<PAGE>   1
                                 EXHIBIT 99.1 TO

                                    FORM 10-K


                                    FORM 11-K

                                  ANNUAL REPORT


                        Pursuant to Section 15(d) of the
                         Securities Exchange Act of 1934


              For the Fiscal Years Ended December 31, 1998 and 1997


                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
                 ----------------------------------------------
                            (Full title of the plan)


                            ROYAL APPLIANCE MFG. CO.
                            ------------------------
          (Name of issuer of the securities held pursuant to the plan)


                     650 ALPHA DRIVE, CLEVELAND, OHIO 44143
                     --------------------------------------
                     (Address of principal executive office)
<PAGE>   2

                          INDEX OF FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                    PAGES
                                                                    -----
<S>                                                                    <C>
Report of Independent Accountants                                      2

Financial Statements:

  Statement of Net Assets Available for Plan
    Benefits at December 31, 1998                                      3

  Statement of Net Assets Available for Plan
    Benefits at December 31, 1997                                      4

  Statement of Changes in Net Assets Available for
    Plan Benefits for the year ended December 31, 1998                 5

  Statement of Changes in Net Assets Available for
    Plan Benefits for the year ended December 31, 1997                 6

Notes to Financial Statements                                        7-9


Supplemental Schedules:

  Schedule of Assets Held for Investment Purposes
    as of December 31, 1998                                           10

  Schedule of Reportable Transactions for the year
    ended December 31, 1998                                           11
</TABLE>

                                       1
<PAGE>   3
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of the
  Royal Appliance 401(k) Retirement Savings Plan


In our opinion, the accompanying statements of net assets available for plan
benefits present fairly, in all material respects, the financial position of the
Royal Appliance 401(k) Retirement Savings Plan (the "Plan") at December 31, 1998
and December 31, 1997, and the related statements of changes in net assets
available for plan benefits for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Plan'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.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets held
for investment purposes as of December 31, 1998 and reportable transactions for
the year ended December 31, 1998, are presented for the purpose of additional
analysis and are not a required part of the basic financial statements but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The Fund Information in the statements of net assets
available for plan benefits and the statements of changes in net assets
available for plan benefits is presented for purposes of additional analysis
rather than to present the net assets available for plan benefits and changes in
net assets available for plan benefits of each fund. The supplemental schedules
and Fund Information have been subjected to the auditing procedures applied in
the audits of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.


                                         PricewaterhouseCoopers LLP


Cleveland, Ohio
March 16, 1998

                                       2
<PAGE>   4
                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
              STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
                              AT DECEMBER 31, 1998
                              ====================

<TABLE>
<CAPTION>
                                                                     Strong    
                              National City     Institutional      Government       Fidelity       Vanguard 500        Templeton   
                                 Cash             Investors'       Securities        Puritan         Portfolio          Foreign    
        ASSETS                  Account            GIC Fund           Fund            Fund             Fund              Fund     
                                -------            --------           ----            ----             ----              ----   

<S>                           <C>              <C>               <C>              <C>               <C>               <C>         
Investments:                                                         
 Invested Assets              $        --      $ 1,757,628       $   639,213      $ 1,566,360       $ 2,748,110       $ 1,004,334 
 Cash & Cash Equivalents           45,246           (1,872)            4,463           (2,123)           (3,924)           (3,816)
 Due from Broker                       --               --                --               --                --                --   
 Accrued Income                       217                5             2,545               --            19,776                 8 
                              ----------------------------------------------------------------------------------------------------
 Subtotal                          45,463        1,755,761           646,221        1,564,237         2,763,962         1,000,526 

Loan Payments Receivable               --            3,458             1,201            1,919             3,235             1,784 
Contributions Receivable               --           71,953            15,519           31,745            67,912            32,768 
                              ----------------------------------------------------------------------------------------------------
Total Assets                       45,463        1,831,172           662,941        1,597,901         2,835,109         1,035,078 
                              ----------------------------------------------------------------------------------------------------
   LIABILITIES

