<PAGE>
 
Exhibit 13.1

Aerovox Incorporated
Management's Discussion and Analysis of Financial Condition and Results of
Operations

The table below sets forth the year-to-year percentage increases (decreases) in
various items from the consolidated statements of income.

<TABLE>
<CAPTION>
                                                  1995 vs. 1994    1994 vs. 1993
--------------------------------------------------------------------------------
<S>                                               <C>              <C>
Net sales                                              2.1%             9.1%
Cost of sales                                          5.0%            10.2%
Gross profit                                         (11.8%)            3.9%
Selling, general and administrative expenses          (4.9%)            3.7%
Income from operations                               (29.4%)            4.4%
</TABLE> 

The table below depicts the same items as percentages of net sales.

<TABLE> 
<CAPTION>  
                                                                   For The Years Ended
                                                    Dec. 30, 1995     Dec. 31, 1994    Jan. 1, 1994
---------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>              <C> 
Net sales                                              100.0%           100.0%           100.0%
Cost of sales                                           85.3%            82.9%            82.1%
Gross profit                                            14.7%            17.1%            17.9%
Selling, general and administrative expenses            11.4%            12.3%            12.9%
Income from operations                                   3.3%             4.8%             5.0%
</TABLE>

1995 versus 1994

Net sales for the fiscal year of 1995 totaled $128,322,000 compared to net sales
of $125,640,000 for fiscal 1994, a 2.1% increase.  The Aerovox Group reported
net sales of approximately $87,500,000 for 1995 versus $88,400,000 for 1994, a
1% decrease.  The second half of the year was disappointing  for this Group as,
for example, air-conditioning capacitor requirements never returned to 1994
levels even though warm summer temperatures did help deplete air conditioner
inventories.  The Aero M Group had net sales in 1995 of approximately
$18,400,000 compared to about $19,300,000 in 1994, a 4.7% decrease.  Motor start
(AC) capacitor sales were lower by approximately 38% from the previous year -
other type capacitors (DC), along with processed foil sales, increased in 1995
over 1994 but not enough to offset the motor start capacitor shortfall.  BHC
Aerovox Ltd. (United Kingdom) increased its net sales in 1995 by approximately
25% to $22,400,000 as growth in both AC and DC application capacitors exceeded
20%.  Backlog at year end 1995 decreased to $17,923,000 from $21,100,000 at the
end of 1994.

Gross profits in 1995, totaled $18,919,000, 14.7% of net sales, compared to
$21,438,000, 17.1% of net sales, recorded in fiscal year 1994.  Gross profits
were affected by reduced domestic shipment volume but were also impacted by
continued losses, at the gross margin level, by operations in Mexico.
Operations in the United Kingdom (BHC Aerovox Ltd.) improved its gross margin
percentage in 1995 by almost one full percentage point over results in 1994.

Selling and general and administrative expenses for 1995 were $14,673,000, 11.4%
of net sales, versus $15,428,000, 12.3% of net sales, for 1994.  Income from
operations totaled $4,246,000 for fiscal year 1995 as compared to $6,010,000 for
fiscal year 1994, a 29.4% reduction.  As a percentage of net sales, income from
operations decreased to 3.3% compared to 4.8% in 1994.

Interest expense of $2,296,000 was recorded in fiscal year 1995 versus
$1,566,000 in 1994.  Borrowings increased in 1995 by $6,970,000 to support cash
requirements during the year.  Annualized interest rates on these borrowings
ranged from 7.12% to 9.00% during 1995.

Other income totaled $702,000 in 1995 compared to $753,000 in 1994.  A positive
exchange gain in 1994 of $250,000 that was recorded in the U.K. operations was
not repeated in 1995.

Income before taxes for fiscal 1995 was $2,652,000 compared to $4,693,000 for
fiscal year 1994.  1994 had been adversely affected by a $504,000 charge to
earnings for a litigation claim that is still under appeal by


14
<PAGE>
 
Aerovox Incorporated
Management's Discussion and Analysis of Financial Condition and Results of
Operations

the Company.  Provision for income taxes in 1995 was $1,051,000 (39.6%) compared
to a provision in 1994 of $1,669,000 (35.6%).  Net income for 1995 was
$1,601,000 (1.2% of net sales and $.30 per common share) compared to $3,024,000
(2.4% of net sales and $.56 per common share) for fiscal 1994.

1994 versus 1993

Net sales for fiscal 1994 totaled $125,640,000, an approximate 9.1% increase
over net sales for fiscal 1993, at $115,158,000.  The Company acquired Aero M,
Inc., a domestic company, on March 5, 1993, and certain assets of BH Components,
Ltd., a United Kingdom company, on March 11, 1993.  These acquisitions were
accounted for as purchases and, accordingly, the financial results of the
acquired companies are included from the date of acquisition.  Approximately
$33,500,000 of net sales were recorded from date of purchase for these
acquisitions in fiscal 1993 compared to approximately $37,300,000 (an increase
of 11.3%) recorded for the full fiscal year of 1994.  Net sales of the Aero M
Group were adversely affected by the physical move of its assembly operations
from Glasgow, Kentucky, to Juarez, Mexico, during 1994 while the BHC Group
operations in the United Kingdom increased net sales to a record level.  The
third operating Group of the Company, the Aerovox Group, increased its 1994 net
sales level by approximately 8.2% to $88,400,000 from $81,700,000 in fiscal
1993.  Backlog at the end of 1994 totaled $21,100,000 compared to $16,600,000 at
year end 1993.

Gross profits in 1994 totaled $21,438,000, 17.1% of net sales, compared to
$20,628,000 in 1993, 17.9% of net sales, an increase of $810,000.  The reduced
productivity of the Aero M Group, due to the move of its assembly operations to
Mexico, contributed heavily to the lesser gross margin level in 1994.

Income from operations totaled $6,010,000 for fiscal 1994 as compared to
$5,757,000 for fiscal year 1993, a 4.4% increase for the year.  As a percentage
of net sales, income from operations decreased to 4.8% compared to 5.0% in 1993.
Selling, general and administrative expenses for 1994 were $15,428,000, 12.3% of
net sales, versus $14,871,000, 12.9% of net sales, for 1993.  Approximately
$364,000 of this increase of $557,000 is attributable primarily to increased
commissions associated with higher sales volumes.

Interest expense for fiscal 1994 was $1,566,000, compared to $1,388,000 in 1993.
Borrowings increased in 1994 by approximately $2,788,000 to support cash
requirements during the year.  Annualized interest rates on these borrowings
varied between 6.7% and 8.24% during 1994.

Other income of $753,000 in fiscal 1994 was $125,000 greater than the $628,000
recorded in 1993 as a positive exchange gain of approximately $250,000 was
recorded in the U.K. operations.

Income before income taxes was adversely affected by a $504,000 charge to
earnings for a litigation claim that was the result of the reversal of two
earlier court decisions that could have required the umbrella insurer of the
Company to provide coverage for the excess of an environmental settlement
relating to a waste storage site that was not covered by the Company's primary
insurers.  The Company is appealing this decision.  Income before taxes for
fiscal 1994 was $4,693,000 compared to $4,997,000 in 1993.  Provision for income
taxes in 1994 was $1,669,000 (35.6%) compared to a provision of $1,898,000
(38.0%) in 1993 as a valuation reserve was reduced by an approximate $122,000.
On January 3, 1993, the Company adopted Financial Accounting Standard 109
(FAS109), "Accounting for Income Taxes", which necessitated an adjustment of
$590,000 to provide for the cumulative effect of the required accounting change.
At the end of fiscal 1994, the net operating loss carry-forward was reduced to
approximately $1,700,000.  Net income for 1994 was $3,024,000 ($.56 per share)
compared to $3,689,000 ($.68 per share) for fiscal 1993.

