<PAGE>
 
MARSHALL INDUSTRIES                                           
 
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               SECURITIES AND EXCHANGE COMMISSION
               Washington, D.C. 20549
 
               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
               SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended MAY 31, 1998
 
               [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
               SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from       to
                                Commission file number 1-5441
 
               ----------------------------------------------------------------
 
FORM 10-K
               MARSHALL INDUSTRIES
               (Exact name of registrant as specified in its charter)
 
               ----------------------------------------------------------------
<TABLE>
           <S>                                       <C>
           CALIFORNIA                                95-2048764
           (State or other jurisdiction of
            incorporation or                         (I.R.S. Employer Identification No.)
           organization)
           9320 TELSTAR AVENUE                       (Registrant's telephone number,
           EL MONTE, CALIFORNIA 91731-2895           including area code) (626) 307-6000
           (Address of principal executive offices)
 
               Securities registered pursuant to Section 12(b) of the Act:
 
           COMMON STOCK, PAR VALUE $1.00 PER SHARE   NEW YORK STOCK EXCHANGE
           (Title of each class)                     (Name of each exchange on which registered)
 
               Securities registered pursuant to Section 12(g) of the Act:
               NONE
 
               Indicate by check mark whether the Registrant (1) has filed all
               reports required to be filed by Section 13 or 15(d) of the
               Securities Exchange Act of 1934 during the preceding 12 months
               (or for such shorter period that the Registrant was required to
               file such reports) and (2) has been subject to such filing
               requirements for the past 90 days.  YES [X]  NO [_]
 
               Indicate by check mark if disclosure of delinquent filers
               pursuant to Item 405 of Regulation S-K is not contained herein,
               and will not be contained, to the best of Registrant's
               knowledge, in definitive proxy or information statements
               incorporated by reference in Part III of this Form 10-K or any
               amendment to this Form 10-K.  [X]
 
               State the aggregate market value of the voting stock held by
               non-affiliates of the Registrant:
 
               $380,256,319 (computed on the basis of $23.375 per share, which
               was the last sale price on the New York Stock Exchange on July
               31, 1998).
 
               Indicate the number of shares outstanding of each of the
               Registrant's classes of common stock, as of the latest
               practicable date.
           (Class of Stock)                          Number of Outstanding Shares as of July 31, 1998
           COMMON STOCK, PAR VALUE $1.00 PER SHARE   16,616,364
</TABLE>
 
               Proxy Statement for Annual Meeting of Shareholders to be held
               October 20, 1998: PART III
DOCUMENTS
INCORPORATED
BY REFERENCE
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                                                                              11
<PAGE>
 
MARSHALL INDUSTRIES                                                            
 
--------------------------------------------------------------------------------
 
              FORM 10-K
              Marshall Industries
              Year Ended May 31, 1998
 
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GENERAL       PART I
              ITEM 1. BUSINESS
 
                Marshall Industries, with its subsidiaries ("Marshall" or the
              "Company"), is among the largest distributors of industrial
              electronic components and production supplies in North America.
              The Company also provides its customers with a variety of value-
              added services, such as inventory management, kitting, assembly,
              programming of programmable logic devices, and testing services.

                In addition, the Company has a 16% equity interest in the
              electronics distribution companies of Sonepar Electronique
              International ("SEI"), one of the largest electronic components
              distributors in Europe. The Company also has an investment of
              approximately 9% of the common stock of Serial System Ltd.
              ("Serial"), a Singapore based electronic components distributor
              with operations in Southeast Asia. The shares of Serial are traded
              on the Stock Exchange of Singapore.
              
                The Company has also entered into joint marketing and sales
              alliances with SEI and Serial. These investments and alliances
              were made to enhance the Company's capabilities to service
              customers and suppliers globally.
 
                In January 1998, the Company completed the acquisition of
              Sterling Electronics Corporation ("Sterling"), a large, publicly-
              traded distributor of electronic components. The Company acquired
              all of the outstanding capital stock of Sterling for $169 million
              in cash plus the assumption of Sterling's outstanding debt of
              $55.5 million.

                Since its acquisition, the Company has been operating Sterling
              as a separate sales and marketing subsidiary but has integrated
              Sterling's computer, financial and administrative functions with
              those of the Company. The acquisition of Sterling has been
              accounted for under the purchase method of accounting and all
              Company financial information for fiscal 1998 included herein
              includes Sterling's results of operations from its acquisition
              date of January 16, 1998 to May 31, 1998.

                The Company distributes approximately 200,000 different products
              manufactured by over 60 major suppliers to more than 40,000
              customers, including a wide range of original equipment
              manufacturers, contract manufacturers, and value-added resellers.
              The Company emphasizes responsive customer service through its
              network of sales and distribution facilities and corporate support
              and distribution centers in the United States and Canada. This
              local customer service is supported by advanced on-line management
              information systems, 24-hour sales and technical support service
              and an automated distribution facility.
              
                The Company supplies and services a broad range of products,
              including semiconductors, passive components, connectors and
              interconnect products, and computer systems and peripheral
              products, as well as production supplies. The distribution of
              electronic components accounted for approximately 94% and 95% of
              total Company sales in fiscal 1997 and 1998, respectively. The
              distribution of industrial production supplies accounted for the
              balance of total Company sales in each of such periods. The
              Company believes it is the largest domestic distributor in sales
              volume of industrial production supplies to customers in the
              electronics industry.

                Distributors have become an increasingly important marketing
              channel for electronics products, permitting manufacturers to
              market their products economically to a broad range of
 
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12
<PAGE>
 
MARSHALL INDUSTRIES                                         
 
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GENERAL
(CONTINUED)   end-users. Most manufacturers are unable to serve their entire
              customer base directly and rely on distributors, such as the
              Company, to extend their marketing operations. Distributors not
              only provide product, but also provide technical service support
              to customers. In addition, distributors relieve manufacturers from
              a portion of the costs associated with selling their products,
              including large investments in inventories, accounts receivable
              and personnel. At the same time, distributors offer customers the
              convenience of diverse inventory, rapid deliveries, credit and a
              wide range of value-added services.
 
                Marshall is a customer-oriented company which uses automation
              and information technology to enhance customer service and
              intimacy. The Company has invested substantial resources to
              improve its inventory management and information systems, thereby
              assisting its customers in controlling costs, reducing cycle times
              and keeping pace with changes in technology. These investments
              have also increased the Company's efficiency and improved its cost
              competitiveness. Marshall's extensive line-card provides customers
              with the opportunity to purchase their electronic component
              requirements from a single source, thus improving their materials
              resource planning and facilitating their inventory procurement
              needs. The Company provides additional support to its customers
              through field application engineers, electronic data interchange
              and other value-added services. Marshall also utilizes the
              Internet to allow customers to access a variety of services,
              including obtaining product availability information, prices and
              technical specifications. In 1997, the Company introduced
              OrderAgent, which is an on-line ordering system available via the
              Internet. Live and archived interactive training programs are also
              broadcast over the Internet.

-------------------------------------------------------------------------------
PRODUCTS AND 
SUPPLIERS       The distribution of semiconductor products accounted for
              approximately 72% and 64%, respectively, of total Company sales in
              fiscal 1997 and 1998. Passive components, connectors and
              interconnect products accounted for approximately 11% and 14% of
              total Company sales for fiscal 1997 and 1998, respectively. Sales
              of computer systems and peripheral products accounted for
              approximately 11% and 17%, respectively, of total Company sales in
              fiscal 1997 and 1998. Distribution of industrial production
              supplies accounted for approximately 6% and 5% of total Company
              sales for fiscal 1997 and 1998, respectively.
 
              SEMICONDUCTOR PRODUCTS
 
                Texas Instruments ("TI") is the Company's largest supplier of
              products. TI's semiconductor products accounted for 14% and 10% of
              total Company sales in fiscal 1997 and 1998, respectively. The
              Company carries the full range of semiconductor products
              manufactured by TI and distributes the products of a number of
              other leading American semiconductor manufacturers. The Company is
              also the major distributor in sales volume of Japanese
              semiconductor products in North America. Sales of these products
              accounted for approximately 17% of total Company sales in fiscal
              1997 and 1998. Additionally, the Company distributes components
              manufactured by European suppliers, such as Siemens Components,
              Inc. ("Siemens") and Philips Semiconductors, a North American
              Philips Company ("Philips").

                Semiconductor products include memory, logic and programmable
               logic devices, microprocessors and microperipheral components.
               The Company's principal suppliers are Advanced Micro Devices,
               Inc. ("AMD"), Atmel Corporation, Cypress Semiconductor
               Corporation, Fujitsu, Hitachi, Lattice Semiconductor Corporation,
               Linear Technology, Mitel Semiconductors, Inc., NEC Electronics,
               Inc., Philips, Rockwell International Corp., Siemens, Sony
               Electronics, Inc., Sharp Electronics Corporation, TI, Toshiba
               America, Inc., and Xilinx, Inc.
                                                                          ------
                                                                              13
<PAGE>
 
MARSHALL INDUSTRIES                                                             
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
-------------------------------------------------------------------------------
PRODUCTS AND 
SUPPLIERS
(CONTINUED)    Subsequent to May 31, 1998, TI entered into an agreement to sell
              its memory products business to Micron Technology, Inc.
              ("Micron"). The Company has been awarded a franchise agreement by
              Micron to distribute all of its products.

              PASSIVE COMPONENTS, CONNECTORS AND INTERCONNECT PRODUCTS
 
                The Company distributes passive components, including multilayer
              ceramic, tantalum and foil capacitors as well as resistor
              networks. These products are manufactured by such leading
              suppliers as AVX Corporation and Bourns, Inc.

                Connectors and interconnect products include surface mount
              sockets and fiber optic systems, along with printed circuit board
              level connectors. The Company's principal suppliers of connectors
              and interconnect products are AMP Incorporated, Molex, Inc. and
              T&B/Ansley Corporation, which rank among the leading suppliers of
              these products.

              COMPUTER SYSTEMS AND PERIPHERALS
 
                The Company's product offerings include liquid crystal displays,
              optical, hard and floppy disk drives, power supplies, monitors,
              motherboards for personal computers, and other systems components.
              Artesyn Technologies (formerly Computer Products Inc.), Fujitsu,
              IBM Systems Storage Division, NEC Electronics, Inc., Quantum
              Corporation, Sharp Electronics Corporation, Sony Components
              Products, and Toshiba America Information Systems, Inc. are the
              major suppliers of these products to the Company.

              INDUSTRIAL PRODUCTION SUPPLIES
 
                The Company believes that it is the largest domestic distributor
              in sales volume of industrial production supplies to customers in
              the electronics industry. Such supplies include hand tools, static
              control products, test equipment, soldering supplies and equipment
              and work stations. Leading suppliers include Cooper Tools, a
              division of Cooper Industries, Kester Solder, a division of Litton
              Industries, Fluke Corporation, Tektronix, Inc., Loctite
              Corporation and 3M. Although the distribution of industrial
              production supplies may be distinct from distribution of
              electronic components, the Company believes that there are certain
              synergies and strategic benefits from being the leading
              distributor of industrial production supplies.

 
              VALUE-ADDED SERVICES
 
                In addition to the distribution of products, the Company
              provides a variety of value-added services to its customers. The
              Company provides component testing and assembly, just-in-time
              ("JIT") inventory management and delivery systems, programmable
              logic array and PROM and EPROM programming and certain types of
              testing services. In recent years, the Company has introduced a
              number of sophisticated automated inventory procurement and
              management services for its customers through its electronic data
              interchange ("EDI") and auto-replenishment programs. The Company
              also packages electronic components in production-ready kits to
              customers' specifications ("kitting"). Completed kits are
              typically shipped directly to the customer's production line on a
              JIT basis. Turnkey manufacturing solutions are offered to meet
              customer requirements or through arrangements with independent
              contract manufacturers as an extension of the Company's
              JIT/kitting business. Under such arrangements, the Company
              supplies components directly to contract manufacturers who
              
------
14
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
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PRODUCTS AND  
SUPPLIERS     perform assembly and testing to produce a completed product to    
(CONTINUED)   customer specifications. The Company offers 24-hour sales and     
              technical support services for its customers.                     
                                                                                
                In August, 1996 Marshall and Wyle Electronics ("Wyle") formed a 
              value-added services joint venture called Accord Contract Services
              LLC ("Accord"). Wyle was subsequently acquired by Raab Karcher AG,
              an indirect wholly owned subsidiary of VEBA AG. The Company       
              elected to terminate the joint venture in the fall of 1997.
        
--------------------------------------------------------------------------------
RELATIONSHIP 
WITH            The majority of the products sold by the Company are purchased
SUPPLIERS     pursuant to distributor agreements. These agreements are typically
              for terms of one year, renewable annually, non-exclusive, and
              authorize the Company to sell through its sales and distribution
              locations all or a portion of the products produced by that
              manufacturer. These agreements may be canceled by either party on
              short notice and generally provide for a return of the
              manufacturer's inventory upon cancellation. The Company's ten
              largest suppliers accounted for approximately 58% and 51% of total
              Company sales in fiscal 1997 and 1998, respectively. Except for
              TI, which accounted for 14% and 10% of total Company sales for
              fiscal 1997 and 1998, respectively, no other supplier accounted
              for more than 10% of total Company sales in such periods.
              Cancellation of an agreement with, or trade restrictions affecting
              purchases from, a major supplier could have a material adverse
              effect upon the Company's business. The Company believes that it
              has satisfactory relationships with its suppliers. Nonetheless,
              because of uncertainties relating to U.S. trade issues, the
              possibility exists that continued access to Japanese products
              could be affected. In addition, the Company cannot determine the
              direction of U.S. trade policy or its ultimate effect on the
              competitive environment and the Company's results.
 