   Other Liabilities                   --              958             1,592            8,857            15,930            11,665 
                              ----------------------------------------------------------------------------------------------------
Total Liabilities                      --              958             1,592            8,857            15,930            11,665 
                              ----------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE
  FOR PLAN BENEFITS           $    45,463      $ 1,830,214       $   661,349      $ 1,589,044       $ 2,819,179       $ 1,023,413 
                              ====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                             Davis           Blackrock           MAS Small     
                         Dodge & Cox        New York           Small          Capitalization
                           Balanced         Venture       Capitalization          Value         Royal Stock 
     ASSETS                  Fund            Fund              Fund             Portfolio           Fund     
                            ----             ----              ----             ---------           ----     
<S>                     <C>               <C>           <C>               <C>               <C>           
Investments:
 Invested Assets        $   804,317       $ 2,635,339    $ 1,832,076       $   147,327       $   555,962     
 Cash & Cash Equivalents     (1,733)           (4,194)        (1,530)             (822)            1,352     
 Due from Broker             70,753            84,635         16,069                --            10,882     
 Accrued Income                  --                 1              4                --                 9     
                        -------------------------------------------------------------------------------------
 Subtotal                   873,337         2,715,781      1,846,619           146,505           568,205     

Loan Payments Receivable      1,212             3,484          3,370               312             1,387     
Contributions Receivable     23,972            62,406         56,295             9,072            23,236     
                        -------------------------------------------------------------------------------------
Total Assets                898,521         2,781,671      1,906,284           155,889           592,828     
                        -------------------------------------------------------------------------------------
     LIABILITIES

Other Liabilities             1,020            20,808         15,968             1,295            17,621     
                        -------------------------------------------------------------------------------------
Total Liabilities             1,020            20,808         15,968             1,295            17,621     
                        -------------------------------------------------------------------------------------
NET ASSETS AVAILABLE
     FOR PLAN BENEFITS  $   897,501       $ 2,760,863    $ 1,890,316       $   154,594       $   575,207     
                        =====================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                    Loan
     ASSETS                       Account          Total
                                  -------          -----
<S>                          <C>              <C>
Investments:
 Invested Assets             $   769,866      $14,460,532
 Cash & Cash Equivalents              --           31,047
 Due from Broker                      --          182,339
 Accrued Income                       --           22,565
                             ----------------------------
 Subtotal                        769,866       14,696,483

Loan Payments Receivable              --           21,362
Contributions Receivable              --          394,878
                             ----------------------------
Total Assets                     769,866       15,112,723
                             ----------------------------
     LIABILITIES

 Other Liabilities                    --           95,714
                             ----------------------------
Total Liabilities                     --           95,714
                             ----------------------------
NET ASSETS AVAILABLE
     FOR PLAN BENEFITS       $   769,866      $15,017,009
                             ============================
</TABLE>

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

                                       3

<PAGE>   5
                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
               STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
                              AT DECEMBER 31, 1997
                              ====================
<TABLE>
<CAPTION>
                                                                    Strong                                                      
                                National City   Institutional      Government       Fidelity       Vanguard 500       Templeton 
                                    Cash         Investors'       Securities        Puritan          Portfolio         Foreign  
       ASSETS                     Account        GIC Fund            Fund             Fund              Fund             Fund   
                                  -------        --------            ----             ----              ----             ----   
<S>                            <C>              <C>              <C>               <C>              <C>              <C>        
Investments:
   Invested Assets             $        --      $ 1,771,903      $   526,944       $ 1,298,868      $ 1,779,167      $   743,252
   Cash & Cash Equivalents          77,093           26,930           (1,527)            1,662            1,341           38,127
   Accrued Income                       --              108            7,546                 7           20,923               63
                               -------------------------------------------------------------------------------------------------
   Subtotal                         77,093        1,798,941          532,963         1,300,537        1,801,431          781,442
Contributions Receivable                --           65,999           13,471            23,840           43,716           22,937
                               -------------------------------------------------------------------------------------------------
Total Assets                        77,093        1,864,940          546,434         1,324,377        1,845,147          804,379
                               -------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE
     FOR PLAN BENEFITS         $    77,093      $ 1,864,940      $   546,434       $ 1,324,377      $ 1,845,147      $   804,379
                               =================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                 Dodge &          Davis           Parkstone
                                  Cox            New York           Small                            
                                Balanced         Venture       Capitalization    Royal Stock          Loan
       ASSETS                     Fund             Fund              Fund             Fund           Account           Total 
                                  ----             ----              ----             ----           -------           ----- 
<S>                            <C>              <C>              <C>              <C>              <C>              <C>        
Investments:
   Invested Assets             $   240,764      $ 2,076,082      $ 1,918,942      $ 1,072,356      $   671,104      $12,099,382
   Cash & Cash Equivalents         244,479            3,747            2,974            3,220               --          398,046
   Accrued Income                      744               16               11               19               --           29,437
                               ------------------------------------------------------------------------------------------------
   Subtotal                        485,987        2,079,845        1,921,927        1,075,595          671,104       12,526,865
Contributions Receivable            19,261           45,503           51,656           24,182               --          310,565
                               ------------------------------------------------------------------------------------------------
Total Assets                       505,248        2,125,348        1,973,583        1,099,777          671,104       12,837,430
                               ------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE
     FOR PLAN BENEFITS         $   505,248      $ 2,125,348      $ 1,973,583      $ 1,099,777      $   671,104      $12,837,430
                               ================================================================================================
</TABLE>

