SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        For the fiscal year ended December 31, 1998

                                       OR

[  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

        For the transition period from            to             
                         Commission file number 0-17156

                                  MERISEL, INC.
             (Exact name of registrant as specified in its charter)

               Delaware                                   95-4172359
        (State or other jurisdiction        (I.R.S. Employer Identification No.)
    of incorporation or organization)                                 

         200 Continental Boulevard
          El Segundo, California                             90245-0948
  (Address of principal executive offices)                   (Zip Code)


Registrant's telephone number, including area code: (310) 615-3080

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value

     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. [ ]

     As of March  29,1999,  the  aggregate  market value of voting stock held by
non-affiliates  of the  Registrant  based on the last sales price as reported by
the Nasdaq  National  Market  System  was  $44,479,061  (29,652,707  shares at a
closing price of $1.50).

     As of March 29,  1999,  the  Registrant  had  80,278,682  shares of Common
Stock outstanding.
                       Documents Incorporated By Reference

Portions of the  Registrant's  definitive  Proxy  Statement  for its 1999 annual
meeting of stockholders are incorporated by reference into Part III.


<PAGE>
<TABLE>
<CAPTION>


                                TABLE OF CONTENTS




                                                                                                              PAGE
                                     PART I
<S>                                                                                                      <C> 
Item  1.  Business....................................................................................     1
Item  2.  Properties..................................................................................     8
Item  3.  Legal Proceedings...........................................................................     8
Item  4.  Submission of Matters to a Vote of Security Holders.........................................     9

                                     PART II

Item  5.  Market for the Registrant's Common Equity and Related Stockholder Matters...................    10
Item  6.  Selected Financial Data.....................................................................    11
Item  7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.......    12
Item 7A. Quantitative and Qualitative Market Risk Disclosure..........................................    22
Item  8.  Financial Statements and Supplementary Data.................................................    23
Item  9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........    44

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant..........................................    45
Item 11.  Executive Compensation......................................................................    45
Item 12.  Security Ownership of Certain Beneficial Owners and Management..............................    45
Item 13.  Certain Relationships and Related Transactions..............................................    45

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................    45
</TABLE>



<PAGE>


               SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION



         Certain  statements  contained  in this  Annual  Report  on Form  10-K,
including  without  limitation   statements  containing  the  words  "believes,"
"anticipates,"    "expects"   and   words   of   similar   import,    constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended.  Such  forward-looking  statements  involve known and unknown risks,
uncertainties and other factors which may cause the actual results,  performance
or achievements of Merisel,  Inc. (the "Company"),  or industry  results,  to be
materially  different  from any  future  results,  performance  or  achievements
expressed or implied by such forward-looking statements.  These factors include,
but are not limited to, the effect of (i) economic  conditions  generally,  (ii)
industry  growth,  (iii)  competition,  (iv) liability and other claims asserted
against the Company,  (v) the loss of  significant  customers  or vendors,  (vi)
operating margins, (vii) business disruptions, (viii) the ability to attract and
retain qualified personnel,  and (ix) other risks detailed in this report. For a
detailed  discussion  of  certain  of these  factors,  see  "Business  - Certain
Business  Factors."  These factors are also discussed  elsewhere in this report,
including,   without   limitation,   under  the  captions   "Business,"   "Legal
Proceedings" and  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations." Given these uncertainties, readers are cautioned not
to  place  undue  reliance  on  such  forward-looking  statements.  The  Company
disclaims any obligation to update any such factors or to publicly  announce the
result of any revisions to any of the  forward-looking  statements  contained or
incorporated by reference herein to reflect future events or developments.


<PAGE>



                                     PART I

Item 1. Business.

Overview

Merisel,  Inc., a Delaware  corporation and a holding company (together with its
subsidiaries,  "Merisel" or the "Company"), is a leading distributor of computer
hardware and software  products.  The Company  operates three distinct  business
units: United States  distribution,  Canadian  distribution and the Merisel Open
Computing  Alliance  (MOCA(TM)).  The  Company  markets  products  and  services
throughout  the  United  States  and  Canada,   and  has  achieved   operational
efficiencies  that have made it a valued  partner to a broad  range of  computer
resellers,  including value-added resellers ("VARs"),  commercial resellers, and
retailers.  Through MOCATM, the Company supports Sun Microsystems' UNIX(R)-based
products and complementary third-party products.

Merisel  distributes  more than  25,000  products  from the  industry's  leading
hardware and software manufacturers.  These manufacturers include American Power
Conversion,  Apple,  Compaq,   Hewlett-Packard,   IBM/Lotus,  Intel,  Microsoft,
3Com/U.S.  Robotics,  Sun  Microsystems,  Toshiba and Viewsonic.  The breadth of
Merisel's  product  line,  together  with its  extensive  distribution  network,
enables the Company to provide its  customers  with a single  supply  source and
prompt product delivery.

The Company was  incorporated  in 1980 as Softsel  Computer  Products,  Inc. and
changed its name to Merisel,  Inc. in 1990 in connection with the acquisition of
Microamerica,  Inc.  ("Microamerica").  In the years following the  Microamerica
acquisition,  the Company's  revenues  increased  rapidly  through both internal
growth and acquisition.  This increase  reflected the substantial growth in both
domestic and  international  sales as the worldwide market for computer products
expanded and  manufacturers  increasingly  turned to wholesale  distributors for
product distribution. In 1996, the Company began the process of divesting of its
operations  outside  of the United  States  and Canada and its  non-distribution
operations,  which it completed in the first quarter of 1997. See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Overview." As a result, the Company's  operations are now focused exclusively on
the United States and Canada.

The Company's  sales were  approximately  $4.6 billion for 1998. Of these sales,
81% were generated in the United States and 19% were generated in Canada.

The Industry

The primary  participants  in the computer  products  distribution  industry are
manufacturers, wholesale distributors and resellers. Manufacturers sell directly
to  wholesalers,  resellers  and  end  users;  wholesale  distributors  sell  to
resellers;  and  resellers  sell to other  resellers  and directly to end users.
Full-line wholesale distributors,  like Merisel, generally purchase a wide range
of  products  in bulk  directly  from  manufacturers  and then ship  products in
smaller  quantities to many  different  types of  resellers.  Types of resellers
include   corporate   resellers,   value-added   resellers  or  "VARs,"   system
integrators,  original  equipment  manufacturers  or "OEMs,"  direct  marketers,
independent  dealers, and mass merchants and computer chain stores. In addition,
resellers  are often  defined  and  distinguished  by the  types of  value-added
services  they  provide and by the end-user  markets  they serve,  such as large
corporate accounts, small to medium-sized businesses,  and home users. Resellers
rely on wholesale  distributors like Merisel for their broad product  offerings,
product availability,  flexible financing  alternatives,  technical support, and
prompt and  efficient  delivery.  Manufacturers  benefit  from  using  wholesale
distribution  as an  alternative  to direct  sales to resellers by not having to
maintain large sales forces,  warehouse  facilities and  distribution  networks.
Manufacturers  also rely on  wholesale  distributors  to provide  marketing  and
support services as well as credit for reseller customers.

The computer products distribution industry continues to experience double-digit
growth throughout North America. Recent trends in wholesale distribution include
custom   configuration  of  products  by  distributors,   various  supply  chain
management  strategies to eliminate time and cost, and continued  development of
electronic  commerce  and  information  systems.  Additional  industry  dynamics
include the rapid  emergence of Internet  and other  "virtual"  businesses  that
operate with minimal  infrastructure,  changing terms and conditions  from major
systems manufacturers,  increasingly  aggressive pricing practices and continued
industry  consolidation.  In order to compete more  effectively  and lower their
costs,   major  computer  systems   manufacturers  that  rely  on  the  two-tier
distribution  model have begun to take steps to reduce their own inventories and
the  inventories  of their  distributors  and  resellers.  One such  strategy is
"co-location,"   which  involves  the   distributor   occupying   space  in  the
manufacturer's   facility   where  it  takes   possession   of  and   ships  the
manufacturer's product. Additionally, configuration services may be performed at
these  co-location  facilities.   Electronic  commerce  refers  to  the  use  of

<PAGE>

electronic  systems  and  applications  to  exchange  information  and  transact
business. These systems and applications include electronic data interchange, or
"EDI,"  and  Internet-based  order-entry  and  information  systems.  Electronic
commerce can  simplify  account  set-up,  ordering,  shipping  and support,  and
thereby  facilitate  sales while  decreasing both selling and purchasing  costs.
Electronic  commerce  is  becoming  an  increasingly  significant  factor in the
computer products distribution industry.


Business Strategy

Merisel is a full-line  wholesale  distributor  offering  leading  products  and
services to resellers at  competitive  prices.  The Company  provides  dedicated
sales support and customized programs and services to targeted customer groups.

Leading Products and Services. The Company's objective is to offer a broad range
of leading brands of systems, peripherals,  networking products and software. By
stocking a broad mix of products,  the Company  meets the needs of resellers who
prefer to deal with a single source for many of their product requirements.  The
Company continually evaluates new products, the demand for current products, and
its overall product mix, and seeks to develop  distribution  relationships  with
suppliers of products that enhance the Company's product offerings.  The Company
believes that the size of its reseller customer base,  combined with the breadth
and quality of its  marketing  support  programs,  gives  Merisel a  competitive
advantage over smaller,  regional  distributors  in developing  and  maintaining
supplier relationships.

Customer  Service  and  Satisfaction.  Merisel  believes  that a high  level  of
customer  satisfaction is important to achieve and maintain  success in the very
competitive  computer  products  distribution  industry.  The  Company  measures
customer  satisfaction  by such  standards as accuracy and efficiency in product
delivery and the provision of comprehensive  services and  information.  Merisel
strives on an ongoing  basis to improve its  operational  processes  in order to
achieve increasingly high levels of customer satisfaction.

Customer  Groups.  Merisel  serves a variety of  reseller  channels,  which have
diverse product, financing and support requirements. Merisel was among the first
major  wholesale  distributors  in the  industry to offer its  various  customer
groups a channel-dedicated  sales force as well as customized product offerings,
financing programs,  and marketing and technical support programs,  all of which
are  tailored to address  the  differing  needs of these  customer  groups.  The
Company  intends to  continue  focusing on the  profitability  of the markets it
serves to  identify  customer  opportunities  and  develop  sales and  marketing
programs that serve these groups most effectively.

