<PAGE>
 
                                                                    EXHIBIT 13.1

<TABLE>
<CAPTION>
            MARKETS/APPLICATIONS                                PLANTS/TECHNOLOGIES
--------------------------------------------    --------------------------------------------------
<S>                                             <C>  
                   MOTORS                                    NEW BEDFORD, MASSACHUSETTS
                   ------                                    --------------------------             
 .  Compressors, air conditioners,                           .  Metallized polypropylene
   refrigeration, laundry equipment, pumps,                 .  Metallized polyester
   garage door openers, hospital beds                       .  Metallized paper
                                                            .  Film/foil
 
                  LIGHTING                                 JUAREZ, MEXICO - PLANTS 1 & 2
                  --------                                 -----------------------------           
 .  Electromagnetic and electronic ballasts                  .  Aluminum electrolytics
   for fluorescent and HID fixtures, and                    .  Metallized polypropylene
   strobe lights                                            .  EMI Filters
 
             POWER ELECTRONICS                                  HUNTSVILLE, ALABAMA
             -----------------                                  -------------------                
 .  Variable speed drives, UPS, power                        .  Etched and formed aluminum foil
   supplies, transportation, welders, motor
   speed controllers, telecommunications
   equipment, audio/visual equipment, battery
   chargers
 
                SPECIALTY                                        WEYMOUTH, ENGLAND
                ---------                                        -----------------                 
 .  Medical equipment (defibrillators, X-ray                 .  Aluminum electrolytics
   equipment), industrial equipment,                        .  Paper/film/foil
   government and university research
 
   Power factor correction equipment and
   systems
 
   Power supplies, industrial equipment,
   computer and telecommunications
   equipment and appliances
</TABLE>

                                       1
<PAGE>
 
                             CORPORATE INFORMATION

DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS

Sherel D. Horsley 1
Chairman, Aerovox Inc.
Senior Vice President and Manager of Marketing, the Digital Imaging Group of
Texas Instruments Incorporated

Robert D. Elliott 1, 4
President and Chief Executive Officer

John F. Brennan 1, 2
Dean, Sawyer School of Management, Suffolk University

Dennis J. Horowitz 1, 3
President and Chief Executive Officer, Wolverine Tube, Inc.

William G. Little 3, 4
President and Chief Executive Officer, Quam Nichols Company, Inc.

Benedict P. Rosen 3
Chairman and Chief Executive Officer, AVX Corporation

John L. Sprague 2, 4
President, John L. Sprague Associates

EXECUTIVE OFFICERS

Robert D. Elliott
President and Chief Executive Officer

Timothy J. Brown
Senior Vice President, Marketing and Sales

Martin Hudis
Senior Vice President, Technology Development

Ted M. Miller
Senior Vice President, Engineering and Operations

Jeffrey A. Templer
Senior Vice President, Chief Financial Officer, Treasurer and Secretary

Committee Member
1 Executive
2 Audit
3 Compensation
4 Nominating

Corporate Office
Aerovox Inc.
740 Belleville Avenue
New Bedford, MA  02745-6194

FORM 10K/INVESTOR CONTACT

Copies of the Company's annual and quarterly reports filed with the Securities
and Exchange Commission on Form 10-K and Form 10-Q are available on request from
the Company. Requests and other investor contacts should be directed to Jeffrey
A. Templer, Chief Financial Officer.

Internet Access

Corporate news releases, Forms 10-K and 10-Q, parts of the annual report and
other information about the Company are available through Aerovox's web site on
the Internet.  The address is http://www.aerovox.com.
                              ---------------------- 

Annual Meeting

The Annual Meeting of Shareholders of Aerovox Incorporated will be held on
Monday, May 3, 1999 at 11:00 a.m., at the offices of Ropes & Gray, One
International Place, Room 36/1, Boston, Massachusetts 02110.

Common Stock and Dividend Information

The Company's common stock trades on The Nasdaq Stock Market(R), under the
symbol ARVX.  As of February 22, 1999, Aerovox had approximately 8,500
shareholders.  Of that total, 6,152 were shareholders of record.

The Company currently intends to retain all earnings for use in its business and
does not expect to pay dividends for the forseeable future.

The following table sets forth the high and low sales price information as
reported by Nasdaq:


Common Stock Price

<TABLE>
<CAPTION>
                        1998                       1997
                  High        Low            High        Low
-------------------------------------------------------------
<S>               <C>        <C>             <C>        <C>
First             $4.75      $3.13           $5.50      $4.25
 Quarter                                                
Second            $3.69      $2.75           $5.38      $4.13
 Quarter                                                
Third             $4.00      $2.75           $7.00      $4.63
 Quarter                                                
Fourth            $3.13      $1.38           $6.13      $4.31
 Quarter
</TABLE>

Transfer Agent and Registrar

American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: (800) 937-5449

                                       2
<PAGE>
 
                             FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
 (Amounts in thousands, except per share data)
                                                             For The Years Ended
                                                 Jan. 2, 1999  Dec. 27, 1997   Dec. 28, 1996
<S>                                              <C>           <C>             <C>
OPERATING RESULTS
Net sales                                            $116,194       $119,658        $125,975
Income (loss) from operations                           2,648        (12,574)            143
Net income (loss)                                       1,786        (11,499)         (1,347)
Net income (loss) per share                              0.33          (2.15)          (0.25)
 
CASH FLOW
Net cash provided by operating activities            $  1,731       $  9,361        $  8,317
 
FINANCIAL POSITION
Total assets                                         $ 70,571       $ 71,559        $ 84,976
Long-term obligations                                  17,888         23,808          23,806
Stockholders' equity                                   25,289         23,766          35,073
</TABLE>

                             1998 SALES BY MARKET
                              (MILLION US $116.2)

                           [PIE CHART APPEARS HERE]

<TABLE>
<S>                                                    <C>
Motors                                                 33%
Power Electronics                                      31%
Lighting                                               27%
Specialty                                               7%
EMI Filters                                             2%
</TABLE>

AEROVOX is a leading manufacturer of film, paper and aluminum electrolytic
capacitors.  The Company sells its products worldwide, principally to original
equipment manufacturers (OEMs) of electrical and electronic products.
Applications include air conditioners, fluorescent and high-intensity discharge
lighting fixtures, a variety of appliances, motors, power supplies,
photocopiers, telecommunication, computer and medical equipment and industrial
electrical equipment and systems.

The Company's manufacturing facilities are located in New Bedford,
Massachusetts; Huntsville, Alabama; Weymouth, England; and Juarez, Mexico.

                                       3
<PAGE>
 
                              SHAREHOLDER LETTER

                         (PHOTO OF ROBERT D. ELLIOTT)

Dear Fellow Shareholders:


Last year, I defined our 1998 goals as further improving customer responsiveness
by consistently achieving on-time shipping above 90%, while continuing to reduce
end-to-end lead times.  I told you we would cut operating expenses and overhead
costs.  I informed you of our decision to relocate our New Bedford facility to a
modern, cost-efficient building in the near future.  Also, I explained we would
be converting to a fully operational, year 2000-compliant information system
throughout the Company.

I'm proud of the accomplishments we've made in 1998, as we met the challenges
laid before us.

                           IMPROVED CUSTOMER SERVICE
                           -------------------------
                                        
On-time delivery, a key element in satisfying our customers, has been a focal
point for improvement for the past two years.  At year-end 1996, our company-
wide on-time delivery level sat at an unacceptable 62%.  At the close of 1997,
we were able to improve that average to 83%.  Due to a continued cooperative
effort at all locations and improvements in manufacturing processes, 1998 year-
end company-wide on-time deliveries averaged 90% and are climbing, with shorter
end-to-end lead times.  So, not only are we meeting our commitments to our
customers, we are now promising much shorter lead times than we were two years
ago.

A particularly noteworthy accomplishment was made at our electrolytic operation
in Juarez, which had been plagued with manufacturing and delivery problems for
several years.  During the second half of 1998, this plant consistently
performed at or above 95% on-time deliveries, a vast improvement over the
disturbing 25% of 1996.  It is encouraging to see this facility servicing
customers in such a manner.

                                 COST REDUCTION
                                 --------------
                                        
In 1998, we continued to take aggressive cost reduction measures to further
improve profitability.  These cost cutting initiatives, which began in 1996,
were evident in our year-end financial results for 1998.  Gross margin rates
improved to 17.3%, from 14.1% a year ago, and gross margin dollars increased by
over $3 million, despite a $3.4 million drop in sales.

We are streamlining the business by carefully rationalizing our products and
selectively exiting the production of less profitable lines.  We are
reorganizing and redesigning our products, processes, plants and people as we
streamline the business and eliminate waste in all areas.  These on-going
efforts are clearly visible at the gross margin line.

The reduction in fixed costs is expected to continue as we relocate our New
Bedford, Massachusetts operations into a new, modern, cost-effective facility in
the nearby New Bedford Industrial Park.  Last year, I explained that for a
combination of environmental and cost-efficiency reasons, we decided to vacate
the plant rather than attempting an expensive and unlikely remediation of our
nearly 100 year-old multi-story building.

                                       4
<PAGE>
 
At this point, the site, which contained abandoned manufacturing buildings, has
been cleared and is being prepared for new construction.  Groundbreaking is now
scheduled for the second quarter 1999 on a 130,000 square foot, single-story
facility.  We're expecting the construction portion of the project to last about
seven months, with the actual relocation phase taking three to five months.  The
entire New Bedford operation should be completely relocated by the end of the
first half of 2000.