Liquidity and Capital Resources

Working capital at December 30, 1995, was $26,427,000 compared to $22,441,000 at
the end of fiscal 1994.  Current ratio was 2.4:1 at both year end 1995 and 1994.
Net accounts receivable and inventories increased by $3,310,000 and $2,735,000,
respectively during 1995.  Net cash provided by operating activities in 1995
totaled $1,521,000 as compared to $3,144,000 generated in 1994.

The Company invested approximately $8,130,000 in capital assets in 1995 as
compared to $6,990,000 in 1994.


                                                                              15
<PAGE>
 
Aerovox Incorporated
Management's Discussion and Analysis of Financial Condition and Results of
Operations

The Company's Revolving Credit Agreement (as amended on December 29, 1995)
provides for a credit line of $14,360,000 for the Company and 4,400,000 pounds
sterling for its wholly-owned subsidiary in the United Kingdom.  The Agreement
which extends to May 31, 1997, also includes various interest rate options
which, for fiscal year 1995, have varied from 7.12% to 9.00% on an annualized
basis.  The security for this line of credit is accounts receivable and
inventories and a Company guarantee for the U.K. loan.  The outstanding balance
of loans at fiscal years ended December 30, 1995, and December 31, 1994, was
approximately $20,291,000 and $14,120,000, respectively.

The Company also has a term line of credit with an equipment financing company
with an outstanding balance at the end of 1995 of $7,677,000 compared to an
outstanding balance at the end of 1994 of $6,562,000.  (On January 11, 1996, the
Company increased loans outstanding to this equipment financing company by
$1,500,000.)  These loans, secured by equipment at the Company's New Bedford
facility, have five-year terms and carry annual interest rates varying from
7.36% to 8.24%.

Other long-term debt of the Company consists of an Industrial Revenue Bond
maturing on July 1, 2002, with an annual interest rate of 7.42% and quarterly
payments on the principal (outstanding balance at fiscal year end was $2,942,000
versus a balance at year end, 1994, of $3,258,000).

Capital expenditures during 1996 are expected to be funded primarily from cash
provided by operations.

Cash and cash equivalents at December 30, 1995, totaled $573,000 compared to
$102,000 at December 31, 1994.

Other Matters

The Company has been party to certain environmental matters over the past
several years.  The matters have been settled and the related liabilities paid.
Management is not aware of any further environmental exposures which it believes
will have a material impact on future liquidity or results of operations.

The impact of inflation on the Company's business has not been material.


16
<PAGE>
 
Aerovox Incorporated
Consolidated Statements of Income

<TABLE>
<CAPTION>
 
                                                                        For The Years Ended
(Amounts in Thousands, Except Per Share Data)               Dec. 30, 1995     Dec. 31, 1994     Jan. 1, 1994
------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>             <C>
Net sales                                                     $128,322          $125,640        $115,158
Cost of Sales                                                  109,403           104,202          94,530
------------------------------------------------------------------------------------------------------------
Gross profit                                                    18,919            21,438          20,628
Selling, general and administrative expenses                    14,673            15,428          14,871
------------------------------------------------------------------------------------------------------------
Income from operations                                           4,246             6,010           5,757
                                                                                           
Other income (expense):                                                                    
  Litigation settlement (Note J)                                    --              (504)             --
  Interest expense                                              (2,296)           (1,566)         (1,388)
  Other income                                                     702               753             628
------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative                                                  
  effect of the change in accounting for income taxes            2,652             4,693           4,997
Provision for income taxes (Note I)                              1,051             1,669           1,898
------------------------------------------------------------------------------------------------------------
Income before cumulative effect of the change in                                           
  accounting for income taxes                                    1,601             3,024           3,099
Cumulative effect of the change in accounting                                              
  for income taxes (Note A)                                         --                --             590
------------------------------------------------------------------------------------------------------------
Net income                                                    $  1,601          $  3,024        $  3,689
------------------------------------------------------------------------------------------------------------
Net income per share:                                                                      
Income before cumulative effect of the change in                                           
  accounting for income taxes                                     $.30              $.56            $.57
Cumulative effect of the change in accounting                                              
  for income taxes                                                  --                --             .11
------------------------------------------------------------------------------------------------------------
Net income per share                                              $.30              $.56            $.68
------------------------------------------------------------------------------------------------------------
</TABLE> 
 
Consolidated Statements of Stockholders' Equity

<TABLE> 
<CAPTION> 
                                                                                                   Foreign
                                                                   Additional                      Currency        Total
                                                     Common         Paid-in       Retained        Translation   Stockholders'
(Amounts in Thousands)                               Stock          Capital       Earning         Adjustments     Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>           <C>              <C>            <C> 
Balances at January 2, 1993                         $  5,151        $    195      $ 21,174         $  (215)       $26,305
  Net income                                              --              --         3,689              --          3,689
  Proceeds from employee stock                  
   purchase plan and exercise of                
   stock options (20,083 shares)                          20             131            --              --            151
  Foreign currency translation adjustments                --              --            --              13             13
-----------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1994                            5,171             326        24,863            (202)        30,158
  Net income                                              --              --         3,024              --          3,024
  Proceeds from employee stock                         
   purchase plan and exercise of                       
   stock options (59,716 shares)                          60             266            --              --            326
  Foreign currency translation adjustments                --              --            --             (92)           (92)
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994                          5,231             592        27,887            (294)        33,416
  Net income                                              --              --         1,601              --          1,601
  Proceeds from employee stock                   
   purchase plan and exercise of                 
   stock options (68,090 shares)                          68             177            --              --            245
  Foreign currency translation adjustments                --              --            --            (397)          (397)
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 30, 1995                       $  5,299        $    769      $ 29,488         $  (691)       $34,865
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                                                              17
<PAGE>
 
Aerovox Incorporated
Consolidated Balance Sheets

<TABLE> 
<CAPTION> 
(Amounts in Thousands)                                      Dec. 30, 1995    Dec. 31, 1994
------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>
Assets
Current assets:
  Cash                                                         $    573        $    102
  Accounts receivable, net of allowance                     
   for doubtful                                             
    accounts of $635 in 1995 and $295                       
     in 1994 (Note C)                                            19,588          16,278
  Inventories (Notes B and C)                                    22,630          19,895
  Prepaid expenses and other current                        
   assets                                                           974           1,148
  Recoverable income taxes                                           99              77
  Deferred income taxes (Note I)                                    885             997
------------------------------------------------------------------------------------------
      Total current assets                                       44,749          38,497
                                                            
Property, plant and equipment, at cost (Note C):            
  Land                                                              384             308
  Buildings and improvements                                     11,056           9,462
  Machinery and equipment                                        56,010          46,867
  Construction in progress                                        1,588           4,271
------------------------------------------------------------------------------------------
                                                                 69,038          60,908
      Less accumulated depreciation                             (27,787)        (23,807)
------------------------------------------------------------------------------------------
                                                                 41,251          37,101
                                                            
Deferred income taxes (Note I)                                    2,290           1,752
Note receivable                                                     293             285
Other assets                                                        108             124
------------------------------------------------------------------------------------------
      Total assets                                             $ 88,691        $ 77,759
------------------------------------------------------------------------------------------
                                                            