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

                                       4
<PAGE>   6
                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
         STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                      ====================================


<TABLE>
<CAPTION>
                                                                                                   Strong                     
                                                                National City   Institutional    Government      Fidelity     
                                                                    Cash         Investors'      Securities       Puritan     
                                                                   Account        GIC Fund          Fund           Fund       
                                                                   -------        --------          ----           ----       
<S>                                                           <C>             <C>             <C>             <C>             
Additions:
  Contributions And Contributions Receivable:
     Company Contributions                                    $         --    $    104,358    $     30,735    $     68,737    
     Employee Pre-Tax Contributions                                     --          74,484          79,298          90,126    
     Participant's Voluntary After-Tax Contributions                    --             392              20              20    
     Transfer From Other Plan                                           --           4,154           9,540          10,150    
                                                              ----------------------------------------------------------------
       Total Contributions                                              --         183,388         119,593         169,033    
  Miscellaneous Income                                               9,941              --              --              --      

Investment Income:
  Interest and Dividends                                             2,331           1,277          46,372         158,853    
  Net Appreciation/(Depreciation) in Fair Market Value                  --         101,101           1,329          66,682    
  Loans to Participants, Net                                       (43,902)         (6,288)        (10,245)        (18,488)   
  Transfers Between Funds, Net                                          --        (173,322)         23,784           1,367    
                                                              ----------------------------------------------------------------
       Total Additions                                             (31,630)        106,156         180,833         377,447    
Deductions:
  Benefits Paid to Participants                                         --         140,748          65,904         112,767    
  Miscellaneous Fees                                                    --             134              14              13    
                                                              ----------------------------------------------------------------
       Net Additions                                               (31,630)        (34,726)        114,915         264,667    
  Net Assets Available for Plan Benefits, Beginning of Year         77,093       1,864,940         546,434       1,324,377    
                                                              ----------------------------------------------------------------
  Net Assets Available for Plan Benefits, End of Year         $     45,463    $  1,830,214    $    661,349    $  1,589,044    
                                                              ================================================================
</TABLE>



<TABLE>
<CAPTION>
                                                                                                  Dodge &          Davis      
                                                                Vanguard 500     Templeton         Cox            New York    
                                                                 Portfolio        Foreign        Balanced         Venture     
                                                                   Fund            Fund            Fund             Fund      
                                                                   ----            ----            ----             ----      
<S>                                                           <C>             <C>             <C>             <C>             
Additions:
  Contributions And Contributions Receivable:
     Company Contributions                                    $    143,738    $     68,272    $     52,650    $    137,044    
     Employee Pre-Tax Contributions                                208,444          95,314         119,797         248,492    
     Participant's Voluntary After-Tax Contributions                    92             667              --           1,134    
     Transfer From Other Plan                                       21,018          29,931          18,822          38,657    
                                                              ----------------------------------------------------------------
       Total Contributions                                         373,292         194,184         191,269         425,327    
  Miscellaneous Income                                                  --              --              --              --      

Investment Income:
  Interest and Dividends                                            41,257          69,496          70,040          61,795    
  Net Appreciation/(Depreciation) in Fair Market Value             557,107           8,027         (24,320)        294,336    
  Loans to Participants, Net                                       (34,784)         (9,190)          5,302         (29,898)   
  Transfers Between Funds, Net                                     192,914          28,774         196,361          27,870    
                                                              ----------------------------------------------------------------
       Total Additions                                           1,129,786         291,291         438,652         779,430    
Deductions:
  Benefits Paid to Participants                                    155,737          72,127          45,935         143,900    
  Miscellaneous Fees                                                    17             130             464              15    
                                                              ----------------------------------------------------------------
       Net Additions                                               974,032         219,034         392,253         635,515    
  Net Assets Available for Plan Benefits, Beginning of Year      1,845,147         804,379         505,248       2,125,348    
                                                              ----------------------------------------------------------------
  Net Assets Available for Plan Benefits, End of Year         $  2,819,179    $  1,023,413    $    897,501    $  2,760,863    
                                                              ================================================================
</TABLE>