The transfer to a new facility in New Bedford signifies the Company's commitment
to the future and dedication to our employees.  In a new single-level plant, we
will be able to make additional improvements to manufacturing processes and
operating efficiencies, reduce overhead expenditures and retain our valuable
people.

Our company-wide conversion to a state-of-the-art, year-2000 compliant,
enterprise resource planning system is nearing completion.  We have successfully
implemented the new system at three of our five locations, plus corporate
functions, with the remaining two manufacturing sites scheduled to come on-line
in the second quarter of 1999.  All accounting systems are now operating on the
new year-2000 compliant system.

                           TURNING TOWARD THE FUTURE
                           -------------------------

The past two years have been spent rebuilding the foundation of this great
Company.  We now have a strong management team in place, committed to growing
shareholder value by rapidly providing the best quality products and services to
our customers at the lowest possible costs.  We are focused on doing this better
than anyone else in our industry.

Building on our work to date, we now have a company-wide initiative underway
called "Two in 2000".  This continues very specific goals for further
improvement in the speed and quality of our customer responsiveness, and
additional improvements in working capital management.

Now that the foundation is fixed and improving, we can, and are, turning more
time and attention to growth issues: new account development, more effective
sales and marketing programs, new product development and new business
partnerships.

As I write this, we have recently announced our intention to purchase the
capacitor products of Compania General de Electronica, S.A. (CGE) of Mexico
City.  We are very excited about our two companies combining forces.  Mr.
Enrique Sanchez Aldunate, the President and principal owner of CGE, together
with his entire team, has built a strong, nimble, competitive organization.  We
look forward to Enrique and his colleagues joining our Aerovox team.

This combination will make Aerovox the largest supplier of motor start
capacitors in the world and will strengthen our overall aluminum electrolytic
business.  CGE's strong presence in Mexico and throughout Latin America will
open new opportunities for all Aerovox products.  The other capacitor lines of
CGE are additive and complementary to those we currently market.  We expect our
joining with CGE is just the beginning of a new Aerovox, growing both through
internal development and through newly created partnerships with others.

On your behalf, I would like to express sincere appreciation to the members of
your Board of 

                                       5
<PAGE>
 
Directors. They are a group of devoted individuals who have worked closely and
diligently with your management team, as we have dealt with several difficult
issues during the past two to three years.

Thank you for your continued support and interest.  Your entire management team
and Board of Directors look forward with excitement as we move a revitalized
Aerovox into the next Millennium.

Sincerely,

Robert D. Elliott
President and Chief Executive Officer

                                       6
<PAGE>
 
                                EXECUTIVE TEAM
                                        

                           (PHOTO OF EXECUTIVE TEAM)


(from left to right: Ted Miller, Martin Hudis, Jeff Templer, Bob Elliott, Graham
Yates, Tim Brown)

<TABLE> 
<S>                                <C> 
Ted Miller                         "1998 was a year in which the cost of goods sold was
Senior Vice President,             slashed by over 3%.  At the same time, lead times
Engineering                        continued to shrink and on-time deliveries improved at all
                                   North American plants."
 
Martin Hudis                       "The development of both low cost and modern dry capacitor
Senior Vice President,             technology, which will provide the foundation for a new
Technology Development             line of dry capacitors for line frequency and pulsing
                                   applications, was a major accomplishment in 1998."
 
Jeff Templer                       "In 1998, we developed a comprehensive model of the cost
Chief Financial Officer            structure of our manufacturing process that will enable us
                                   to drive costs down over the next several years.
                                   Additionally, we were able to achieve our goal of
                                   converting our information systems to a efficient,
                                   state-of-the-art, Year 2000 compliant ERP system."

Graham Yates                       "During 1998, BHC Aerovox improved on its 1997
Managing Director                  performance, despite extremely difficult trading
BHC Aerovox Ltd.                   conditions."
 
Tim Brown                          "In the past year, we made great improvements in our
Senior Vice President,             customer service posture, including new application
Marketing and Sales                engineering resources in major product areas and improved
                                   order entry and expediting capabilities."
</TABLE>

                                       7
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
                                        

Statements concerning the Company's anticipated performance including future
revenues, costs and profits, or about the development of the Company's markets,
made through this Annual Report, may be deemed forward-looking statements.  Such
statements are based on the current assumptions of Aerovox management, which are
believed to be reasonable.  However, they are subject to significant risks and
uncertainties, including, but not limited to the important factors described
under "Certain Factors That May Affect Future Results" that could cause actual
results to differ materially from those described in the forward-looking
statements.


RESULTS OF OPERATIONS

The table below depicts significant components from the statement of operations
as percentages of net sales.

<TABLE>
<CAPTION>
                                                   For Fiscal Years
                                                -----------------------
                                                 1998    1997     1996
                                                ------  -------  ------
<S>                                             <C>     <C>      <C>
Net sales                                       100.0%   100.0%  100.0%
Cost of sales                                    82.7%    85.9%   85.2%
Gross profit                                     17.3%    14.1%   14.8%
Selling, general and administrative expenses     15.0%    13.8%   14.7%
Income from operations                            2.3%  (10.5)%    0.1%
</TABLE>

Fiscal year 1998 ended on January 2, 1999, and included 53 weeks. Fiscal years
1997 and 1996 included 52 weeks.  The additional week in 1998 was required to
comply with Company policy that the fiscal year end on the Saturday nearest to
December 31.   Because the additional week included in 1998 was the week between
the Christmas and New Year holiday, during which shipping activity is
historically slow and included only three shipping days, the Company believes
the effect on sales and income from operations was immaterial.

1998 VERSUS 1997

Sales
-----

Consolidated net sales for 1998 were $116.2 million versus $119.7 million in
1997, a decline of 2.9%.  Sales of products manufactured by the Company's North
American business units declined 5.3%, to $89.7 million in 1998 from $95.0
million in 1997; whereas, net sales at BHC Aerovox increased 6.0% to $26.5
million in 1998 from $25.0 million in 1997.  The decline in net sales was due to
declining prices in the electrical equipment and appliances markets served by
both the North American and European operations of the Company, the loss of
several key customers for the Company's line of microwave and motor run
capacitors,  as well as the elimination of the Power Factor Correction Systems
("PFC") business in the second half of the year.  Price erosion experienced by
BHC Aerovox was overcome by increases in sales of certain electrolytic
capacitors used in power electronics applications.

                                       8
<PAGE>
 
In general, the Company's sales are seasonal, with the first two quarters having
higher shipping rates due mainly to seasonal production schedules among OEM
manufacturers of air conditioning equipment. The strength and variation of these
seasonal patterns vary from year to year depending upon weather and other
conditions.  During 1998, the Company experienced sharply lower demand in the
first two quarters as compared to 1997, and year-to-date sales at June 28, 1998
were lower by $5.0 million than sales for the same period of the prior year.
During the second half of the 1998, sales increased by $1.6 million over those
of the last six months of 1997, due mainly to weather related demand for air
conditioning equipment in the United States.

Gross Profit
------------

Gross profit on sales increased to $20.1 million in 1998 from $16.9 million in
1997 as a result of a significant cost reduction effort, which began in the
fourth quarter of 1997 and continued throughout 1998.  Declining prices noted
above offset the positive impact of the cost reductions by approximately $3.0
million.

Research and Development
------------------------

Expenditures for research, product development and engineering charged to
selling, general, and administrative expense aggregated $2.5 million and $2.7
million for 1998 and 1997, respectively. Prior to fiscal 1998, these costs were
included with cost of sales on the statement of operations, and presentation of
those years results have been restated to provide comparability.

Selling, General and Administrative
-----------------------------------

Selling, general and administrative expenses increased to $15.0 million in 1998
from $13.8 million in 1997, primarily due to $0.8 million of expenses related to
the implementation of new information systems throughout the Company, which
address improvement of the planning and control systems of the Company as well
as compliance with Year 2000 computing.

Interest Expense
----------------

Interest expense for 1998 of $1.5 million was lower by $0.2 million compared to
1997 as a result of more favorable interest rates and a lower average
outstanding balance on the Company's lines of credit and outstanding term loans.

Other Income
------------

The $1.2 million increase in other income to $1.5 million in 1998 from $0.3
million in 1997 resulted primarily from the sale of the Company's PFC business
to a unit of General Electric Company.  This business entailed the assembly of
capacitor and other component into systems sold to large industrial consumers of
electrical power.  The Company remains in the business of manufacturing
capacitors used in power factor systems.  A gain on the sale of $0.9 million was
recorded in the third quarter of 1998. An increase in royalty income from
licensees and foreign currency exchange losses account for the remaining $0.2
million increase in other income.

Provision for Income Taxes
--------------------------
The provision for income taxes included credits against deferred tax accounts of
$0.8 million and 

                                       9
<PAGE>
 
taxes currently payable of $37,000.



1997 VERSUS 1996

Sales
-----

Consolidated net sales for 1997 were $119.7 million versus $126.0 million in
1996, a decline of 5.0%.  Sales of products manufactured by the Company's North
American business units declined 7.3%, to $95.0 million in 1997 from $102.4
million in 1996.  Although North American business unit sales were ahead of the
prior year through the second quarter of 1997, revenues fell sharply during the
second half of 1997.  The causes of this decline were partially offset by an
increase in the sale of aluminum electrolytic foil and aluminum electrolytic
capacitors.