1999   Initiatives  and   Investments.   To  capitalize  on  its  strengths  and
differentiate  Merisel from its  competitors  in 1999, the Company is focused on
key  initiatives  aimed at  generating  new ways to support  its  customers  and
increase sales and gross margins.  The Company is focused on expanding its reach
to  specific  customer  groups  that  offer   significant   revenue  and  margin
opportunities,  such as VARs,  Internet  and  other  "virtual"  businesses,  and
high-end  resellers that offer enterprise  computing  solutions.  To support its
customers,  expand service offerings,  and increase productivity and efficiency,
the  Company  has also  identified  three  key  areas  for  further  investment:
electronic  commerce,  enhanced  information  systems and improved  supply chain
management.


Manufacturers and Manufacturer Programs and Services

Merisel has established and developed long-term business relationships with many
of the leading  manufacturers in the computer products  industry.  The Company's
suppliers  number  more  than 500 and  include  Adobe  Systems,  American  Power
Conversion,   Apple,  Compaq,   Computer   Associates,   Corel,  Epson  America,
Hewlett-Packard,   IBM/Lotus,   Informix,   Intel,  Intuit,   Iomega,   Kingston
Technology,  Lexmark, Microsoft, NEC Technologies,  Network Associates,  Novell,
Okidata, Seagate, Sony, Sun Microsystems, Symantec, 3Com/U.S. Robotics, Toshiba,
ViewSonic  and Western  Digital.  Merisel is one of only three  distributors  in
North America authorized to sell Sun Microsystems products.

Merisel enters into written  distribution  agreements with the  manufacturers of
the products it distributes.  As is customary in the industry,  these agreements
usually provide non-exclusive  distribution rights and often contain territorial
restrictions  that  limit  the  countries  in  which  Merisel  is  permitted  to
distribute the products.  The agreements  generally  provide  Merisel with stock
balancing and price  protection  provisions that partially reduce Merisel's risk
of loss due to slow-moving inventory, supplier price reductions, product updates
or  obsolescence.   In  the  past  year,   however,   certain  computer  systems
manufacturers  that are among  the  Company's  largest  vendors  have  announced
changes in price  protection and other terms and conditions that could adversely
affect the Company.  The Company is working closely with these manufacturers and
has developed buying  procedures and controls to manage  inventory  purchases to
reduce the potential  adverse impact from these changes while balancing the need
to maintain  sufficient  levels of  inventory.  There is no assurance  that such
efforts  will be  successful  in  preventing  a material  adverse  effect on the
Company. The Company's  agreements,  which generally have a term of at least one
year, may contain  minimum  purchase  amounts and generally  contain  provisions
permitting earlier termination by either party upon written notice.


<PAGE>

Additional  manufacturer  programs toward which Merisel is devoting  substantial
resources  include  configuration  and co-location.  Configuration  involves the
assembly of computer products from multiple vendors into a single unit or system
that conforms to the specific needs of an individual end user. While at one time
configuration was a very minor aspect of a wholesale  distributor's business, it
has  become a major  initiative  as  manufacturers  outsource  this  segment  of
production to wholesale  distributors.  Through  1996,  Merisel  outsourced  its
configuration business to two third-party  providers.  In 1997, the Company took
these  responsibilities  in-house and currently performs system configuration in
its Hayward,  California, and Toronto, Canada, warehouse facilities.  Merisel is
in the process of expanding its configuration  capabilities and has attained ISO
9002  certification for both of these  facilities,  which is required by certain
systems manufacturers.

Co-location involves establishing  operations jointly with systems manufacturers
in their  facilities  to take  steps,  time,  and costs out of the  distribution
process,  while offering improved levels of service. In a co-location  facility,
the  distributor  takes  possession of the  manufacturer's  product and ships it
directly to the  customer,  without  sending  the  product to the  distributor's
distribution center first.  Merisel established its first co-location  operation
with IBM in IBM's  Raleigh,  North  Carolina,  facility  in October,  1998,  and
recently  announced  a similar  agreement  with  Compaq  their  Houston,  Texas,
facility.  Merisel's current strategy calls for the Company to perform high-end,
custom configuration at these facilities.  The Company will continue to evaluate
market trends and adapt its strategy to meet the evolving  needs of its business
partners.

Although Merisel distributes more than 25,000 products and accessories  supplied
by more than 500 manufacturers, 73% of net sales for the North American Business
in 1998 (as compared to 69% in 1997 and 60% in 1996) was derived  from  products
supplied by Merisel's 10 largest vendors, with the sale of products manufactured
by  Hewlett-Packard,  Microsoft,  Sun  Microsystems  and Compaq  accounting  for
approximately  13%,  13%, 13%, and 12%,  respectively,  of net sales in 1998 (as
compared to 12%, 15%, 12% and 10%,  respectively,  in 1997, and 9%, 14%, 10% and
10%,  respectively,  in 1996).  Because reseller  customers often prefer to deal
with a single source for many of their product needs, the loss of the ability to
distribute  a  particularly  popular  product  could  result  in losses of sales
unrelated to the product.  The loss of a direct relationship between the Company
and any of its key  suppliers  could  have an  adverse  impact on the  Company's
business and financial results.

Merisel  provides its  manufacturers  with access to one of the largest bases of
computer  resellers in North America,  as well as the means to reduce inventory,
credit,  marketing,  and overhead costs typically  associated  with  maintaining
direct reseller relationships.  Through its product marketing group, the Company
develops and  implements  promotional  programs for  specific  manufacturers  to
increase  customer  purchasing depth and breadth.  Promotional  programs include
bundle offers,  growth-goal incentives,  and reseller training events as well as
channel   communication   vehicles  such  as  targeted   direct  mail,  fax  and
advertising.

In  addition,  the  Company  provides  manufacturers  with  the  opportunity  to
participate in Merisel's  Softeach  computer products training forum. Each year,
more than 4,000  resellers  and dozens of leading  manufacturers  gather for two
days  of  intensive,   small-group   seminars  in  cities  across  the  country.
Manufacturers  can take  advantage  of this forum to train  resellers  on how to
market their products and increase sales.



Customers and Customer Services

In 1998,  Merisel  sold  products  and  services  to more than  35,000  computer
resellers  throughout North America.  Merisel's  smaller  customers often do not
have  the   resources  to   establish  a  large  number  of  direct   purchasing
relationships  or stock  significant  product  inventories,  nor can  they  meet
manufacturers'  minimum  purchase  requirements  or  obtain  acceptable  credit.
Consequently,  they tend to purchase a high  percentage  of their  products from
distributors  such as Merisel,  which can meet their inventory needs quickly and
efficiently.   Larger  resellers  often  establish  direct   relationships  with
manufacturers  for their more  popular  products  but utilize  distributors  for
slower-moving  products and for fill-in orders of fast-moving  products that may
not be  available  on a timely  basis  from  manufacturers.  No single  customer
accounted for more than 4% of Merisel's net sales in 1998, 1997 or 1996.

Single Source  Provider.  Merisel offers computer  resellers a single source for
more than  25,000  competitively  priced  hardware  and  software  products.  By
purchasing from Merisel,  the reseller only needs to comply with a single set of
ordering,  billing and  product  return  procedures  and may also  benefit  from
attractive  volume pricing and financing  programs.  In addition,  resellers are
generally allowed,  within specified time limits and/or specified volume limits,
to return  products  for  credit to be applied  against  future  purchases  from
Merisel.  Customers of TM are  authorized by Sun  Microsystems  to purchase from
only one of its three North American distributors,  and may generally change the
distributor with whom they deal only once per year.


<PAGE>

Sales  Organization.   The sales departments for the Company's U.S. and Canadian
distribution  businesses are organized to serve the varying  requirements of the
different  customer  groups  in  the  industry.   The  Company's  United  States
distribution  business is  organized  into three sales  divisions  to serve VAR,
commercial,  and retail customer  groups.  The VAR division  offers  specialized
services and technical products to value-added resellers, system integrators and
OEMs who offer service, support and consulting to clients in addition to selling
computer  products.  Because of the specialized nature of servicing the needs of
customers  who  sell  products   directly  to  the  federal,   state  and  local
governments,  and to  educational  institutions,  the Company has also created a
dedicated  Government and Education  sales team. The commercial  division offers
direct fulfillment  services,  EDI transaction  support, and dedicated field and
inside  sales  support  to  large-volume  national  accounts,  while the  retail
division primarily  services mass merchants,  computer chain stores and Internet
resellers.

The Company's sales force is composed of field sales  representatives who manage
relationships with larger accounts and inside sales  representatives who solicit
and receive product orders and answer customer inquiries.  When a customer calls
Merisel, screen synchronization  technology automatically causes a sales profile
to appear on the sales  representative's  computer screen. The Company's systems
allow the sales  representative  to enter customer  orders,  obtain  descriptive
information  regarding  products,  check inventory  status,  determine  customer
credit availability, and obtain special pricing and promotion information.

Prompt Delivery.  In the United States and Canada,  orders received by 5:00 p.m.
local time are typically shipped the same day,  provided the required  inventory
is in stock.  Merisel maintains sufficient inventory levels in the United States
to  fill  consistently  approximately  92% of all  units  ordered  on the day of
receipt.  As  part  of  a  continuing  effort  to  improve  accuracy,  Merisel's
Information and Logistics Efficiency System ("MILES") was first installed in the
Company's Atlanta  distribution  center in early 1994. By 1996,  installation of
this custom computerized  warehouse  management system was completed in all nine
of Merisel's North American distribution  centers.  Merisel has also established
MILES environments as part of its co-location  strategy in IBM's Raleigh,  North
Carolina,  facility  and  Compaq's  Houston,  Texas,  facility.  The  successful
implementation  of MILES has resulted in significant  improvements  in inventory
and shipping  accuracy rates.  The Company  believes that its shipping  accuracy
rates are currently the highest in the industry at 99.99%.

Merisel typically delivers products from its regional  distribution  centers via
Federal  Express,  United  Parcel  Service,  and  other  common  carriers.  Most
customers in the United States  receive orders within one or two working days of
shipment.  Merisel also  provides  customer-paid  overnight  air  handling  upon
request.  These services allow  resellers to minimize  inventory  investment and
serve their customers  responsively.  For larger customers in the United States,
Merisel  also  provides  a  fulfillment  service  to  ship  orders  directly  to
resellers'  customers,  which  speeds  delivery and further  minimizes  reseller
inventories.

Financing Programs.  Merisel's credit policy for qualified resellers  eliminates
the need for them to establish multiple credit relationships with a large number
of  manufacturers.  In  addition,  the  Company  arranges  floor  plan and lease
financing  through  a number of  credit  institutions  and  allows  credit  card
purchases by qualified  customers.  Another program provides for direct shipment
to and  billing  of the  reseller's  customer.  To allow  certain  resellers  to
purchase  larger  orders in the United  States,  the  Company  can also  arrange
alternative  financing  such as  escrow  programs  and  selected  bid  financing
arrangements.