<TABLE>
<CAPTION>
                                                                   Parkstone      Blackrock         MAS Small
                                                                     Small          Small       Capitalization
                                                                Capitalization  Capitalization        Value       Royal Stock
                                                                     Fund            Fund           Portfolio        Fund    
                                                                     ----            ----           -------          -----   
<S>                                                           <C>             <C>             <C>             <C>            
Additions:
  Contributions And Contributions Receivable:
     Company Contributions                                    $     47,351    $     76,970    $     12,993    $     53,476   
     Employee Pre-Tax Contributions                                 95,952          75,895          17,012          75,621   
     Participant's Voluntary After-Tax Contributions                   413             479              --             150   
     Transfer From Other Plan                                       21,338              --              --          48,646   
                                                              ---------------------------------------------------------------
       Total Contributions                                         165,054         153,344          30,005         177,893   
  Miscellaneous Income                                                  --              --              --              --     

Investment Income:
  Interest and Dividends                                               249             124          32,852             230   
  Net Appreciation/(Depreciation) in Fair Market Value             111,033          46,413         (47,742)       (478,262)  
  Loans to Participants, Net                                         6,514         (19,959)         (1,601)             69
  Transfers Between Funds, Net                                  (2,143,072)      1,825,469         141,915        (122,060)  
                                                              ---------------------------------------------------------------
       Total Additions                                          (1,860,222)      2,005,391         155,429        (422,130)  
Deductions:
  Benefits Paid to Participants                                    113,336         115,062             835         102,416   
  Miscellaneous Fees                                                    25              13              --              24   
                                                              ---------------------------------------------------------------
       Net Additions                                            (1,973,583)      1,890,316         154,594        (524,570)  
  Net Assets Available for Plan Benefits, Beginning of Year      1,973,583              --              --       1,099,777   
                                                              ---------------------------------------------------------------
  Net Assets Available for Plan Benefits, End of Year         $         --    $  1,890,316    $    154,594    $    575,207   
                                                              ===============================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                  Loan
                                                                 Account        Total 
                                                                 -------        -----
<S>                                                           <C>             <C>
Additions:
  Contributions And Contributions Receivable:
     Company Contributions                                    $        --     $    796,324
     Employee Pre-Tax Contributions                                    --        1,180,435
     Participant's Voluntary After-Tax Contributions                   --            3,367
     Transfer From Other Plan                                          --          202,256
                                                              ----------------------------
       Total Contributions                                             --        2,182,382
  Miscellaneous Income                                                 --            9,941

Investment Income:
  Interest and Dividends                                           56,154          541,030
  Net Appreciation/(Depreciation) in Fair Market Value                 --          635,704
  Loans to Participants, Net                                       42,608         (119,862)
  Transfers Between Funds, Net                                         --               --
                                                              ----------------------------
       Total Additions                                             98,762        3,249,195
Deductions:
  Benefits Paid to Participants                                        --        1,068,767
  Miscellaneous Fees                                                   --              849
                                                              ----------------------------
       Net Additions                                               98,762        2,179,579
  Net Assets Available for Plan Benefits, Beginning of Year       671,104       12,837,430
                                                              ----------------------------
  Net Assets Available for Plan Benefits, End of Year          $  769,866     $ 15,017,009
                                                              ============================
</TABLE>


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

                                       5
<PAGE>   7
                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
         STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                      ====================================
<TABLE>
<CAPTION>
                                                                                                  Strong                  
                                                               National City   Institutional    Government     Fidelity   
                                                                   Cash         Investors'      Securities      Puritan   
                                                                  Account        GIC Fund          Fund          Fund     
                                                                  -------        --------          ----          ----     
<S>                                                           <C>            <C>            <C>            <C>            
Additions:
  Contributions and Contributions Receivable:
     Company Contributions                                    $    77,902    $   106,593    $    27,640    $    55,440    
     Employee Pre-Tax Contributions                               214,177         64,463         22,749         77,082    
     Participant's Voluntary After-Tax Contributions                  683            310             90             90    

  Investment Income:
     Interest and Dividends                                           281          5,672         30,617        102,205    

     Net Appreciation/(Depreciation) in Fair Market Value              --         96,122         13,820        123,319    

     Loans to Participants, Net                                        --        (18,768)        (3,007)       (12,472)   

     Transfers Between Funds, Net                                (231,410)       (64,868)       (32,272)        22,240
                                                              ------------------------------------------------------------
       Total Additions                                             61,633        189,524         59,637        367,904    

Deductions:
  Benefits Paid to Participants                                        --        115,041         28,547         77,073    
  Miscellaneous Fees                                                   --            553              8             11    
  Other                                                           171,532             --             --             --      
                                                              ------------------------------------------------------------
       Net Additions                                             (109,899)        73,930         31,082        290,820    