Sales by the Company's UK capacitor manufacturing subsidiary, BHC Aerovox Ltd.,
increased 6.1% to $25.0 million 1997 from $23.5 million in 1996, primarily due
to increases in shipments of microwave oven capacitors from a new production
line which began operations in mid-1996.

Gross Profit
------------

Gross profit on sales declined to $16.9 million in 1997 from $18.6 million in
1996.  As a percentage of sales, gross profit declined to 14.1% in 1997 from
14.8% in 1996.  This decline resulted from lower prices,  and lower volumes
during the second half of 1997.  Gross profits were further negatively impacted
by increased manufacturing overhead of $1.1 million incurred in connection with
the realignment of certain production lines in the Company's New Bedford plant.

Research and Development
------------------------

Expenditures for research, and product development and engineering charged to
selling, general, and administrative expense aggregated $2.7 million and $2.8
million for 1997 and 1996, respectively. Prior to fiscal 1998, these costs were
included with cost of sales on the statement of operations, and presentation of
those years results have been restated to provide comparability.

Selling, General and Administrative
-----------------------------------

Selling, general and administrative expenses declined to $13.8 million in 1997
from $15.6 million in 1996.  $0.5 million of the decline was attributable to
lower commissions paid to independent sales agents on lower sales volumes.  The
remainder of the change resulted from special charges incurred in 1996 that did
not recur in 1997.

In the fourth quarter of 1997, the Company recorded a provision of $13.0 million
for environmental costs, plant remediation and impairment of assets.  The
provision included a reserve for environmental remediation and associated
consulting, legal and engineering costs of $7.2 million, resulting from the
identification of PCB contamination in the New Bedford plant, and the Company's
consequent decision to vacate that facility.  In addition, building and building
improvements, and equipment expected to be abandoned in connection with this
closure were 

                                       10
<PAGE>
 
written off. The effect of this write-off on income from operations, included in
the provision was $5.8 million.

Interest Expense
----------------

Interest expense for 1997 of $1.7 million was lower by $0.5 million compared to
1996.  The Company made scheduled principal repayments of $2.7 million during
1997, and additional principal repayments of $4.7 million.

Other Income
------------

Other income increased $0.6 million to $0.3 million in 1997 from a loss of $0.3
million in 1996. The improvement was the result of increased royalty income from
licenses, as well as lower foreign currency exchange losses.

Provision for Income Taxes
--------------------------

The provision for income taxes included credits against losses during the period
of $5.7 million, less certain state, local and foreign taxes, and increases in
reserves against deferred tax assets of $3.1 million.  These reserves were
deemed necessary due to the historical variability of operating earnings, and
the timing of expirations of tax credits and operating loss carry forwards.

 
LIQUIDITY AND CAPITAL RESOURCES

Working capital, calculated as total current assets less total current
liabilities at January 2, 1999 was $13.5 million compared to $15.2 million at
the end of fiscal 1997.  The decrease was due to reclassification of balances
outstanding at end of fiscal year 1998 under certain bank lines as current
liabilities which had been categorized as long-term liabilities at the end of
the prior year, reflecting the terms of new credit arrangements entered into
subsequent to the end of fiscal 1998. (See Note 3 to the Company's 1998
Consolidated Financial Statements.)  Excluding the current portion of short term
debt, working capital increased during 1998 from $17.1 million to $20.8 million.
Current ratio was 1.84 at year-end 1998 and 1.82 at year-end 1997. Net accounts
receivable and days sales outstanding in accounts receivable were unchanged
year-end to year-end.  Inventories increased by $1.7 million during 1998
primarily due to build up of finished goods in anticipation of customer orders
in the fourth quarter. Net cash provided by operating activities in 1998 totaled
$1.7 million compared to $9.4 million in 1997 and $8.3 million in 1996.

The Company invested approximately $2.8 million in capital assets in 1998
compared to $2.7 million in 1997 and $3.3 million in 1996.  Of these totals,
investment in capital assets at BHC Aerovox was $1.6 million, $0.6 million and
$0.9 million, respectively.

The Company's Revolving Credit Agreement, as amended on September 28, 1998,
provides for a credit line of $21.8 million to the Company, including 4.4
million British Pounds ($7.3 million at year-end exchange rates) to BHC Aerovox
Ltd. ("BHC"), a wholly-owned subsidiary in the United Kingdom. The agreement,
which extends to May 31, 1999, also includes various interest rate options
which, for fiscal 1998, have varied from 7.05% to 8.50% on an annualized basis.
The bank has indicated to the Company their intention to renew the credit line
under similar 

                                       11
<PAGE>
 
terms, although they have not committed to do so. The Company believes that
other lenders will be willing to enter into similar credit arrangements with the
Company should the present lending bank decline to renew the credit line. The
security for this line of credit is accounts receivable and inventories and a
Company guarantee for the UK loan. The outstanding balance of loans at fiscal
years ended January 2, 1999, and December 27, 1997, was $14.5 million and $12.7
million, respectively. (See Note 3 to the Company's 1998 Consolidated Financial
Statements.) Net availability under this line at January 2, 1999 was $5.9
million.

On February 22, 1999, BHC Aerovox entered into an agreement with a bank which
provides for 1) a ten-year mortgage on real property in the amount of 500,000
British Pounds, 2) a five-year loan secured by machinery and equipment in the
amount of 1,000,000 British Pounds, and 3) an "Overdraft" credit line allowing
borrowings in British Pounds, European Currency Units, or US Dollars up to
equivalent of 2,500,000 British Pounds.  It is the Company's intention to use
these new credit arrangements to repay existing bank debt of BHC, and to fund
future working capital needs of that company.

The Company also has a term line of credit with an equipment financing company
with an outstanding balance at the end of 1998 of $2.3 million compared to an
outstanding balance at the end of 1997 of $3.8 million.  These loans, secured by
equipment at the Company's New Bedford facility, have five-year terms and carry
annual interest rates varying from 7.16% to 8.13%.  The Company was in violation
of certain financial covenants at January 2, 1999 for which it received a waiver
from the lender.  (See Note 3 to the Company's 1998 Consolidated Financial
Statements.)

On February 26, 1999, the Company amended its agreement with this lender.  Under
this amendment, the balances outstanding at that date were repaid and additional
funds borrowed under a new promissory note and security agreement in the amount
of $9.0 million, payable monthly over six years, and bearing interest at a rate
of 7.8%.  Principal payments due under that note in 1999 are $1.3 million, and
$1.5 million per year thereafter.  The additional funds borrowed of $6.8 million
were used to pay down the balance due under the Company's revolving credit
agreement.

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. The outstanding balance at fiscal year-end 1998 was
$1.8 million versus a balance at year-end 1997, of $2.2 million.

Cash at January 2, 1999, totaled $1.1 million compared to $0.7 million at
December 27, 1997.  In 1998, the Company received $1.6 million in cash, net of
$0.4 million of expenses, from the sale of the Company's Power Factor Correction
Systems business.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March, 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use".  The Company plans to adopt the SOP in the fiscal
year ending January 1, 2000.  The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use.  The Company currently expenses such costs

                                       12
<PAGE>
 
as incurred.  Management has determined that the effect of the SOP 98-1 will be
immaterial to the Company's consolidated financial position, results of
operations and cash flows.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activity" ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999.  The Statement
permits early adoption as of the beginning of any fiscal quarter.  The Company
has yet to determine its date of adoption.  The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted
through fair value through income.  If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings.  The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management has determined that SFAS 133 will have an immaterial effect on the
Company's consolidated financial statements.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Year 2000
----------

Many currently operational computer systems, software products and other
equipment utilizing microprocessors are coded to accept only two digit entries
in the date code field.  These date code fields will need to accept four digit
entries to distinguish twenty-first century dates from twentieth century dates.
This situation is commonly referred to as the "Year 2000 issue".

The Company is currently involved in implementing a year 2000-compliant, state-
of-the-art enterprise resource planning ("ERP") system (the "Millennium
Project") to be completed by the second quarter of 1999.  In regards to the Year
2000 issue, the Millennium Project is focused on two objectives: 1) the software
and systems used in the Company's internal business; and 2) the software and
systems of the Company's customers and third-party suppliers.  The Company's
products have no date-oriented functionality and, therefore, pose no risks to
customers with respect to the Year 2000 issue.

The new ERP system is now operational in two of the Company's four North
American plants, as well as in BHC.  The remaining two plants in North America
will implement the system by the second quarter of 1999.  In the event that the
final phase is not completed by the end of the second quarter of 1999,
management believes there will be sufficient time remaining to complete the
Millennium Project as intended prior to the year 2000.

During 1998, the Company expensed $0.8 million ($0.9 million project-to-date at
January 2, 1999) on the Millennium Project and was approximately 85% complete
with the project tasks.  In addition to addressing the Year 2000 issue, the
system is expected to improve operating efficiencies, customer service levels
and product costing data.  It is therefore impossible to distinguish how much of
the cost of implementation can be attributed to the Year 2000 issue versus the
cost of implementing a more up-to-date and functional information system.

                                       13
<PAGE>
 
Satisfactorily addressing the Year 2000 issue is dependent on many factors, some
of which are not completely within the Company's control.  Should the Company's
internal systems or the internal systems of one or more significant suppliers or
customers fail to achieve year 2000 compliance, the Company's business and its
results of operations could be adversely affected.