                Most manufacturers of electronic components, including foreign
              manufacturers, protect authorized distributors, such as the
              Company, against potential inventory losses from declining prices
              and obsolescence. To protect their distributors from declining
              market prices, most electronic component manufacturers allow their
              distributors pricing adjustments as products are sold to customers
              as well as credits on unsold inventory when the manufacturers
              reduce prices on their price lists. In addition, under the terms
              of many such agreements, the distributor has the right to return
              to the manufacturer, for credit, any product classified as
              obsolete by the manufacturer and a specified portion of other
              inventory items purchased within a designated period of time. In
              the event of a termination of a distributor agreement, the
              manufacturer is generally required to purchase from the
              distributor the products of such manufacturer carried in the
              distributor's inventory. In some cases, the repurchase of the
              inventory requires a restocking charge. Such agreements provide
              important but not complete protection from inventory losses. No
              assurance can be given, however, that such price adjustment and
              return policies will continue.
 
                To service its kitting and turnkey contract manufacturing
              customers, the Company must buy a certain amount of products from
              third parties on a non-franchised basis. Since there are typically
              no return or price protection provisions applicable to these
              purchases, there are significantly greater inventory risks
              associated with kitting and turnkey contract manufacturing orders
              than with the purchase and stocking of inventory pursuant to its
              normal distributor agreements.
 
                                                                          ------
                                                                              15
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
--------------------------------------------------------------------------------
SALES AND 
MARKETING       Distributors offer electronics customers the convenience of
              immediate price and delivery information, backlog status, diverse
              off-the-shelf inventories in small and large quantities, rapid
              deliveries and the financing of their purchases. The Company's
              electronics distribution business services approximately 40,000
              customers, the majority of which are small and medium size
              companies in the following industries: computers, communications,
              capital and office equipment, industrial control and medical
              equipment and systems integration. In recent years, contract
              manufacturers have also become major customers for electronic
              component distributors, including the Company, as many original
              equipment manufacturers have outsourced their purchasing and
              manufacturing functions to them. No single customer accounted for
              more than 6% of the Company's sales during any of the last five
              fiscal years.
 
                The Company's products are sold by both field and inside sales
              people. Sales personnel work directly with customers providing
              price, delivery, backlog and technical information regarding the
              products which the Company distributes. Approximately 46% of the
              Company's employees were involved in sales at May 31, 1998.
 
                Most of the Company's branches are also staffed by field
              application engineers who provide technical assistance to
              customers in their design of new products. Through this process,
              Marshall has the opportunity to develop a preferred or exclusive
              supply relationship with respect to components incorporated into
              the resulting products. The Company believes that field
              application engineers play an important role in its marketing
              efforts.
 
                Each sales and distribution center is electronically linked to
              the Company's central computer system, which provides fully
              integrated on-line, real-time data with respect to the Company's
              nationwide inventory levels. The Company's computer system
              facilitates the control of purchasing and payables, shipping and
              receiving, and billing and collections. A salesperson may order
              shipment of a product from any distribution center within a matter
              of minutes. The Company has made significant investments in its
              computerized information systems which management believes have
              the capabilities to support future changes and enhancements
              required to meet market needs and growth. These systems have also
              allowed the Company to increase its EDI capabilities with its
              suppliers and customers. In addition, the Company has an
              electronic telecommunications service that allows customers to
              design, engineer and purchase products via the Internet. To
              increase their customer service and productivity capabilities, the
              outside field sales staff has been equipped with laptop computers.
              Due to the high volume of transactions and the cost
              competitiveness of the electronic components distribution
              industry, the Company believes that the expansion and upgrading of
              its information technology capabilities will be an ongoing
              requirement.
 
                The Company currently has a national distribution network in the
              United States and Canada consisting of sales and distribution
              centers and corporate support and distribution centers. The
              Company believes that it has sales facilities in all of the major
              electronic products markets in the United States, including the
              Los Angeles/Orange County, San Francisco/Silicon Valley, Boston,
              Chicago, Denver, Philadelphia, Portland, Seattle, Connecticut,
              Florida, New Jersey, Georgia, Maryland, Minnesota, Ohio, Nevada
              and Texas areas. In Canada the Company has sales facilities in
              Ottawa, Toronto, Montreal, Quebec City, Calgary, and Vancouver.
 
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16
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
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SALES AND 
MARKETING 
(CONTINUED)     As described in Note 7 to the accompanying consolidated
              financial statements, the Company has made a 16% investment in
              SEI, one of the largest electronic component distributors in
              Europe. In addition, as described in Note 8 to the accompanying
              consolidated financial statements, the Company has an investment
              of approximately 9% of the common stock of Serial System Ltd., an
              electronic components distributor based in Singapore.
 
                At May 31, 1998, the Company had approximately 2,300 employees,
              substantially all of whom were employed full-time.
 
--------------------------------------------------------------------------------
BACKLOG
                Information concerning backlog is not material to an
              understanding of the Company's business, as the Company's
              objective is to ship orders on the same day they are received
              unless the customer has requested a specific future delivery date
              on an order. Additionally, it is common industry practice for
              customers, in most cases, to be able to re-schedule or cancel
              orders for standard products with future delivery dates without
              penalties.
              
--------------------------------------------------------------------------------
CERTAIN 
CONSIDERATIONS
              CYCLICAL NATURE OF ELECTRONICS INDUSTRY; FLUCTUATIONS IN 
              QUARTERLY OPERATING RESULTS
 
                The Company's business is affected by the cyclical nature of the
              electronics industry and overall trends in the general economy.
              The electronics distribution industry is very sensitive to
              fluctuating market conditions, primarily caused by changes in the
              supply and demand for electronic products, which impact product
              availability and prices. As a result, the Company's financial
              results may reflect significant variations from period to period.
              Other factors which affect operating results include but are not
              limited to availability of products from suppliers, the product
              mix sold by the Company, price competition for products sold by
              the Company, price decreases or obsolescence on inventory that is
              not price protected or returnable to suppliers, and the ability of
              the Company's customers to pay their obligations.
 
              NATURE OF DISTRIBUTOR AGREEMENTS
 
                The Company's distributor agreements with its suppliers are non-
              exclusive. Consequently, the Company competes with numerous other
              distributors who sell the same or similar products, as well as
              with its suppliers, which tend to sell directly to their larger
              customers. The distributors' customers are generally smaller and
              less credit worthy than the principal customers of the suppliers.
              The Company's distributor agreements are also terminable on short
              notice. Suppliers have from time to time terminated such
              agreements with the Company and there can be no assurance that
              such terminations will not occur in the future. The Company's ten
              largest suppliers accounted for approximately 58% and 51% of the
              Company's total sales in fiscal 1997 and 1998, respectively. The
              loss of a key supplier could have a material adverse effect upon
              the Company and its future results of operations.

              PRODUCT SUPPLIES AND PRICING
 
                From time to time, the industry has experienced product
              shortages and excess supplies. The prices and margins on the
              Company's products are often materially impacted by these product
              shortages and excess supplies. There is currently an excess supply
              of a number of electronic component products, particularly memory
              devices. As a result, the industry has experienced significant
              pricing and margin pressures on products. It is uncertain when
              there will be a change in these unfavorable market conditions.
               
                                                                          ------
                                                                              17
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
-------------------------------------------------------------------------------
CERTAIN 
CONSIDERATIONS 
(CONTINUED)    COMPETITION
 
                 Supplying and servicing the electronics industry is a highly
               competitive business. The Company competes with other large
               national distributors, numerous local and regional distributors,
               as well as some of the Company's suppliers. The Company believes
               that competition is based primarily on customer service, product
               lines, product availability, competitive pricing and technical
               information, as well as value-added services.
 
                 From time to time, the Company has experienced competition from
               "unauthorized" U.S. distributors and brokers of electronic
               components who purchase these products from various sources,
               including sources outside the United States, at prices below
               those which the Company may purchase such products directly from
               its suppliers. In addition, a limited number of the Company's
               customers have moved their manufacturing operations out of the
               United States in recent years. Such changes have not had a
               material impact on the Company's business.
 
                 Motorola, Inc., one of the largest American semiconductor
               manufacturers, recently changed its policy whereby its
               authorized distributors in the United States can carry its line
               plus one Asian semiconductor line. The Company is a leading
               distributor of Asian semiconductor products. This policy change
               is expected to increase competition in the distribution of Asian
               semiconductor products. The overall impact of this change in
               policy on the Company is uncertain at this time.
 
               DEPENDENCE UPON KEY PERSONNEL
 
                 The Company's success depends to a significant extent upon the
               continued contributions of its management and key employees. The
               loss of these key employees could adversely impact the Company.
               The Company's future success will also depend in part upon its
               ability to attract and retain highly qualified personnel.

--------------------------------------------------------------------------------

 
               ITEM 2. PROPERTIES
 
                 The Company presently has 77 sales and distribution facilities
               and 6 corporate support and distribution centers. The Company's
               executive offices and corporate support and distribution center
               are located in El Monte, California. This facility is Company
               owned, has 258,000 square feet of space and utilizes an
               automated inventory handling system. The Company owns an
               additional 65,500 square foot warehouse and office facility in
               El Monte.
 
                 In addition to the El Monte facilities, a majority of the
               sales and distribution facilities located in Marshall's major
               markets are Company owned. The three largest facilities range
               from approximately 58,000 to approximately 65,000 square feet in
               size and are located in Milpitas, California; Irvine,
               California; and Boston, Massachusetts. The Company also owns
               facilities in Austin, Texas; Endicott, New York; Milwaukee,
               Wisconsin; San Diego, California; and Wallingford, Connecticut
               of approximately 8,000 to 40,000 square feet each.

                 The Company leases its remaining sales and distribution
               facilities. The largest leased facility is the support center in
               Grapevine, Texas which has approximately 180,000 square feet of
               space with a lease expiration date in fiscal year 2007. The
               remaining leased facilities are located in cities throughout the
               United States and Canada, vary in size depending on sales volume
               and are
 
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18
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
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-------------------------------------------------------------------------------
              subject to leases whose initial terms expire at various dates
              through fiscal year 2004. Substantially all of those leases
              include renewal provisions.

                The Company plans to sell its current facility in Milpitas,
              California and acquire a larger facility to meet the growth of its
              business. The Northern California market is the largest in North
              America for the industry and the Company. In connection therewith,
              the Company has entered into an agreement subsequent to May 31,
              1998 for the purchase of a 10-acre property in Milpitas,
              California for the construction of a sales, marketing and
              distribution facility.
 
                Except for the expansion in Northern California as described
              herein, the Company believes that the current facilities are
              adequate for the Company's operating requirements.

--------------------------------------------------------------------------------
              ITEM 3. LEGAL PROCEEDINGS
 
                There are no material pending legal proceedings to which the
              Company or any of its subsidiaries is a party or which any of
              their properties are the subject.

--------------------------------------------------------------------------------
              ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
                No matter was submitted to a vote of security holders during the
              quarter ended May 31, 1998.

              PART II
 
              ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                      STOCKHOLDER MATTERS
 
                The Company's Common Stock is listed on the New York Stock
              Exchange under the symbol MI. The following table shows, for the
              periods indicated, the published closing sale prices per share for
              the Company's Common Stock.
 -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
               -----------------------------------------------------------------
                                                                 High      Low
               -----------------------------------------------------------------
                <S>                                            <C>       <C>    
                FISCAL YEAR 1997                                                
                 First Quarter                                 $30 7/8   $26 1/4
                 Second Quarter                                 32 1/8    27 3/4
                 Third Quarter                                  33 1/8    28 3/4
                 Fourth Quarter                                 36 3/8    30 1/2
               -----------------------------------------------------------------
                FISCAL YEAR 1998                                                
                 First Quarter                                 $42 3/4   $35 7/8
                 Second Quarter                                 42        34 1/2
                 Third Quarter                                  35 15/16  28 3/8
                 Fourth Quarter                                 34 5/8    28 7/8
               -----------------------------------------------------------------
</TABLE>
 
                The Company had approximately 5,000 shareholders at July 31,
              1998. It has never paid a cash dividend. Earnings have been
              retained to provide for the growth and expansion of the Company's
              business. The Board of Directors periodically considers whether or
              not to pay dividends. At this time, the Company does not plan to
              pay dividends.
 
                                                                          ------
                                                                              19
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
-------------------------------------------------------------------------------

              ITEM 6. SELECTED FINANCIAL DATA
  
                The following selected financial data of the Company should be
              read in conjunction with the historical consolidated financial
              statements and notes thereto. The following table sets forth
              selected financial data with respect to the consolidated
              statements of income of the Company for the five fiscal years
              ended May 31, 1998, and the consolidated balance sheets of the
              Company at year end for each of those years. The selected
              financial data is derived from consolidated financial statements
              for such years and at such dates as audited by Arthur Andersen
              LLP, independent public accountants, including the consolidated
              statements of income for the three years ended May 31, 1998, and
              the consolidated balance sheets at May 31, 1997 and 1998 included
              elsewhere herein.