Liabilities and Stockholders' Equity                        
Current liabilities:                                        
  Accounts payable                                             $ 11,270        $  9,986
  Accrued compensation and related                          
   expenses                                                       2,523           2,716
  Other accrued expenses                                            816             578
  Current maturities of long-term debt                      
   (Note C)                                                       3,205           2,292
  Income taxes                                                      508             484
------------------------------------------------------------------------------------------
      Total current liabilities                                  18,322          16,056
Deferred income taxes (Note I)                                    6,727           5,821
Industrial revenue bond (Note C)                                  2,573           2,943
Long-term debt less current maturities (Note C)                  25,132          18,705
Deferred compensation                                             1,072             818
Commitments and contingencies (Notes D, E and J)          
Stockholders' equity (Notes E, F and G):                  
  Preferred stock, $.01 par value; 5,000,000 shares            
   authorized; none issued                                           --              --
  Common stock; $1.00 par value; 20,000,000 shares authorized;             
   5,298,741 and 5,230,651 shares issued and outstanding          5,299           5,231
  Additional paid-in capital                                        769             592
  Retained earnings                                              29,488          27,887
  Foreign currency translation                             
   adjustments                                                     (691)           (294)
------------------------------------------------------------------------------------------
      Total stockholders' equity                                 34,865          33,416
------------------------------------------------------------------------------------------
      Total liabilities and stockholders' equity               $ 88,691        $ 77,759
------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.


18
<PAGE>
 
Aerovox Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                   For The Years Ended
(Amounts in Thousands)                              Dec. 30, 1995     Dec. 31, 1994     Jan. 1, 1994
---------------------------------------------------------------------------------------------------- 
<S>                                                    <C>               <C>             <C>
Cash flows from operating activities:                                             
Net income                                             $ 1,601           $ 3,024         $  3,689
Adjustments to reconcile net income                                               
 to cash provided by operating activities,                                        
 net of effect of acquired companies:                                             
  Litigation settlement                                     --                --           (1,000)
  Depreciation and amortization                          3,980             3,663            3,238
  Deferred income taxes                                    480             1,220            2,039
  Cumulative effect of change in accounting                                       
   principle                                                --                --             (590)
Changes in operating assets and liabilities:                                      
  Accounts receivable                                   (3,310)             (348)          (2,598)
  Inventories                                           (2,735)           (4,173)          (1,635)
  Prepaid expenses                                         174                 9             (395)
  Recoverable income taxes                                 (22)              255             (225)
  Accounts payable                                       1,284             2,119              344
  Accrued compensation and related expenses               (193)             (662)           1,404
  Other accrued expenses                                   238            (1,866)          (1,132)
  Income taxes payable                                      24               (97)             114
---------------------------------------------------------------------------------------------------- 
Net cash provided by operating activities                1,521             3,144            3,253
---------------------------------------------------------------------------------------------------- 
Cash flows from investing activities:                                             
  Acquisition of property, plant and equipment          (8,130)           (6,990)          (4,066)
  Acquisition of businesses                                 --                --           (9,575)
  Cash equivalents pledged as collateral                    --               505              225
  Proceeds from sales of assets                             --                --              208
  Other                                                   (135)              114              117
---------------------------------------------------------------------------------------------------- 
Net cash used in investing activities                   (8,265)           (6,371)         (13,091)
---------------------------------------------------------------------------------------------------- 
Cash flows from financing activities:                                             
  Proceeds from employee stock purchase plan                                          
   and exercise of stock options                           245               326              151
  Net borrowings under line of credit                    6,170             4,940            9,180
  Long-term borrowings                                   3,500                --            5,000
  Payments of short-term debt                               --                --           (2,485)
  Payments of long-term debt                            (2,700)           (2,152)          (1,854)
---------------------------------------------------------------------------------------------------- 
Net cash provided by financing activities                7,215             3,114            9,992
---------------------------------------------------------------------------------------------------- 
Increase (decrease) in cash                                471              (113)             154
Cash at beginning of year                                  102               215               61
---------------------------------------------------------------------------------------------------- 
Cash at end of year                                    $   573           $   102         $    215
---------------------------------------------------------------------------------------------------- 
Supplemental disclosure of cash flow information:                                 
  Cash paid during the year for interest               $ 2,344           $ 1,592         $  1,371
---------------------------------------------------------------------------------------------------- 
  Cash paid during the year for income taxes           $   637           $   621         $    209
---------------------------------------------------------------------------------------------------- 
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                                                              19
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

A.  Summary of Significant Accounting Policies:

Basis of Presentation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.  All intercompany transactions have been
eliminated.

Fiscal Year

The Company's fiscal year ends on the Saturday nearest to December 31.  Fiscal
years 1995, 1994, and 1993 ended on December 30, 1995, December 31, 1994, and
January 1, 1994, respectively.

Translation of Foreign Currencies

Assets and liabilities of all foreign subsidiaries are translated at period-end
rates of exchange, and income statement accounts are translated at average rates
of exchange.  Resulting translation adjustments are recorded as a separate
component of stockholders' equity, "Foreign currency translation adjustments."

Cash

Cash consists of cash on hand.  Interest income included in other income
amounted to $72,000, $101,000 and $46,000 in 1995, 1994, and 1993, respectively.

Grants

Grants received from governments by foreign subsidiaries are recognized in
income when the related funds are received.  In 1995, grants of approximately
$250,000 received by the Company's United Kingdom subsidiary were recognized as
a reduction to related operating expenses.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using
the last-in, first-out (LIFO) method for some domestic inventories and the
first-in, first-out (FIFO) method for foreign inventories and other domestic
inventories.

Property, Plant and Equipment

Property, plant and equipment are stated at cost.  Provisions for depreciation
of plant and equipment are computed using the straight-line method over the
estimated useful lives of the assets (buildings and improvements, 20-40 years;
lease-hold improvements, over the life of the lease; machinery and equipment, 5-
15 years).  Expenditures for repairs and maintenance are charged to expense when
incurred.  Betterments which materially extend the life of the related assets
are capitalized and depreciated.  Upon retirement or other disposition of
property and equipment, the cost and related depreciation are removed from the
accounts and the resulting gain or loss is reflected in earnings.

Risks and Uncertainties

The Company's products are used primarily in air conditioners, fluorescent
lighting, high intensity discharge lighting, microwave ovens,
telecommunications, power supplies, and industrial power factor correction
applications.  The Company maintains reserves for potential credit losses and
such losses have been within management's expectations.  The Company invests its
excess cash in deposits and other securities with major banks.  These
investments typically mature within ninety days and therefore bear minimal risk.
The Company has not incurred any losses related to these investments.

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

Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purpose.  On January 3, 1993, the
Company adopted Financial Accounting Standard No. 109 (FAS 109), "Accounting for
Income Taxes" which necessitated an adjustment of $590,000 to provide for the
cumulative effect of the required accounting change.  Prior year financial
statements were not restated to apply the provisions of FAS 109.


20
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

Net Income Per Share

Net income per share is computed based on the weighted average number of common
and  common equivalent shares outstanding during the year (5,393,202 in 1995,
5,410,088 in 1994 and 5,393,294 in 1993).  Fully diluted net income per share is
the same as net income per share.

B.  Inventories:

At December 30, 1995, domestic inventories at FIFO amounted to $20,423,000 and
were $18,377,000 at December 31, 1994, of which $12,487,000 and $13,045,000 were
subject to LIFO, respectively.

