued to the named Insurance
                  Companies included in the Note Purchase Agreement dated
                  February 1, 1991, as amended............................        (*)
      10.     Material contracts
              a.  The Employment and Deferred Compensation Agreements
              dated January 1, 1979 and the Amendment thereto dated August
                  6, 1979 concerning certain officers of Registrant.......        (*)
              b.  The 1990 Stock Option and Incentive Plan included as
              Exhibit A to Registrant's definitive Proxy Statement (File
                  No. 1-7899) filed in connection with the Annual Meeting
                  of Shareholders held October 29, 1990...................        (*)
              c.  The 1993 Employees' Stock Purchase Plan included as
              Exhibit A to Registrant's definitive Proxy Statement (File
                  No. 1-7899) filed in connection with the Annual Meeting
                  of Shareholders held November 2, 1993...................        (*)
              d.  The Amendment to Employment and Deferred Compensation
              Agreement dated September 14, 1994 included as to Exhibit
                  (10) of the Registrant's Quarterly Report on Form 10-Q
                  dated September 30, 1994................................        (*)
              e.  The Bell Industries, Inc. Directors' Retirement Plan for
              Non-employees included as Exhibit (99) of the Registrant's
                  Quarterly Report on Form 10-Q dated September 30,
                  1994....................................................        (*)
              f.  The 1994 Stock Option Plan included as Exhibit A of the
              Registrant's definitive Proxy Statement (File No. 1-7899)
                  filed in connection with the Annual Meeting of
                  Shareholders held on November 1, 1994...................        (*)
              g.  Form of Severance Compensation Agreement between the
              Registrant and its executive officers.......................        (*)
              h.  Form of Indemnity Agreement between the Registrant and
              its executive officers and directors........................        (*)
              i.  The Amendment to Employment and Deferred Compensation
              Agreement dated September 26, 1995..........................        (*)
              j.  Non-Employee Directors' Stock Option Plan, as revised...        (*)
              k.  Form of Stock Option Agreement between the Registrant
              and Non-employee Directors..................................        (*)
              l.  The Amendment to Employment and Deferred Compensation
              Agreement dated November 21, 1996...........................        (*)
              m. Credit Agreement dated as of January 7, 1997 among
              Registrant, Bell Ontario Holding, Inc., the Lenders named
                 therein, and Union Bank of California, as agent..........        (*)
</TABLE>
<PAGE>   33
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>                                                           <C>
              n.  Amendments No. 1, 2, 3 and 4 to the Credit Agreement
              dated January 21, 1997, February 7, 1997, August 1, 1997 and
                  December 31, 1997 among Registrant, Bell Ontario
                  Holding, Inc., the Lenders listed therein, and Union
                  Bank of California, N.A., as agent......................        (*)
              o.  Severance Agreement dated January 20, 1997 between the
              Registrant and Bruce M. Jaffe...............................        (*)
              p.  Amendment to the 1994 Stock Option Plan dated August 8,
                  1997....................................................        (*)
              q.  Post-effective Amendment No. 1 to the 1994 Stock Option
              Plan dated August 12, 1997..................................        (*)
              r.  1997 Deferred Compensation Plan dated August 27, 1997...        (*)
              s.  Employment Agreement between the Registrant and Tracy A.
              Edwards, dated February 1, 1999.............................
              t.  Form of Consulting Agreement between the Registrant and
                  Gordon Graham...........................................
              u.  The Rights Agreement, dated February 1, 1999, by and
              between Bell Industries, Inc. and Harris Trust Company of
                  California, as Rights Agent.............................        (*)
              v.  Asset Purchase Agreement dated August 28, 1998 between
              Bell Industries, Inc. and PrimeSource Corporation...........        (*)
              w.  The Agreement of Purchase and Sale dated October 1, 1998
              between Bell Industries, Inc. and Arrow Electronics, Inc....        (*)
      21.     Subsidiaries of the Registrant
      23.     Consent of Independent Accountants
      27.     Financial Data Schedule
</TABLE>
 
---------------
(*) Incorporated by reference.