Information  Services.  Merisel provides its reseller customers with a series of
publications  containing detailed information on products,  pricing,  promotions
and  developments  in the industry.  Merisel also publishes the Merisel  Product
Catalog,  which lists Merisel's current product offerings.  Merisel's  corporate
Web site offers technical product information on thousands of products and links
to more than 350 of the industry's leading  manufacturers.  Resellers can obtain
current  information  on  programs  and  services,   daily  product  promotions,
strategic Merisel announcements and MOCA. Customers can communicate with Merisel
Customer  Service via e-mail,  download return  authorization  and system return
forms,  and track  product  shipments  with  links to Federal  Express  and UPS.
Merisel's Web site also offers secure,  24-hour access to SELline II,  Merisel's
remote order-entry and information service, so resellers can place their product
orders  through the Company's Web site at  www.merisel.com.  SELline II provides
resellers  with real-time  access to pricing  information,  credit  information,
technical descriptions,  product availability and promotional information. Since
its inception,  SELline has had  approximately  26,000 enrollees in the U.S. and
Canada.  Merisel also  utilizes EDI systems to allow  large-volume  customers to
communicate with the Company's computer system directly for order processing and
account data.


<PAGE>

Training and Technical Support. Through Merisel's Educational Services offering,
resellers  and their  customers  can choose from a broad  selection  of training
solutions  on  UNIX(R),   networking  systems,  the  Internet,   intranet,  data
communications  and  mainstream  software  applications.  Merisel also  provides
training and product  information  to resellers  through  Softeach,  a series of
manufacturer-hosted  computer  products  training  forums.  Each year, more than
4,000  resellers  and  dozens of  leading  manufacturers  gather for two days of
intensive,  small group  seminars in cities  across the  country.  In  addition,
Merisel's Tech Trax Technology Training Seminars are designed to provide Merisel
resellers  with   technology-focused   training  on  how  to  sell  and  support
profitable, high-end solutions.

Merisel provides resellers with direct access to the Company's technical support
engineers  through  a  dedicated  hot  line.  Resellers  can take  advantage  of
specialized  pre-sale and post-sale  technical support for product lines sold by
Merisel.  In addition,  Merisel's  technical  engineers  provide regular product
training for Merisel's sales representatives to help them increase their product
knowledge and their ability to answer resellers' questions.


Operations, Distribution and Systems

Locations.  At December 31, 1998, the Company operated nine distribution centers
throughout  North  America:  seven in the United  States and two in Canada.  The
Company  also  operates   specialized   distribution  centers  as  part  of  its
co-location  strategy at IBM's Raleigh,  North  Carolina,  facility and Compaq's
Houston, Texas, facility.

Systems.  Merisel has made  significant  investments  in advanced  computer  and
warehouse  management systems for its North American operations to support sales
growth  and  improve  service  levels.  All of  Merisel's  nine  North  American
distribution  centers,  and the co-location  facilities at IBM's Raleigh,  North
Carolina,  facility and Compaq's  Houston,  Texas,  facility,  utilize the MILES
computerized  warehouse  management  system,  which uses infrared bar coding and
advanced  computer  hardware and  software to improve  shipping,  receiving  and
picking accuracy rates. See "Customers and Customer  Services - Prompt Delivery"
above.

Merisel is in the process of converting its North American operations to the SAP
enterprise-wide  information  system. SAP integrates all functional areas of the
business including order entry,  inventory management and finance in a real-time
environment.  The Company  began  designing the new system in 1993 and converted
its Canadian operations from a mainframe to the SAP enterprise-wide  information
system in August 1995. The new system is designed to provide greater transaction
functionality,  flexibility,  and  custom  pricing  applications.  In the  early
implementation  stages,  the Canadian SAP system  produced  results and response
times  below the  Company's  expectations,  which  prompted  a delay in the U.S.
implementation  of SAP.  This  system is now fully  implemented  in  Canada,  is
performing to  expectations  and for more than two years has been operating with
essentially no unscheduled downtime.

The Company  resumed the  conversion of its United States  operations to the SAP
system in the fourth quarter of 1997. The Company  expects to go live on the SAP
system in the United  States during the second  quarter of 1999.  The design and
implementation  of these new systems are complex  projects  and involve  certain
risks.  The  conversion  to the new  system  may  result  in  delays  and  other
unanticipated  interruptions.  However,  Merisel believes that the stability and
availability  of its  Canadian  system has served as an advantage by providing a
working  system on which to test and  fine-tune  the  Company's  North  American
protocols.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Systems and Processes."


Competition

Competition  in  the  computer  products   distribution   industry  is  intense.
Competitive factors include price, brand selection,  breadth and availability of
product  offering,  purchasing  arrangements,  financing  options,  shipping and
packaging accuracy,  speed of delivery, level of training and technical support,
marketing services and programs, and ability to influence a buyer's decision.

Certain of Merisel's  competitors have substantially greater financial resources
than  Merisel.  Merisel's  principal  competitors  for  its  U.S.  and  Canadian
distribution  businesses include large United States-based  distributors such as
Inacom,  Ingram Micro,  Pinacor and Tech Data, as well as regional  distributors
and franchisers.  MOCA's  competitors are Access Graphics,  which is owned by GE
Capital, and Ingram Micro.

Merisel  also  competes  with  manufacturers  that  sell  directly  to  computer
resellers,  sometimes  at prices  below  those  charged by Merisel  for  similar
products. The Company believes its broad product offering, product availability,
prompt  delivery  and  support  services  may  offset  a  manufacturer's   price
advantage.  In addition,  many  manufacturers  concentrate their direct sales on
large computer  resellers  because of the relatively high costs  associated with
dealing with small-volume computer resellers.



<PAGE>

Variability of Quarterly Results and Seasonality

Historically,  the  Company  has  experienced  variability  in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the  future.   Management  believes  that  the  factors  influencing   quarterly
variability  include:  (i) the overall  growth in the  computer  industry;  (ii)
shifts in short-term demand for the Company's products resulting,  in part, from
the  introduction  of new  products  or  updates  to  existing  products;  (iii)
intensity  of  price  competition  among  the  Company  and its  competitors  as
influenced by various  factors;  and (iv) the fact that virtually all sales in a
given quarter result from orders booked in that quarter. In addition,  quarterly
variability  could be  affected  by the year 2000 issue by  shifting  demand for
computer  products during 1999 and future years. Due to the factors noted above,
as well as the dynamic qualities of the computer products distribution industry,
the  Company's  revenues  and  earnings  may be subject to material  volatility,
particularly on a quarterly basis.

Additionally,  in the U.S.  and Canada,  the  Company's  net sales in the fourth
quarter  have  been  historically  higher  than  in its  other  three  quarters.
Management believes that the pattern of higher fourth quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday  purchases.  As a result of this pattern,  the Company's working capital
requirements  in the fourth  quarter  have  typically  been  greater  than other
quarters.  Net sales in the Canadian  operations are also historically strong in
the first quarter of the fiscal year,  which is primarily due to buying patterns
of Canadian  government  agencies.  See  "Management's  Discussion  and Analysis
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources."


Employees

As of December 31, 1998,  Merisel had  approximately  2,700  employees.  Merisel
believes it has good relations with its employees.

Environmental Compliance

The Company believes that it is in substantial compliance with all environmental
laws applicable to it and its operations.


Certain Business Factors

In addition to the other  information  in this report,  readers are cautioned to
carefully  consider the  following  business  factors that may affect the future
operations and performance of the Company.

Decline in Gross  Margins.  Over the past few years,  the  computer  industry in
general and the Company in particular have experienced a significant decrease in
gross  margins.  While the  Company  has  taken  actions  over the last  several
quarters intended to improve margin performance, gross margins have continued to
decline primarily due to intense  competitive  pricing.  These pricing pressures
escalated  during the fourth  quarter of 1998 and are continuing in 1999. If the
Company's efforts to increase gross margins are not successful,  the Company may
not be able to achieve satisfactory levels of profitability.

Vendor Terms and Conditions.  Like other wholesale  distributors,  the Company's
business is subject to the risk that the value of its inventory will be affected
adversely by vendor price  reductions  or by product  obsolescence  that results
from  technological  changes  or  product  updates.  It is the  policy  of  most
manufacturers  of  microcomputer  products to protect  distributors who purchase
directly  from  them  from  the  loss  in  value  of  inventory  due to  product
obsolescence or the manufacturer's price reductions.  Over the last year certain
major PC  manufacturers  that are  among  the  Company's  largest  vendors  have
announced changes to price protection and other terms and conditions,  including
product return rights,  that could adversely affect the Company.  The Company is
working closely with these manufacturers and has developed buying procedures and
controls to manage  inventory  purchases to reduce the potential  adverse impact
from these changes while  balancing  the need to maintain  sufficient  levels of
inventory.  There is no  assurance  that  such  efforts  will be  successful  in
preventing  a material  adverse  effect on the  Company.  Unforeseen  changes in
current price  protection  policies or other changes in terms and  conditions of
any of the Company's  major vendors could have a material  adverse effect on the
Company.

Dependence on Key Vendors.  In 1998,  73% of the Company's net sales was derived
from products  supplied by the Company's 10 largest vendors,  as compared to 69%
in 1997 and 60% in 1996. The Company's large vendors generally provide incentive
funds for marketing and based on sales levels of their products. These incentive
funds  contribute  substantially  to the Company's  gross profit  margin.  As is
customary in the industry,  the Company's  agreements with these vendors provide
non-exclusive  distribution rights and may generally be terminated by the vendor
on short notice.  The termination of the Company's  distribution  agreement with
one of its key vendors,  or a material  change in the terms of the  distribution
agreement,  including  a  decrease  in  incentive  funds,  could have a material
adverse effect on the Company.  In addition,  in the past year some vendors have
reduced the  incentive  funds they pay to  distributors  or increased  the sales
volumes required to receive various levels of incentive funds.


<PAGE>

Size of Competitors.  The Company's  competitors  include  distributors that are
substantially larger than the Company, partially as a result of the trend toward
consolidation  in the industry.  Because of their size,  these firms can achieve
greater  economies  of scale than the Company  and may be able to form  stronger
relationships  with  manufacturers.  The Company  does not  believe  that it can
achieve  operating  expense levels as a percentage of sales as low as those that
can be achieved  by its much  larger  competitors.  A  continuation  of industry
consolidation not involving the Company may exacerbate this disadvantage.

Direct Sales by  Manufacturers.  Several  computer  product  manufacturers  have
expanded their direct selling  efforts to resellers and end users.  Although the
Company does not believe that its  business has been  significantly  affected by
these   developments,   continued  efforts  by  manufacturers  to  change  their
businesses to compete with the direct sales model may adversely the Company. The
Company  believes  that the direct  sales  business  will grow faster than sales
through the distribution  channel and that  consolidation of resellers,  who are
the customers of distributors,  may contribute to such differential. An increase
in sales of computer products outside the traditional  distribution  channel may
have a material adverse effect on the Company.