  Net Assets Available for Plan Benefits, Beginning of Year       186,992      1,791,010        515,352      1,033,557    
                                                              ------------------------------------------------------------
  Net Assets Available for Plan Benefits, End of Year         $    77,093    $ 1,864,940    $   546,434    $ 1,324,377    
                                                              ============================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                                                              Davis     
                                                               Vanguard 500    Templeton    Dodge & Cox      New York   
                                                                 Portfolio      Foreign       Balanced       Venture    
                                                                   Fund           Fund          Fund           Fund     
                                                                   ----           ----          ----           ----     
<S>                                                           <C>            <C>           <C>            <C>           
Additions:
  Contributions and Contributions Receivable:
     Company Contributions                                    $   106,392    $    54,001   $    44,330    $   113,464   
     Employee Pre-Tax Contributions                               126,594         80,278        68,464        163,923   
     Participant's Voluntary After-Tax Contributions                   40            105          --              538   

  Investment Income:
     Interest and Dividends                                        17,906         32,917        23,569         81,715   

     Net Appreciation/(Depreciation) in Fair Market Value         388,513         23,861        48,537        413,397   

     Loans to Participants, Net                                   (39,634)           796          (878)       (26,401)  

     Transfers Between Funds, Net                                 224,401         28,071        19,811        205,218
                                                              ----------------------------------------------------------
       Total Additions                                            824,212        220,029       203,833        951,854   

Deductions:
  Benefits Paid to Participants                                    85,776         62,676        31,982        184,179   
  Miscellaneous Fees                                                   35             15             7             29   
  Other                                                                --             --            --             --     
                                                              ----------------------------------------------------------
       Net Additions                                              738,401        157,338       171,844        767,646   

  Net Assets Available for Plan Benefits, Beginning of Year     1,106,746        647,041       333,404      1,357,702   
                                                              ----------------------------------------------------------
  Net Assets Available for Plan Benefits, End of Year         $ 1,845,147    $   804,379   $   505,248    $ 2,125,348   
                                                              ==========================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                 Parkstone
                                                                   Small                            
                                                              Capitalization   Royal Stock       Loan
                                                                   Fund            Fund         Account        Total 
                                                                   ----            ----         -------        ----- 
<S>                                                            <C>            <C>            <C>           <C>        
Additions:
  Contributions and Contributions Receivable:
     Company Contributions                                     $   142,082    $    57,377    $        --   $   785,221
     Employee Pre-Tax Contributions                                207,565         66,546             --     1,091,841
     Participant's Voluntary After-Tax Contributions                   536            526             --         2,918

  Investment Income:
     Interest and Dividends                                        141,300          4,213         37,356       477,751

     Net Appreciation/(Depreciation) in Fair Market Value         (260,957)       (51,504)            --       795,108

     Loans to Participants, Net                                     (7,642)         4,753        103,253            --

     Transfers Between Funds, Net                                 (113,373)       (37,294)       (20,524)           --
                                                              --------------------------------------------------------
       Total Additions                                             109,511         44,617        120,085     3,152,839

Deductions:
  Benefits Paid to Participants                                    194,217        106,424             --       885,915
  Miscellaneous Fees                                                   122             27             --           807
  Other                                                                 --             --             --       171,532
                                                              --------------------------------------------------------
       Net Additions                                               (84,828)       (61,834)       120,085     2,094,585

  Net Assets Available for Plan Benefits, Beginning of Year      2,058,411      1,161,611        551,019    10,742,845
                                                              --------------------------------------------------------
  Net Assets Available for Plan Benefits, End of Year          $ 1,973,583    $ 1,099,777    $   671,104   $12,837,430
                                                              ========================================================
</TABLE>

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

                                       6
<PAGE>   8
                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
                          NOTES TO FINANCIAL STATEMENTS
                          -----------------------------

1.   Plan Description and Benefits:
     ------------------------------

     The following brief description of the Royal Appliance 401(k) Retirement
     Savings Plan (the "Plan") is provided for general information purposes
     only. Participants should refer to the Summary Plan Description for more
     complete information.

     GENERAL - The Plan is a defined contribution plan covering substantially
     all employees of Royal Appliance Mfg. Co. (the "Company"). Employees who
     attain age 18 and complete at least six months of service are eligible to
     become participants in the Plan.

     On December 27, 1991, the Company filed Form S-8 with the Securities and
     Exchange Commission (SEC) allowing participants in the Plan to invest in
     Common Shares of the Company. This investment option was available as of
     February 1, 1992. As a result, the Plan is now required to comply with the
     reporting provisions of the SEC Form 11-K.