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                          December 30, 1995                   December 31, 1994
                                  Domestic     Foreign      Total     Domestic     Foreign      Total
------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>         <C>         <C>         <C>         <C>
Raw materials                      $10,584     $ 2,263     $12,847     $ 7,661     $ 1,536     $ 9,197
Work in process                      4,030         658       4,688       5,155         528       5,683
Finished goods                       5,809         312       6,121       5,561         480       6,041
------------------------------------------------------------------------------------------------------
                                    20,423       3,233      23,656      18,377       2,544      20,921
Less excess of FIFO                                                                        
  cost over LIFO cost               (1,026)         --      (1,026)     (1,026)         --      (1,026)
------------------------------------------------------------------------------------------------------
                                   $19,397     $ 3,233     $22,630     $17,351     $ 2,544     $19,895
------------------------------------------------------------------------------------------------------
</TABLE>

C.  Debt:

On August 30, 1994, the Company entered into a First Amendment to Amended and
Restated Revolving Credit Agreement which increased the Company's line of credit
to approximately $21 million (from $15 million) by incorporating a 4,000,000
British Pounds line of credit to BHC Aerovox, Ltd. (BHC), a wholly-owned
subsidiary of the Company.  On December 29, 1995, a Second Amendment to The
Revolving Credit Agreement was entered into which adjusted the BHC line of
credit to 4,400,000 British Pounds with no change to the $21 million total lines
of credit for the Company.  The Second Amendment also incorporated changes
including violation waivers to financial covenants which require the Company to
maintain debt to tangible net worth and interest coverage ratios as the Company
had been in violation of these covenants as of the end of the third and fourth
quarters of 1995.  Interest is at the bank's prime rate payable in arrears on
the outstanding loan balance.  The Company has the option to convert from a bank
base rate loan into a Eurodollar Loan at the then Eurodollar (LIBOR) rate plus 1
3/4 percentage points.  The Company also has the option to convert up to $4
million of loans to a Bankers' Acceptance facility at interest rates equal to
the per annum average discount rate quoted to the bank on date of request for
such facility plus 1 1/2% per annum.  The Agreement matures on May 31, 1997.  A
commitment fee, equal to one-quarter percent per annum will be charged on the
unused portion of the total commitment.  At December 30, 1995, borrowings
outstanding under this Agreement were $20,300,000.

A ten-year Industrial Revenue Bond was issued by the Massachusetts Industrial
Finance Agency in July 1982 to finance the acquisition of equipment.  The bond
was transferred to another purchaser in June 1992.  Interest at the rate of
12.5% per annum through June 1992 and 7.42% per annum thereafter and principal
are payable monthly commencing July 1, 1992 to July 1, 2002.  The amount of each
installment is calculated on an assumed 10-year amortization schedule. $370,000
of principal is payable in 1996.  At December 30, 1995, the bond balance
outstanding under this agreement was $2,942,000.

Other long-term debt of the Company consists of a term line of credit agreement
with an equipment financing company in the amount of $10,000,000, collateralized
by certain equipment.  Payments of principal and interest are due quarterly.  At
December 30, 1995, borrowings outstanding under this agreement were $7,677,000,
at annualized interest rates ranging from 7.36% to 8.24%, and maturing at dates
through the year 2000.  This agreement contains certain restrictive covenants,
the most restrictive of which is to maintain a specified debt to tangible net
worth ratio.  (On January 11, 1996, the Company increased loans outstanding to
the equipment financing Company by $1,500,000.)


                                                                              21
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

Total maturities of long-term debt over the next five years are:

<TABLE>
<CAPTION>
 
                      Year
                      ------------------------------------------
                      <S>                            <C>
                      1996                           $ 3,205,000
                      1997                            23,543,000
                      1998                             1,421,000
                      1999                             1,157,000
                      2000                               784,000
                      Thereafter                         800,000
</TABLE>

D.  Commitments:

The Company leases office space and equipment under various non-cancelable
operating leases.  Rental expense amounted to $1,375,000 in 1995, $1,652,000 in
1994, and $1,047,000 in 1993.  At December 30, 1995, future minimum annual
rental payments under all leases are as follows:

<TABLE>
<CAPTION>
 
                      Year
                      ------------------------------------------
                      <S>                             <C>
                      1996                            $  932,000
                      1997                               862,000
                      1998                               803,000
                      1999                               779,000
                      2000                               772,000
                      Thereafter                      $2,837,000
</TABLE>

The Company is self-insured for workers' compensation benefits for some of its
employees.  The amounts charged to expense for workers' compensation were
$357,000 in 1995,  $417,000 in 1994, and $275,000 in 1993, based upon reported
claims and estimates of claims incurred but not reported.

The Company is also self-insured for a portion of health care costs not covered
by insurance for some of its employees.  The Company is liable for claims up to
$150,000 per employee and aggregate claims up to a maximum of $2,470,000 (based
on current enrollment) for 1995.  Costs accrued are based upon reported claims
and estimates of claims incurred but not reported.  The amount charged to
expense for health care costs, which includes paid claims, individual and
aggregate stop/loss coverage and administrative fees, less employee
contributions, was $1,830,000 in 1995, $1,672,000 in 1994, and $1,772,000 in
1993.

E.  Incentive and Other Plans:

Stock Incentive Plan

The 1989 Stock Incentive Plan, permits the granting of a variety of stock and
stock-based awards, including stock options, rights to receive cash or shares in
respect of increases in the value of the Company's common stock, the award of
restricted and unrestricted shares, rights to receive cash or shares on a
deferred basis or based on performance, cash payments sufficient to offset the
federal ordinary income taxes under the plan, loans to participants in
connection with awards, and other common stock-based awards, including the sale
or award of convertible securities, that meet the requirements of the plan.  The
plan also provides that option holders may surrender outstanding options in
exchange for a cash payment during the sixty-day period following a change in
control as defined in the plan.

A total of 700,000 shares of common stock have been reserved by the board of
directors and may be issued under the plan to full or part-time officers and
other key employees of the Company and its subsidiaries.  The plan limits the
terms of awards to ten years and prohibits the granting of awards more than ten
years after the effective date of the plan.

The plan permits the granting of non-transferable stock options that qualify as
incentive stock options (ISOs) and options that do not so qualify.  The exercise
price of each option may not be less than 100% of the fair market value, or 110%
in the case of a person holding 10% or more of the outstanding voting power of
all classes of stock of the Company, on the date of grant in the case of ISOs
and not less than 50% of the fair


22
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

market value in the case of non-qualified options.  The term of each option is
fixed by the board of directors but may not exceed 10 years from the date of
grant (5 years in the case of a 10% shareholder) with respect to ISOs and 10
years and a day with respect to non-qualified options.

In the event of termination of employment by reason of retirement, disability or
death, an option may be exercised (to the extent it was then exercisable) for a
period of three years.  In the event of termination for other reasons, an option
may be exercised (to the extent it was then exercisable) for three months.

Each option becomes exercisable at the rate of 20% per year and expires ten
years from the date of grant.  Information for fiscal years, 1995, 1994, and
1993, with respect to the plan, is as follows:

<TABLE>
<CAPTION>
 
                                                                 Option Price
                                                Shares            Per Share
-----------------------------------------------------------------------------
<S>                                           <C>                <C>
Outstanding at January 2, 1993                  365,000          $3.000-6.125
Granted                                         145,500           7.875-8.875
Canceled                                        (14,000)          3.000-8.875
Exercised                                       (10,000)             3.000
-----------------------------------------------------------------------------
Outstanding at January 1, 1994                  486,500           3.000-8.875
Granted                                          87,500           7.125-9.000
Canceled                                        (37,000)          8.875-9.000
Exercised                                       (52,500)          7.625-8.125
-----------------------------------------------------------------------------
Outstanding at December 31, 1994                484,500           3.000-9.000
Granted                                          66,000              7.625
Canceled                                        (54,500)          7.125-8.875
Exercised                                       (50,000)             3.000
-----------------------------------------------------------------------------
Outstanding at December 30, 1995                446,000          $3.000-9.000
-----------------------------------------------------------------------------
</TABLE>

These options expire at various dates through December 2004.  Options for
273,200 shares were exercisable at December 30, 1995.  At December 30, 1995,
there were 133,000 shares held available for future grants.