Environmental Status
--------------------

In June 1997, the United States Environmental Protection Agency (EPA) conducted
tests that revealed the presence of polychlorinated biphenyls (PCBs) on surfaces
within the Company's New Bedford plant. While the Company and its expert
advisors consider the PCBs to represent no threat to the health of the employees
of the Company or the surrounding community, subsequent engineering studies
indicated that the cost to remove PCBs within the building to the levels
proscribed by the EPA and the Toxic Substances Control Act would be prohibitive.
Therefore, the Company decided, and informed the EPA, that it intends to vacate
the building, to demolish it, and to dispose of all contaminated building
materials in a legally compliant manner. Accordingly, the Company wrote-off, as
of December 27, 1997, the undepreciated value of that building, all improvements
thereto, and certain machinery and equipment, and a reserve was established and
charged to income as of December 27, 1997, in the amount of $7.2 million, which
the Company believes is adequate to dismantle and dispose of the building, clean
equipment located within it, and  to pay for related engineering, legal and
professional services. Of this amount, $0.4 million was expended during 1998 for
such legal and professional services. During 1998, the EPA approved the
Company's plan to dismantle and dispose of the building, and the Company is
currently engaged in discussions with the EPA regarding the timing of the
planned dismantling and disposal activity.

                                       14
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE> 
<CAPTION> 
                                                                                     For The Years Ended
  (Amounts in thousands, except per share data)                    Jan. 2, 1999         Dec. 27, 1997         Dec. 28, 1996
  <S>                                                              <C>               <C>                      <C>      
  Net sales                                                        $    116,194        $    119,658           $   125,975     
  Cost of sales                                                          96,062             102,731               107,356     
                                                                   ------------------------------------------------------     
  Gross profit                                                           20,132              16,927                18,619      
  Research and development                                                2,492               2,708                 2,830      
  Selling, general and administrative expenses                           14,992              13,793                15,646      
  Provision for environmental costs, plant                                   --              13,000                    --        
    remediation, and impairment of assets                                                                                     
                                                                    -----------------------------------------------------     
  Income (loss) from operations                                           2,648            (12,574)                   143     
  Other income (expense):                                                                                                     
      Interest expense                                                   (1,530)             (1,741)               (2,263)      
       Other income (expense)                                             1,520                 323                  (331)    
                                                                    -----------------------------------------------------     
  Income (loss) before income taxes                                       2,638            (13,992)                (2,451)    
  Provision for (benefit from) income taxes                                 852             (2,493)                (1,104)    
                                                                    -----------------------------------------------------      
  Net income (loss)                                                 $     1,786        $   (11,499)           $    (1,347)    
                                                                    =====================================================      
  Earnings (loss) per share - basic and diluted                     $      0.33        $     (2.15)           $     (0.25)    
                                                                    =====================================================     
</TABLE> 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE> 
<CAPTION> 
                                                                                  ACCUMULATED
                                                       ADDITIONAL                    OTHER             TOTAL
                                            COMMON      PAID-IN      RETAINED    COMPREHENSIVE      STOCKHOLDERS'    COMPREHENSIVE
(Amounts in thousands)                      STOCK       CAPITAL      EARNINGS    Profit (LOSS)         EQUITY        INCOME (LOSS)
<S>                                         <C>        <C>           <C>         <C>                <C>              <C> 
Balances at December 30, 1995               $ 5,299     $   769      $ 30,128        $ (691)          $  35,505    
     Net loss                                    --          --        (1,347)           --              (1,347)       $  (1,347)  
     Proceeds from employee stock                16          73            --            --                  89                    
     purchase plan and exercise of                                                                                                 
     stock options (16,254 shares)                                                                                                 
     Foreign currency translation                --          --            --           826                 826              826   
                                                                                                                       ---------   
           Comprehensive loss                                                                                          $    (521)  
                                            -------------------------------------------------------------------        =========   
Balances at December 28, 1996                 5,315         842        28,781           135              35,073                    
                                            -------------------------------------------------------------------                    
     Net loss                                    --          --       (11,499)           --             (11,499)       $ (11,499)  
     Proceeds from employee stock                69         195            --            --                 264                    
     purchase plan and exercise of                                                                                                 
     stock options (69,384 shares)                                                                                                 
     Foreign currency translation                --          --            --           (72)                (72)             (72)  
                                                                                                                       ---------   
           Comprehensive loss                                                                                          $ (11,571)  
                                            -------------------------------------------------------------------        =========   
Balances at December 27, 1997                 5,384       1,037        17,282            63              23,766                    
                                            -------------------------------------------------------------------                    
       Net income                                --          --         1,786            --               1,786        $   1,786   
        Proceeds from employee stock              9          22            --            --                  31 
        purchase plan and exercise of                                                                                              
        stock options (8,842 shares)                                                                                               
     Foreign currency translation                --          --            --          (294)               (294)            (294)  
           Comprehensive income                                                                                        $   1,492   
                                            -------------------------------------------------------------------        ---------   
Balances at January 2, 1999                 $ 5,393     $ 1,059      $ 19,068        $ (231)        $    25,289    
                                            ===================================================================    
</TABLE> 

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

                                      15

<PAGE>
 
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)                                                    JAN. 2, 1999        DEC. 27, 1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>
Assets
Current assets:
  Cash                                                                        $  1,149             $    693
  Accounts receivable, net of allowance for doubtful                  
     accounts of $606 in 1998 and $617 in 1997                                  14,220               14,249
  Inventories                                                                   19,906               18,176
  Prepaid expenses and other current assets                                        566                  637
                                                                     --------------------------------------
     Total current assets                                                       35,841               33,755
Property, plant and equipment, at cost:                               
  Land                                                                             290                  303
  Buildings and improvements                                                     3,197                3,190
  Machinery and equipment                                                       63,351               60,830
                                                                     --------------------------------------
                                                                                66,838               64,323
     Less accumulated depreciation and amortization                            (36,338)             (32,060)
                                                                     --------------------------------------
                                                                                30,500               32,263
Deferred income taxes                                                            4,146                5,385
Other assets                                                                        84                  156
                                                                     --------------------------------------
     Total assets                                                             $ 70,571             $ 71,559
                                                                     ======================================
LIABILITIES AND STOCKHOLDERS' EQUITY                                  
Current liabilities:                                                  
  Accounts payable                                                            $  9,490             $ 10,351
  Accrued compensation and related expenses                                      3,048                2,887
  Other accrued expenses                                                         2,374                3,030
  Current maturities of long-term debt                                           7,376                1,909
  Income taxes                                                                      84                  362
                                                                     --------------------------------------
     Total current liabilities                                                  22,372               18,539
Deferred income taxes                                                            5,022                5,446
Industrial revenue bond                                                          1,292                1,750
Long-term debt less current maturities                                           9,916               14,973
Reserve for environmental costs and plant remediation                            6,033                6,033
Deferred compensation                                                              647                1,052
                                                                      
Commitments and contingencies                                         
                                                                      
Stockholders' equity:                                                 
  Preferred stock, $.01 par value; 5,000,000 shares                   
     authorized; none issued                                                        --                   --
  Common stock; $1.00 par value; 20,000,000 shares authorized;        
     5,393,221 and 5,384,379  shares issued and outstanding                      5,393                5,384
  Additional paid-in capital                                                     1,059                1,037
  Retained earnings                                                             19,068               17,282
  Accumulated other comprehensive profit (loss)                                   (231)                  63
                                                                     -------------------------------------- 
     Total stockholders' equity                                                 25,289               23,766
                                                                     -------------------------------------- 
     Total liabilities and stockholders' equity                               $ 70,571             $ 71,559
                                                                     ======================================
</TABLE>

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

                                       16
<PAGE>
 
<TABLE>  
<CAPTION> 

CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                     FOR THE YEARS ENDED
(Amounts in thousands)                                            JAN. 2, 1999           DEC. 27, 1997         DEC. 28, 1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                    <C>                   <C>
Cash flows from operating activities:
Net income (loss)                                                      $ 1,786               $ (11,499)              $(1,347)
Adjustments to reconcile net income (loss) to cash provided       
 by operating activities:                                         
  Provision for bad debts                                                   --                      --                    50
  Depreciation and amortization                                          4,366                   4,602                 4,673
  Environmental cost, plant remediation and write-                          --                  13,000                    --
   down of impaired assets                                                     
  Gain on sale of business unit                                           (949)                     --                    --
  Loss on disposal of assets                                                --                     349                    --
  Deferred income taxes                                                    833                  (2,801)               (1,104)
Changes in operating assets and liabilities:                      
  Accounts receivable                                                     (371)                  1,819                 3,822
  Inventories                                                           (1,912)                  2,682                 3,052
  Prepaid expenses                                                          82                     408                    38
  Accounts payable                                                        (790)                  2,045                (3,069)
Accrued compensation and related expenses                                   55                    (244)                  326
  Other accrued expenses                                                (1,097)                 (1,131)                2,183
  Income taxes payable                                                    (272)                    131                  (307)
                                                            ----------------------------------------------------------------
Net cash provided by operating activities                                1,731                   9,361                 8,317
                                                            ----------------------------------------------------------------
                                                                                           