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CONSOLIDATED 
STATEMENTS OF 
INCOME
<TABLE> 
<CAPTION> 
                Years Ended May 31,         1994      1995       1996       1997     1998(/4/)       
                --------------------------------------------------------------------------------      
                                                 (In thousands except for per share data)             
                 <S>                       <C>      <C>        <C>        <C>         <C>             
                 Net sales                 $822,548 $1,009,315 $1,164,812 $1,184,604  $1,461,363      
                 Cost of sales              652,121    820,571    955,331    988,371   1,232,026      
                --------------------------------------------------------------------------------      
                  Gross profit              170,427    188,744    209,481    196,233     229,337      
                 Selling, general and                                                                 
                  administrative expenses   112,220    117,287    123,188    128,927     163,556      
                --------------------------------------------------------------------------------      
                  Income from operations     58,207     71,457     86,293     67,306      65,781      
                 Interest expense                                                                     
                  (income) and other                                                                  
                  net(/1/)                    1,931      1,916        989     (1,197)      7,480      
                --------------------------------------------------------------------------------      
                 Income before income                                                                 
                  taxes and extraordinary                                                             
                  gain                       56,276     69,541     85,304     68,503      58,301      
                 Provision for income                                                                 
                  taxes                      23,105     29,130     35,250     28,850      24,958      
                --------------------------------------------------------------------------------      
                 Income before                                                                        
                  extraordinary gain         33,171     40,411     50,054     39,653      33,343      
                 Extraordinary gain from                                                              
                  termination of joint                                                                
                  venture (Net of income                                                              
                  taxes of $10,535)            --         --         --         --        14,615      
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------      
                 Net income                $ 33,171 $   40,411 $   50,054 $   39,653  $   47,958      
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------      
                 Earnings per share                                                                   
                  (basic):(/2/)                                                                       
                 Income per share before                                                              
                  extraordinary gain       $   1.93 $     2.34 $     2.90 $     2.35  $     2.01      
                 Extraordinary gain per                                                               
                  share                        --         --         --         --          0.88      
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------      
                 Net income per share      $   1.93 $     2.34 $     2.90 $     2.35  $     2.89      
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------      
                 Earnings per share                                                                   
                  (diluted):(/2/)                                                                     
                 Income per share before                                                              
                  extraordinary gain       $   1.92 $     2.33 $     2.87 $     2.33  $     1.99      
                 Extraordinary gain per                                                               
                  share                        --         --         --         --    $     0.87      
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------      
                 Net income per share      $   1.92 $     2.33 $     2.87 $     2.33  $     2.86      
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------      
                 Cash dividends per                                                                   
                  share(/3/)                   --         --         --         --          --        
                --------------------------------------------------------------------------------      
                --------------------------------------------------------------------------------       
</TABLE>
 
------
20
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
CONSOLIDATED 
STATEMENTS OF 
INCOME 
(CONTINUED)
<TABLE>
<CAPTION>
               Years Ended May 31,             1994     1995     1996     1997     1998   
              ---------------------------------------------------------------------------
               <S>                           <C>      <C>      <C>      <C>      <C>     
               Weighted average number of                                                
                shares outstanding, basic      17,160   17,256   17,278   16,861   16,616
               Weighted average number of                                                
                shares outstanding, diluted    17,282   17,372   17,414   16,997   16,772 
</TABLE>
-------------------------------------------------------------------------------
CONSOLIDATED 
BALANCE SHEETS -- 
SUMMARY 
<TABLE>
<CAPTION>
                May 31,                           1994     1995     1996     1997     1998  
               -----------------------------------------------------------------------------
                                                               (In thousands)               
                <S>                             <C>      <C>      <C>      <C>      <C>     
                Working capital                 $229,019 $254,394 $284,508 $330,962 $435,596
                Total assets                     363,659  423,307  472,611  539,673  853,824
                Long-term debt, net of current                                              
                 portion                          34,742   45,205   25,000   50,000  245,500
                Shareholders' investment         238,716  279,752  329,994  348,942  400,439 
</TABLE>
-------------------------------------------------------------------------------
 (1) Amounts are net of interest income of $1.2 million, $1.7 million, $2.6
     million and $0.4 million in 1995, 1996, 1997 and 1998, respectively.
     Interest income was not material in fiscal 1994.
 (2) Basic and diluted net income per share are computed on the basis of the
     weighted average common and common equivalent shares outstanding during
     each year. All amounts have been restated to reflect the two for one stock
     split on February 28, 1994, and reflect the adoption of SFAS No. 128.
 (3) The Company has never paid a cash dividend. Earnings have been retained to
     provide for the growth and expansion of the Company's business.
 (4) The 1998 amounts include Sterling Electronics which was acquired on
     January 16, 1998.
-------------------------------------------------------------------------------
 
                                                                         ------
                                                                              21
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
-------------------------------------------------------------------------------
              ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
CONSOLIDATED 
RESULTS OF 
OPERATIONS      The following table sets forth items in the consolidated
              statements of income as a percent of net sales for periods shown:
 -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
               -----------------------------------------------------------------------   
               Years Ended May 31,                                1996   1997   1998     
               -----------------------------------------------------------------------   
               <S>                                              <C>     <C>    <C>      
               Net sales                                          100.0% 100.0% 100.0%   
               Cost of sales                                       82.0   83.4   84.3    
               -----------------------------------------------------------------------   
                Gross profit                                       18.0   16.6   15.7    
               Selling, general and administrative expenses        10.6   10.9   11.2    
               -----------------------------------------------------------------------   
                Income from operations                              7.4    5.7    4.5    
               Interest expense (income) and other -- net            .1    (.1)    .5    
               -----------------------------------------------------------------------   
                Income before provision for income taxes                                               
                 and extraordinary gain                             7.3    5.8    4.0    
               Provision for income taxes                           3.0    2.4    1.7    
               -----------------------------------------------------------------------   
                Income before extraordinary gain                    4.3    3.4    2.3    
               -----------------------------------------------------------------------   
                Extraordinary gain (net of income taxes)             --     --    1.0    
               -----------------------------------------------------------------------   
               Net income                                           4.3%   3.4%   3.3%    
               -----------------------------------------------------------------------   
               -----------------------------------------------------------------------    
 </TABLE>
                 As an aid to understanding the results of operations, the
               following is a summary of the Company's unaudited quarterly
               results of operations for fiscal years 1996, 1997 and 1998 (in
               thousands except for per share data):
 <TABLE>
 <CAPTION>
               ---------------------------------------------------------------------------      
                                        First    Second        Third    Fourth                  
                1996                   Quarter  Quarter       Quarter  Quarter     Year         
               ---------------------------------------------------------------------------      
               <S>                    <C>      <C>           <C>      <C>      <C>              
                Net sales              $275,870 $295,532      $288,008 $305,402 $1,164,812      
                Gross profit             50,945   53,692        52,220   52,624    209,481      
                Net income               12,199   13,639        12,250   11,966     50,054      
                Net income per share,                                                           
                 basic(/2/)                 .71      .79           .71      .69       2.90      
                Net income per share,                                                           
                 diluted(/2/)               .70      .78           .70      .69       2.87      
                 1997                                                                           
               ---------------------------------------------------------------------------      
                 Net sales              $269,290 $286,346      $304,007 $324,961 $1,184,604     
               Gross profit             46,862   47,820        48,274   53,277    196,233       
               Net income                8,783    9,350         9,799   11,721     39,653       
               Net income per share,                                                            
                basic(/2/)                 .51      .55           .59      .71       2.35       
               Net income per share,                                                            
                diluted(/2/)               .51      .55           .58      .70       2.33       
               1998                                                                             
               ---------------------------------------------------------------------------      
               NET SALES              $324,423 $351,212      $368,112 $417,616 $1,461,363       
               GROSS PROFIT             50,721   51,845        58,681   68,090    229,337       
               NET INCOME                9,260   24,034(/1/)    8,007    6,657     47,958(/1/)  
               NET INCOME PER SHARE,                                                            
                BASIC(/2/)                 .56     1.45(/1/)      .48      .40       2.89(/1/)  
               NET INCOME PER SHARE,                                                            
                DILUTED(/2/)               .55     1.42(/1/)      .48      .40       2.86(/1/)  
               ---------------------------------------------------------------------------       
</TABLE>
               (1) Includes extraordinary gain of $14,615, net of income taxes
                   and basic and diluted EPS of $0.88 and $0.87, respectively.
               (2) Amounts have been restated to reflect adoption of SFAS No.
                   128.
 
                As described in Note 2 to the accompanying consolidated
              financial statements, the Company acquired Sterling Electronics on
              January 16, 1998. Sterling's net sales of $46.7 million and $94.0
              million were included in the company's third and fourth quarters
              of fiscal 1998 results, respectively.

------
22
<PAGE>
 
MARSHALL INDUSTRIES                                          
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
FISCAL 1998 
COMPARED TO 
FISCAL 1997     The Company's fiscal 1998 net sales increased by $276.8 million
              to $1.461 billion from fiscal year 1997. The Company's results
              included those of Sterling, which was acquired on January 16,
              1998. Sterling's net sales from its acquisition date of January
              16, 1998 to May 31, 1998 accounted for $140.7 million of this
              increase in net sales. The Company's fiscal 1998 net sales,
              excluding the sales of Sterling, increased by $136.1 million or
              11.5%, compared to fiscal 1997. In recent months, particularly in
              the fourth quarter of fiscal 1998, the industry and the Company
              have experienced a moderation in customer demand. This, along with
              the increased availability of many products, has contributed to
              increased pressures on unit pricing and margins of many of the
              products that the Company sells.

                Excluding the net sales of Sterling, the increase in the
              Company's net sales of $136.1 million for fiscal 1998, as compared
              to fiscal 1997, was due primarily to an increase in the sales
              volume of most of the Company's major products, particularly mass
              storage products. These products accounted for $66.5 million of
              this increase. The addition of new suppliers during the last
              several years was the primary reason for the substantial growth of
              the Company's mass storage products. The increase in sales was,
              however, partially offset by a decrease in the sales of memory
              products, particularly "DRAMs". Sales of DRAMs decreased by $52.2
              million in fiscal 1998, from fiscal 1997, primarily due to the
              continuing declines in the unit pricing of such products.

                For fiscal year 1998 the net margins of the Company decreased to
              15.7%, from 16.6% for fiscal 1997. This decline in margins was
              primarily attributable to mass storage products being a higher
              percentage of the Company's sales, which are lower margin products
              when compared to the Company's other major products, and the
              continuing market pressures experienced by many electronic
              component products. These declines were partially offset by the
              decrease in the sales of DRAMs, which are relatively lower margin
              products, and the inclusion of Sterling's sales, which have
              relatively higher margins due to differences in product and
              customer mix.
 
                Selling, general and administrative ("SG&A") expenses for fiscal
              1998 increased by $34.6 million to $163.6 million from fiscal
              1997. Excluding Sterling's SG&A expenses of $22.1 million from its
              acquisition date of January 16, 1998 to the end of the fiscal
              year, the Company's SG&A expenses increased by $12.5 million, as
              compared to fiscal 1997. Salary adjustments and additions to
              staffing in the areas of Information Technology and the
              warehousing functions resulted in higher salary costs of $5.0
              million, as compared to last year. In addition, $1.3 million in
              increased expenses for outside consultants and contractors were
              incurred during fiscal 1998, as compared to the prior year, to
              enhance and expand the Company's information technology
              capabilities. Also, approximately $1.2 million of goodwill
              amortization expense was incurred related to the Sterling
              acquisition. The Company also incurred higher than normal levels
              of expenses in operating Sterling's warehousing functions. This
              higher level of expenses is expected to continue until the
              consolidation of these functions into Sterling's automated
              warehouse in Grapevine, Texas, which is expected to be completed
              in early fiscal 1999. For fiscal year 1998 such expenses were $0.7
              million. The remaining increase in the SG&A expenses of the
              Company for fiscal 1998, compared to the prior year, was primarily
              to service the higher sales volumes and costs of integrating
              Sterling's operations.

                The increase in net interest expense to $7.5 million in fiscal
              1998 from interest income of $1.2 million in fiscal 1997 was
              primarily due to bank borrowings incurred for the acquisition of
              Sterling and higher levels of borrowings to support increases in
              inventories and receivables from
              
                                                                          ------
                                                                              23
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
--------------------------------------------------------------------------------
FISCAL 1998 
COMPARED TO 
FISCAL 1997
(CONTINUED)   the increased sales volume. Additionally, there was a decrease in
              interest income as a result of the conversion of the note
              receivable from SEI, as described in Note 7 to the accompanying
              consolidated financial statements.

                During the second quarter of fiscal 1998, the Company received a
              fee of $25.1 million, $14.6 million net of income taxes, from the
              termination of a joint venture, as described in Note 10 to the
              accompanying consolidated financial statements.
 
--------------------------------------------------------------------------------
FISCAL 1997 
COMPARED TO 
FISCAL 1996     The increase in net sales for fiscal 1997, as compared to fiscal
              1996, was due primarily to an increase in the sales volume of mass
              storage, microprocessor and liquid crystal display ("LCD")
              products. Sales of these products increased by $80.7 million in
              fiscal 1997, as compared to fiscal 1996. The addition of new
              suppliers during the fiscal 1996 and 1997 contributed to most of
              the increase in the sales of such products. This increase was
              partially offset by a decrease in the sales of memory products,
              DRAM's and SRAM's. Sales of these products decreased $77.8 million
              in fiscal 1997, as compared to fiscal 1996. While there was an
              increase in the unit volume sold of memory products in fiscal 1997
              from fiscal 1996, the substantial market decline in unit pricing
              during the period reported accounted for the significant decrease
              in sales dollars of such products. The sales volume of the
              Company's other major products increased modestly from the prior
              year.
 