1989 Stock Option Plan for Directors

The 1989 Stock Option Plan for Directors reserved 50,000 shares of common stock
for the granting of options to purchase stock at 100% of the fair market value
on the date of grant.  Directors who are not employees of the Company are
eligible under the plan.  Each newly elected director will be awarded options to
purchase 2,500 shares of common stock on the date of his first election.
Following the initial grant, each person who is an eligible director on the day
immediately succeeding the day of each annual meeting of shareholders of the
Company, will receive options covering 1000 shares.  On August 13, 1993, the
Board of Directors adopted an amendment to the Plan approved by the stockholders
at the 1994 Annual Stockholders' Meeting, which increased the number of shares
covered by options that are awarded at the time of the annual meeting from 500
to 1,000, or 250 for each quarter of service if less than one year elapses
between the initial grant and an annual grant (subject to the maximum number of
shares available under the plan) of options on such date.  These options expire
in ten years and become exercisable on the first anniversary of the date of the
grant.  No options may be awarded under the plan after April 1999.

In addition, directors were allowed to elect to receive options to purchase
common stock of the Company at $1.00 per share in lieu of cash payments for
annual fees under the Deferred Director Fee Option Plan.  The difference between
the option price and the fair market value at the date of election by the
Director is charged to expense.  During 1992, options to purchase 1,951 shares
were granted under this arrangement.  No shares were granted under this
agreement in 1994 and the Plan was discontinued on March 2, 1994, by vote of the
Board of Directors.


                                                                              23
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

Information for fiscal years 1995, 1994, and 1993, with respect to the plan, is
as follows:

<TABLE>
<CAPTION>
                                                              Option Price
                                              Shares            Per Share
---------------------------------------------------------------------------
<S>                                         <C>               <C>
Outstanding at January 2, 1993                 26,201          $1.000-6.750
Granted                                         7,000           8.875-9.625
Exercised                                        (500)             4.500
---------------------------------------------------------------------------
Outstanding at January 1, 1994                 32,701           1.000-9.625
Granted                                         8,500           6.750-9.000
Canceled                                       (1,167)          6.125-9.625
Exercised                                        (833)          6.125-6.750
---------------------------------------------------------------------------
Outstanding at December 31, 1994               39,201           1.000-9.625
Granted                                         8,250           7.500-7.750
Canceled                                       (5,835)          6.125-9.625
Exercised                                      (9,951)          1.000-6.750
---------------------------------------------------------------------------
Outstanding at December 30, 1995               31,665          $2.750-9.625
---------------------------------------------------------------------------
</TABLE>

These options expire at various dates through December 2003.  Options for 18,745
shares were exercisable at December 30, 1995.  There were 36,502 shares
available for future grants at December 30, 1995.

New Accounting Pronouncement

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is effective for fiscal year 1996.  The Company has
determined that it will elect the disclosure-only alternative.  The Company will
be required to disclose the pro forma net income or loss and per share amounts
in the notes to the financial statements using the fair value based method
beginning in fiscal 1996 with comparable disclosures for fiscal 1995.  The
Company has not determined the impact of those pro forma adjustments.

Employee Stock Purchase Plan

In 1989, the Company established the Employee Stock Purchase Plan under which
100,000 shares of common stock were reserved for purchase by employees.  The
plan provides for the sale of common stock at the average of the reported high
and low sales prices of the stock on the last business day of the accounting
period each month.  Common stock purchases are paid through regular payroll
deductions of up to 10% of eligible compensation plus Company payments equal to
5% of the participant's payment plus an additional 1% for each full year of
continuous employment with the Company since January 1, 1973, up to a maximum of
20% of the participant's payment.  In 1995, 1994, and 1993,  8,139, 6,383 and
9,583 shares, respectively, were sold under the plan.  There were 31,072 shares
qualified for future sale at December 30, 1995.

Change of Control Severance Benefits

The Company has severance agreements with certain key employees which provide
that if, within 24 months following a change in control (as defined in the
severance agreements), the Company were to terminate the employee's employment
other than for cause or the employee were to terminate his employment for
reasons specified in the agreements, the employee would receive amounts up to
three times his annual base salary plus target bonus for such year without
deduction for any amounts previously paid under the bonus plan.  The agreements
also provide for the immediate vesting of bonus awards, stock options and
similar awards, the immediate payment of deferred compensation amounts and the
continuation of certain benefits.  The maximum contingent liability under these
agreements at December 30, 1995 was approximately $4,142,000.

Profit-Sharing Savings Plan

The Company maintains a Profit-Sharing Savings Plan which covers substantially
all domestic employees with at least twelve months of service.  Under the plan,
each employee can elect to make a pre-tax contribution to the plan of not less
than 3% and not more than 8% of qualified compensation.  The Company


24
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

makes annual contributions to the Plan on behalf of each participating employee
in an amount which, together with any forfeitures during the Plan year, is equal
to each employee's voluntary contribution up to a maximum aggregate contribution
of 6% of the pre-tax income of the Company, as defined, or 50% of the aggregate
pre-tax contributions of the participating employees.  The Company's subsidiary
in the United Kingdom maintains a plan covering its eligible employees wherein
Company contributions are made on the basis of the individual's age and amount
of contribution.  Expense under these plans amounted to $479,000 in 1995,
$608,000 in 1994, and $501,000 in 1993.

Deferred Supplemental Savings Plan

The Company has a Deferred Supplemental Savings Plan under which certain key
employees may defer a percentage of their compensation equal to the difference
between pre-tax amounts of compensation eligible to be contributed to the
Profit-Sharing Savings Plan and amounts actually eligible for contributing to
such plan.  Under this plan, the Company will make a matching contribution in an
amount equal to the matching contribution which would have been made if such
contribution had been made under the Profit-Sharing Savings Plan.  Expense
related to the Deferred Supplemental Savings Plan amounted to $189,000 in 1995,
$71,000 in 1994, and $101,000 in 1993.

Executive Incentive Bonus Plan

The Company has an Executive Incentive Bonus Plan under which certain officers
and other members of management may receive incentive awards based on a
percentage of the participants' base compensation and an annually targeted
return on net assets, as defined.  Bonus expense amounted to $195,000 in 1995,
$934,000 in 1994, and $1,124,000 in 1993.

F.  Preferred Stock:

The Company is authorized to issue up to 5,000,000 shares of preferred stock
without further stockholder approval in such series and with such preferences,
terms and other provisions as may be designated by the board of directors.

On August 16, 1989, the board of directors voted to create a series of 55,000
shares of preferred stock, par value $.01 per share, designated as Series A
Junior Participating Preferred Stock ("Series A Preferred").  Each Series A
Preferred share is entitled to receive a minimum preferential quarterly dividend
of $1.00 per share and an aggregate dividend of 100 times any dividend declared
per share of common stock.  Each share of Series A Preferred is entitled to one
hundred votes and votes together as one class with the common stock.  Upon
liquidation or dissolution of the Company, the holder of each share of Series A
Preferred is entitled to a liquidation payment of $100 per share plus an
aggregate payment of 100 times the payment made per share on the common stock.
The Series A Preferred shares are not redeemable and rank junior to all other
series of preferred stock of the Company.