Cash flows from investing activities:                                                      
  Proceeds from sale of business unit                                    2,000                      --                    -- 
  Acquisition of property, plant and equipment                          (2,785)                 (2,661)               (3,348)
  Other                                                                   (400)                    147                   666
                                                            ----------------------------------------------------------------
Net cash used in investing activities                                   (1,185)                 (2,514)               (2,682)
                                                            ----------------------------------------------------------------
                                                                                           
Cash flows from financing activities:                                                      
  Proceeds from employee stock purchase plan and                                           
     exercise of stock options                                              30                     264                    89
  Net borrowings (repayments) under line of credit                       1,855                  (4,616)               (3,387)
  Long-term borrowings                                                                             946                 1,500
  Payments of long-term debt                                            (1,861)                 (3,646)               (3,481)
                                                            ----------------------------------------------------------------
Net cash provided by (used in) financing activities                         24                  (7,052)               (5,279)
                                                            ----------------------------------------------------------------
                                                                                           
Effects of exchange rate on cash                                          (114)                     34                   (65)
                                                            ----------------------------------------------------------------
Increase (decrease) in cash                                                456                    (171)                  291
Cash at beginning of year                                                  693                     864                   573
                                                            ----------------------------------------------------------------
Cash at end of year                                                    $ 1,149                $    693               $   864
                                                            ================================================================
Supplemental disclosure of cash flow information:                                          
  Cash paid during the year for interest                               $ 1,530                $  1,733               $ 2,263
                                                            ================================================================
  Cash paid during the year for income taxes                           $   398                $    461               $   582
                                                            ================================================================
</TABLE>

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

                                       17
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - 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. Certain reclassifications have been made to prior years' financial
statements to conform to the 1998 presentation.

FISCAL YEAR

The Company uses a fiscal calendar, which normally includes 52 weeks, and ends
on the Saturday nearest to December 31. In 1998, the fiscal calendar included 53
weeks ending on Saturday, January 2, 1999, the Saturday nearest to December 31.
Fiscal years 1997 and 1996 ended on December 27 and December 28, respectively,
and each included 52 weeks.

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, "Accumulated other comprehensive profit
(loss)."

CASH

Cash consists of cash on hand.

FINANCIAL INSTRUMENTS

Derivative financial instruments are used by the Company in the management of
foreign currency exposures to reduce commodity and financial market risk and are
accounted for on an accrual basis. Gains and losses resulting from effective
hedges of existing assets, liabilities, or firm commitments are deferred and
recognized when the offsetting gains and losses are recognized on the related
hedged items. The Company does not enter into derivative transactions for
speculative purposes.

INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is determined by
the first-in, first-out (FIFO) method.

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, 5-40 years;
leasehold improvements, over the life of the lease or the useful life of the
asset, whichever is shorter; machinery and equipment, 3-15 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.

Depreciation and amortization expense was approximately $4,366,000, $4,602,000,
and $4,673,000 

                                       18
<PAGE>
 
for 1998, 1997, and  1996, respectively.

CONCENTRATIONS OF CREDIT RISKS

Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables and certain other off-balance
sheet financial instruments. By their nature, all such financial instruments
involve risk, including risk of non-performance by counterparties, and the
maximum potential loss may exceed the amounts recognized on the balance sheet.
Exposure to credit risk is controlled through credit approvals, credit limits,
and monitoring procedures.

USE OF ESTIMATES

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.

REVENUE RECOGNITION

Revenues from product sales are recorded when the product is shipped.
Provisions for product returns and allowances are recorded in the same period as
the related revenue.

RESEARCH AND DEVELOPMENT

Expenditures for research, and product development and engineering were
$2,492,000, $2,713,000 and $2,830,000 for 1998, 1997 and 1996, respectively.

ENVIRONMENTAL REMEDIATION COSTS

The Company accrues for costs associated with environmental remediation
obligations when such expenditures are probable and reasonably estimable.
Accruals for estimated costs of environmental remediation obligations generally
are recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value.

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 purposes.

NET INCOME (LOSS) PER SHARE (BASIC AND DILUTED)

Net income (loss) per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the year, calculated
under the treasury stock method.

Options to purchase 743,375 shares of common stock at prices ranging from $3.00
to $9.625 per share were outstanding at January 2, 1999 but were not included in
the computation of diluted earnings per share because the exercise price of the
options was greater than the average market price 

                                       19
<PAGE>
 
of common shares.

Options to purchase 313,250 shares of common stock at prices ranging from $6.125
to $9.625 per share were outstanding at December 27, 1997 but were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price of common shares. Options
to purchase 251,625 shares of common stock at prices ranging from $3.00 to $5.00
per share were outstanding at December 27, 1997 but were not included because
the options were anti-dilutive.

Options to purchase 372,500 shares of common stock at prices ranging from $6.125
to $9.625 per share were outstanding at December 28, 1996 but were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price of common shares. Options
to purchase 211,875 shares of common stock at prices ranging from $3.00 to $5.00
per share were outstanding at December 26, 1996 but were not included because
the options were anti-dilutive.

NEW PRONOUNCEMENTS

In March 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company plans to adopt the SOP in the fiscal
year ending January 1, 2000. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses such costs
as incurred. Management has determined that the effect of the SOP 98-1 will be
immaterial to the Company's consolidated financial position, results of
operations and cash flows.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activity" ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter. The Company
has yet to determine its date of adoption. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted
through fair value through income. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management has determined that SFAS 133 will have an immaterial effect on the
Company's consolidated financial statements.

                                       20
<PAGE>
 
NOTE 2 - INVENTORIES:

Inventories consist of the following (in thousands):

                          JANUARY 2, 1999                DECEMBER 27, 1997
                    DOMESTIC   FOREIGN    TOTAL    DOMESTIC   FOREIGN    TOTAL
                    ------------------------------------------------------------
Raw materials       $  7,309   $ 2,528   $ 9,837   $  7,697   $ 2,060   $ 9,757
Work in process        1,935       276     2,211      2,450       343     2,793
Finished goods         7,021       837     7,858      4,914       712     5,626
                    ------------------------------------------------------------
                    $ 16,265   $ 3,641   $19,906   $ 15,061   $ 3,115   $18,176
                    ------------------------------------------------------------

NOTE 3 - DEBT:

The Company maintains a Revolving Credit Agreement (the "Agreement") with a
bank, which, as amended, provides a credit line of approximately $22 million to
the Company, including a 4,400,000 British Pounds ($7,302,000 at year-end
exchange rates) line of credit to BHC Aerovox, Ltd. ("BHC"), a wholly-owned
subsidiary of the Company. Amendment Seven to the Agreement was issued on
September 28, 1998, adjusting financial covenants which require the Company to
maintain certain interest coverage ratios. Had this covenant not been amended,
the Company would have been in violation at the end of the third and fourth
quarters of 1998. The lender waived, as of that date, its rights to accelerate
payment on that loan for financial covenant violations of certain tangible net
worth, earnings and cash flow covenants. This debt is collateralized by
inventory and accounts receivable.

Interest on the credit line 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
$4,000,000 of loans to a Bankers' Acceptance facility at interest rates equal to
the per annum average discount rate quoted to the bank on the date of request
for such facility plus 1 1/2% per annum. The Agreement matures on May 31, 1999.
The bank has indicated to the Company their intention to renew the credit line
under similar terms, although they have not committed to do so. The Company
believes that other lenders will be willing to enter into similar credit
arrangements with the Company should the present lending bank decline to renew
the credit line. A commitment fee, equal to one-quarter percent per annum will
be charged on the unused portion of the total commitment. At January 2, 1999,
borrowings outstanding under this Agreement were $14,506,000, including
3,194,000 British Pounds ($5,284,000 at year-end exchange rates); and at
December 27, 1997 the amount was $12,693,000, including 2,440,000 British Pounds
($4,097,000 at year-end exchange rates). Net availability under this line at
January 2, 1999 was $5,900,000.

On February 22, 1999, BHC Aerovox entered into an agreement with a bank which
provides for 1) a ten-year mortgage on real property in the amount of 500,000
British Pounds, 2) a five-year loan secured by machinery and equipment in the
amount of 1,000,000 British Pounds, and 3) an "Overdraft" credit line allowing
borrowings in British Pounds, European Currency Units, or US Dollars up to
equivalent of 2,500,000 British Pounds. It is the Company's intention to use
these new credit arrangements to repay existing bank debt of BHC, and to fund
future working capital needs of that company.

A ten-year Industrial Revenue Bond was issued by the Massachusetts Industrial
Finance Agency in 

                                       21
<PAGE>
 
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 ten-year amortization schedule. $458,000 of principal
is payable in 1999. On January 2, 1999 and December 27, 1997, the bond balance
outstanding under this agreement was $1,750,000 and $2,175,000, respectively.

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 monthly. At
January 2, 1999, borrowings outstanding under this agreement were $2,328,000 at
annualized interest rates ranging from 7.16% to 8.13%, and maturing at various
dates through the year 2002; and at December 27, 1997, $3,764,000 at annualized
interest rates ranging from 7.36% to 8.18%. The agreement contains several
financial covenants requiring the Company to maintain certain ratios regarding
debt, equity, and interest costs. The Company was in violation of those
covenants on January 2, 1999. The lender waived, on February 10, 1999, its right
to accelerate payment of this debt for violations of these financial covenants.