<PAGE>

Item 2. Properties.

At December  31,  1998,  the Company  maintained  distribution  centers in seven
locations  throughout  the  United  States  and  in  two  locations  in  Canada.
Additionally,  the Company  maintains  United  States  administrative  and sales
offices in El Segundo, California;  Marlborough,  Massachusetts; and Cary, North
Carolina,  as well as  Canadian  administrative  and sales  offices in  Toronto,
Ontario; Montreal, Quebec; and Vancouver, British Columbia.

The  Company's  headquarters  are located in El Segundo,  California,  where the
Company owns an 112,500 square-foot facility,  leases another 50,700 square-foot
facility and leases 23,000  square feet in a third  building.  In addition,  the
Company owns a 61,000  square-foot  facility and 29 acres of undeveloped land in
Cary,  North  Carolina.  All of the Company's other  facilities are leased.  The
Company  believes that its facilities  provide  sufficient space for its present
needs, and that additional suitable space will be available on reasonable terms,
if needed.


Item 3. Legal Proceedings.

In June 1994, Merisel and certain of its officers and/or directors were named in
putative  securities class actions filed in the United States District Court for
the  Central  District  of  California,  consolidated  as  In re  Merisel,  Inc.
Securities Litigation.  The parties executed a Stipulation of Settlement,  which
was approved by the district court judge on December 21, 1998. The judge entered
a judgment to dismiss the case with  prejudice  and such  judgment  was final on
January 20,  1999.  Under the  settlement,  Merisel was not required to make any
material payment.

Effective  April 14, 1997, the Company  entered into a Limited Waiver and Voting
Agreement (the "Limited Waiver  Agreement") with holders of more than 75% of the
outstanding principal amount of the Company's 12-1/2% Senior Notes due 2004 (the
"12.5% Notes").  Pursuant to the terms of the Limited Waiver Agreement, upon the
fulfillment  of certain  conditions,  holders of the 12.5% Notes would  exchange
(the "Exchange")  their 12.5% Notes for common stock of the Company (the "Common
Stock"), which would equal approximately 80% of the outstanding shares of Common
Stock immediately after the Exchange. The Limited Waiver Agreement also provided
that,  immediately  after the  consummation  of the Exchange,  the Company would
issue certain  warrants to the existing  holders of Common Stock. The conditions
to the Exchange  were not met and, on September  19,  1997,  the Limited  Waiver
Agreement  terminated in accordance with its terms.  Prior to the termination of
the Limited Waiver Agreement on September 19, 1997, certain  disagreements arose
between  the  Company  and  certain   holders  of  the  Company's   12.5%  Notes
("Noteholders")  over the interpretation of the Company's  obligations under the
Limited Waiver  Agreement,  including that the Limited Waiver  Agreement did not
require  either the Board of  Directors  of the  Company  (the  "Board")  or the
Company to recommend to its stockholders proposals relating to the proposed debt
restructuring  in which the  Noteholders  would have exchanged their 12.5% Notes
for Common Stock (the "Noteholder  Restructuring")  and that the Company was not
obligated to seek  confirmation  of a "prepackaged  plan" of  reorganization  by
means of the "cramdown" provisions of the Bankruptcy Code. On September 4, 1997,
the  Company  filed suit in  Delaware  Chancery  Court (the  "Delaware  Action")
seeking a declaratory judgment with respect to these issues. The Company intends
to  vigorously  prosecute  its  claim in the  Delaware  Action.  There can be no
assurance,  however, that the Company will ultimately be successful with respect
to its claims.

On September  11, 1997,  certain  Noteholders  filed an answer to the  Company's
complaint in the Delaware  Action as well as a counterclaim  against the Company
asserting claims for breach of the Limited Waiver  Agreement,  unjust enrichment
and a declaratory  judgment (the  "Noteholder  Suit").  The Noteholder Suit also
asserts  a claim  for  unjust  enrichment  against  Dwight  A.  Steffensen,  the
Company's Chief Executive  Officer.  The Noteholder Suit seeks damages in excess
of $100 million from the Company. The Company's alleged breaches include,  among
other  things,  that the  Board  changed  its  recommendation  with  respect  to
proposals  relating  to  the  Noteholder  Restructuring.  The  Company  and  Mr.
Steffensen  filed  motions  for  judgment  on the  pleadings  on October 7, 1997
seeking to have the Noteholder Suit dismissed.  On January 5, 1998, the Delaware
Chancery  Court (the "Court")  denied both motions.  In January 1999 the Company
and Mr. Steffensen filed motions for summary  judgment.  If the Court denies the
motion, in whole or in part, as currently scheduled, trial will commence on June
1, 1999. The Company and Mr.  Steffensen  believe that they have strong defenses
to each of the claims asserted and intend to defend themselves vigorously. There
can be no assurance, however, as to the ultimate outcome of these claims.

On March 16, 1998, the Company  received a summons and  complaint,  filed in the
Superior  Court of  California,  County of Santa  Clara,  in a matter  captioned
Official  Unsecured  Creditors  Committee  of Media Vision  Technology,  Inc. v.
Merisel,  Inc. The plaintiff  alleges that certain  executive  officers of Media
Vision Technology,  Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision  through,  inter alia, the improper  recognition and
reporting of sales, revenue and income and the failure to properly recognize and
report product returns during 1993 and 1994,  thereby  overstating the financial

<PAGE>

condition of Media Vision as reflected in its financial statements for 1993. The
plaintiff further alleges that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision  executives.  The plaintiff
seeks to recover compensatory damages, including interest thereon, exemplary and
punitive  damages,  and costs  including  attorneys'  fees. On May 6, 1998,  the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive  damages prayer.  In response to the motions,
the plaintiff filed a first amended complaint on August 31, 1998, adding a claim
for unfair business  practices under California  Business & Professions Code ss.
17200 and additional allegations. The plaintiff's filing of an amended complaint
mooted the Company's original motions. The Company filed a motion to dismiss the
amended complaint on various grounds and a motion to strike the punitive damages
prayer.  In its  opposition  to the  Company's  motion to strike,  the plaintiff
withdrew its prayer for punitive damages.  On January 15, 1999, the Court issued
an Order  staying  prosecution  of the action  under the  doctrine of  exclusive
concurrent  federal  jurisdiction.  It is unknown  whether  the  plaintiff  will
proceed  further with its action in any forum.  The Company has defended  itself
vigorously against this claim and will continue to do so.


The  Company is  involved  in certain  other  legal  proceedings  arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.



Item 4. Submission of Matters to a Vote of Security Holders.

None.




<PAGE>


                                     PART II


Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters.

The Company's  Common Stock is traded on the National  Market tier of the Nasdaq
Stock Market under the symbol MSEL. The following table sets forth the quarterly
high and low sale  prices  for the  Common  Stock as  reported  by the  National
Market.

                                            High              Low
                     Fiscal Year 1997
                     First quarter....       2 1/2            1 9/16
                     Second quarter...       2 7/16           1 1/32
                     Third quarter....       4 7/8            1 7/8
                     Fourth quarter...       5 21/32          3 3/8
                     Fiscal Year 1998
                     First quarter....       4 1/2            2 3/4
                     Second quarter...       3 1/2            2 3/4
                     Third quarter....       3 1/2            2 1/8
                     Fourth quarter...       3 1/4            2


As of March 29, 1999,  there were 1,074 record  holders of the Company's  Common
Stock.

Merisel has never declared or paid any dividends to stockholders.  The indenture
relating to the Company's 12-1/2% Senior Notes due 2004 currently  prohibits the
payment of dividends by the Company.  See "Management's  Discussion and Analysis
of  Financial  Condition  and  Results of  Operations  -  Liquidity  and Capital
Resources."

<PAGE>
<TABLE>
<CAPTION>


Item 6. Selected Financial Data.

                                                                                          Year Ended December 31,
                                                                 1994           1995           1996           1997            1998
                                                              ------------  ------------   ------------   ------------   -----------
                                                                              (In thousands, except per share amounts)
<S>                                                           <C>           <C>            <C>             <C>            <C>    

Income Statement Data:(1)
Net sales .................................................   $ 5,018,687   $ 5,956,967    $ 5,522,824    $ 4,048,972    $ 4,552,984
Cost of sales .............................................     4,676,164     5,633,278      5,233,570      3,807,888      4,298,553
                                                              ------------  ------------   ------------   ------------   -----------
Gross profit ..............................................       342,523       323,689        289,254        241,084        254,431
Selling, general & administrative expenses ................       281,796       317,195        295,021        191,406        199,929
Impairment losses .........................................                      51,383         42,033         14,100
Restructuring charge ......................................                       9,333
                                                              ------------  ------------   ------------   ------------   -----------
Operating income (loss) ...................................        60,727       (54,222)       (47,800)        35,578         54,502
Interest expense ..........................................        29,024        37,583         37,431         26,957         14,671
Loss on sale of European, Mexican, and
Latin American operations .................................                                     33,455
Debt Restructuring Costs ..................................                                                     5,230
Other expense .............................................        11,752        13,885         20,150         14,992         20,904
                                                              ------------  ------------   ------------   ------------   -----------
Income (loss) before income taxes .........................        19,951      (105,690)      (138,836)       (11,601)        18,927
Provision (benefit) for income taxes ......................         8,341       (21,779)         1,539            496            417
                                                              ------------  ------------   ------------   ------------   -----------
Net income (loss) Before Extraordinary Item ...............        11,610       (83,911)      (140,375)       (12,097)        18,510
Extraordinary Loss on Extinguishment of
    Debt ..................................................                                                     3,744
                                                              ------------  ------------   ------------   ------------   -----------
Net Income (Loss) .........................................   $    11,610   $   (83,911)   $  (140,375)   $   (15,841)   $    18,510
                                                              ============  ============   ============   ============   ===========
Per Share Data:
Net income (loss) per diluted share .......................   $      0.38   $     (2.82)   $     (4.68)   $      (.48)   $       .23
Weighted average number of diluted shares .................        30,389        29,806         30,001         33,216         80,485
Balance Sheet Data:
Working capital ...........................................   $   399,848   $   280,864    $   190,544    $   197,154    $   181,742
Total assets ..............................................     1,191,870     1,230,334        731,039        747,111        945,320
Long-term and subordinated debt ...........................       357,685       356,271        294,763        133,429        131,856
Total debt ................................................       395,556       382,395        294,950        133,429        135,657
Stockholders' equity ......................................       236,164       154,466         14,997        137,508        154,253
</TABLE>




(1)  Merisel's  fiscal year is the 52- or 53-week  period ending on the Saturday
     nearest to December 31. For clarity of presentation  throughout this Annual
     Report on Form 10-K, Merisel has described fiscal years presented as if the
     year ended on December 31. Except for 1997, all fiscal years presented were
     52 weeks in duration.  The selected financial data set forth above includes
     those balances and activities related to the Company's  Australian business
     until its disposal  effective  January 1, 1996 and the Company's  European,
     Mexican and Latin  American  businesses  until their disposal on October 4,
     1996,  effective as of September 27, 1996. It also includes results Merisel
     FAB (as defined  below) from the date such business was acquired on January
     31, 1994  through  its  disposal as of March 28,  1997.  See  "Management's
     Discussion and Analysis of Financial Condition and Results of Operations."