     CONTRIBUTIONS - Contributions consist of employer matching, employer profit
     sharing, salary reduction, voluntary after-tax contributions, and rollover
     contributions.

     In 1998 and 1997, employer matching contributions were 100% of the first 2%
     of salary reduction contributions and 50% of the next 4% of salary
     reduction contributions. The employer profit sharing contribution is 
     discretionary based on amounts as authorized by the Board of Directors.
     All employer contributions have been made in the form of cash. Salary
     reduction contributions may range from 1% to 15% of qualified compensation
     subject to annual I.R.S. limits. Participants may also make voluntary
     after-tax contributions of up to 10% of their annual compensation in
     addition to the contribution through salary reduction. Rollover
     contributions are also permitted.

     Effective January 1, 1999, the Company amended the Plan to adopt the safe
     harbor match contribution formula. The revised matching contributions are
     100% of the first 3% of salary reduction contributions and 50% of the next
     2% of salary reduction contributions.

     INVESTMENT OF FUNDS - All of the investment transactions are executed by
     National City Trust ("National City"), an affiliate of National City
     Corporation.

     Each participant may elect among the following investment vehicles:

     A.   INSTITUTIONAL INVESTORS' GIC FUND - seeks to provide income and
          stability of principal by investing in guaranteed investment contracts
          (GIC's) or similar instruments issued by insurance companies and/or
          banks.

     B.   STRONG GOVERNMENT SECURITIES FUND - seeks to provide a high level of
          current income by investing in securities issued or guaranteed by the
          U.S. government.

     C.   FIDELITY PURITAN FUND - seeks to maximize income, with growth of
          capital being a secondary objective. Invests in high-yielding
          securities, including common stocks, preferred stocks and bonds.

     D.   VANGUARD 500 PORTFOLIO FUND - seeks to return investment results that
          correspond to the price and yield performance of the S&P 500 index.

     E.   TEMPLETON FOREIGN FUND - seeks long term growth of capital by
          investing in companies generally located in foreign countries. In
          1997, this fund changed investments from the Templeton Foreign Mutual
          Fund to the Templeton Institutional Foreign Equity Mutual Fund.

     F.   DODGE & COX FUND - seeks income, conservation of principal,
          and long-term growth of principal and income by investing in equity
          securities and bonds.


                                       7
<PAGE>   9

                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
                          NOTES TO FINANCIAL STATEMENTS
                          -----------------------------


     1.   Plan Description and Benefits (continued):
          ------------------------------------

          G.   DAVIS NEW YORK VENTURE FUND - seeks long term capital growth by
               investing in securities that have above average appreciation
               potential.

          H.   PARKSTONE SMALL CAPITALIZATION FUND- seeks growth of capital by
               investing in stocks of small to medium size companies primarily
               in the United States. This investment option was discontinued in
               1998.

          I.   BLACKROCK SMALL CAPITALIZATION FUND - seeks long-term capital
               growth by investing in stocks of small companies with earnings
               growth momentum and relative price strength.

          J.   MAS SMALL CAPITALIZATION VALUE PORTFOLIO - seeks long-term
               capital growth by investing in stocks of small companies with
               stocks selling at discounted price/earnings valuations.

          K.   ROYAL STOCK FUND - This fund is comprised exclusively of Common
               Shares, without par value of the Company (Common Shares). Each
               participant electing to purchase Common Shares through the Stock
               Fund is permitted to vote such Common Shares in the same manner
               as any other shareholder and is furnished proxy materials to such
               effect. If a participant does not vote their proxy, the Trustee
               votes the proxy for the participant's Common Shares. Common
               Shares purchased under the Account are generally purchased on the
               open market for cash. The price of Common Shares purchased on the
               open market is priced for each participant's account at an
               average purchase price of all shares purchased, plus brokerage
               fees, taxes, commissions and expenses incident to the purchase,
               unless it is determined that the Company will bear these costs.
               No more than 50% of a participant's contributions may be invested
               in the Royal Stock Fund.


          Participants can allocate their contribution between the Funds in
          various percentages, which can be changed on a quarterly basis
          throughout the year.

          The number of participants in each investment program as of December
          31, 1998 was as follows:
<TABLE>
<CAPTION>
                                                                    Number of
                                                                   Participants
                                                                   ------------
<S>                                                                     <C>
             Institutional Investors' GIC Fund                          343
             Strong Government Securities Fund                          201
             Fidelity Puritan Fund                                      290
             Vanguard 500 Portfolio Fund                                404
             Templeton Foreign Fund                                     291
             Dodge & Cox Balanced Fund                                  238
             Davis New York Venture Fund                                398
             Blackrock Small Capitalization Fund                        389
             MAS Small Capitalization Value Portfolio                    86
             Royal Stock Fund                                           260
</TABLE>

     VESTING - All contributions are 100% vested and non-forfeitable.