On February 26, 1999, the Company amended its agreement with the equipment
financing company noted above. Under this amendment, the balances outstanding at
that date were repaid and additional funds borrowed under a new promissory note
and security agreement in the amount of $9,000,000, payable monthly over six
years, and bearing interest at a rate of 7.8%. Principal payments due under that
note in 1999 are $1,250,000, and $1,500,000 per year thereafter.

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


        YEAR
        ------------------------------------------------------
        1999                                      $  7,376,000
        2000                                         2,405,000
        2001                                         2,440,000
        2002                                         2,185,000
        2003                                         1,912,000
        Thereafter                                   2,266,000

NOTE 4 - SALE OF BUSINESS UNIT

On July 29, 1998, the Company sold its Power Factor Correction ("PFC") Systems
business to a unit of General Electric Company. The PFC unit manufactured and
sold equipment used to enhance the efficient use of power by large industrial
plants. Proceeds from the sale were $2,000,000. Included in income for the third
quarter was a gain of $949,000 on the sale of the business.


NOTE 5 - OTHER ACCRUED EXPENSES:

Other accrued expenses consist of the following at January 2, 1999 and December
27, 1997 (in thousands):

                                       22
<PAGE>
 
                                           1998                     1997
                                         --------------------------------
Warranty                                 $  654                   $  840
Duty                                        550                      370
Environmental cost and
  plant remediation                         730                    1,200
Other                                       440                      620
                                         --------------------------------
                                         $2,374                   $3,030
                                         --------------------------------


NOTE 6 - COMMITMENTS AND CONTINGENCIES:

The Company leases manufacturing space, equipment and software under various
non-cancelable operating leases. Rental expense amounted to $1,717,000 in 1998,
$1,721,000 in 1997, and $1,672,000 in 1996. On January 2, 1999, future minimum
annual rental payments under all leases are as follows:

                 YEAR                                                   
                 ----------------------------------------------------   
                 1999                                $1,154,560         
                 2000                                $  842,213         
                 2001                                $  760,952         
                 2002                                $  708,390         
                 2003                                $  612,008         
                 Thereafter                          $  524,940          


The Company leases, and in turn sublets, office space in North Dartmouth,
Massachusetts. Since rental income from the sublease substantially offsets
rental expense under the lease, the future minimum annual rental payments above
exclude payments related to those offices.

The Company is self-insured for workers' compensation benefits for some of its
employees. The amounts charged to expense for workers' compensation were
$359,000 in 1998, $352,000 in 1997, and $307,000 in 1996, 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 US employees. The Company is liable for claims up
to $150,000 per employee and aggregate claims up to a maximum of $1,875,000
(based on average monthly enrollment) for 1998. 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 $1,816,000 in 1998, $1,867,000 in 1997, and $1,883,000 in
1996.

NOTE 7 - FINANCIAL INSTRUMENTS

The Company operates internationally, with manufacturing facilities, customers,
and vendors in several countries outside of the United States. The Company may
reduce its exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of foreign currency forward contracts, a
type of derivative financial instrument. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives.

                                       23
<PAGE>
 
At January 2, 1999 the Company held foreign currency forward contracts with
costs totaling approximately $1,509,000 (910,000 British Pounds Sterling).
These contracts matured on various dates through February, 1999.   The fair
value of these contracts at January 2, 1999 $1,523,000.

At December 27, 1997, the Company held foreign currency forward contracts with
costs totaling approximately $485,000 (289,000 British Pounds Sterling).  These
contracts matured on December 29, 1997.   The fair value of these contracts at
December 27, 1997 $371,000.

NOTE 8 - INCENTIVE AND OTHER PLANS:
STOCK INCENTIVE PLAN

The 1989 Stock Incentive Plan ("Plan"), permits the granting of a variety of
stock and stock-based awards, including stock options, rights to receive cash or
shares for 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 950,000 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)
for United States Federal income tax purposes 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 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 ten years from the date of grant (five years in the
case of a 10% shareholder) with respect to ISOs and ten 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 beginning on the
first anniversary of the date of grant and expires ten years from the date of
grant. Information for fiscal years, 1998, 1997, and 1996, with respect to the
Plan, is as follows:

                                       24
<PAGE>
 
<TABLE>
<CAPTION>
                                           1998                           1997                          1996
                                 SHARES    WEIGHTED AVERAGE     SHARES    WEIGHTED AVERAGE    SHARES    WEIGHTED AVERAGE
                                            EXERCISE PRICE                 EXERCISE PRICE                 EXERCISE PRICE
<S>                             <C>        <C>                 <C>        <C>                 <C>        <C>
Outstanding at beginning
    of year                     471,000        $5.59           500,000          $5.59         446,000          $5.57
Granted                         239,000        $3.48            67,000          $4.50         140,000          $6.80
Exercised                            --           --           (61,500)         $3.00          (7,000)         $3.00
Canceled                        (66,500)       $4.55           (34,500)         $8.01         (79,000)         $7.88
                              ---------------------------------------------------------------------------------------
Outstanding at end of year      643,500        $4.91           471,000          $5.59         500,000          $5.59
                              =======================================================================================
Options exercisable at
    year-end                    265,300        $5.50           257,300          $4.95         293,000          $4.46
                              =======================================================================================
Options available for
 future grant                   117,000                        289,500                        322,000
                              =======================================================================================
</TABLE>

  The following table summarizes information about stock options outstanding at
   January 2, 1999:

<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
                          NUMBER                    WEIGHTED               WEIGHTED               NUMBER               WEIGHTED
EXERCISE PRICE        OUTSTANDING AT            AVERAGE REMAINING          AVERAGE              EXERCISABLE AT            AVERAGE
    RANGE             JANUARY 2, 1999           CONTRACTUAL LIFE        EXERCISE PRICE       JANUARY 2, 1999          EXERCISE PRICE
<S>                   <C>                      <C>                      <C>                  <C>                      <C>
$3.00 - $4.50                404,500                    7.0                   $3.57             121,700                   $3.38
$4.51 - $6.75                105,000                    6.2                   $5.97              60,000                   $5.91
$6.76 - $9.00                134,000                    6.3                   $8.16              83,600                   $8.32
-------------------------------------------------------------------------------------------------------------------------------
$3.00 - $9.00                643,500                    6.7                   $4.91             265,300                   $5.51
===============================================================================================================================
</TABLE>

     NON-STATUTORY STOCK OPTION AWARD AGREEMENT

     On September 1, 1996, an officer of the Company was awarded an option to
     purchase 50,000 shares of Aerovox common stock, bearing an exercise price
     of $6.00 per share. The option is exercisable at the rate of 20% per year
     and expires ten years from the date of grant. On January 2, 1999, options
     for 20,000 shares were exercisable under this agreement.

     1989 STOCK OPTION PLAN FOR DIRECTORS

     The 1989 Stock Option Plan for Directors (the "Directors Plan") reserved
     80,000 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 Directors Plan. Each
     newly elected director will be awarded options to purchase 2,500 shares of
     common stock on the date of election. Following the initial grant, each
     person who is an eligible director on the day of each annual meeting of
     shareholders of the Company, will receive options covering 1,000 shares or
     250 for each quarter of service if less than one year

                                       25
<PAGE>
 
     elapses between the initial grant and an annual grant.

     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 Directors
     Plan after April 1999. In the event of termination of director status by
     retirement, an option may be exercised for a period of three years, or
     until expiration, if earlier; or for one year after death in the event an
     optionee dies during the final year of such exercise period, or until the
     expiration of the stated term of the option. In the event of termination of
     status of director by reason of 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.

     Information for fiscal years 1998, 1997, and 1996, with respect to the
     Directors Plan, is as follows:

<TABLE>
<CAPTION>
                                             1998                            1997                              1996
                                           WEIGHTED AVERAGE                WEIGHTED AVERAGE                  WEIGHTED AVERAGE
                                SHARES      EXERCISE PRICE      SHARES      EXERCISE PRICE      SHARES        EXERCISE PRICE
<S>                             <C>        <C>                  <C>        <C>                  <C>        <C>
Outstanding at                                                                                                           
  beginning of year             43,875                $6.00     34,375                $6.41     31,665             $6.14 
Granted                          6,000                $3.50      9,500                $4.50      6,000             $6.50
Exercised                           --                   --         --                   --         --                --
Canceled                            --                   --         --                   --     (3,290)  
                               -------------------------------------------------------------------------------------------
Outstanding at end of year      49,875                $5.70     43,875                $6.00     34,375             $6.41
                               =========================================================================================== 
Options exercisable at                                                                                                   
  year-end                      43,875                $6.00     34,375                $6.42     26,539             $6.29 
                               =========================================================================================== 
Options available                                                                                         
  future grant                  18,292                          24,292                          33,792    
                               =========================================================================================== 
</TABLE>

     The following table summarizes information about stock options outstanding
     at January 2, 1999:


<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                                OPTIONS EXERCISABLE
                      NUMBER           WEIGHTED AVERAGE     WEIGHTED AVERAGE         NUMBER         WEIGHTED AVERAGE
EXERCISE PRICE    OUTSTANDING AT           REMAINING            EXERCISE         EXERCISABLE AT         EXERCISE
    RANGE         JANUARY 2, 1999      CONTRACTUAL LIFE          PRICE           JANUARY 2, 1999         PRICE
<S>               <C>                 <C>                   <C>                  <C>                <C>
$3.00 - $4.50          24,125               5.8                   $3.79               18,125              $3.88
$4.51 - $6.75          11,500               5.9                   $6.54               11,500              $6.54
$6.76 - $9.63          14,250               5.7                   $8.27               14,250              $8.27
                  ---------------------------------------------------------------------------------------------------  
                       49,875               5.8                   $5.70               43,875              $6.00
                  =================================================================================================== 
</TABLE>

                                       26
<PAGE>
 
ACCOUNTING FOR STOCK OPTIONS

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") describes a "fair value" method for calculating the
effect of options granted on the reported earnings of the Company. This method
uses certain historical data regarding outstanding options and the price history
of a company's shares in a mathematical model to determine the hypothetical
value of the option had it been sold in the open securities market rather than
granted to the plan participant. This is in contrast to the valuation method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), which
calculates the value at the date of grant as the difference, if any, between the
exercise price and the market price of the shares on that date.