<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results 
        of Operations.


Overview

The Company was founded in 1980 as Softsel Computer  Products,  Inc. and changed
its  name to  Merisel,  Inc.  in 1990 in  connection  with  the  acquisition  of
Microamerica,  Inc.  ("Microamerica").  In the years following the  Microamerica
acquisition,  the Company's  revenues  increased  rapidly  through both internal
growth and acquisition, reaching $5.0 billion in 1994 and nearly $6.0 billion in
1995. This increase partially  reflected the substantial growth in both domestic
and  international  sales as the worldwide market for computer products expanded
and  manufacturers  increasingly  turned to wholesale  distributors  for product
distribution.  In 1996,  the  Company  began the  process  of  divesting  of its
operations outside of North America and its non-distribution operations.

Asset Dispositions

On March 7, 1996, Merisel sold its wholly owned Australian  subsidiary,  Merisel
Pty Ltd. ("Merisel  Australia"),  to Tech Pacific.  The sale was effective as of
January 1, 1996.

On October 4, 1996, the Company  completed the sale of substantially  all of its
European, Mexican and Latin American businesses ("EML") to CHS Electronics, Inc.
("CHS").   The  sale  was  effective  as  of  September  17,  1996.  A  loss  of
approximately  $33,455,000,  including  $7,400,000 of direct selling costs,  was
recorded in  connection  with the sale.  The final sales price was  $147,631,000
based on the  combined  closing  balance  sheet  of EML,  and  consisted  of (i)
$110,379,000  in  cash,   (ii)  the  assumption  of  Merisel's   European  asset
securitization agreement,  against which $26,252,000 was outstanding at closing,
and (iii) a short term  receivable of  $11,000,000  due at various dates through
1997.

As of March 28, 1997, the Company completed the sale of substantially all of the
assets of its wholly owned subsidiary  Merisel FAB, Inc.  ("Merisel FAB"), which
had  been  acquired  by  the  Company  from  the  United  States  Franchise  and
Distribution   Division   of   Vanstar   Corporation   (formerly    ComputerLand
Corporation),  to a wholly owned subsidiary of SYNNEX Information  Technologies,
Inc.  ("Synnex").  The sales  price,  computed  based upon the February 21, 1997
balance sheet of Merisel FAB, was  $31,992,000  consisting of the  assumption by
the  buyer of  $11,992,000  of trade  payables  and  accrued  liabilities  and a
$20,000,000 extended payable due to Vanstar Corporation. In anticipation of this
sale,  the Company  recorded an impairment  charge in the fourth quarter of 1996
for $2,033,000 to adjust Merisel FAB's assets to their fair value.

Debt Restructuring and Equity Investment

On September 19, 1997,  the Company and its main operating  subsidiary,  Merisel
Americas Inc.  ("Merisel  Americas"),  entered into a definitive  Stock and Note
Purchase Agreement with Phoenix  Acquisition Company II, L.L.C.  ("Phoenix"),  a
Delaware  limited  liability  company  whose sole member is  Stonington  Capital
Appreciation 1994 Fund, L.P. Pursuant to the Stock and Note Purchase  Agreement,
on September 19, 1997, Phoenix acquired a Convertible Note for $137,100,000 (the
"Convertible  Note") and 4,901,316 shares of Common Stock (the "Initial Shares")
for $14,900,000. The Convertible Note was an unsecured obligation of the Company
and  Merisel  Americas  and  provided  that,  upon the  satisfaction  of certain
conditions, including obtaining stockholder approval, the Convertible Note would
automatically  convert into 45,098,684  shares of Common Stock (the  "Conversion
Shares").  The Conversion  Shares and Initial  Shares would  together  represent
50,000,000  shares of Common Stock at a purchase  price of $3.04 per share,  and
approximately  62.4% of the Common Stock outstanding  immediately  following the
issuance of the  Conversion  Shares.  The  Company  used the  proceeds  from the
issuance of the Initial Shares and the Convertible Note to repay indebtedness of
its  operating   subsidiaries  (the  "Operating  Company  Debt")  consisting  of
$80,697,000  principal amount  outstanding  under a revolving credit  agreement,
$53,798,000  of its 11.5% Senior  Notes,  and  $13,200,000  principal  amount of
subordinated  notes.  On  October  10,  1997,  Phoenix  exercised  its option to
convert,  without any additional  payment,  $3,296,286  principal  amount of the
Convertible Note into 1,084,305 shares of Common Stock, representing the maximum
amount that could be  converted  prior to  obtaining  stockholder  approval.  On
December 19, 1997,  following  receipt of  stockholder  approval,  the remaining
portion of the Convertible Note was converted into Common Stock. As of March 31,
1999, Phoenix owned 50,000,000 shares of Common Stock, or approximately 62.3% of
the outstanding Common Stock. See "Notes to Consolidated  Financial Statements -
Note  7 -  Income  Taxes"  regarding  the  impact  of the  restructuring  on the
Company's available net operating loss carryforwards.




<PAGE>

Results of Operations

As a result of the asset dispositions  described above, the Company's operations
are now focused  exclusively on North America.  The North American  Business (as
defined  below)  produced  approximately  $4.6 billion,  $3.8 billion,  and $3.4
billion in revenues for 1998, 1997 and 1996, respectively. Former Operations (as
defined below) produced  approximately $202 million and $2.1 billion in revenues
for 1997 and  1996,  respectively.  Because  the  North  American  Business  now
represents  the ongoing  business of the Company,  the following  discussion and
analysis  will compare the results of operations  solely for the North  American
Business unless otherwise indicated.

As used in this  discussion  and analysis,  the term "North  American  Business"
refers to Merisel's United States and Canadian operations,  and the term "Former
Operations" refers to those operations  disposed of since the beginning of 1996,
namely EML and Merisel FAB.

The following  table sets forth the results of operations for the North American
Business and for the Former Operations for the fiscal years indicated. 
<TABLE>
<CAPTION>                                                   
                                                               (in thousands)
                                                        
                         North American Business             Former Operations                        Consolidated Total
                   /---------December31,-----------\  /----------December31,-----------\  /--------------December31,------------\
                   1996         1997       1998          1996        1997      1998        1996         1997            1998

<S>             <C>          <C>          <C>          <C>          <C>        <C>         <C>         <C>           <C>       
Net Sales       $ 3,441,343  $3,846,795   $4,552,984   $2,081,481  $202,177                $5,522,824  $4,048,972    $4,552,984
Cost of Sales     3,262,105   3,613,389    4,298,553    1,971,465   194,499                 5,233,570   3,807,888     4,298,553
                -----------  ----------   ----------   ----------  --------   ---------    ----------  ----------    -----------
Gross Profit        179,238     233,406      254,431      110,016     7,678                   289,254     241,084       254,431

SG&A                193,521     185,206      199,929      101,500     6,200                   295,021     191,406       199,929
Impairment
  loss                           14,100                    42,033                              42,033      14,100
                -----------  ----------   ----------   ----------  --------   ---------    ----------  ----------    -----------
Operating
 (loss)Income   $   (14,283)  $  34,100   $   54,502   $  (33,517) $  1,478                 $ (47,800)  $  35,578     $  54,502
                ===========  ==========   ==========   ==========  ========   =========    ==========  ==========    ============
</TABLE>


Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997

The Company's net sales for the North  American  Business  increased  18.4% from
$3,846,795,000 in 1997 to  $4,552,984,000  for the year ended December 31, 1998.
This increase  resulted from increased sales of 12.2% in Canada and 19.9% in the
United  States.  For the year,  while MOCA and retail  sales  continued  to show
substantial  growth at 36% and 55%,  respectively,  neither  VAR nor  commercial
performance  was as  robust,  resulting  in U.S.  growth  slowing  considerably,
particularly  in  the  fourth  quarter.  During  1998,  VAR  sales  grew  9% and
commercial  sales  increased 19%. The growth rate in Canada in terms of Canadian
dollars was 20.3%,  but the decline in the value of the Canadian dollar hampered
the growth rate in terms of U.S. dollars, particularly in the second half of the
year.

In the North American  Business,  hardware and accessories  accounted for 78% of
net  sales  and  software  accounted  for 22% of net  sales  for the year  ended
December 31, 1998 as compared to 77% and 23%, respectively,  for such categories
for the year ended December 31, 1997.

Gross profit for the North American Business increased 9.0% from $233,406,000 in
1997 to  $254,431,000  in 1998.  Gross profit as a percentage of sales, or gross
margin,  decreased  from  6.07% in 1997 to 5.59% in 1998.  Gross  margins in the
United States and Canada were 5.48% and 6.07%, respectively,  for 1998, compared
to 6.01% and  6.31%,  respectively,  for 1997.  The  decrease  in  margins  as a
percentage of sales has resulted in large part from intense  competitive pricing
pressures,  as well as  changes  in vendor  terms  and  conditions.  The  margin
decrease is also partially the result of changes in customer  concentration  and
mix and product mix. The Company has committed resources to address the issue of
declining  margins by  focusing  attention  on more  profitable  product  lines,
expanding  the  Company's  customer  base,  and  enhancing  customer  support by
segmenting  customers by business model and geographical  location and assigning
those customers to dedicated sales teams. The Company is also continuing efforts
to improve the  controls  and  management  supervision  over  margin  management
related activities such as sales execution and processes.  However,  the Company
continues to face intense competitive pricing pressures,  which escalated during
the fourth  quarter of 1998 and  continue  to  persist.  In  addition,  changing
manufacturer  terms  and  conditions,  particularly  in price  protection,  have
contributed  to greater  inventory risk and  necessitated  changes in purchasing
practices that in turn have affected selling, pricing, and vendor rebates.