                The decrease in gross profit as a percent of sales for fiscal
              1997, from fiscal 1996, was primarily due to a shift in the mix of
              products sold with an increase in the sales of mass storage
              products and microprocessors, which are lower margin products. The
              decline in the margins on some of the Company's products,
              particularly DRAM's, also contributed to the decrease in margins
              in fiscal 1997, as compared to fiscal 1996.
 
                The increase in SG&A for fiscal 1997 from fiscal 1996 was
              largely from higher salary and related expenses. The increase of
              $4.5 million in these expenses was due to salary adjustments and
              higher staffing levels during the year. The increase in expenses
              to enhance and expand the Company's sales automation and other
              information technology capabilities in fiscal 1997 from fiscal
              1996, was partially offset by a decrease in bad debt expense.
 
                Interest expense-net decreased in fiscal 1997 from fiscal 1996
              mainly from the lower levels of borrowings during the year and an
              increase in interest income recorded on its note receivable due
              from SEI, as described in Note 7 to the consolidated financial
              statements.
 
--------------------------------------------------------------------------------
LIQUIDITY AND 
CAPITAL 
RESOURCES       The Company's sources of liquidity at May 31, 1998 consisted
              principally of working capital of $435.6 million and a bank credit
              facility of $325 million, of which $253 million was outstanding at
              May 31, 1998. The Company believes that its working capital,
              borrowing capabilities and additional funds generated from
              operations should be sufficient to finance its anticipated
              operating requirements for at least the next twelve months.
 
                Mainly due to the Company's borrowings to finance the Sterling
              acquisition, the Company's long term debt increased to $245.5
              million at May 31, 1998 from $50 million at May 31, 1997. Under
              the terms of the bank facility agreement, there are quarterly
              reductions in the facility beginning in 1999, which would result
              in a reduction of the facility availability by $100 million, in
              the aggregate, by the year 2002.
 
------
24
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
LIQUIDITY AND 
CAPITAL 
RESOURCES 
(CONTINUED)     At May 31, 1998, the Company's working capital increased by
              $104.6 million to $435.6 million, from the prior year. This
              increase was primarily attributable to the Sterling acquisition
              which resulted in the addition of $112.3 million of working
              capital. The increase in other current assets primarily relates to
              investments and current tax benefits from the Sterling
              acquisition. The increase in the Company's inventory levels
              required to support the increased sales volume, was offset by an
              increase in accounts payable.
 
                Net cash used in fiscal 1998 in investing activities related
              mainly to the cash paid for the acquisition of Sterling of $174.5
              million, the investment in Serial System Ltd. of $7.2 million and
              capital expenditures of $12.2 million. Capital expenditures for
              fiscal 1998 related primarily to the purchase of warehousing
              equipment for the Grapevine, Texas support center and investment
              in information technology equipment to enhance customer service
              capabilities. Also included in fiscal year 1998 results was a
              $25.1 million ($14.6 million net of income taxes) fee received
              from the termination of the Accord joint venture as described in
              Note 10 to the accompanying consolidated financial statements.
 
                The borrowings to fund the acquisition of Sterling, as described
              above and in Notes 2 and 3 to the accompanying consolidated
              financial statements, primarily contributed to the net cash
              provided by financing activities in fiscal 1998.
 
                Working capital increased by $46.5 million and $30.1 million for
              fiscal 1997 and 1996, respectively, as compared to the prior
              years.
 
                Net cash used by operating activities was $2.0 million for
              fiscal 1997 which was primarily the result of increased accounts
              receivables and inventories, which were needed to support the
              increased sales volume for fourth quarter of fiscal 1997 and
              certain customer requirements. This increase in inventories and
              accounts receivable was partially offset by an increase in
              accounts payable. Net cash provided by operating activities was
              $24.5 million for fiscal 1996.

                The Company incurred capital expenditures of $2.7 million and
              $5.3 million for fiscal 1997 and 1996, respectively.
 
                The purchase of 725,000 shares of the Company's common stock for
              $21.8 million, offset by net bank credit line borrowings of $25.0
              million, accounted for substantially all of the financing
              activities for fiscal 1997. During fiscal 1996 the Company repaid
              $20.6 million in bank credit line borrowings.

                The Company plans to sell its current facility in Milpitas,
              California and acquire a larger facility to meet the growth of its
              business. In connection therewith, the Company has entered into an
              agreement subsequent to May 31, 1998 for the purchase of a 10-acre
              property for $16.1 million in Milpitas, California for the
              construction of a sales, marketing and distribution facility. The
              Company estimates the construction cost of this new facility will
              be approximately $10 million. In addition to the intended sale of
              the current Milpitas facility, the Company plans to sell its
              Dallas, Texas facility, which is currently leased to a third party
              tenant, and its Irvine, California facility where a significant
              portion of the facility is leased to a third party tenant. It is
              anticipated that some, if not all, of the building sales will
              qualify as tax-free property exchanges under the Internal Revenue
              Service Code.
 
                The Company believes that the sales of these facilities may
              generate approximately half of the funds required for the
              acquisition and construction of the new Milpitas facility. Working
              capital from the Company's operations and the bank credit facility
              will be used to fund the balance.
               
                                                                          ------
                                                                              25
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
-------------------------------------------------------------------------------
YEAR 2000 
COMPLIANCE        The Company has initiated a program to ensure all its
                business systems are Year 2000 compliant and anticipates
                achieving this objective over the next fiscal year by
                converting certain of its business systems to upgraded software
                platforms that comply with the Year 2000 requirements. Although
                the Company believes that it is taking appropriate measures
                against any disruption of its systems due to the Year 2000
                issue, there can be no assurance that the Company will identify
                all significant Year 2000 problems in advance of their
                occurrence, or that the Company will be able to successfully
                remedy all such problems that are discovered. The estimated
                cost of the Year 2000 project has not been and is not expected
                to be material to the Company's financial position or results
                of operations.

--------------------------------------------------------------------------------
NEW ACCOUNTING 
STANDARDS         In June 1998, the Financial Accounting Standards Board issued
                SFAS No. 133, "Accounting for Derivative Instruments and
                Hedging Activities." The new standard, which will be effective
                for the second quarter of fiscal year 2000, requires all
                derivatives to be recognized on the balance sheet at fair
                value. The Company does not expect the implementation of this
                new standard to be material to the Company's financial position
                or results of operations.
 
--------------------------------------------------------------------------------
INFORMATION 
RELATING TO 
FORWARD-LOOKING 
STATEMENTS        This Annual Report contains forward-looking statements within
                the meaning of the "safe harbor" provisions of the Private
                Securities Litigation Reform Act of 1995. Reference is made in
                particular to the description of the Company's plans and
                objectives for future operations, assumptions underlying such
                plans and objectives and other forward-looking statements
                included in "Management's Discussion and Analysis of Financial
                Condition and Results of Operations" and other portions of this
                Annual Report. Such statements may be identified by the use of
                forward-looking terminology such as "may," "will," "expect,"
                "believe," "estimate," "anticipate," "continue," or similar
                terms, variations of such terms or the negative of such terms.
                Such statements are based on management's current expectations
                and are subject to a number of factors and uncertainties which
                would cause actual results to differ materially from those
                described in the forward-looking statements. Factors which
                could cause such results to differ materially from those
                described in the forward-looking statements include changes in
                industry conditions, the addition or loss of suppliers or major
                customers, fluctuation in quarterly results, foreign currency
                translations, the matters discussed in "Business--Certain
                Considerations," and other risks and uncertainties that are
                detailed in the reports filed by the Company with the
                Securities and Exchange Commission.
 
------
26
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
              ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
 
                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE 
SHAREHOLDERS AND 
BOARD OF DIRECTORS 
OF MARSHALL 
INDUSTRIES:     We have audited the accompanying consolidated balance sheets of
              Marshall Industries (a California corporation) and subsidiaries as
              of May 31, 1997 and 1998, and the related consolidated statements
              of income, shareholders' investment and cash flows for each of the
              three years in the period ended May 31, 1998. These financial
              statements are the responsibility of the Company's management. Our
              responsibility is to express an opinion on these financial
              statements based on our audits.

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

                In our opinion, the financial statements referred to above
              present fairly, in all material respects, the financial position
              of Marshall Industries and subsidiaries as of May 31, 1997 and
              1998, and the results of their operations and their cash flows for
              each of the three years in the period ended May 31, 1998, in
              conformity with generally accepted accounting principles.
               
                                         ARTHUR ANDERSEN LLP
 
              Los Angeles, California
              July 20, 1998
 
                                                                          ------
                                                                              27
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               CONSOLIDATED BALANCE SHEETS
               Marshall Industries
 
-------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                                   
                May 31,                                              1997      1998    
ASSETS         ----------------------------------------------------------------------- 
                                                                 (Dollars in thousands)
                <S>                                                <C>       <C>       
                CURRENT ASSETS:                                                        
                 Cash                                              $  1,687  $  4,796  
                 Receivables, less reserves of $8,003 in 1997 and                      
                  $10,632 in 1998                                   167,769   212,956  
                 Inventories                                        284,419   387,655  
                 Prepaid expenses and other current assets              904    13,464  
                 Deferred income tax benefits (Note 4)               14,272    22,872  
               ----------------------------------------------------------------------- 
                   Total current assets                             469,051   641,743  
               ----------------------------------------------------------------------- 
                PROPERTY, PLANT AND EQUIPMENT, at cost (Note 1):                       
                 Land                                                 8,863     9,068  
                 Buildings and improvements                          35,304    39,052  
                 Equipment, furniture, fixtures and other            23,204    32,285  
                 Computer equipment                                  13,849    22,550  
               ----------------------------------------------------------------------- 
                                                                     81,220   102,955  
                 Accumulated depreciation and amortization          (44,988)  (57,099) 
               ----------------------------------------------------------------------- 
                                                                     36,232    45,856  
                NOTE RECEIVABLE (Note 7)                             33,110       --   
                INVESTMENTS (Notes 7 and 8)                             --     43,486  
                GOODWILL, NET (Notes 1 and 2)                           --    120,744  
                OTHER ASSETS -- NET (Note 1)                          1,280     1,995  
               ----------------------------------------------------------------------- 
                                                                   $539,673  $853,824  
               -----------------------------------------------------------------------  
               -----------------------------------------------------------------------  
</TABLE>
-------------------------------------------------------------------------------
LIABILITIES AND 
SHAREHOLDERS' 
INVESTMENT
<TABLE>
               <S>                                                        <C>      <C>       
               CURRENT LIABILITIES:                                                         
                Current portion of long-term debt (Note 3)                $    --  $  7,500 
                Accounts payable                                           120,149  168,008 
                Other accrued liabilities including salaries and wages      16,500   30,639 
                Income taxes payable                                         1,440      --  
              ------------------------------------------------------------------------------
                  Total current liabilities                                138,089  206,147 
              ------------------------------------------------------------------------------
               LONG-TERM DEBT (Note 3)                                      50,000  245,500 
               DEFERRED INCOME TAX LIABILITIES (Note 4)                      2,642    1,738 
               COMMITMENTS AND CONTINGENCIES (Note 5)                                       
               SHAREHOLDERS' INVESTMENT (Notes 1 and 6):                                    
                Common stock, $1.00 par value                                               
                 Shares authorized -- 40,000,000                                            
                 Shares issued and outstanding -- 16,616,364 in 1997 and                    
                  in 1998                                                   16,616   16,616 
                 Additional paid-in capital                                 33,611   41,019 
                 Unrealized loss on securities available for trade             --    (3,641)
                 Foreign currency translation adjustment                       --      (228)
                 Retained earnings                                         298,715  346,673 
              ------------------------------------------------------------------------------
                                                                           348,942  400,439 
              ------------------------------------------------------------------------------
                                                                          $539,673 $853,824 
              ------------------------------------------------------------------------------
              ------------------------------------------------------------------------------ 
</TABLE>
 The accompanying notes are an integral part of these consolidated financial
 statements.
 