Calculated in accordance with SFAS 123, the weighted average fair value at date
of grant for options granted in 1998, 1997 and 1996 was $2.09, $2.83 and $3.83
per option, respectively. The fair value of these options at the date of grant
was estimated using the Black-Scholes model with the following weighted average
assumptions for 1998, 1997 and 1996: risk-free interest rates as of the grant
dates from 5.13% to 7.14%; no dividend yields; a volatility factor of the
expected market price of the Company's common stock of 38.28%, 33.82%, and
30.97%, respectively; and a weighted average expected life of the options of
9.79, 9.81 , and 9.87  years, respectively.

As allowed by SFAS 123, the Company elected the disclosure-only alternative, and
continues to calculate and report net income and net income per share according
to APB 25 for employee and director stock-based compensation. Had compensation
cost for the Company's 1998, 1997, and 1996 grants for stock-based employee and
director compensation plans been determined using the fair value method as
prescribed by SFAS 123, the Company's net income, and net income per share for
those years would approximate the pro forma amounts below (in thousands except
for per share data).

<TABLE>
<CAPTION>
                                        JANUARY 2, 1998          DECEMBER 27, 1997        DECEMBER 28, 1996
                                         AS         PRO          AS            PRO          AS         PRO
                                      REPORTED     FORMA      REPORTED        FORMA      REPORTED     FORMA
  <S>                                 <C>          <C>        <C>           <C>          <C>         <C>
  Net income (loss)                     $1,786     $1,673     $(11,499)     $(11,784)    $(1,347)    $(1,493)
  Basic earnings (loss)
   per share                            $ 0.33     $ 0.31     $  (2.15)     $  (2.20)    $ (0.25)    $ (0.28)
  Diluted earnings (loss)
   per share                            $ 0.33     $ 0.31     $  (2.15)     $  (2.20)    $ (0.25)    $ (0.28)
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of the pro forma effect on net income in future years because these pro forma
calculations do not take into consideration grants made prior to 1995.

                                       27
<PAGE>
 
EMPLOYEE STOCK PURCHASE PLAN

In 1989, the Company established the Employee Stock Purchase Plan (the "ESPP")
under which 100,000 shares of common stock were reserved for purchase by
employees. The ESPP 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 1998, 1997, and 1996, 8,842,
7,884, and 9,254 shares, respectively, were sold under the ESPP. There were
5,092 shares qualified for future sale on January 2, 1999.

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 of up to
three times that person's 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 on January 2, 1999 was approximately $2,496,000.

PROFIT-SHARING SAVINGS PLAN

The Company maintains a Profit-Sharing Savings Plan  ("PSSP") which covers
substantially all domestic employees with at least six months of service. Under
the PSSP, each employee can elect to make a pre-tax contribution to the PSSP of
not less than 3% and not more than 15% of qualified compensation, of which up to
the first 8% is eligible for a Company match.  The Company makes regular
contributions to the PSSP on behalf of each participating employee in an amount
which, together with any forfeitures during the PSSP 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, or 50% of the first 8% of the
aggregate pre-tax contribution 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 $639,000 in 1998, $506,000 in 1997, and $471,000 in 1996.

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 PSSP
and amounts actually eligible for contributing to the PSSP under Section 401k of
the Revenue Code of the United States.  Under the Deferred Supplemental Savings
Plan, the Company will make a matching contribution in 

                                       28
<PAGE>
 
an amount equal to the matching contribution which would have been made if such
contribution had been made under the PSSP. Expense related to the Deferred
Supplemental Savings Plan amounted to $85,000 in 1998, $85,000 in 1997, and
$252,000 in 1996.

CONSULTING AGREEMENTS

The Company has Consulting, Non-Competition and Confidentiality Agreements with
two former executives. Under the Agreements, which expire on December 28, 2006,
the executives are paid an aggregate of $160,000 per year.

NOTE 9 - 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.

On January 2, 1999, 55,000 shares of Series A Preferred were reserved for
issuance for stock purchase rights (see Note 10). No such rights have become
exercisable and no shares of Series A Preferred have been issued.

NOTE 10 - PREFERRED SHARE PURCHASE RIGHTS:

On August 16, 1989, the board of directors approved a preferred share rights
plan (the "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. The Rights, which do not have voting rights, expire on December 1,
1999, unless redeemed earlier by the Company.

The Rights will become exercisable if a person or group of affiliated or
associated persons (an "Acquiring Person") acquires beneficial ownership  (the
"Shares Acquisition Date") of 15% or more of the outstanding shares of the
Company's common stock or following the 

                                       29
<PAGE>
 
commencement of, or announcement of an intention to make a tender offer or
exchange offer 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.

At any time on or prior to the date the Rights become exercisable, the Company
may redeem the Rights in whole, but not in part, at a price of $0.01 per Right.

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 Rights 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).

NOTE 11 - SEGMENT INFORMATION:

The Company is engaged in one operating segment, the manufacture of capacitors
and EMI filters.  The Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" during the fourth quarter of 1998.
Statement No. 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders.  It also established standards for related disclosures about
products, services and geographic areas.

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

                                       30
<PAGE>
 
     OPERATIONS BY GEOGRAPHIC AREA:

<TABLE>
<CAPTION>
                                      UNITED              UNITED
                                      STATES             KINGDOM             MEXICO          ELIMINATIONS         CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                <C>                 <C>             <C>                  <C>
YEAR ENDED JANUARY 2, 1999
Sales to unaffiliated customers       $ 89,348            $26,465              $  381          $                     $116,194
Transfer between geographic areas        3,981                  -               7,073           (11,054)                    -
                                    ----------------------------------------------------------------------------------------- 
Total sales                           $ 93,329            $26,465              $7,454          $(11,054)             $116,194
                                    =========================================================================================
Operating profit (loss)               $    872            $ 1,474              $  302          $      -              $  2,648
Interest expense                                                                                                       (1,530)
Interest income                                                                                                         1,520
                                    ----------------------------------------------------------------------------------------- 
Income before income taxes                                                                                           $  2,638
                                    ========================================================================================= 
Identifiable assets                   $ 60,166            $16,569              $1,806          $ (7,970)             $ 70,571
                                    =========================================================================================
YEAR ENDED DECEMBER 27, 1997          
Sales to unaffiliated customers       $ 93,778            $24,966              $  914          $      -              $119,658
Transfer between geographic areas        3,870                  -               7,325           (11,195)                    -
                                    ----------------------------------------------------------------------------------------- 
Total sales                           $ 97,648            $24,966              $8,239           (11,195)             $119,658
                                    =========================================================================================
Operating profit (loss)               $(13,824)           $ 1,244              $  281          $      -              $(12,299)
Interest expense                                                                                                       (1,741)
Interest income                                                                                                            48
                                    -----------------------------------------------------------------------------------------
Loss before income taxes                                                                                             $(13,992)
                                    =========================================================================================
Identifiable assets                   $ 63,103            $15,362              $1,030          $ (7,936)             $ 71,559
                                    =========================================================================================
YEAR ENDED DECEMBER 28, 1996          
Sales to unaffiliated customers       $101,664            $23,535              $  776          $      -              $125,975
Transfer between geographic areas        3,739                  -               6,385           (10,124)                    -
                                    ----------------------------------------------------------------------------------------- 
Total sales                           $105,403            $23,535              $7,161           (10,124)             $125,975
                                    =========================================================================================
Operating profit                      $ (1,680)           $ 1,077              $  342          $      -              $   (261)
Interest expense                                                                                                       (2,263)
Interest income                                                                                                            73
                                    -----------------------------------------------------------------------------------------
Loss before income taxes                                                                                             $ (2,451)
                                    ========================================================================================= 
Identifiable assets                   $ 75,535            $15,901              $1,162          $ (7,622)             $ 84,976
                                    ========================================================================================= 
</TABLE>


     Transfers between geographic areas are accounted for at cost plus
     15% in 1998, 1997, and 1996, except for transfers of etched and
     formed foil in 1998 and 1997 which were accounted for at prices
     intended to approximate sales to unrelated third parties.
     Operating profit (loss) is total sales less operating expenses
     which in 1998 included a special gain on the sale of certain
     assets related to a product line, and in 1997 included a special
     provision for environmental costs and asset write-down.
     Identifiable assets are those assets of the Company that are
     identified with the operations in each geographic area.