In the event of any merger, consolidation or other transaction in which shares
of the Company's common stock are exchanged, each Series A Preferred share will
be entitled to receive 100 times the amount received per share of common stock.

At December 30, 1995, 55,000 shares of Series A Preferred were reserved for
issuance for stock purchase rights (see Note G).  No such rights have become
exercisable and no shares of Series A Preferred have been issued.

G.  Preferred Share Purchase Rights:

On August 16, 1989, the board of directors approved a preferred share rights
plan pursuant to which one preferred share purchase right (a "Right") was
distributed for each share of outstanding common stock.  Each Right entitles the
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, $.01 par value per share, at a price of
$16.00 per one one-hundredth of a Series A Preferred Share, subject to
adjustment (see Note F).  The Rights, which do not have voting rights, expire on
December 1, 1999, unless redeemed earlier by the Company.


                                                                              25
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

At any time on or prior to the date which is ten days after the Shares
Acquisition Date, as defined in the plan, the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right.

The Rights will become exercisable if a person or group of affiliated or
associated persons (an "Acquiring Person") acquires beneficial ownership of 15%
or more of the outstanding shares of the Company's common stock or following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding shares of the
Company's common stock.

In the event that the Company is acquired in a merger or other business
combination transaction or 30% or more of its consolidated assets or earnings
power are sold, the plan requires that proper provision be made so that each
holder of a Right will thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Right, that number of shares
of common stock of the acquiring company which at the time of such transaction
will have a market value of two times the exercise price of the Right.  In the
event that any person becomes an Acquiring Person, the holder of a Right, other
than Rights beneficially owned by the Acquiring Person (which will hereafter be
void), will have the right to receive upon exercise that number of shares of
common stock having a net value of two times the exercise price of the Right.

At any time after the Shares Acquisition Date and prior to the acquisition by an
Acquiring Person of 50% or more of the outstanding shares of the Company's
common stock, the Company may exchange the Rights (other than Rights owned by
Acquiring Persons which have become void), in whole or in part, at an exchange
ratio of one share of common stock, or one one-hundredth of a Series A Preferred
Share (or of a share of a class or series of the Preferred Stock of the Company
having equivalent rights, preferences and privileges), per Right (subject to
adjustment).


26
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

H.  Operations by Geographic Area:

The Company is engaged in one industry segment, the manufacture of AC
capacitors, aluminum electrolytic capacitors, DC film capacitors, power factor
correction and energy discharge capacitors and EMI filters.

Information about the Company's operations in these geographic areas is as
follows (in thousands):

<TABLE>
<CAPTION>
                                    United                    United
                                    States        Canada      Kingdom        Mexico      Eliminations  Consolidated
-------------------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>          <C>           <C>            <C>           <C>
Year Ended December 30, 1995
Sales to unaffiliated customers    $105,278      $     --     $ 22,444      $    600       $     --      $128,322
Transfer between geographic                                                                              
  areas                               2,058            --           --         6,648          8,706            --
-------------------------------------------------------------------------------------------------------------------
Total sales                        $107,336      $     --     $ 22,444      $  7,248       $  8,706      $128,322
-------------------------------------------------------------------------------------------------------------------
Operating profit (loss)            $  2,277      $    (19)    $  2,404      $    214       $     --      $  4,876
-------------------------------------------------------------------------------------------------------------------
Interest expense                                                                                           (2,296)
Interest income                                                                                                72
-------------------------------------------------------------------------------------------------------------------
Income before taxes                                                                                      $  2,652
-------------------------------------------------------------------------------------------------------------------
Identifiable assets                $ 79,332      $    336     $ 15,037      $    848       $  6,862      $ 88,691
-------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994                                                                             
Sales to unaffiliated customers    $107,223      $     --     $ 17,995      $    422       $     --      $125,640
Transfer between geographic                                                                              
  areas                               1,385            --          532         5,625          7,542            --
-------------------------------------------------------------------------------------------------------------------
Total sales                        $108,608      $     --     $ 18,527      $  6,047       $  7,542      $125,640
-------------------------------------------------------------------------------------------------------------------
Operating profit                   $  4,297      $      2     $  1,476      $    383       $     --      $  6,158
-------------------------------------------------------------------------------------------------------------------
Interest expense                                                                                           (1,566)
Interest income                                                                                               101
-------------------------------------------------------------------------------------------------------------------
Income before taxes                                                                                      $  4,693
-------------------------------------------------------------------------------------------------------------------
Identifiable assets                $ 70,583      $    441     $ 10,769      $  1,011       $  5,045      $ 77,759
-------------------------------------------------------------------------------------------------------------------
Year Ended January 1, 1994                                                                               
Sales to unaffiliated customers    $102,134      $     --     $ 13,024      $     --       $     --      $115,158
Transfer between geographic                                                                              
  areas                                 226            --           --            --            226            --
-------------------------------------------------------------------------------------------------------------------
Total sales                        $102,360      $     --     $ 13,024      $     --       $    226      $115,158
-------------------------------------------------------------------------------------------------------------------
Operating profit (loss)            $  6,490      $    (41)    $   (110)     $     --       $     --      $  6,339
-------------------------------------------------------------------------------------------------------------------
Interest expense                                                                                           (1,388)
Interest income                                                                                                46
-------------------------------------------------------------------------------------------------------------------
Income before taxes                                                                                      $  4,997
-------------------------------------------------------------------------------------------------------------------
Identifiable assets                $ 68,133      $    421     $  9,785      $     --       $  7,244      $ 71,095
-------------------------------------------------------------------------------------------------------------------
</TABLE>

Transfers between geographic areas are accounted for at cost plus 15% in 1995,
1994, and 1993. Operating profit is total sales less operating expenses.
Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area.
                                                                              27
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

I.  Provision for Income Taxes:

The provision for income taxes consists of (in thousands):

<TABLE>
<CAPTION>
                                                     Dec. 30, 1995       Dec. 31, 1994      Jan. 1, 1994
--------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>                <C>
Currently payable:
  Federal                                               $    6             $   24            $   70
  State                                                     93                 75              (211)
  Foreign                                                  472                350                --
--------------------------------------------------------------------------------------------------------
                                                           571                449              (141)
--------------------------------------------------------------------------------------------------------
Deferred:                                                                           
  Federal                                                  109                870             1,804
  State                                                     19                153               318
  Foreign                                                  352                197               (83)
--------------------------------------------------------------------------------------------------------
                                                           480              1,220             2,039
--------------------------------------------------------------------------------------------------------
  Provision for income taxes                            $1,051             $1,669            $1,898
--------------------------------------------------------------------------------------------------------
Deferred income taxes arise from (in thousands):
  Accelerated depreciation                              $  906             $  949            $  910
  Net operating losses                                     278              1,614               735
  Inventory valuation                                     (396)              (337)                5
  Allowance for doubtful accounts                         (120)                 2               (12)
  Compensation related costs                              (118)               (98)              (71)
  Litigation reserve                                        --                 --               472
  Other                                                    (73)               (75)               --
  Tax credits                                                3               (713)               --
  Valuation allowance                                       --               (122)               --
--------------------------------------------------------------------------------------------------------
                                                        $  480             $1,220            $2,039
--------------------------------------------------------------------------------------------------------
Income taxes are reconciled to the United States
 statutory corporate tax rate as follows
 (in thousands):
  United States corporate tax at statutory rate         $  902             $1,596            $1,699
  Increase (decrease) arising from:                      
  State taxes                                              112                184               313
  Foreign taxes                                             80                 --                --
  Alternative minimum tax                                   --                 --                70
  Tax credits                                               --                 --              (228)
  Other                                                    (43)                11                44
  Change in valuation allowance                             --               (122)               --
--------------------------------------------------------------------------------------------------------
                                                        $1,051             $1,669            $1,898
--------------------------------------------------------------------------------------------------------
</TABLE>

The provision for income taxes, at $1,898,000 for 1993, was reduced by a
favorable adjustment in the amount of $228,000.