------
28
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               CONSOLIDATED STATEMENTS OF INCOME
               Marshall Industries
 
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
               For the Years Ended May 31,                  1996       1997        1998      
              ----------------------------------------------------------------------------   
                                                      (In thousands except per share data)   
               <S>                                       <C>        <C>         <C>          
               Net sales                                 $1,164,812 $1,184,604  $1,461,363   
               Cost of sales                                955,331    988,371   1,232,026   
              ----------------------------------------------------------------------------   
                Gross profit                                209,481    196,233     229,337   
               Selling, general and administrative                                           
                expenses                                    123,188    128,927     163,556   
              ----------------------------------------------------------------------------   
                Income from operations                       86,293     67,306      65,781   
               Interest expense (income) and other, net                                      
                (Note 1)                                        989     (1,197)      7,480   
              ----------------------------------------------------------------------------   
                Income before income taxes and                                               
                 extraordinary gain                          85,304     68,503      58,301   
               Provision for income taxes (Notes 1 and 4)    35,250     28,850      24,958   
              ----------------------------------------------------------------------------   
                Income before extraordinary gain             50,054     39,653      33,343   
               Extraordinary gain from termination of                                        
                joint venture (Net of income taxes of                                        
                $10,535)                                        --         --       14,615   
              ----------------------------------------------------------------------------   
               NET INCOME                                $   50,054 $   39,653  $   47,958   
              ----------------------------------------------------------------------------   
              ----------------------------------------------------------------------------   
               EARNINGS PER SHARE (BASIC):                                                   
                Income per share before extraordinary                                        
                 gain                                         $2.90      $2.35       $2.01   
                Extraordinary gain per share                    --         --         0.88   
              ----------------------------------------------------------------------------   
              ----------------------------------------------------------------------------   
               NET INCOME PER SHARE (Note 11)                 $2.90      $2.35       $2.89   
              ----------------------------------------------------------------------------   
              ----------------------------------------------------------------------------   
               EARNINGS PER SHARE (DILUTED):                                                 
                Income per share before extraordinary gain    $2.87      $2.33       $1.99   
                Extraordinary gain per share                    --         --         0.87   
              ----------------------------------------------------------------------------   
              ----------------------------------------------------------------------------   
               NET INCOME PER SHARE (Note 11)                 $2.87      $2.33       $2.86   
              ----------------------------------------------------------------------------    
              ----------------------------------------------------------------------------    
</TABLE>
              The accompanying notes are an integral part of these consolidated
              financial statements.

                                                                          ------
                                                                              29
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
               Marshall Industries
 
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                   Retained  
                                                    Common Stock      Additional Earnings and
                                                 -------------------   Paid-in      Other    
                                                   Shares    Amount    Capital   Equity items
               ------------------------------------------------------------------------------
                                                           (Dollars in thousands)            
                <S>                              <C>         <C>      <C>        <C>         
                BALANCE, MAY 31, 1995            17,268,864  $17,269   $53,475     $209,008  
                 Compensation expense related                                                
                  to nonqualified stock options                                              
                  (Note 6)                              --       --         30          --   
                 Exercise of stock options           10,000       10        79          --   
                 Tax benefit from stock options                                              
                  exercised                             --       --         69          --   
                 Net income                             --       --        --        50,054  
               ------------------------------------------------------------------------------
                BALANCE, MAY 31, 1996            17,278,864   17,279    53,653      259,062  
                 Purchase of company stock                                                   
                  (Note 5)                         (725,000)    (725)  (21,094)         --   
                 Exercise of stock options           62,500       62       531          --   
                 Tax benefit from stock options                                              
                  exercised                             --       --        521          --   
                 Net income                             --       --        --        39,653  
               ------------------------------------------------------------------------------
                BALANCE, MAY 31, 1997            16,616,364   16,616    33,611      298,715  
                 Stock options issued (Note 7)          --       --      7,408          --   
                 Foreign currency translation                                                
                  adjustment                            --       --        --          (228) 
                 Unrealized loss on securities                                               
                  available for trade                   --       --        --        (3,641) 
                 Net Income                             --       --        --        47,958  
               ------------------------------------------------------------------------------
                BALANCE, MAY 31, 1998            16,616,364  $16,616   $41,019     $342,804  
               ------------------------------------------------------------------------------
               ------------------------------------------------------------------------------ 
</TABLE>
               The accompanying notes are an integral part of these consolidated
               financial statements.

------
30
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS
               Marshall Industries
 
--------------------------------------------------------------------------------
CASH FLOWS FROM 
OPERATING 
ACTIVITIES:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                   For the Years Ended May 31,                         1996     1997      1998        
                  -------------------------------------------------------------------------------     
                                                                       (Dollars in thousands)         
                   <S>                                                <C>      <C>      <C>           
                   Net income                                         $50,054  $39,653  $ 47,958      
                   Adjustments to reconcile net income to net cash                                    
                    provided by (used for) operating activities:                                      
                     Extraordinary gain from termination of joint                                     
                      venture, net of income taxes                        --       --    (14,615)     
                     Depreciation and amortization                      7,877    8,756     9,195      
                     Provision for bad debts                            2,964    2,370     2,540      
                     Interest on note receivable                       (1,639)  (2,421)     (172)     
                     Change in current assets and liabilities net of                                  
                      business acquired:                                                              
                       Decrease (increase) in receivables              (5,857) (29,354)    9,733      
                       Increase in inventories                        (44,785) (43,537)  (24,119)     
                       Increase in prepaid expenses                       --       --     (1,114)     
                       Increase in accounts payable                    18,631   21,463    16,679      
                       Increase (decrease) in other accrued                                           
                        liabilities, including salaries and wages       3,610    2,329      (533)     
                       Increase (decrease) in income taxes payable     (1,686)     326    (7,346)     
                     Deferred income tax benefit, net                  (4,507)  (1,431)   (2,541)     
                     Other                                               (184)    (140)      260      
                  -------------------------------------------------------------------------------     
                      Total adjustments                               (25,576) (41,639)  (12,033)     
                  -------------------------------------------------------------------------------     
                      Net cash provided by (used for) operating                                       
                       activities                                      24,478   (1,986)   35,925      
-------------------------------------------------------------------------------------------------     
CASH FLOWS FROM    Cash consideration paid for acquired business          --       --   (174,460)     
INVESTING          Net proceeds from termination of joint venture         --       --     14,615      
ACTIVITIES:        Investment in Serial System Ltd.                       --       --     (7,229)     
                   Capital expenditures, net                           (5,269)  (2,706)  (12,216)     
                   Deferred software costs                                (52)    (124)      --       
                   Other                                                  --       --        312      
                  -------------------------------------------------------------------------------     
                      Net cash used in investing activities            (5,321)  (2,830) (178,978)     
-------------------------------------------------------------------------------------------------     
CASH FLOWS FROM    Net borrowings (repayments) under bank credit                                      
FINANCING           lines                                             (20,000)  50,000    67,787      
ACTIVITIES:        Repayments of long-term debt                          (615)     --        --       
                   Net term loan borrowings (repayments)                  --   (25,000)   79,761      
                   Purchase of common stock                               --   (21,819)      --       
                   Exercise of stock options                              158    1,114       --       
                   Capitalized financing costs                            --       --     (1,384)     
                   Other                                                  --       --         (2)     
                  -------------------------------------------------------------------------------     
                      Net cash provided by (used in) financing                                        
                       activities                                     (20,457)   4,295   146,162      
                  -------------------------------------------------------------------------------     
                   Net increase (decrease) in cash                     (1,300)    (521)    3,109      
                   Cash at beginning of year                            3,508    2,208     1,687      
                  -------------------------------------------------------------------------------     
                  -------------------------------------------------------------------------------     
                   Cash at end of year                                $ 2,208  $ 1,687  $  4,796      
-------------------------------------------------------------------------------------------------     
SUPPLEMENTAL       Cash paid during the year for the following:                                       
DISCLOSURES OF      Interest                                          $ 2,399  $ 1,237  $  7,323      
CASH FLOW         -------------------------------------------------------------------------------     
INFORMATION:      -------------------------------------------------------------------------------     
                    Income taxes                                      $41,253  $29,558  $ 43,911      
                  -------------------------------------------------------------------------------     
                  -------------------------------------------------------------------------------      
</TABLE>
                  The accompanying notes are an integral part of these
                  consolidated financial statements.
 
                                                                          ------
                                                                              31
                 
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              Marshall Industries
              May 31, 1998
 
-------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES      NATURE OF OPERATIONS:
 
                Through a network of sales and distribution facilities and
              corporate support and distribution centers in the United States
              and Canada, the Company supplies and services a broad range of
              products, including semiconductor, passive component, connector
              and interconnect products, and computer systems and peripheral
              products, as well as production supplies.
 
              PRINCIPLES OF CONSOLIDATION:
 
                The consolidated financial statements include the accounts of
              the Company and its wholly owned subsidiaries. All significant
              intercompany transactions have been eliminated in consolidation.
 
              REVENUE RECOGNITION:
 
                Sales are recognized at the time of product shipment.
 
              DEPRECIATION AND AMORTIZATION:
 
                Depreciation on buildings is computed using the straight-line
              method over useful lives of 25 years. Building and leasehold
              improvements are amortized on the straight-line method over the
              shorter of the lives of the buildings or the remaining terms of
              the leases or useful lives of the assets. Depreciation on all
              other plant and equipment is computed on the straight-line and
              declining balance methods over useful lives of two to ten years.
              Maintenance and repairs and minor replacements of property are
              charged to expense when incurred. Major expenditures for additions
              and improvements are capitalized at cost. When assets are retired,
              or otherwise disposed of, the cost and related reserves are
              removed from the accounts, and any resulting gain or loss is
              included in income.
 
              EXCESS OF COST OVER FAIR VALUE:
 
                Goodwill represents the excess of the purchase price over the
              fair value of net assets acquired. The goodwill related to the
              purchase of Sterling and the SEI investment is being amortized on
              a straight-line basis over 40 and 30 years, respectively. On an
              ongoing basis, the Company will evaluate the carrying value and
              the remaining economic useful life of all goodwill, and will
              adjust the carrying value and the related amortization period if
              and when appropriate.
 
              INTEREST EXPENSE:
 
                Interest income of $1.7 million, $2.6 million and $0.4 million
              is netted against interest expense in fiscal 1996, 1997 and 1998,
              respectively.
 
              INCOME TAXES:
 
                The Company accounts for income taxes in accordance with
              Statement of Financial Accounting Standards (SFAS) No. 109,
              "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
              assets and liabilities are computed based on the difference
              between the financial statement and income tax bases of assets and
              liabilities using the enacted tax rates.
 
              CASH AND ACCOUNTS PAYABLE:
 
                The Company's banking arrangements provide for the daily
              replenishment of its bank accounts for check clearing
              requirements. Accordingly, outstanding checks of $22.9 million and
              $33.5 million that had not yet been paid by the Company's banks at
              May 31, 1997 and 1998, respectively, are reflected in cash and
              accounts payable in the accompanying consolidated financial
              statements.
 
------
32
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
--------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF    
SIGNIFICANT
ACCOUNTING  
POLICIES    
(CONTINUED)   INVENTORIES:

                The Company values its inventories at the lower of weighted 
              average cost or market.
              
              SHAREHOLDERS' INVESTMENT:
 
                The Company has authorized 200,000 shares of no par value
              preferred stock, of which none was outstanding at May 31, 1997 or
              1998.
 
              CAPITALIZED DEFERRED SOFTWARE COSTS:
 
                Deferred software costs are included in other assets in fiscal
              1997 and represent payments to vendors for the design, purchase
              and implementation of the computer software for the Company's
              operating and financial systems. Such deferred costs, aggregating
              $10.3 million, were amortized over a five year period. At May 31,
              1997 the unamortized balance of such costs was $0.7 million which
              was fully amortized as of December 1997.
 
              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 disclosures 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.
              Management believes that these estimates and assumptions provide a
              reasonable basis for the fair presentation of the consolidated
              financial statements.
 
              CONCENTRATION OF CREDIT RISK:
 
                The Company places its cash in what it believes to be credit-
              worthy financial institutions. However, cash balances exceed FDIC
              insured levels at various institutions. In addition, the Company
              has significant receivable balances from certain customers.
 
              WHOLLY OWNED SUBSIDIARIES:
 
                During fiscal 1997, the Company established the following wholly
              owned subsidiaries: Marshall Industries Technology Products to
              conduct U.S. sales activities, GS Marshall-Canada Inc. to conduct
              Canadian sales activities, and At Once, Inc. to conduct certain
              catalogue and telemarketing sales activities. The Company is
              engaged in one business, the sales and distribution of electronic
              components, computer products and production supplies.
              
                During the third quarter of fiscal 1998, the Company acquired
              all of the capital stock of Sterling Electronics Corporation as
              described in Note 2 to the accompanying consolidated financial
              statements.

-------------------------------------------------------------------------------
NOTE 2.
ACQUISITION OF 
STERLING
ELECTRONICS 
CORPORATION     On January 16, 1998, the Company acquired all of the outstanding
              capital stock of Sterling Electronics Corporation ("Sterling"), a
              distributor of electronic components, for $21 per share or $169.0
              million in cash plus the assumption of Sterling's outstanding debt
              of $55.5 million and other acquisition costs of $5.5 million. This
              acquisition was accounted for using the purchase method of
              accounting. The excess of cost over fair market value of the net
              assets acquired at the date of acquisition was estimated at $120.7
              million, which is being amortized over 40 years. The goodwill
              allocation is subject to final resolution of carrying values and
              acquisition liabilities.
                                                                          ------
                                                                              33
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               Marshall Industries
               May 31, 1998
 
-------------------------------------------------------------------------------
NOTE 2.
ACQUISITION OF 
STERLING
ELECTRONICS 
CORPORATION
(CONTINUED)     Accumulated amortization relating to this goodwill at May 31,
              1998 was $1.2 million. The operating results of Sterling are
              included with those of the Company from the date of acquisition.
              Sterling's net sales of $140.7 million were included in the
              Company's fiscal 1998 results.