                                       31
<PAGE>
 
NOTE 12 - PROVISION FOR INCOME TAXES:
The provision for income taxes consists of (in thousands):

<TABLE>
<CAPTION>
                                                               JAN. 2, 1999          DEC. 27, 1997          DEC. 28, 1996
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                   <C>                    <C>
CURRENT:
Federal                                                           $(315)                 $     -               $              
State                                                                                          -                    58        
Foreign                                                             352                      338                  (118)       
                                                        ---------------------------------------------------------------------  
Total Current                                                        37                      338                   (60)       
DEFERRED:                                                                                                                     
Federal                                                             691                   (1,974)               (1,074)       
State                                                               124                     (950)                 (190)       
Foreign                                                                                       93                   220        
                                                        ---------------------------------------------------------------------  
Total deferred taxes                                                815                   (2,831)               (1,044)       
                                                        ---------------------------------------------------------------------  
Provision for (benefit from) income taxes                         $ 852                  $(2,493)              $(1,104)       
                                                        ===================================================================== 
Deferred income taxes arise from (in thousands):                                                                              
       Environmental reserve                                      $ 350                  $(2,901)              $     -        
  Accelerated depreciation                                         (355)                  (2,477)                1,196        
  Net operating losses                                               42                     (633)               (2,033)       
  Inventory valuation                                               (25)                    (363)                  577        
  Allowance for doubtful accounts                                     4                       26                     4        
  Compensation related costs                                        162                      286                   (71)       
  Warranty reserve                                                   74                      210                  (492)       
  Other                                                             509                      (95)                 (335)       
  Tax credits                                                       133                      (22)                  (28)       
  Valuation allowance                                               (79)                   3,138                   138        
                                                        ---------------------------------------------------------------------  
                                                                  $ 815                  $(2,831)              $(1,044)       
                                                        =====================================================================
Income taxes are reconciled to the United States
 statutory corporate tax rate as follows (in thousands):
  United States corporate tax at statutory rate                   $ 897                  $(4,756)              $  (832)
  Increase (decrease) arising from:                                                                            
  State taxes                                                       124                     (934)                 (190)
  Foreign taxes                                                    (193)                      50                  (218)
  Other                                                             103                        9                    (2)
  Change in valuation allowance                                     (79)                   3,138                   138
                                                        ---------------------------------------------------------------------  
                                                                  $ 852                  $(2,493)              $(1,104)
                                                        =====================================================================
</TABLE>

                                       32
<PAGE>
 
The components of the Company's deferred tax assets and liabilities as of
January 2, 1999 and December 27, 1997 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                            JANUARY 2, 1999                       DECEMBER 27, 1997
     DEFERRED TAXES:                                    ASSETS         LIABILITIES          ASSETS            LIABILITIES
     --------------------------------------------------------------------------------------------------------------------
     <S>                                                <C>            <C>                  <C>               <C>
     Net operating loss carryforwards                   $ 3,025            $    --           $ 3,067               $   --
     Compensation related cost                              261                 --               422                   --
     Allowance for doubtful accounts                        173                 --               177                   --
     Depreciation                                            --              5,091                --                5,446
     Environmental reserve                                2,551                 --             2,901                   --
     Equipment reserve                                       --                 --                66                   --
     Inventory reserves                                     160                 --               135                   --
     Warranty reserves                                      208                 --               282                   --
     Tax credit carry forwards                            1,043                 --             1,177                   --
     Valuation allowance                                 (3,275)                --            (3,354)                  --
     Other                                                                     (69)              512                   --
                                                      ------------------------------------------------------------------- 
     Total                                              $ 4,146            $ 5,022           $ 5,385               $5,446
                                                      ===================================================================
</TABLE>

The change in valuation allowance is due to the expiration of foreign tax
credits. At January 2, 1999, the Company had a net operating loss carry-forward
of approximately $7,534,000 for tax purposes, which begin to expire in 2007. At
January 2, 1999, the Company also had $1,043,000 of foreign and other tax
credits which expire from 1999 to 2012.

NOTE 13 - ENVIRONMENTAL MATTERS:

The Company manufactures film capacitors and maintains its corporate offices in
a building located in New Bedford, Massachusetts, which has been occupied by the
Company and predecessor organizations also engaged in the manufacture of
capacitors since 1938.  In June 1997, the United States Environmental Protection
Agency (EPA) conducted preliminary tests within the building that revealed the
presence of polychlorinated biphenyls (PCBs) on surfaces within the plant.
Subsequent engineering tests by independent consultants retained by the Company
confirmed the presence of residual PCBs throughout the plant, which resulted
from their use prior to 1978.  While the Company and its expert advisors
consider the PCBs to represent no threat to the health of the employees of the
Company or the surrounding community, subsequent engineering studies indicated
that the cost to remove PCBs within the building to the levels proscribed by the
EPA and the Toxic Substances Control Act would be prohibitive.  Therefore, the
Company has decided, and has so informed the EPA, that it intends to vacate the
building, to demolish it, and to dispose of all contaminated building materials
in a legally compliant manner.  Accordingly, a reserve was established and
charged to income as of December 27, 1997, in the amount of $7,233,000, which
the Company believes is adequate to dismantle and dispose 
of the building, clean equipment located within it, and to pay for related
engineering, legal and professional services. Of this amount, $6,033,000 has
been classified as a long-term liability. Additionally, the Company wrote-off,
as of December 27, 1997, the depreciated value of that building, all
improvements thereto, and certain machinery and equipment which the Company
believes will become surplus, abandoned, or otherwise unusable upon disposal of
the building. The amount of this write-off was $5,767,000. During 1998, the EPA
approved the Company's plan to dismantle and dispose 

                                      33
<PAGE>
 
of the building, and the Company is currently engaged in discussions with the
EPA regarding the timing of the planned dismantling and disposal activity.

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 ("PCBs") in the Acushnet River and New Bedford Harbor.
The Settlement Agreement resolved all of the governments' claim against the
Company and Aerovox Industries, Inc. (a predecessor of the Company) arising out
of the contamination of the Acushnet River and New Bedford Harbor with PCBs,
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. 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.

NOTE 14 - FOREIGN OPERATIONS:
Summarized financial information for the Company's foreign operations is as
follows (in thousands):

<TABLE>
<CAPTION>
                                               JANUARY 2,     DECEMBER  27,   DECEMBER 28, 
                                                  1999           1997            1996
------------------------------------------------------------------------------------------
<S>                                            <C>            <C>             <C>
Current assets                                   $10,122           $ 9,045        $ 9,132
Non-current assets                                 7,826             7,470          8,132
                                                -----------------------------------------
                                                 $17,948           $16,515        $17,264
                                                =========================================
Current liabilities                              $ 5,808           $ 3,138        $ 2,126
Due to parent                                        428               238            659
Deferred income taxes                                824               835            744
Long-term debt                                     2,465             4,097          6,113
Stockholders' equity                               8,423             8,207          7,622
                                                -----------------------------------------
                                                 $17,948           $16,515        $17,264
                                                =========================================
Net sales                                        $26,846           $25,880        $24,311
                                                =========================================
Net income                                       $ 1,005           $   720        $   840
                                                =========================================
</TABLE>

                                      34
<PAGE>
 
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                         JAN. 2,    DEC. 27,     DEC. 28,       DEC. 30,     DEC. 31,
(Amounts in thousands, except per share data)             1999        1997        1996           1995         1994
--------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>          <C>            <C>         <C>
Income statement data:
  Net sales                                              $116,194    $119,658     $125,975      $129,311    $126,532
  Income (loss) from operations                             2,648     (12,574)         143         4,666       6,262
  Net income (loss)                                         1,786     (11,499)      (1,347)        1,601       3,024
  Basic earning (loss) per share                             0.33       (2.15)       (0.25)         0.31       0.60
  Diluted earnings (loss) per share                          0.33       (2.15)       (0.25)         0.30       0.56
Balance sheet data:
  Total assets                                           $ 70,571    $ 71,559     $ 84,976      $ 89,331    $ 78,397
  Long-term obligations                                    17,888      23,808       23,806        28,777      22,466
  Total stockholders' equity                               25,289      23,766       35,073        35,505      34,054
</TABLE>

SUMMARY OF QUARTERLY RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
(Unaudited)                                                                       QUARTER
(Amounts in thousands, except per share data)                  First         SECOND         THIRD         FOURTH
-----------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>           <C>
Year Ended January 2, 1999
  Net sales                                                    $29,528       $32,228       $27,384       $ 27,054
  Gross profit                                                   5,227         6,168         4,538          4,199
  Net income                                                       325           748           550            163
  Earnings per share - basic and diluted                          0.06          0.14          0.10           0.03
YEAR ENDED DECEMBER 27, 1997
  Net sales                                                    $32,616       $34,185       $26,126       $ 26,731
  Gross profit                                                   5,923         5,641         2,495          2,868
  Net income (loss)                                                513           340          (838)       (11,514)
  Earnings (loss) per share - basic and diluted                   0.09          0.06         (0.16)         (2.14)
</TABLE>

                                      35
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AEROVOX INCORPORATED:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Aerovox
Incorporated (the "Company") at January 2, 1999 and December 27, 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999 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 (signed)

Boston, Massachusetts
February 23, 1999, except for certain
information presented in Note 3 for which the
date is February 26, 1999

                                      36
<PAGE>
 
(Aerovox Logo)

740 Belleville Avenue
New Bedford, Massachusetts  02745-6194
www.aerovox.com
---------------

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