     DISTRIBUTION AND WITHDRAWALS - Loans and hardship withdrawals are permitted
     pursuant to the terms of the Plan. In addition, participants may make
     hardship withdrawals from the voluntary after-tax contribution account by
     filing a written request at least thirty (30) days in advance.

     Participants and their beneficiaries are entitled to receive a distribution
     of their account balances upon death, disability, termination of employment
     prior to retirement, or retirement. Distribution may be made in a lump sum
     or periodic payments, as may be elected by the participants or their
     beneficiaries, subject to the terms of the Plan.


                                       8

<PAGE>   10

                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
                          NOTES TO FINANCIAL STATEMENTS
                          -----------------------------


1.   Plan Description and Benefits (continued):
     ------------------------------------------

     APPRECIATION (DEPRECIATION) IN FAIR MARKET VALUE OF ASSETS  - The Plan
     presents, in the Statements of Changes in Net Assets Available for Plan
     Benefits, the net appreciation (depreciation) in the fair market value of
     its investments, which consist of realized gains or losses and unrealized
     appreciation (depreciation). Total realized gains (losses) for 1998 and
     1997 were ($125,472) and $249,534, respectively, and the unrealized
     appreciation (depreciation) was $761,176 and $545,574 for 1998 and 1997,
     respectively.

     EXPENSES - Administrative fees, brokerage fees and other Plan expenses are
     the responsibility of the Plan. The Company, at its discretion has elected
     to pay these costs directly.

2.   Summary of Significant Accounting Policies:
     -------------------------------------------

     BASIS OF PRESENTATION - The accompanying financial statements
     have been prepared on an accrual basis in accordance with
     generally accepted accounting principles.

     INVESTMENTS - Certain assets of the Plan are maintained in Guaranteed
     Investment Contracts (the Institutional Investors' GIC Fund) and Investment
     Funds (Strong Government Securities Fund, Fidelity Puritan Fund, Vanguard
     500 Portfolio Fund, Templeton Foreign Fund, Dodge & Cox Balanced Fund,
     Davis New York Venture Fund, Parkstone Small Capitalization Fund, Blackrock
     Small Capitalization Fund, and MAS Small Capitalization Value Portfolio)
     and common shares of the Company. Contributions and income from investments
     of each fund are reinvested in the same fund.

     Investments in Guaranteed Investment Contracts are recorded at
     the guaranteed value (contribution and interest) of the Plan
     assets.

     Other investments are valued at fair market value by National
     City using readily available published market values.

     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 net assets available for plan
     benefits and changes, therein. Actual results could differ from
     those estimates.

     RISKS AND UNCERTAINTIES - The Plan provides for various investment options
     in any combination of Guaranteed Investment Contracts, Investment Funds and
     common shares of the Company. Investments are exposed to various risks,
     such as interest rate, market and credit. Due to the level of risk
     associated with certain investments, it is at least reasonably possible
     that changes in risks in the near term could materially affect 
     participants' account balances and the amounts reported in the statements 
     of net assets available for plan benefits and the statements of changes in
     net assets available for plan benefits.


3.   Income Tax Status
     -----------------

     The Internal Revenue Service (IRS) has issued a favorable determination
     letter dated June 20, 1995, with respect to the Plan's qualified status, as
     amended, under Section 401(a) of the Internal Revenue Code (Code). As such,
     the trust established thereunder is exempt from Federal income taxes under
     Section 501(a) of the Code. All withdrawals, with the exception of after
     tax employee contributions, are taxable to the participants of the Plan.

4.   Right to Terminate:
     -------------------
   
     Although it has not expressed any interest to do so, the Company has the
     right to terminate the Plan at any time.

5.   Reconciliation to Form 5500
     ---------------------------

     Write-offs of loan balances which total $171,532 were recorded to the
     statement of changes in net assets available for plan benefits in 1997
     which were recorded to the Form 5500 in prior years.