<PAGE>

Selling,  general and  administrative  expenses for the North American  Business
increased by $14,723,000 or 7.9% from  $185,206,000  for the year ended December
31, 1997 to $199,929,000 for the year ended December 31, 1998. Selling,  general
and administrative  expenses in 1997 included compensation charges of $1,950,000
incurred pursuant to employment  contracts of certain executive  officers of the
Company and related to the debt restructuring  completed during 1997.  Excluding
this charge, selling, general and administrative expenses increased $16,673,000,
but decreased as a percentage  of sales from 4.8% in 1997 to 4.4% in 1998.  This
decrease is  primarily  attributable  to efforts to control  operating  expenses
while the  Company  experienced  sales  growth  of 18.4% for the year.  Selling,
general and administrative  costs include  depreciation and amortization expense
totaling  $10,980,000 in 1998 and  $11,073,000  in 1997.  The Company's  capital
expenditures  of $50,067,000 in 1998 and similarly  planned amounts in 1999 will
result in a significant increase in depreciation expense in future periods. (See
"Liquidity  and Capital  Resources  - Debt  Obligations,  Financing  Sources and
Capital Expenditures"  below.) In addition to increased  depreciation expense in
1999,  the Company  expects to incur  operating  expenses to fund its  strategic
initiatives (See "Item 1. Business - Business  Strategy"),  Year 2000 compliance
expenses,  and expenses related to  implementation  and stabilization of the new
SAP operating system for the U.S.

In the fourth quarter of 1997, the Company  recorded a non-cash asset impairment
charge of $14,100,000  against  capitalized costs associated with the previously
scheduled  implementation  of the SAP information  system in the U.S., which was
delayed in 1996.  Through  implementation  planning  that  resumed in the fourth
quarter of 1997 and a recently completed evaluation of SAP in its upgraded form,
the Company  identified  costs that would not provide  future  value,  and it is
these  costs  that  are the  basis  of the  impairment  charge.  See  "Notes  to
Consolidated Financial Statements - Note 2 - Impairment Losses."

As a result of the above  items,  the  Company's  North  American  Business  had
operating income of $54,502,000 for the year ended December 31, 1998 compared to
operating income of $34,100,000 for the year ended December 31, 1997.  Excluding
the restructuring  related compensation costs incurred and the impairment charge
taken in 1997, the Company's  North  American  Business would have had operating
income of $50,150,000 in 1997.

Interest Expense; Other Expense; Income Tax Provision

Interest expense for the Company,  including Former Operations,  decreased 45.6%
from  $26,957,000  for the year ended December 31, 1997 to  $14,671,000  for the
year ended December 31, 1998.  This decrease was primarily  attributable  to the
debt  restructuring,  which resulted in the elimination of substantially  all of
the  Operating  Company  Debt on  September  19,  1997 using  proceeds  from the
issuance of the Initial Shares and the Convertible Note.

Other  expense for the Company,  including  Former  Operations,  increased  from
$14,992,000  for the year ended  December 31, 1997 to  $20,904,000  for the year
ended December 31, 1998.  This increase is attributable in part to the recording
of a gain on the sale of property held in North Carolina for $1,530,000 in 1997,
which reduced other expenses.  The increase is also attributable to a $1,534,000
increase  in  foreign  currency  losses  and  a  $1,534,000  increase  in  asset
securitization  fees.  The  increased  securitization  fees are due to increased
sales of accounts  receivables in order to fund sales growth,  daily  operations
and, in the fourth  quarter,  increased  levels of inventory in  anticipation of
higher sales volumes that did not materialize.

Also during 1997,  the Company  incurred  $5,230,000 in expenses  related to the
Company's  efforts  to  effect  a  restructuring  of its  debt.  These  expenses
represent  professional  fees and other  costs  associated  with the  terminated
Limited Waiver and Voting  Agreement (the "Limited  Waiver  Agreement")  entered
into with certain  holders of the Company's  12-1/2%  Senior Notes due 2004 (the
"12.5%  Notes"),  and costs  incurred as a result of the change in control  that
occurred as a result of the  conversion of the  Convertible  Note.  See "Item 3.
Legal Proceedings."

The income tax provision decreased from $496,000 for the year ended December 31,
1997 to $417,000 for 1998. In both years the income tax provision  reflects only
the minimum  statutory tax  requirements  in the various states and provinces in
which the Company conducts business, as the Company had sufficient net operating
losses from prior years. The Company has not recognized a tax provision  benefit
in either year,  having fully utilized its ability to carryback those losses and
obtain  refunds  of taxes  paid in  prior  years.  See  "Notes  to  Consolidated
Financial Statements - Note 7 - Income Taxes".

Consolidated Net Income

The Company, including Former Operations, reported net income of $18,510,000, or
$.23 per diluted share, in 1998 compared to a net loss of $15,841,000,  or $0.48
per diluted share,  in 1997.  Included in the 1997 net loss is an  extraordinary
loss on the  extinguishment  of debt of $3,744,000,  or $0.12 per diluted share,
related to the repayment of the Operating Company Debt.


<PAGE>

Comparison of Fiscal Years Ended December 31, 1997 and December 31, 1996

The Company's net sales for the North  American  Business  increased  11.8% from
$3,441,343,000 in 1996 to  $3,846,795,000  for the year ended December 31, 1997.
This increase  resulted from increased sales of 18.2% in Canada and 10.3% in the
United States. The growth rate in Canada in terms of Canadian dollars was steady
throughout  the  year,  but the  decline  in the  value of the  Canadian  dollar
hampered the growth rate in terms of U.S.  dollars,  particularly  in the fourth
quarter of the year.  U.S.  sales growth was lower in the first half of the year
(-1.1% and 5.2% for the first and second quarters,  respectively) despite double
digit rates of growth in MOCA(TM) and VAR sales.  This was partially  related to
declines  in  retail  sales,   which   reflected   the  Company's   decision  to
substantially  reduce its retail  sales  activities  in early  1996,  in part to
address liquidity issues and constraints.  The Company  recommitted  significant
resources  to  rebuilding  its  retail  customer  base  in  early  1997,   which
contributed   to  fourth   quarter   growth  in  retail  sales  of  28.2%  on  a
year-over-year  basis.  Growth rates in all other  customer areas also increased
measurably  during the second  half of 1997 over 1996  levels,  contributing  to
combined U.S.  growth rates of 16.6% and 20.6% in the third and fourth  quarters
of 1997, respectively, on a year-over-year basis.

In the North American  Business,  hardware and accessories  accounted for 77% of
net  sales  and  software  accounted  for 23% of net  sales  for the year  ended
December 31, 1997 as compared to 76% and 24%, respectively,  for such categories
for the year ended December 31, 1996.

Gross profit for the North American  Business  increased 30.2% from $179,238,000
in 1996 to $233,406,000 in 1997. Both years were affected by significant  margin
adjustments.  In 1996, the Company  recorded  $27,338,000  in charges  primarily
related to customer disputes and vendor reconciliation  issues. In 1997, through
the process of  resolving  these  customer  disputes  and vendor  reconciliation
issues,  margins were  favorably  affected by adjustments  totaling  $7,245,000.
Excluding the effect of these margin  adjustments,  gross profit would have been
5.88% and 6.0% for 1997 and 1996,  respectively.  The decrease in adjusted gross
profit is attributed  primarily to competitive  pricing pressures and the impact
of  liquidity  constraints  on the  Company's  ability to purchase on  favorable
terms.

Selling,  general and  administrative  expenses for the North American  Business
decreased by $8,315,000 or 4.3% from  $193,521,000  for the year ended  December
31, 1996 to $185,206,000 for the year ended December 31, 1997. Selling,  general
and administrative  expenses in 1996 include approximately  $10,500,000 in costs
related to  professional  fees  incurred as part of the 1996  business  plan for
process  improvements,  professional  fees related to lender  negotiations,  and
severance charges related to management changes.  In 1997, selling,  general and
administrative  expenses included  compensation  charges of $1,950,000  incurred
pursuant to employment  contracts of certain  executive  officers of the Company
and related to the debt  restructuring  completed  during 1997.  Excluding these
charges in both years,  selling,  general and  administrative  expenses  did not
change  significantly  in total dollars,  but decreased as a percentage of sales
from 5.3% in 1996 to 4.8% in 1997.  This decrease is primarily  attributable  to
efforts to control operating expenses even though sales increased throughout the
year.  Selling,  general  and  administrative  costs  include  depreciation  and
amortization expense totaling $11,073,000 in 1997 and $12,360,000 in 1996.

In the fourth quarter of 1997, the Company  recorded a non-cash asset impairment
charge of $14,100,000  against  capitalized costs associated with the previously
scheduled  implementation  of the SAP information  system in the U.S., which was
delayed in 1996.  Through  implementation  planning  that  resumed in the fourth
quarter of 1997 and an  evaluation  of SAP in its  upgraded  form,  the  Company
identified costs that would not provide future value,  which costs are the basis
of the impairment charge. See "Notes to Consolidated Financial Statements - Note
2 - Impairment Losses."

As a result of the above items,  the Company's  North  American  Business had an
operating profit of $34,100,000 for the year ended December 31, 1997 compared to
an operating loss of $14,283,000 for the year ended December 31, 1996. Excluding
the margin  adjustments taken in both years, the professional fees and severance
costs noted in 1996, the restructuring  related  compensation  costs in 1997 and
the impairment charge taken in 1997, the Company's North American Business would
have had operating income of $42,905,000 in 1997 as compared to operating income
of $23,555,000 in 1996.


Interest Expense; Other Expense; Income Tax Provision

Interest  expense for the Company,  including Former  Operations,  decreased 28%
from  $37,431,000  for the year ended December 31, 1996 to  $26,957,000  for the
year ended  December 31, 1997.  This  decrease  was  attributable  to: (i) lower
average  borrowings  resulting  from a $72,500,000  debt paydown in October 1996
using  proceeds from the sale of EML;  (ii)  scheduled  debt  payments  totaling
$13,090,000; and (iii) elimination of substantially all of the Operating Company
Debt on September  19, 1997,  using  substantially  all of the  $152,000,000  in
proceeds from the issuance of the Initial Shares and the Convertible Note. These
factors were offset in part by an increase in interest rates under the Operating
Company Debt during 1997 prior to its elimination in September of 1997.


<PAGE>

Other  expense for the Company,  including  Former  Operations,  decreased  from
$20,150,000  for the year ended  December 31, 1996 to  $14,992,000  for the year
ended  December 31, 1997.  This decrease is primarily  attributable  to one-time
financing charges paid in the first quarter of 1996 of approximately  $3,125,000
related to amendments of financing  agreements that have since been  terminated.
Additionally,  the Company  recorded a gain of $1,530,000 in 1997 on the sale of
property held in North Carolina.