                The following unaudited pro forma information presents a summary
              of consolidated results of operations of the Company and Sterling
              as if the acquisition had occurred on June 1, 1996 and June 1,
              1997, respectively. The unaudited pro forma results include
              estimates of goodwill amortization and increased interest expense
              (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                                     Years Ended May 31,     
                                                                       1997       1998       
              ---------------------------------------------------------------------------    
               <S>                                                  <C>        <C>           
               Net sales                                            $1,535,348 $1,741,163    
               Income before extraordinary gain                         38,770     32,554    
               Net income                                               38,770     47,169    
               Income per share before extraordinary gain, basic          2.30       1.96    
               Net income per share, basic                                2.30       2.84    
               Income per share before extraordinary gain, diluted        2.28       1.94    
               Net income per share, diluted                              2.28       2.81    
              ---------------------------------------------------------------------------    
              ---------------------------------------------------------------------------    
</TABLE> 

                This unaudited pro forma sales and earnings information is not
              necessarily indicative of the combined results that would have
              occurred had the acquisition been completed as of such date, nor
              is it necessarily indicative of results that may occur in the
              future.

-------------------------------------------------------------------------------
NOTE 3.
LONG-TERM DEBT
                Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                         May 31,      
                                                                   1997           1998  
              ---------------------------------------------------------------------------    
              <S>                                                  <C>           <C>     
              Bank credit lines                                    $50,000       $153,000
              Term loan                                                --         100,000
              ---------------------------------------------------------------------------    
                                                                    50,000        253,000
              Less current portion                                     --           7,500
              ---------------------------------------------------------------------------    
                                                                   $50,000       $245,500 
              ---------------------------------------------------------------------------    
              ---------------------------------------------------------------------------    
</TABLE> 
              Bank Credit Lines
 
                Concurrent with the acquisition of Sterling, the Company entered
              into an agreement for a $325 million unsecured credit facility
              expiring in November 2002 with a group of banks (the "Agreement")
              to finance the purchase of Sterling, retire all existing debt of
              both companies and provide for ongoing working capital
              requirements. The credit facility consists of a $100 million term
              loan and a revolving facility of $225 million. The new facility,
              which replaced the Company's previous bank line of credit,
              provides for interest at either LIBOR plus a margin or at a prime
              rate of interest. At May 31, 1998, the prime rate was 8.50%. The
              facility is subject to a commitment fee on the unused line of
              credit and has no compensating balance requirements. Both the
              LIBOR margin on the borrowing and the fees on the unused line of
              credit is based on the Company's ratio of total funded debt to
              operating cash flow, as defined in the Agreement, calculated on a
              rolling four quarter basis. Based on the Company's performance
              under this calculation, the LIBOR margin on borrowings is expected
              to range from .375% to .950%, and fees for the unused line of
              credit will range from .125% to .375%.

 
------
34
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
NOTE 3.
LONG-TERM DEBT
(CONTINUED)     The Agreement requires the Company, among other things, to meet
              certain interest coverage ratios and maintain certain minimum
              tangible net worth levels and current ratios. In addition, the
              Agreement prohibits the Company from making investments in other
              companies (with certain exceptions) or paying dividends in excess
              of certain amounts. Pursuant to the terms of the Agreement, there
              is a first priority lien on 100% (65% for foreign) of the equity
              or other ownership interests of all material subsidiaries of the
              Company and all material subsidiaries of the Company have jointly
              and severally guaranteed the Agreement. The Company's current
              material subsidiaries, as defined in the Agreement, are Sterling
              and Marshall Industries Technology Products.
 
              Term Loan
 
                Beginning in 1999, there will be quarterly reductions on the
              $100 million term loan portion of the credit facility, increasing
              in amounts from $15 million in the aggregate for 1999 to a total
              reduction of $100 million over the term of the Agreement.
 
              Interest Rate Swap Agreements
 
                The Company has entered into separate interest rate swap
              agreements with three banks for the notional amounts of $50
              million, $50 million and $25 million to manage variable interest
              rate exposures. The agreements expire in January 2003 and are
              accounted for as hedge instruments. The Company agreed to
              exchange, at quarterly intervals, the difference between the
              Company's floating rate interest obligations with fixed pay rates
              of 5.775%, 5.725% and 5.679% per annum, respectively. The notional
              amounts of these agreements do not represent amounts exchanged by
              the parties, and thus, are not a measure of the exposure to the
              Company. While it is the Company's intention to hold these
              contracts through expiration, any termination of these swap
              agreements at May 31, 1998, based on the fair value of the swap
              agreements as determined by reference to the current interest
              rates and agreements with similar terms, would not have been
              material to the Company's results of operations. Additional
              interest expense resulting from these agreements was not material
              to the Company's financial position or results of operations.
 
              Maturities of long-term debt
 
                The maturities of long-term debt are as follows:
 
<TABLE>
                                                                        (In thousands) 
              ---------------------------------------------------------------------------    
              Fiscal Year Ended May 31,                                      Amount 
              ---------------------------------------------------------------------------    
              <S>                                                       <C>            
              1999                                                      $        7,500 
              2000                                                              17,500 
              2001                                                              22,500 
              2002                                                              32,500 
              2003                                                             173,000 
              ---------------------------------------------------------------------------    
                                                                        $      253,000  
              ---------------------------------------------------------------------------    
</TABLE>

              Fair Value
 
                The Company's bank credit lines and term loan approximate fair
              value as they bear floating interest rates.
               
                                                                          ------
                                                                              35
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               Marshall Industries
               May 31, 1998
 
-------------------------------------------------------------------------------
NOTE 4.
INCOME TAXES
<TABLE> 
<CAPTION> 
                The provision for income taxes consists of the following (in thousands):
 
               <S>                                                 <C>      <C>      <C>      
               Current:                                             1996     1997     1998    
              ------------------------------------------------------------------------------  
                Federal                                            $31,458  $23,386  $26,292  
                State                                                8,299    6,895    6,660  
              ------------------------------------------------------------------------------  
                                                                    39,757   30,281   32,952  
              ------------------------------------------------------------------------------  
               Deferred:                                                                      
                Federal                                             (3,615)  (1,144)   2,247  
                State                                                 (892)    (287)     294  
              ------------------------------------------------------------------------------  
                                                                    (4,507)  (1,431)   2,541  
              ------------------------------------------------------------------------------  
                   Total                                           $35,250  $28,850  $35,493  
              ------------------------------------------------------------------------------  
              ------------------------------------------------------------------------------   
</TABLE> 
 
                The difference between the income tax provision at the Federal
              statutory rate and the recorded income tax provision is reconciled
              as follows (in thousands):
              ------------------------------------------------------------------
<TABLE>
<CAPTION> 
                                                                      1996    1997    1998   
               ----------------------------------------------------------------------------- 
                <S>                                                  <C>     <C>     <C>     
                Computed Federal income taxes at the statutory rate  $29,856 $23,976 $29,208 
                State income taxes, net of Federal income tax                                
                 benefit                                               4,814   4,295   5,207 
                Other, net                                               580     579   1,078 
               ----------------------------------------------------------------------------- 
                    Provision for income taxes                       $35,250 $28,850 $35,493  
               ----------------------------------------------------------------------------- 
               ----------------------------------------------------------------------------- 
</TABLE> 
 
                As of May 31, 1997 and 1998, deferred tax assets (liabilities)
               were comprised of the following (in thousands):
               ----------------------------------------------------------------
<TABLE>
<CAPTION> 
              ------------------------------------------------------------------   
                                                                1997     1998    
              ------------------------------------------------------------------ 
                <S>                                           <C>      <C>       
                Operating reserves                             $ 8,657  $14,854  
                Tax depreciation in excess of book amounts      (2,345)  (3,255) 
                Capitalization of deferred software                              
                 costs for book purposes                          (310)     --   
                Capitalization of inventory costs for income                     
                 tax purposes                                      633    1,253  
                State tax provision                              1,223    1,921  
                Vacation expense accrued for book purposes       1,054    1,151  
                Other, net                                       2,718    5,210  
              ------------------------------------------------------------------ 
                  Total net deferred tax asset                 $11,630  $21,134  
              ------------------------------------------------------------------ 
              ------------------------------------------------------------------  
</TABLE> 
 
                As of May 31, 1998, the Company had total deferred tax assets of
              $22.9 million and total deferred tax liabilities of $1.7 million.
              The Company did not record any valuation allowances against
              deferred tax assets at May 31, 1998.

--------------------------------------------------------------------------------
NOTE 5.
COMMITMENTS AND 
CONTINGENCIES   LEASE COMMITMENTS:
 
                 The Company leases certain facilities and equipment under
                operating leases expiring at various dates through fiscal year
                2007. The aggregate rent expense for all operating leases was
                $2.3 million in 1996, $2.6 million in 1997 and $4.0 million in
                1998.

------
36
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
NOTE 5.
COMMITMENTS AND 
CONTINGENCIES 
(CONTINUED)     The future minimum lease payments under all leases are shown
              below (in thousands):
<TABLE> 
<CAPTION> 
              -------------------------------------------------------------------------------
                                                                            Operating Leases 
              -------------------------------------------------------------------------------
              <S>                                                            <C> 
              Year Ending May 31,                                                            
                 1999                                                          $ 3,810       
                 2000                                                            3,091       
                 2001                                                            2,507       
                 2002                                                            2,103       
                 2003                                                            1,304       
                 Thereafter                                                      3,127       
              -------------------------------------------------------------------------------
                                                                               $15,942       
              -------------------------------------------------------------------------------
              ------------------------------------------------------------------------------- 
</TABLE>
 
                Amounts shown above are net of sublease income of $587,000,
              $414,000 and $218,000 for 1999, 2000 and 2001, respectively.

              STOCK BUY-BACK:
 
                During fiscal 1997, the Company purchased 725,000 shares of the
              Company's common stock at an aggregate amount of $21.8 million
              under the stock repurchase plan authorized by the Board of
              Directors in May 1996.

              FACILITY EXPANSION:
 
                The Company plans to sell its current facility in Milpitas,
              California and acquire a larger facility to meet the growth of its
              business. The Northern California market is the largest in North
              America for the industry and the Company. In connection therewith,
              the Company has entered into an agreement subsequent to May 31,
              1998 for the purchase of a 10-acre property for $16.1 million in
              Milpitas, California for the construction of a sales, marketing
              and distribution facility. The Company estimates that the
              construction cost of the new facility will be approximately $10
              million.
 
              LITIGATION:
 
                There are no material pending legal proceedings to which the
              Company or any of its subsidiaries is a party.

              INCOME TAXES:
 
                During fiscal 1997, the Internal Revenue Service ("IRS")
              completed its examination of the Company's Federal income tax
              returns for taxable years 1991 through 1994 which resulted in the
              issuance of deficiency notices seeking additional taxes. This
              assessment was appealed by the Company at the administrative
              appeals level. Subsequent to May 31, 1998, the IRS concluded its
              review of this administrative appeal in favor of the Company on
              all of the material issues and the final assessment does not have
              a material impact on the Company's financial position or results
              of operations.

--------------------------------------------------------------------------------
NOTE 6.
STOCK OPTIONS   The Company has two active stock option plans which provide for
              the granting of incentive and nonqualified stock options covering
              1,100,000 shares of common stock. There was one other plan, which
              was inactive with respect to the granting of new options, during
              the periods reported. Nonqualified stock options may have an
              exercise price which is less than market value at the date of
              grant; incentive stock options must have an exercise price equal
              to market value at the date of grant. There were 50,000, 35,000
              and 250,000 options granted in fiscal 1996, 1997
 
                                                                          ------
                                                                              37
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               Marshall Industries
               May 31, 1998
 
-------------------------------------------------------------------------------
NOTE 6.       and 1998, respectively, at exercise prices ranging from $25.25 to
STOCK         $35.875 per share. At May 31, 1998, 440,000 shares were available
OPTIONS       for additional grants.
(CONTINUED)  
              As permitted by Statement of Financial Accounting Standards
              (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
              effective for fiscal 1998, the Company continues to account for
              stock compensation costs in accordance with the provisions of
              Accounting Principles Board Opinion No. 25, "Accounting for Stock
              Issued to Employees." Had compensation costs for the Company's
              stock plans been determined in accordance with SFAS No. 123, the
              Company's net income and earnings per share would have been
              reduced to the following pro forma amounts (in thousands except
              per share data):
<TABLE>
<CAPTION> 
              ----------------------------------------------------------------------------
                                                                      1997    1998
              ----------------------------------------------------------------------------
              <C>                                  <S>               <C>     <C>
              Net income                           As reported       $39,653 $47,958
                                                   Pro forma         $39,490 $47,564
              Net income per share, basic          As reported       $  2.35 $  2.89
                                                   Pro forma         $  2.34 $  2.86
              Net income per share, diluted        As reported       $  2.33 $  2.86
                                                   Pro forma         $  2.32 $  2.84
              ----------------------------------------------------------------------------
              ----------------------------------------------------------------------------
</TABLE>
 
              Because the SFAS No. 123 method of accounting has not been applied
              to options granted prior to May 31, 1995, the resulting pro forma
              compensation costs may not be representative of those to be
              expected in future years.
 
              The fair value of each option grant is estimated on the date of
              grant using the Black-Scholes option pricing model with the
              following weighted-average assumptions used for options granted in
              fiscal 1997 and 1998: risk-free interest rate of approximately 7%
              and 6%, respectively; expected dividend yields of 0%; expected
              volatility of approximately 26%; and expected life of 7 years .