                                       9

<PAGE>   11


                 ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
          ITEM 27 (a) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
                            AS OF DECEMBER 31, 1998

<TABLE>
<CAPTION>
   -------------------------------------------------------------------------------------------------------------------------
   (a)                     (b)                                           (c)                          (d)          (e)
         Identity of issue, borrower, lessor, or    Description of investment including               Cost       Current
                      similar party                maturity date, rate of interest, collateral,                   Value
                                                             par or maturity value
   -------------------------------------------------------------------------------------------------------------------------
   1998
   ====
<S>                                                 <C>                                            <C>          <C>     
      Institutional Investors GIC Fund              GIC Fund                                        $1,372,694   $1,757,628
      Strong Government Securities Fund             Mutual Fund                                        625,920      639,213
      Fidelity Puritan Fund                         Mutual Fund                                      1,355,704    1,566,360
      Vanguard 500 Portfolio Fund                   Mutual Fund                                      1,713,098    2,748,110
      Templeton Foreign Fund                        Mutual Fund                                      1,088,719    1,004,334
      Dodge & Cox Balanced Fund                     Mutual Fund                                        822,600      804,317
      Davis New York Venture Fund                   Mutual Fund                                      1,858,897    2,635,339
      Blackrock Small Capitalization Fund           Mutual Fund                                      1,762,598    1,832,076
      MAS Small Capitalization Value Portfolio      Mutual Fund                                        166,997      147,327
      Royal Stock Fund                              Common Stock                                       922,090      555,962
      Armada Money Market Fund                      Mutual Fund                                         31,047       31,047
      Participant Loans                             Various maturity dates; interest prime plus        769,866      769,866
                                                    1%
</TABLE>

                                       10
<PAGE>   12


                ROYAL APPLIANCE 401(k) RETIREMENT SAVINGS PLAN
       ITEM 27 (d) - SCHEDULE OF TRANSACTIONS OR SERIES OF TRANSACTIONS
             IN EXCESS OF 5% OF THE CURRENT VALUE OF PLAN ASSETS
                     FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                                       Number of       Purchase      Selling        Cost of      
   Identity of Party Involved         Description of Asset           Transactions       Price         Price          Asset       
   --------------------------         --------------------           ------------       -----         -----          -----       
<S>                             <C>                                  <C>            <C>              <C>             <C>
        Single transaction
        National City           Blackrock Small Capitalization Fund
                                     Purchases                                       $1,700,000      $       --      $       --    

                                Parkstone Small Capitalization Fund
                                     Sales                                           $       --      $1,847,153      $2,097,990  

        Series of Transactions
        National City           Davis New York Venture Fund
                                     Purchases                             104       $  667,116      $       --      $       --    
                                     Sales                                  32       $       --      $  395,648      $  279,809  

                                Blackrock Small Capitalization Fund
                                     Purchases                              19       $2,019,835      $       --      $       --    
                                     Sales                                  19       $       --      $  237,040      $  257,237  

                                Dodge & Cox Balanced Fund
                                     Purchases                              95       $  743,284      $       --      $       --    
                                     Sales                                  26       $       --      $  137,312      $  135,419  

                                Parkstone Small Capitalization Fund
                                     Purchases                              52       $  256,407      $       --      $       --    
                                     Sales                                  14       $       --      $2,272,299      $2,584,999  

                                Vanguard 500 Portfolio Fund
                                     Purchases                             104       $  649,766      $       --      $       --    
                                     Sales                                  31       $       --      $  230,685      $  154,112  

                                Armada Money Market Fund
                                     Purchases                             506       $6,447,680      $       --      $       --    
                                     Sales                                 415       $       --      $6,802,190      $6,802,190  
</TABLE>
<TABLE>
<CAPTION>
                                                                      Current Value     Realized  Gain
   Identity of Party Involved         Description of Asset              of Asset        (Loss)on Sale
   --------------------------         --------------------              --------        -------------
<S>                             <C>                                  <C>                <C>
       Single transaction
        National City           Blackrock Small Capitalization Fund
                                     Purchases                           $1,700,000      $       --

                                Parkstone Small Capitalization Fund
                                     Sales                               $       --      $ (250,837)

       Series of Transactions
        National City           Davis New York Venture Fund
                                     Purchases                           $  667,116      $       --
                                     Sales                               $       --      $  115,839

                                Blackrock Small Capitalization Fund
                                     Purchases                           $2,019,835      $       --
                                     Sales                               $       --      $  (20,197)

                                Dodge & Cox Balanced Fund
                                     Purchases                           $  743,284      $       --
                                     Sales                               $       --      $    1,893

                                Parkstone Small Capitalization Fund
                                     Purchases                           $  256,407      $       --
                                     Sales                               $       --      $ (312,700)

                                Vanguard 500 Portfolio Fund
                                     Purchases                           $  649,766      $       --
                                     Sales                               $       --      $   76,573

                                Armada Money Market Fund
                                     Purchases                           $6,447,680      $       --
                                     Sales                               $       --      $       --
</TABLE>                        

                                       11