Also during 1997,  the Company  incurred  $5,230,000 in expenses  related to the
Company's  efforts  to  effect  a  restructuring  of its  debt.  These  expenses
represent  professional  fees and other costs associated with the Limited Waiver
Agreement, and costs incurred as a result of the change in control that occurred
as a result of the conversion of the Convertible Note.

The income tax provision  decreased from  $1,539,000 for the year ended December
31, 1996 to $496,000 for 1997. In 1997,  the income tax provision  reflects only
the minimum  statutory tax  requirements  in the various states and provinces in
which the Company conducts business, as the Company had sufficient net operating
loss  provisions  from prior year losses.  The Company has not  recognized a tax
provision benefit in either year, having fully utilized its ability to carryback
those  losses and obtain  refunds of taxes  paid in prior  years.  In 1996,  the
Company  recognized  additional  tax  provision  expense  that  represented  the
establishment  of a valuation  allowance  against a previously  recognized state
deferred tax asset. See "Notes to Consolidated  Financial  Statements - Note 7 -
Income Taxes".


Consolidated Loss

The Company, including Former Operations, reported a net loss of $15,841,000, or
$0.48 per diluted  share,  in 1997  compared to a net loss of  $140,375,000,  or
$4.68  per  diluted  share,  in  1996.  Included  in the  1997  net  loss  is an
extraordinary  loss on the  extinguishment  of debt of $3,744,000,  or $0.12 per
diluted share, related to the repayment of the Operating Company Debt.


Systems and Processes

Merisel has made significant investments in new, advanced computer and warehouse
management systems for its North American operations to support sales growth and
improve  service  levels.  All of Merisel's nine North  American  warehouses now
utilize Merisel's  Information and Logistical  Efficiency  System  ("MILES"),  a
computerized  warehouse  management  system,  which uses infrared bar coding and
advanced computer hardware and software to maintain high picking,  receiving and
shipping accuracy rates.

Merisel  is in the  process  of  converting  its  U.S.  operations  to  the  SAP
client/server operating system. The Company plans to convert its U.S. operations
to the SAP system during the second quarter of 1999.  The Company  converted its
Canadian  operations from a mainframe to the SAP client/server  operating system
in August 1995. SAP is an enterprise-wide system which integrates all functional
areas of the business including order entry, inventory management and finance in
a  real-time  environment.  The  new  system  is  designed  to  provide  greater
transaction functionality,  automated controls,  flexibility, and custom pricing
applications.

The design and  implementation  of these new systems are  complex  projects  and
involve certain risks. The U.S. SAP implementation in particular, because of its
scope and complexity,  involves risks that could have a material  adverse impact
on operations and financial  results,  particularly  during the quarter in which
the  implementation  occurs.  Among other things,  the implementation of the SAP
system in the U.S.  may result in delays and other  unanticipated  interruptions
that could adversely affect the Company's business.


Year 2000 Issues

Introduction

The term  "Year  2000  issue" is a general  term used to  describe  the  various
problems  that  may  result  from the  improper  processing  of  dates  and date
sensitive  calculations  by  computers  and other  equipment as the year 2000 is
approached  and  reached.  These  problems  generally  arise  from the fact that
computers and equipment have  historically  used two-digit fields that recognize
dates  using the  assumption  that the first two digits are "19".  On January 1,
2000,  systems using  two-digit date fields could recognize a date using "00" as
the year 1900 rather than the year 2000.

Year 2000 Project and the Company's State of Readiness

The  Company  believes  that  implementation  of the SAP  operating  system will
address its major Year 2000 issues for its core  information  technology  ("IT")
systems. See "Systems and Processes" above. The Company has developed a plan for
addressing  the remainder of its Year 2000 issues which focuses on the following
six areas:  core IT systems;  off-line IT subsystems;  technical  infrastructure

<PAGE>

(e.g.,  networks,   servers,  desktop  computers);   vendor/customer  interfaces
(consisting  of electronic  data  interchange or "EDI");  facilities  (including
security systems,  elevators,  and heating and cooling systems); and third-party
suppliers, vendors and customers ("External Parties"). For the first five areas,
the Company's Year 2000 plan consists of the following phases: (1) conducting an
inventory  of items with Year 2000  implications;  (2)  assessment  of Year 2000
compliance; (3) remediation or replacement of material items that are determined
not to be Year 2000  compliant;  (4) testing  (including  re-testing of material
items that were  remediated or  replaced);  and (5)  certification  of Year 2000
compliancy.

The Company has  completed the  inventory  phase with respect to all areas.  The
assessment  phase is  substantially  completed and the  remediation  and testing
phases are in process and are scheduled to be substantially completed during the
second quarter of 1999,  with a limited amount of remediation  completed  during
the  third  quarter  of 1999.  In  addition,  the  Company  intends  to  conduct
integration  testing  during  the early part of the third  quarter of 1999.  The
Company  currently  plans to complete the Year 2000 project by the  beginning of
the fourth quarter of 1999.

Costs

The Company currently estimates that the aggregate cost of its Year 2000 project
will be approximately $4.2 million,  although the total amount could be greater.
Less than  $500,000 had been spent through the end of 1998.  The aggregate  cost
estimate  excludes the cost of implementing the SAP operating system in the U.S.
and costs incurred pursuant to the Company's  technology  upgrade strategy where
the  upgrades  were not  accelerated  due to Year 2000 issues.  In  addition,  a
portion of the estimated  total costs of the Year 2000 project will be funded by
reallocation of existing resources rather than incurring incremental costs. This
reallocation  of resources is not expected to have a  significant  impact of the
day-to-day  operations  of the Company,  including  any  material  effect on the
implementation of any IT project. The Company's aggregate cost estimate does not
include  costs that may be incurred by the Company as a result of the failure of
any third parties,  including  suppliers,  to become Year 2000 ready or costs to
implement any  contingency.  The Year 2000 project costs will be expensed by the
Company as incurred.

Risks

The  Company  believes  that the  completion  of its Year 2000  project  and the
implementation of the SAP operating system in the U.S. as planned will result in
the Company being Year 2000 compliant in a timely manner.  However,  the failure
to correct a material Year 2000 problem could result in an interruption in, or a
failure of,  certain  normal  business  activities  or  operations,  which could
materially and adversely affect the Company's  results of operations,  liquidity
and  financial  condition.  In addition,  if third parties that provide goods or
services  that  are  critical  to the  Company's  business  activities  fail  to
adequately  address  their Year 2000 issues,  there could be a similar  material
adverse  effect on the Company.  The Company  believes that its most  reasonably
likely worst case scenario is the failure of such a third party.  Such a failure
could result in, for example,  the inability of the Company to ship  product,  a
telecommunications  failure  at one or more of the  Company's  call  centers,  a
decrease in customer orders,  delays in product deliveries from vendors or power
outages at one or more of the  Company's  facilities.  The  Company's  Year 2000
project is expected to  significantly  reduce the Company's level of uncertainty
about the Year 2000 problem and, in particular,  about the Year 2000  compliance
and readiness of material External Parties.  The Company believes that, with the
completion of its Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.

Contingency Plans

As part of the Company's Year 2000 project, Year 2000-specific contingency plans
are being  developed.  The Company  expects that these plans will continue to be
modified as the Company obtains additional  information  regarding the Company's
internal  systems and equipment during the remediation and testing phases of its
Year 2000  program  and  regarding  the  status of the Year  2000  readiness  of
External Parties. The Company expects these plans to be finalized by the date of
completion of all other areas of the Year 2000 project. In addition, as a normal
course of business,  the Company maintains and deploys contingency plans as part
of its disaster  recovery  program that are  designed to address  various  other
potential business  interruptions.  These plans may be applicable to address the
failure of  External  Parties to provide  goods or  services to the Company as a
result of their failure to be Year 2000 ready.  During 1999, the Company intends
to expand its  disaster  recovery  program to cover  systems for which  detailed
contingency plans do not currently exist.

Readers are cautioned that forward-looking statements contained under "Year 2000
Issues" should be read in conjunction with the Company's  disclosures  under the
heading: "SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION" on page ii.


Variability of Quarterly Results and Seasonality

Historically,  the  Company  has  experienced  variability  in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the  future.   Management  believes  that  the  factors  influencing   quarterly
variability  include:  (i) the overall  growth in the  computer  industry;  (ii)

<PAGE>

shifts in short-term demand for the Company's products resulting,  in part, from
the  introduction  of new  products or updates of existing  products;  (iii) the
intensity  of  price  competition  among  the  Company  and its  competitors  as
influenced by various  factors;  and (iv) the fact that virtually all sales in a
given quarter result from orders booked in that quarter. In addition,  quarterly
variability  could be  affected  by the Year 2000 issue by  shifting  demand for
computer  products during 1999 and future years. Due to the factors noted above,
as well as the dynamic  characteristics  of the  computer  product  distribution
industry,  the  Company's  revenues  and  earnings  may be subject  to  material
volatility, particularly on a quarterly basis.

Additionally,  in the U.S.  and Canada,  the  Company's  net sales in the fourth
quarter  have  been  historically  higher  than  in its  other  three  quarters.
Management believes that the pattern of higher fourth quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday  purchases.  As a result of this pattern,  the Company's working capital
requirements  in the fourth  quarter  have  typically  been  greater  than other
quarters.  Net sales in the Canadian  operations are also historically strong in
the first quarter of the fiscal year.  This is primarily due to buying  patterns
of Canadian government agencies. See "Liquidity and Capital Resources" below.


Liquidity and Capital Resources

Cash Flows Activity For The Year Ended December 31, 1998

Net cash used by operating  activities  during the year ended  December 31, 1998
was  $52,493,000.  The  primary  uses  of  cash  were an  increase  in  accounts
receivable of  $156,967,000  and an increase in inventory of  $124,565,000.  The
primary sources of cash include an increase in accounts payable of $186,462,000.
The increase in accounts  receivable is primarily the result of increased  sales
during 1998. The increase in inventory can be attributed to large purchases near
the end of the fourth quarter made with the expectation of a higher sales volume
that did not  materialize.  The increase in inventories  also contributed to the
increase in accounts payable.

Net cash used in investing  activities in 1998 consisted of capital expenditures
of $50,067,000. The expenditures were primarily related to costs associated with
development of SAP and with other information systems as well as the purchase by
the Company of its call center facility in Cary, North Carolina.