28
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

The components of the Company's deferred tax assets and liabilities as of
December 30, 1995 and December 31, 1994 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                    December 30, 1995         December 31, 1994
                                                 Assets      Liabilities   Assets      Liabilities
--------------------------------------------------------------------------------------------------
<S>                                              <C>         <C>           <C>         <C>
Deferred taxes:                                                                        
  Net operating loss carryforwards               $  401           --       $  679           --
  Compensation related costs                        637           --          519           --
  Bad debt reserve                                  207           --           87           --
  Depreciation                                       --       $6,727           --       $5,821
  Inventory reserves                                733           --          337           --
  Tax credit carryforwards                        1,127           --        1,130           --
  Valuation allowance                               (78)          --          (78)          --
  Other                                             148           --           75           --
--------------------------------------------------------------------------------------------------
                                                 $3,175       $6,727       $2,749       $5,821
--------------------------------------------------------------------------------------------------
</TABLE>

The Company had established a valuation allowance of $78,000 at December 30,
1995, principally for tax credits not expected to be realized.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

At December 30, 1995, the Company had a net operating loss carryforward of
approximately $1.0 million for tax purposes, which expires in 2007.  This net
operating loss carryforward resulted primarily from litigation settlement
payments made during 1992 and differences between expenses recorded under book
and tax depreciation methods.  At December 30, 1995, the Company also had
$1,127,000 of foreign and other tax credits which expire from 1997 to 2010.

Income before income taxes and cumulative effect of the change in accounting for
income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
 
                                      Dec. 30, 1995    Dec. 31, 1994    Jan. 1, 1994
------------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>
United States                             $  464           $2,941          $5,316
Foreign                                    2,188            1,752            (319)
------------------------------------------------------------------------------------
Income before income taxes and                                     
 cumulative effect of the change in                                
 accounting for income taxes              $2,652           $4,693          $4,997
------------------------------------------------------------------------------------
</TABLE>

J.  Legal Proceedings:

The Company settled a claim made against it concerning the cost of clean up of a
hazardous waste facility ("Resolve") in Massachusetts, in which the Company will
pay an amount currently estimated at $1,500,000, but subject to change.
Approximately $715,000 of the amount has been reimbursed to the Company by its
primary insurers.  The Company initiated appropriate action to collect amounts
not covered by the primary insurers from its excess/umbrella liability insurer.
The excess insurer denied that it is required to cover this matter and brought
suit against the Company seeking a declaration that the excess liability
insurance policies issued by it to the Company do not cover claims made by the
Company for environmental response costs with respect to the so-called Resolve
site.  In April of 1993, the insurer moved for Summary Judgment on its claims,
relying on a "sudden and accidental" pollution exclusion clause. By order, dated
October 8, 1993, the Court denied the insurers' motion but stated that the
motion would be allowed unless Aerovox submitted additional evidence concerning
property damage caused by an earlier fire at the site. A Motion for
Reconsideration was filed by the insurer on December 7, 1993. The Company
submitted additional evidence on January 6, 1994, in accordance with the Court's
Order. On February 28, 1994, the Court released a Memorandum of Decision and
Order Denying Plaintiff's Motion for Reconsideration and Denying the Motion for
Summary Judgment, stating that Aerovox had complied with the Court's Order of
October 8,

                                                                              29
<PAGE>
 
Aerovox Incorporated
Notes to Consolidated Financial Statements

1993, and had submitted evidence tending to show a causal link between a "sudden
and accidental" occurrence and property damage for which it was held liable. On
April 27, 1994, the insurer moved for reconsideration of the February 28, 1994,
decision and, on September 26, 1994, the Court granted the Plaintiffs Motion for
Summary Judgment. Accordingly, the Company charged approximately $500,000 to
earnings in the third quarter of 1994. On December 23, 1994, the Company filed a
notice of appeal of this decision of the Court. The Appeal Brief was filed on
February 13, 1996. The Company, based on information presently available, does
not believe that this matter will have any further material adverse effect on
the Company's financial condition.

On February 9, 1990, the Company entered into a settlement agreement (the
"Settlement Agreement") with the United States and The Commonwealth of
Massachusetts (the "governments") resolving litigation commenced by the
governments in the U.S. District Court for the District of Massachusetts, on
December 10, 1983 under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, commonly known as the "Superfund" legislation.  The
litigation concerned the alleged disposal by various defendants of
polychlorinated biphenyls ("PCB's") in the Acushnet River and New Bedford
Harbor.  The Settlement Agreement resolved all of the governments' claim against
the Company and Aerovox Industries, Inc. (the Company's predecessor, now known
as Belleville Industries, Inc.) arising out of the contamination of the Acushnet
River and New Bedford Harbor with PCB's, including cleanup costs, study costs
and damages to natural resources, now or hereafter incurred, except that the
Settlement Agreement provides that the governments may seek damages from the
Company and Aerovox Industries, Inc. for future liability in the event that such
future liability arises out of unknown conditions at the site.

K.  Foreign Operations:

Summarized financial information for the Company's foreign operations is as
follows (in thousands):

<TABLE>
<CAPTION>
 
                              Dec. 30, 1995     Dec. 31, 1994     Jan. 1, 1994
------------------------------------------------------------------------------
<S>                        <C>               <C>               <C>
Current assets                   $ 8,876           $ 7,286          $ 7,062
Non-current assets                 7,345             4,935            3,144
------------------------------------------------------------------------------
                                 $16,221           $12,221          $10,206
------------------------------------------------------------------------------
Current liabilities              $ 3,099           $ 2,493          $ 1,747
Due to parent                        338               668            4,944
Long-term debt                     6,423             4,554               --
Stockholders' equity               6,361             4,506            3,515
------------------------------------------------------------------------------
                                 $16,221           $12,221          $10,206
------------------------------------------------------------------------------
Net sales                        $23,044           $18,417          $13,024
------------------------------------------------------------------------------
Net income (loss)                $ 1,363           $ 1,148          $  (223)
------------------------------------------------------------------------------
</TABLE>