 
              The following is a summary of changes in outstanding options for
              the Company's stock option plans for the three years ended May 31,
              1998:
 
<TABLE>
<CAPTION>
              ---------------------------------------------------------------
                                                             Weighted-Average
                                                    Shares    Exercise Price
              ---------------------------------------------------------------
              <S>                                  <C>      <C>
              OPTIONS OUTSTANDING AT MAY 31, 1995  443,500      $15.268
              Options granted                       50,000       35.875
              Options exercised                    (10,000)       8.900
                                                   -------
              OPTIONS OUTSTANDING AT MAY 31, 1996  483,500       17.531
              Options granted                       35,000       30.089
              Options exercised                    (62,500)       9.494
              Options expired or canceled           (5,000)      30.000
                                                   -------
              OPTIONS OUTSTANDING AT MAY 31, 1997  451,000       19.481
              Options granted                      250,000       32.684
                                                   -------
              OPTIONS OUTSTANDING AT MAY 31, 1998  701,000      $24.190
              ---------------------------------------------------------------
              ---------------------------------------------------------------
              Options exercisable at May 31, 1996  138,500      $13.904
              Options exercisable at May 31, 1997  111,000       21.138
              Options exercisable at May 31, 1998  153,500       23.363
              ---------------------------------------------------------------
              ---------------------------------------------------------------
</TABLE>
 
 
------
38
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
NOTE 6. 
STOCK OPTIONS
(CONTINUED)     The following table outlines the detail of options outstanding
               at May 31, 1998:
<TABLE> 
<CAPTION> 
              ------------------------------------------------------------------------------------------------------
                                                                 Weighted-Average   Exercisable     Weighted-Average   
                  Number                      Weighted-Average      Remaining            at        Exercise Price of   
                of Options     Option Price    Exercise Price    Contractual Life   May 31, 1998   Exercisable Shares  
              ------------------------------------------------------------------------------------------------------
                <S>          <C>              <C>                <C>                <C>            <C>                 
                260,000           $14.00           $14.00              12.9            20,000            $14.00        
                420,000       24.00 - 35.875        31.26               8.5           112,500             27.73        
                 21,000        8.675 - 8.90          8.89               2.7            21,000              8.89        
              ------------------------------------------------------------------------------------------------------
                701,000      $8.675 - $35.875      $24.19               9.9           153,500            $23.36        
              ------------------------------------------------------------------------------------------------------
              ------------------------------------------------------------------------------------------------------
</TABLE>
 
                The difference between the quoted market value of the shares at
              the date of grant and the option price for grants made under the
              nonqualified plans is charged to income as compensation expense
              over the vesting periods of the related options. During fiscal
              1996, $30,000 was charged against income and credited to
              additional paid-in capital under these plans. No amounts were
              charged in fiscal 1997 and 1998. Options granted vest over periods
              from four to ten years and are exercisable over periods from ten
              to twenty years. The income tax effect of any difference between
              the market price at the grant date and the market price at the
              exercise date is credited to additional paid-in capital as the
              options are exercised.

-------------------------------------------------------------------------------
NOTE 7.
INVESTMENT IN 
SONEPAR 
ELECTRONIQUE 
INTERNATIONAL   During the first quarter of fiscal 1998, the Company converted
              the note receivable from Sonepar Electronique International (SEI)
              plus accrued interest into a minority equity interest of 16% in
              Eurotronics B.V. (Eurotronics), a new company comprised of SEI's
              electronics distribution companies. In connection with this
              conversion, the Company granted a stock option to SEI, with an
              exercise period of two years, to purchase 874,545 shares of the
              Company's stock at a price of $34.5685 per share, which was based
              on the average trading price of the Company's stock for the 90
              days preceding the conversion date. The Company has accounted for
              this investment using the equity method. The Company believes that
              it has significant influence on the operations of SEI through its
              board membership and its veto rights on certain significant
              aspects of the operations of the business. The Company's recording
              of its initial investment was based on preliminary estimates of
              the fair value of the net assets of the companies contributed. In
              preparing the audited Eurotronics consolidated financial
              statements as of the acquisition date, Eurotronics decided not to
              record goodwill in its financial statements, as allowed by Dutch
              GAAP. Due to this decision, the Company's investment, including
              the value of the stock option at $7.4 million, exceeds the net
              assets of Eurotronics by $30 million. The Company will amortize
              this difference over a period of thirty years. This treatment will
              result in the same accounting impact on the Company's financial
              statements as if the difference or goodwill had been recorded by
              Eurotronics in its financial statements. During fiscal 1998 the
              Company recorded non-cash currency translation loss of $192,000 on
              the equity investment with an offsetting charge against
              shareholders' investments. The Company's pro-rata share of the
              earnings from this equity investment was not material to the
              Company's results of operations for fiscal 1998.
 
                                                                          ------
                                                                              39
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               Marshall Industries
               May 31, 1998
 
-------------------------------------------------------------------------------
NOTE 8.
INVESTMENT IN   
SERIAL        
SYSTEMS, LTD.   In April 1998, the Company purchased 17,814,138 shares 
              (comprising approximately 9%) of the common stock of Serial 
              System Ltd., an electronic components distributor based in
              Singapore, the shares of which are traded on the Stock Exchange of
              Singapore. The purchase price for the shares, which were newly
              issued shares, was $7.2 million. In connection with this
              transaction, Marshall and Serial entered into a joint marketing
              agreement to increase each company's ability to service the global
              marketplace. The investment in Serial System Ltd. was adjusted by
              $3.6 million as of May 31, 1998 due to the market decline of
              Serial's common stock and the decline of the Singapore dollar to
              the U.S. dollar. The Company did not record a tax benefit as a
              result of this adjustment. This adjustment is reflected in the
              Company's shareholder's investment in accordance with SFAS No.
              115, "Accounting for Certain Investments in Debt and Equity
              Securities. "

--------------------------------------------------------------------------------
NOTE 9.
BUSINESS 
SEGMENT         The Company is engaged in the distribution of industrial
              electronic components and production supplies through a nationwide
              network of sales and distribution facilities. In the opinion of
              management, the Company's products are identifiable to only one
              industry segment.
 
                The Company's Canadian operations are currently not material to
              its results of operations or financial position.

--------------------------------------------------------------------------------
NOTE 10.
ACCORD CONTRACT 
SERVICES JOINT 
VENTURE         In August 1996, the Company formed a joint venture with Wyle
              Electronics ("Wyle"), another distributor of semiconductors and
              computer products. The venture, known as Accord Contract Services
              LLC ("Accord"), was 50% owned by each of the Company and Wyle.
 
                On or about August 6, 1997 Raab Karcher AG, an indirect wholly-
              owned subsidiary of VEBA AG, consummated a tender offer for all or
              substantially all of the common stock of Wyle. Under the terms of
              the Agreement, such a change in the ownership of Wyle entitled the
              Company, at its option, to initiate the dissolution of Accord. In
              such event, the Agreement provided that the Company was entitled
              to receive termination fees in the aggregate amount of
              approximately $25 million from Wyle. The Company elected to
              terminate the joint venture and received a termination fee of
              $25.1 million on September 30, 1997, which was recorded in the
              Company's second quarter fiscal 1998 results of operations as an
              extraordinary item, net of the related income taxes.
              
------
40
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
NOTE 11.
INCOME PER 
SHARE           In February 1997, the Financial Accounting Standards Board
              issued SFAS No. 128, "Earnings per Share" (EPS), which requires
              dual presentation of basic EPS and diluted EPS, simplifies
              existing computational guidelines, and increases the comparability
              of earnings per share on an international basis. SFAS 128 was
              effective for periods ending after December 15, 1997. All prior
              periods have been restated.
 
                Income, average weighted shares outstanding and earnings per
              share data as restated for SFAS No. 128 are as follows (in
              thousands, except per share data):
 
--------------------------------------------------------------------------------
<TABLE>
<CAPTION> 
                                                             For the Years Ended May 31,                         
                                      -------------------------------------------------------------------------- 
                                                1996                     1997                     1998           
                                      -----------------------  -----------------------  -------------------------
                                                    Per Share                Per Share                  Per Share
                                      Income  Shares  Amount   Income  Shares  Amount   Income    Shares  Amount  
                                      ---------------------------------------------------------------------------
                <S>                   <C>     <C>    <C>       <C>     <C>    <C>       <C>       <C>    <C>      
                BASIC EARNINGS                                                                                    
                 Income before                                                                                    
                  extraordinary item  $50,054 17,278   $2.90   $39,653 16,861   $2.35   $33,343   16,616   $2.01  
                 Extraordinary gain       --     --      --        --     --      --     14,615   16,616    0.88  
                 Net income            50,054 17,278    2.90    39,653 16,861    2.35    47,958   16,616    2.89  
                 Options                  --     136               --     136               --       156          
                -------------------------------------------------------------------------------------------------
                DILUTED EARNINGS PER                                                                              
                 SHARE                                                                                            
                 Income before                                                                                    
                  extraordinary item  $50,054 17,414   $2.87   $39,653 16,997   $2.33   $33,343   16,772   $1.99  
                 Extraordinary gain       --     --      --        --     --      --     14,615   16,772    0.87  
                 Net income            50,054 17,414    2.87    39,653 16,997    2.33    47,958   16,772    2.86  
                -------------------------------------------------------------------------------------------------
                ------------------------------------------------------------------------------------------------- 
</TABLE>
 
                The effect of this accounting change on previously reported
              earnings per share (EPS) data was as follows:
<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------
                                                                                             For the Years Ended      
                                                                                                   May 31,        
                                                                                            --------------------   
                                                                                            1996           1997              
                ------------------------------------------------------------------------------------------------
                 <S>                                                                        <C>            <C>               
                 PER SHARE AMOUNTS                                                                                           
                  Diluted EPS as reported                                                   $2.86          $2.32             
                  Effect of SFAS No. 128                                                      .01            .01             
                                                                                            -----          -----             
                  Diluted EPS as restated                                                   $2.87          $2.33             
                ------------------------------------------------------------------------------------------------
</TABLE>
 
                Options to purchase 115,000 shares of common stock at $35.625
              and $35.875 per share were outstanding as of May 31, 1998, but
              were not included in the computation of diluted EPS because the
              options' exercise price was greater than the average market price
              of the common shares for the year ended May 31, 1998. The options
              expire on October 24, 2005 and October 21, 2007.
 
                                                                          ------
                                                                              41
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               Marshall Industries
               May 31, 1998
 
-------------------------------------------------------------------------------
NOTE 12.
EMPLOYEE
BENEFIT
PLANS         TAX DEFERRED PROFIT SHARING PLAN:
 
                Under the provisions of the Marshall Industries Tax Deferred
              Profit Sharing Plan (the "Plan"), participating employees,
              excluding Sterling employees, may defer from two to twelve
              percent, with certain limitations, of their earnings each payroll
              period, and such amount is deposited in a nonforfeitable, fully
              vested trust account for the employees' benefit. The Company
              contributes quarterly an amount equal to 50 percent of the
              employees' contributions, limited to 3% of such employee earnings
              for the quarter. Forfeitures of matching contributions are used to
              reduce the employer's matching contributions. Company
              contributions may be limited to the extent of net profits and must
              be invested in the Company's common stock. The Plan, however, may
              not own more than 20 percent of the Company's outstanding shares.
              At May 31, 1998 the Plan owned less than 2% of the Company's
              outstanding shares. Company contributions to the Plan amounted to
              $1.5 million in 1996, $1.2 million in 1997 and $1.4 million in
              1998.
 
                Under the provisions of the Sterling Electronics Corporation
              401(k) Plan, participating employees may defer from one to fifteen
              percent of their annual compensation, with certain limitations,
              each payroll period. The employee contributions are deposited in a
              nonforfeitable, fully vested trust account for the employees'
              benefit. The Company makes qualified matching cash contributions
              up to 50% of the amount contributed by each participant up to 5%
              of each plan participant's compensation. Forfeitures of matching
              contributions are used to reduce the employer's matching
              contributions. Company contributions to the Plan, from Sterling
              acquisition date of January 16, 1998 to May 31, 1998, were
              $242,000.
 
              EMPLOYEE COMPENSATION PLANS:
 
                Sterling has supplemental compensation plans for certain key
              employees. These plans provide certain defined benefits upon
              retirement or termination. The expense related to these plans for
              fiscal year 1998 is not material to the Company's results of
              operations.
 
------
42
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
--------------------------------------------------------------------------------
              ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE
 
              NONE
 
--------------------------------------------------------------------------------
              PART III
 
                Marshall will file with the Securities and Exchange Commission a
              definitive Proxy Statement pursuant to Regulation 14A. The
              material under the following captions of the Proxy Statement for
              the Annual Meeting of Shareholders to be held on October 20, 1998
              is incorporated herein by this reference: Election of Directors,
              Executive Officers, Executive Compensation, Principal
              Shareholders, Certain Relationships and Related Transactions.
 
--------------------------------------------------------------------------------
              PART IV

              ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                       FORM 8-K
 
                (a) 1. CONSOLIDATED FINANCIAL STATEMENTS -- The following
              consolidated financial statements of Marshall Industries are set
              forth in Item 8 of this Annual Report on Form 10-K:
<TABLE> 
<CAPTION>                 
              -------------------------------------------------------------------------  
                                                                                Page     
              -------------------------------------------------------------------------  
                <S>                                                              <C>     
                Report of Independent Public Accountants                          27     
                Consolidated Financial Statements:                                       
                 Balance Sheets -- May 31, 1997 and 1998                          28     
                 Statements for the years ended May 31, 1996, 1997 and 1998 --           
                  Income                                                          29     
                  Shareholders' Investment                                        30     
                  Cash Flows                                                      31     
                 Notes to Consolidated Financial Statements                       32      
</TABLE>
 
                (a) 2. FINANCIAL STATEMENT SCHEDULES -- All schedules are
              omitted since they are not applicable, not required, or the
              required information is included in the consolidated financial
              statements or notes thereto.
 
                (a) 3. EXHIBITS -- The following exhibits are attached to this
              Annual Report on Form 10-K:
 

              Exhibit  2.1: Agreement and Plan of Merger dated as of September
                            18, 1997, by and among Marshall Industries, MI
                            Holdings Nevada, Inc. and Sterling Electronics
                            Corporation. (Incorporated herein by reference to
                            Exhibit 2.1 on Form 8-K event date September 18,
                            1997.)

              Exhibit  3.1: Articles of Incorporation, as amended. (Incorporated
                            herein by reference to Exhibit 3.1 to the Company's
                            Annual Report on Form 10-K for the fiscal year ended
                            May 31, 1996.)

              Exhibit  3.2: Amended and Restated By-Laws. (Incorporated herein
                            by reference to Exhibit 3.2 to the Company's Current
                            Report on Form 8-K event date April 28, 1998.)

                                                                          ------
                                                                              43
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
               FORM 10-K
               Marshall Industries
               Year Ended May 31, 1998
 
-------------------------------------------------------------------------------
 
<TABLE>
              <C>             <S>                                                                  
              Exhibit 10.1:   Credit Agreement dated as of January 16, 1998 by and among           
                              Marshall Industries and, subject to and in accordance with           
                              Addendum A thereto, Sterling Electronics Corporation and             
                              First Union National Bank, as Administrative Agent, together         
                              with Addendum A thereto. (Incorporated herein by reference to        
                              Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q          
                              for the quarter ended February 28, 1998.)                            

              Exhibit 10.2:   First Amendment to Credit Agreement dated February 26, 1998          
                              by and among Marshall Industries, Sterling Electronics               
                              Corporation the Lenders party to the Credit Agreement and            
                              First Union National Bank, as Administrative Agent.                  
                              (Incorporated herein by reference to Exhibit 10.2 to the             
                              Company's Quarterly Report on Form 10-Q for the quarter ended        
                              February 28, 1998.)                                                  

              Exhibit 10.3:   Pledge Agreement dated January 16, 1998 made by Marshall             
                              Industries in favor of First Union National Bank as                  
                              Administrative Agent. (Incorporated herein by reference to           
                              Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q          
                              for the quarter ended February 28, 1998.)                            

              Exhibit 10.4:   Unconditional Guaranty Agreement dated as of January 16, 1998        
                              made by each of the Subsidiary Guarantors in favor of First          
                              Union National Bank as Administrative Agent. (Incorporated           
                              herein by reference to Exhibit 10.4 to the Company's                 
                              Quarterly Report on Form 10-Q for the quarter ended February         
                              28, 1998.)                                                           

              Exhibit 10.5*:  Marshall Industries 1984 Stock Option Plan. (Incorporated            
                              herein by reference to Exhibit A to the Company's Final Proxy        
                              Statement dated September 17, 1984.)                                 

              Exhibit 10.6*:  Marshall Industries 1992 Nonqualified Stock Option Plan.             
                              (Incorporated herein by reference to Exhibit A to the                
                              Company's Final Proxy Statement dated August 31, 1992.)              

              Exhibit 10.7*:  Marshall Industries 1997 Stock Option Plan. (Incorporated            
                              herein by reference to Exhibit A to the Company's Final Proxy        
                              Statement dated August 29, 1997.)                                    

              Exhibit 10.8*:  Change in Control Agreement dated February 6, 1996 between           
                              Marshall Industries and Gordon S. Marshall. (Incorporated            
                              herein by reference to Exhibit 99.1 to the Company's                 
                              Quarterly Report on Form 10-Q for the quarter ended February         
                              29, 1996.)                                                           

              Exhibit 10.9*:  Change in Control Agreement dated February 7, 1996 between           
                              Marshall Industries and Robert Rodin. (Incorporated herein by        
                              reference to Exhibit 99.2 to the Company's Quarterly Report          
                              on Form 10-Q for the quarter ended February 29, 1996.)               

              Exhibit 10.10*: Change in Control Agreement dated January 10, 1997 between           
                              Marshall Industries and Richard D. Bentley. (Incorporated            
                              herein by reference to Exhibit 10.12 to the Company's                
                              Quarterly report on Form 10-Q for the quarter ended November         
                              30, 1996.)                                                           

              Exhibit 10.11*: Form of Indemnification Agreement with certain officers and          
                              directors. (Incorporated herein by reference to Exhibit 10.13        
                              to the Company's Quarterly report on Form 10-Q for the               
                              quarter ended November 30, 1996.)                                     
</TABLE>
 
------
44
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
 
<TABLE>
              <C>             <S>                                                                      
              Exhibit 10.12*: Schedule of Omitted Indemnification Agreements. (Incorporated            
                              herein by reference to Exhibit 10.14 to the Company's                    
                              Quarterly report on Form 10-Q for the quarter ended November             
                              30, 1996.)                                                               

              Exhibit 10.13*: Employment Agreement dated as of September 18, 1997 by and               
                              between Marshall Industries and Ronald S. Spolane.                       
                              (Incorporated herein by reference to Exhibit 10.1 on Form 8-K            
                              event date September 18, 1997.)                                          

              Exhibit 10.14*: Employment Agreement dated as of September 18, 1997 by and               
                              between Marshall Industries and David S. Spolane.                        
                              (Incorporated herein by reference to Exhibit 10.1 on Form 8-K            
                              event date September 18, 1997.)                                          

              Exhibit 10.15:  Shareholders Agreement with Sonepar Electronique                         
                              International. (Incorporated herein by reference to Exhibit              
                              10.3 to the Company's Quarterly Report on Form 10-Q for the              
                              quarter ended August 31, 1997.)                                          

              Exhibit 10.16:  Marshall Industries Non-qualified Stock Option Grant.                    
                              (Incorporated herein by reference to Exhibit 10.4 to the                 
                              Company's Quarterly Report on Form 10-Q for the quarter ended            
                              August 31, 1997.)                                                        

              Exhibit 10.17:  Marshall Warrant Rescission Agreement dated February 28, 1997            
                              between Marshall Industries and Wyle Electronics.                        
                              (Incorporated herein by reference to Exhibit 10.15 to the                
                              Company's Quarterly report on Form 10-Q for the quarter ended            
                              February 28, 1997.)                                                      

              Exhibit 10.18:  Amendment No. 3 to Limited Liability Company Agreement of                
                              Accord Contract Services LLC, dated February 28, 1997 between            
                              Marshall Industries and Wyle Electronics. (Incorporated                  
                              herein by reference to Exhibit 10.16 to the Company's                    
                              Quarterly report on Form 10-Q for the quarter ended                      
                              February 28, 1997.)                                                      

              Exhibit 10.19*: Change in Control Agreement dated August 26, 1997 between                
                              Marshall Industries and Henry W. Chin. (Incorporated herein              
                              by reference to Exhibit 10.21 to the Company's Annual Report             
                              on Form 10-K for the fiscal year ended May 31, 1997.)                    

              Exhibit 10.20:  Registration Rights Agreement dated as of September 15, 1994             
                              by and between Marshall Industries and Sonepar Electronique              
                              International. (Incorporated herein by reference to Exhibit              
                              10.21 to the Company's Annual Report on Form 10-K for the                
                              fiscal year ended May 31, 1997.)                                         

              Exhibit 23:     Consent of Independent Public Accountants.                               

              Exhibit 27:     Financial Data Schedule.                                                  
</TABLE>
 
                (b) REPORTS ON FORM 8-K -- Form 8-K/A dated March 31, 1998 (Item
              7) regarding pro forma financial statements of Marshall Industries
              taking into account the acquisition of Sterling Electronics
              Corporation.
 
              * Management contract, compensatory plan or arrangement.
 
                                                                          ------
                                                                              45
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
 
 
-------------------------------------------------------------------------------
SIGNATURES      Pursuant to the requirements of Section 13 or 15 (d) of the
              Securities Exchange Act of 1934, Marshall has duly caused this
              report to be signed on its behalf by the undersigned, thereunto
              duly authorized.
 
              MARSHALL INDUSTRIES
 
                                                                
              By:      HENRY W. CHIN                            August 26, 1998 
                 ---------------------------
                     Henry W. Chin
                Vice President, Finance, Chief
               Financial Officer and Secretary
 
                Pursuant to the requirements of the Securities Exchange Act of
              1934, this report has been signed below by the following persons
              on behalf of the Registrant and in the capacities and on the dates
              indicated.
<TABLE>
              <S>                                                            <C>                    
                            GORDON S. MARSHALL                                August 26, 1998       
              _____________________________________________                                         
                            Gordon S. Marshall                                                      
                    Chairman of the Board and Director                                              
                                                                                                    
                               ROBERT RODIN                                   August 26, 1998       
              _____________________________________________                                         
                               Robert Rodin                                                         
                  President, Chief Executive Officer and                                            
                                 Director                                                           
                      (Principal Executive Officer)                                                 
                                                                                                    
                              HENRY W. CHIN                                   August 26, 1998       
              _____________________________________________                                         
                              Henry W. Chin                                                         
                 Vice President, Finance, Chief Financial                                           
                Officer and Secretary (Principal Financial                                          
                         and Accounting Officer)                                                    
                                                                                                    
                            RICHARD D. BENTLEY                                August 26, 1998       
              ---------------------------------------------                                         
                            Richard D. Bentley                                                      
                                 Director                                                           
                                                                                                    
                            RICHARD C. COLYEAR                                August 26, 1998       
              ---------------------------------------------                                         
                            Richard C. Colyear                                                      
                                 Director                                                           
                                                                                                    
                              JEAN FRIBOURG                                   August 26, 1998       
              ---------------------------------------------                                         
                              Jean Fribourg                                                         
                                 Director                                                           
                                                                                                    
                             LATHROP HOFFMAN                                  August 26, 1998       
              ---------------------------------------------                                         
                             Lathrop Hoffman                                                        
                                 Director                                                           
                                                                                                    
                            JOSE MENENDEZ                                     August 26, 1998       
              ---------------------------------------------                                         
                              Jose Menendez                                                         
                                 Director                                                           
                                                                                                    
                         RAYMOND G. RINEHART                                  August 26, 1998       
              ---------------------------------------------                                         
                           Raymond G. Rinehart                                                      
                                 Director                                                           
                                                                                                    
                             HOWARD C. WHITE                                  August 26, 1998       
              ---------------------------------------------                                         
                             Howard C. White                                                        
                                 Director                                                            
</TABLE>
 
------
46
<PAGE>
 
MARSHALL INDUSTRIES                                           
 
--------------------------------------------------------------------------------
                              Corporate Information
 
-------------------------------------------------------------------------------
<TABLE>
 <C>                             <C>                                   <S>
 CORPORATE OFFICERS              Gordon S. Marshall                    Robert Rodin
                                 Chairman of the Board                 President and
                                                                       Chief Executive Officer
                                 Richard D. Bentley
                                 Executive Vice President              Henry W. Chin
                                                                       Vice President, Finance,
                                                                       Chief Financial Officer
                                                                       and Secretary
-------------------------------------------------------------------------------------------------
 BOARD OF DIRECTORS              Gordon S. Marshall                    Robert Rodin
                                 Chairman of the Board                 President and
                                 Marshall Industries                   Chief Executive Officer
                                                                       Marshall Industries
                                 Richard D. Bentley
                                 Executive Vice President              Jose Menendez
                                 Marshall Industries                   Chairman of the
                                                                       Executive Boards
                                 Richard C. Colyear                    of Sonepar Electronique
                                 President,                            International
                                 Colyear Development Corporation       and Sonepar Distribution 
                                 El Monte, CA                                                   
                                                                       Raymond G. Rinehart    
                                 Jean Fribourg                         Former Chairman of the  
                                 Chief Executive Officer,              Board and President           
                                 Sonepar Electronique International    Clow Corporation        
                                                                       Oak Brook, IL 
                                 Lathrop Hoffman                       
                                 President,                            Howard C. White  
                                 Sierra Autocars, Inc.                 Retired Partner   
                                 Monrovia, CA                          Andersen Worldwide
                                                                       Chicago, IL       
-------------------------------------------------------------------------------------------------
                                                                       TRANSFER AGENT & REGISTRAR 
 CORPORATE INFORMATION           CORPORATE HEADQUARTERS                First Union National
                                 Marshall Industries                   Bank of North Carolina
                                 9320 Telstar Avenue                   Charlotte, NC
                                 El Monte, CA 91731-2895               
                                 (626) 307-6000                        AUDITORS          
                                                                                          
                                 STOCK LISTING                         Arthur Andersen LLP
                                                                       Los Angeles, CA    
                                 Common Stock traded on                                   
                                 the New York Stock
                                 Exchange (Symbol MI)
-------------------------------------------------------------------------------------------------
                                 
 SUBSIDIARIES                    Marshall Industries Technology Products
                                 G.S. Marshall-Canada Inc.
                                 At Once, Inc.
                                 Sterling Electronics Corporation
</TABLE>
 
                                                                         ------
                                                                              47
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