30
<PAGE>
 
Aerovox Incorporated
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
                                                                       For The Years Ended
                                                  Dec. 30,     Dec. 31,      Jan. 1,      Jan. 2,     Dec. 28,
(Amounts in Thousands, Except Per Share Data)       1995         1994         1994         1993         1991
--------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>          <C>
Income statement data:
  Net sales                                       $128,322     $125,640     $115,158     $ 73,651     $ 63,582
  Income from operations                             4,246        6,010        5,757        3,490        3,422
  Income before cumulative effect of                                                                   
   change in accounting for income taxes             1,601        3,024        3,099        1,654          133
  Cumulative effect of change in                                                                       
   accounting for income taxes                          --           --          590           --           --
--------------------------------------------------------------------------------------------------------------
  Net income                                      $  1,601     $  3,024     $  3,689     $  1,654     $    133
--------------------------------------------------------------------------------------------------------------
  Net income per share:                                                                                
  Income before cumulative effect of                                                                   
   change in accounting for                                                                            
   income taxes                                   $    .30     $    .56     $    .57     $    .32     $    .03
  Cumulative effect of change in                                                                       
   accounting for income taxes                          --           --          .11           --           --
--------------------------------------------------------------------------------------------------------------
  Net income per share                            $    .30     $    .56     $    .68     $    .32     $    .03
--------------------------------------------------------------------------------------------------------------
Cash dividends per share                                --           --           --           --           --
Balance sheet data:                                                                                    
  Total assets                                    $ 88,691     $ 77,759     $ 71,095     $ 49,759     $ 47,874
  Long-term obligations                             28,777       22,466       19,671        8,104        7,586
  Total stockholders' equity                        34,865       33,416       30,158       26,305       24,742
</TABLE> 
<TABLE> 
<CAPTION> 
Summary of Quarterly Results of Operations
(Unaudited)                                                                       Quarter                         
(Amounts in Thousands, Except Per Share Data)                 First        Second         Third        Fourth     
--------------------------------------------------------------------------------------------------------------       
<S>                                                         <C>           <C>           <C>           <C>            
Year Ended December 30, 1995:                                                                                        
  Net sales                                                 $ 34,141      $ 36,737      $ 27,678      $ 29,766       
  Gross profit                                                 5,925         6,052         3,074         3,868       
  Net income (loss)                                         $    834      $  1,091      $   (406)     $     82       
  Net income (loss) per share                               $    .15      $    .21      $   (.08)     $    .02       
                                                                                                                     
Year Ended December 31, 1994:                                                                                        
  Net sales                                                 $ 32,904      $ 34,801      $ 28,884      $ 29,051       
  Gross profit                                                 6,600         7,445         4,758         2,635       
  Net income (loss)                                         $  1,353      $  1,886      $    499      $   (714)      
  Net income (loss) per share                               $    .25      $    .35      $    .09      $   (.14)       
</TABLE>                                                 
                                                         

                                                                              31
<PAGE>
 
Aerovox Incorporated
Report of Independent Accountants

To the Board of Directors and Stockholders of Aerovox Incorporated:

We have audited the accompanying consolidated balance sheets of Aerovox
Incorporated as of December 30, 1995 and December 31, 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 30, 1995.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aerovox
Incorporated as of December 30, 1995 and December 31, 1994 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 30, 1995, in conformity with generally accepted accounting
principles.

As discussed in Note A to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes.


Boston, Massachusetts                           /s/ Coopers & Lybrand L.L.P. 
February 28, 1996


32
<PAGE>
 
Directors

John F. Brennan
Dean, School of Management, Suffolk University, Formerly Chairman and Chief
Executive Officer of the Hackney Corporation,
Director of The Timberland Company,
Director of Data Storage Corporation

James B. Hangstefer
President of Cordel Associates, Inc.,
Director of Dynatech Corporation

Dennis Horowitz
President, Americas, AMP Incorporated,
Director of Superconductor Technologies, Inc.

William G. Little
President and Chief Executive Officer of
Quam Nichols Co., Inc.,
Director of Ohmite Manufacturing Co.

Ronald F. Murphy
Senior Vice President and Treasurer since 1976, Secretary since 1989

Benedict P. Rosen
President and Chief Executive Officer of
AVX Corporation,
Senior Managing and Representative Director of Kyocera Corporation,
President of Elco Corp.

John L. Sprague
President of John L. Sprague Associates, Formerly President and Chief Executive
Officer of Sprague Electric Co.,
Director of Allmerica Financial Corporation, Director of California Micro
Devices Corp., Director of Sipex Corporation

Clifford H. Tuttle
Chairman of the Board since 1989,
President and Chief Executive Officer since 1973


Audit Committee
John F. Brennan, Chairman
James B. Hangstefer
John L. Sprague

Compensation Committee
William G. Little, Chairman
John F. Brennan
Benedict P. Rosen

Executive Committee
Clifford H. Tuttle, Chairman
Dennis Horowitz
Benedict P. Rosen
John L. Sprague

Finance Committee
James B. Hangstefer, Chairman
Dennis Horowitz
William G. Little

Nominating Committee
John L. Sprague, Chairman
John F. Brennan
James B. Hangstefer
Clifford H. Tuttle


Corporate Officers

Clifford H. Tuttle
Chairman, President and Chief Executive Officer

Richard D. Capra*
Senior Vice President, Electrolytics

John A. Chmura Jr.
Senior Vice President, Sales and Marketing

Philip J. Fox
Senior Vice President, Operations Support

Dr. Martin Hudis
Senior Vice President, Technology

Robert R. Hunter
Senior Vice President and Managing Director, BHC Aerovox Ltd.

Peter B. Kirschmann
Senior Vice President and President,
Aerovox Group

Ronald F. Murphy
Senior Vice President, Treasurer and Secretary

William T. Allen III
Vice President, Manufacturing Operations

Dr. Mulk R. Arora
Vice President, Foil Operations,
Aerovox Foil Division

Lawrence K. Bromley
Vice President, Quality Assurance

Earl F. Sherman
Vice President, Marketing, Aerovox Group

*In October 1995, Mr. Capra became a part-time
 employee consultant to Aero M and BHC, the
 Company's electrolytic groups.

Annual Meeting

The Annual Meeting of the shareholders of Aerovox Incorporated will be held at
the offices of Ropes & Gray, One International Place, Room 36/1, Boston,
Massachusetts 02110, at 10:00 a.m. on Tuesday, May 7, 1996.

Shareholders Inquiries
Inquiries concerning general shareholder matters should be addressed to:
Aerovox Inc.,
Shareholder Relations
370 Faunce Corner Road
North Dartmouth, MA  02747-1217
Telephone:  (508) 995-8000, ext. 1653.

Transfer Agent and Registrar
Communications concerning change of address, lost certificates, stock transfer
and transfer requirements should be addressed to:  American Stock Transfer &
Trust Company, 40 Wall Street, New York, NY  10005.

10-K Report
A copy of the Company's 1995 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained by writing to Shareholder Relations at
the corporate offices.

Stock Listing
The Company's Common Stock has been listed on the NASDAQ Stock Market (National
Market) under the symbol ARVX since February 26, 1990.

<TABLE>
<CAPTION>
 
Common Stock            1995                     1994
                  High        Low         High         Low
------------------------------------------------------------
<S>              <C>         <C>         <C>          <C>
1st Quarter      $8 1/4      $6 5/8      $ 9          $7 1/2
2nd Quarter       7 3/4       7           11           7
3rd Quarter       8 7/8       7           10 1/2       8
4th Quarter       8 1/8       5 3/8        9 3/4       6 1/4
 
</TABLE>

Additional Stock Information at February 16, 1996
Last sale price: $6.437
Number of shares outstanding: 5,306,195
Approximate number of stockholders: 7,887

The Company currently intends to retain all earnings for use in its business and
does not expect to pay dividends for the foreseeable future.  The Company's
common stock dividend policy will be reviewed periodically by the board of
directors as may be appropriate in the light of relevant factors.

Aerovox Group  740 Belleville Avenue, New Bedford, MA  02745-6194
Aero M Group  9 C Founders Boulevard, El Paso, TX  79906-4905
BHC Aerovox Ltd.  20-21 Cumberland Drive, Granby Industrial Estate, Weymouth,
Dorset DT4 9TE  ENGLAND
Aerovox Foil Division  2615 Memorial Parkway S.W., Huntsville, AL  35801-5629

Aerovox(R), AeroMet(R) II, Aero(R) M and AeroMax(TM) are trademarks of Aerovox
Incorporated