Net cash  provided  by  financing  in 1998 was  $104,670,000  and was  comprised
primarily of proceeds  received from the sale of receivables under the Company's
asset securitization  agreements.  Uses of cash for financing activities include
scheduled  debt  payments  of  $1,572,000.  As noted  above,  a  portion  of the
Company's  funds are also  generated  through the sale of receivables by Merisel
Capital Funding, Inc. ("Merisel Capital Funding"),  a wholly owned subsidiary of
Merisel  Americas.  Merisel  Capital  Funding's  sole  business  is the  ongoing
purchase of trade  receivables  from Merisel  Americas.  Merisel Capital Funding
sells these  receivables,  in turn,  under an  agreement  with a  securitization
company,  whose  purchases  yield proceeds of up to $500,000,000 at any point in
time.  Merisel  Capital  Funding is a separate  corporate  entity with  separate
creditors who, in the event of liquidation,  are entitled to be satisfied out of
Merisel Capital  Funding's assets prior to any value in the subsidiary  becoming
available to the subsidiary's  equity holder.  This agreement expires in October
2003.

Effective  December 15, 1995,  Merisel Canada,  Inc.  ("Merisel Canada") entered
into a receivables  purchase agreement with a securitization  company to provide
funding for Merisel Canada.  In accordance  with this agreement,  Merisel Canada
sells receivables to the securitization  company, which yields proceeds of up to
$150,000,000  Canadian  dollars  at any  point in time.  The  agreement  expires
December 12, 2000, but is extendible by notice from the securitization  company,
subject to the Company's approval.

Under the securitization agreements, the receivables are sold at face value with
payment of a portion of the purchase  price being  deferred.  As of December 31,
1998, the total amount outstanding under these agreements was $416,121,000. Fees
incurred  in  connection  with  the  sale of  accounts  receivable  under  these
agreements for the years ended December 31, 1998, December 31, 1997 and December
31, 1996 were $17,564,000,  $16,030,000, and $16,029,000,  respectively, and are
recorded as other expense.


Cash Flows Activity for the Year Ended December 31, 1997

Net cash used by operating  activities  during the year ended  December 31, 1997
was  $44,968,000.  The  primary  uses  of  cash  were an  increase  in  accounts
receivable  of  $70,119,000  and an increase in  inventory of  $70,196,000.  The
primary sources of cash were an increase in accounts  payable of $76,203,000 and
$15,563,000  of  cash  generated  from  operations.  The  increase  in  accounts
receivable  is primarily  the result of  increased  sales of 18.8% in the fourth
quarter of 1997.  The increase in  inventory  relates  partially to  investments
required to meet the demands of increased  sales volume and to strategic  volume
purchases that the Company took advantage of late in the fourth quarter of 1997.
The  increase  in  inventories  also  contributed  to the  increase  in accounts
payable.


<PAGE>

Net cash used in  investing  activities  in 1997 was  $2,270,000  consisting  of
capital expenditures of $7,290,000,  which was partially offset by proceeds from
the sale of land held in North Carolina  totaling  $5,020,000.  The expenditures
were primarily for the maintenance and improvement of existing facilities.

Net cash  provided by  financing in 1997 was  $40,307,000.  Sources of cash from
financing  activities included $61,740,000 in proceeds received from the sale of
receivables under the Company's asset securitization facilities and $139,901,000
in net proceeds  from the issuance of Initial  Shares and the  Convertible  Note
(which consists of $152,000,000 in gross proceeds less $12,099,000 in investment
banking,  legal,  accounting and other direct costs). Uses of cash for financing
activities include scheduled debt payments of $13,634,000 and the extinguishment
of Operating Company Debt of $147,700,000.

Cash Flows Activity For The Year Ended December 31, 1996

Cash flows  activity  for the year ended  December  31,  1996 was  significantly
affected by the plan developed in 1996,  following  substantial  losses in 1995,
that  sought  to  maximize  cash  flow  by  controlling   costs  and  curtailing
non-essential  capital investments during the remainder of 1996 and disposing of
assets. See "Overview - Asset Dispositions" above.

Net cash  provided by operating  activities  during the year ended  December 31,
1996 was $29,249,000. The primary sources of cash from operating activities were
decreases in accounts  receivable,  inventories,  and income taxes receivable of
$132,480,000, $91,059,000 and $33,470,000, respectively. The primary use of cash
from  operations  during  the  period  was a  decrease  in  accounts  payable of
$179,304,000.  Lower inventory and accounts receivable levels resulted primarily
from  improved  management  of  inventories  and  collections.  The  decrease in
inventories also contributed to the decrease in accounts payable.

Net cash provided from investing activities in 1996 was $101,041,000, consisting
of  proceeds  from  the sale of EML and the  Company's  Australian  business  of
$110,379,000  and $8,515,000,  respectively,  partially  offset by the Company's
earn-out  obligation  under the  Merisel  FAB  acquisition  of  $13,409,000  and
property and equipment expenditures of $9,652,000, net of proceeds from the sale
of property and equipment of $5,975,000. Expenditures for property and equipment
were primarily  attributed to the upgrading of the Company's  computer  systems,
expenditures for a new warehouse management system and the upgrading of existing
facilities and leasehold improvements.

Net cash used in financing activities in 1996 was $82,765,000, related primarily
to repayments of indebtedness of the Company's operating subsidiaries consisting
of  $43,195,000  of  repayments  of  11.5%  senior  notes,  $17,792,000  of  net
repayments  under a revolving  credit  agreement,  the  payment of a  $4,400,000
installment of subordinated  notes and payments of $17,742,000  under other bank
facilities.


Debt Obligations, Financing Sources and Capital Expenditures

At December  31, 1998,  Merisel,  Inc. had  outstanding  $125,000,000  principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of 12.5%
payable  semi-annually.  By virtue of being an obligation of Merisel,  Inc., the
12.5% Notes are  effectively  subordinated  to all  liabilities of the Company's
subsidiaries,  including  trade  payables,  and are not guaranteed by any of the
Company's  subsidiaries.  The  indenture  relating to the 12.5%  Notes  contains
certain  covenants  that,  among  other  things,  limit  the type and  amount of
additional  indebtedness  that  may be  incurred  by the  Company  or any of its
subsidiaries  and imposes  limitations on investments,  loans,  advances,  asset
sales or  transfers,  dividends  and  other  payments,  the  creation  of liens,
sale-leasebacks, transactions with affiliates and certain mergers.

At December 31,  1998,  the Company had  promissory  notes  outstanding  with an
aggregate balance of $6,857,000.  Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that  commenced  February 1, 1996,  with balloon  payments due at maturity.  The
notes  are  collateralized  by  certain  of  the  Company's  real  property  and
equipment.

Merisel Americas entered into a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security  Agreement")  with a subsidiary  of Bank of America
NT&SA  ("BA"),  acting as agent,  that  provides for  borrowings  on a revolving
basis.  Effective  April 1,  1999,  the  obligations  of BA  under  the Loan and
Security  Agreement  will be  assumed  by Bank of  America  NT&SA.  The Loan and
Security Agreement permits  borrowings of up to $100,000,000  outstanding at any
one time  (including  face  amounts of letters  of  credit),  subject to meeting

<PAGE>

certain  availability  requirements  under a  borrowing  base  formula and other
limitations.  Borrowings under the Loan and Security  Agreement are secured by a
pledge  of  substantially  all  of  the  inventory  held  by  Merisel  Americas.
Borrowings  bear interest at the rate of LIBOR plus a specified  margin,  or, at
the Company's option, the agent's prime rate. An annual fee of 0.375% is payable
with  respect to the unused  portion of the  commitment.  The Loan and  Security
Agreement has a termination  date of June 30, 2003. No amounts were  outstanding
under the Loan and Security Agreement as of December 31, 1998.

In addition to its requirements for working capital for operations,  the Company
presently  anticipates that its capital expenditures will be between $35,000,000
and  $45,000,000  for  1999,  primarily  consisting  of  costs  associated  with
information  systems,  including systems for enhancing  electronic  services and
growing the Company's  infrastructure,  implementing  the SAP operating  system,
developing  the  Company's  configuration  and  co-location  capabilities,   and
upgrading warehouse systems and other Company facilities. The Company intends to
fund its capital  expenditures  primarily through internally  generated cash and
lease financing.

At December 31, 1998, the Company had cash and cash  equivalents of $36,341,000.
In the opinion of management, anticipated cash from operations in 1999, together
with proceeds from the sale of  receivables  under the Company's  securitization
agreements  and  trade  credit  from  vendors,  will be  sufficient  to meet the
Company's  requirements for the next 12 months,  without the need for additional
financing. This assumes, however, that there are not material adverse changes in
the  Company's  relationships  with  its  vendors,  customers  or  lenders.  Any
unforeseen event that adversely  impacts the industry or the Company's  position
in the  industry  could have a direct  and  material  unfavorable  effect on the
liquidity of the Company.

Inflation

Due  to the  short-term  nature  of  Merisel's  contracts  and  agreements  with
customers  and  vendors,  the Company  does not  believe  that  inflation  had a
material impact on its operations.


Asset Management

Merisel attempts to manage its inventory  position to maintain levels sufficient
to achieve high product  availability  and same-day order fill rates.  Inventory
levels may vary from period to period,  due to factors  including  increases  or
decreases in sales levels,  Merisel's practice of making large-volume  purchases
when  it  deems  such  purchases  to be  attractive,  and  the  addition  of new
manufacturers and products.  The Company has negotiated  agreements with many of
its manufacturers  that contain stock balancing and price protection  provisions
intended  to  reduce,  in part,  Merisel's  risk of loss due to  slow-moving  or
obsolete inventory or manufacturer price reductions.  The Company is not assured
that these  agreements  will  succeed in reducing  this risk.  In the event of a
manufacturer  price  reduction,  the  Company  generally  receives  a credit for
products  in  inventory.  In  addition,  the  Company  has the right to return a
certain percentage of purchases,  subject to certain limitations.  Historically,
price protection and stock return privileges, as well as the Company's inventory
management  procedures,  have  helped  to  reduce  the risk of loss of  carrying
inventory.  In the past year,  however,  certain computer systems  manufacturers
that are among the Company's  largest  vendors have  announced  changes in price
protection  and other  terms and  conditions  that  could  adversely  affect the
Company.  The  Company  is working  closely  with  these  manufacturers  and has
developed buying procedures and controls to manage inventory purchases to reduce
the potential  adverse  impact from these  changes  while  balancing the need to
maintain sufficient levels of inventory. There is no assurance that such efforts
will be successful in preventing a material adverse effect on the Company.

The  Company   purchases   exchange   contracts  to  minimize  foreign  exchange
transaction  gains and losses.  The Company  intends to continue the practice of
purchasing foreign exchange contracts and is currently  considering  adjustments
to its hedging strategy in an attempt to reduce foreign exchange risks. However,
the risk of foreign exchange transaction losses cannot be completely eliminated.


<PAGE>

The Company  offers  credit terms to  qualifying  customers  and also sells on a
prepay,  early pay, credit card and  cash-on-delivery  basis.  In addition,  the
Company has  developed a number of customer  financing  alternatives,  including
escrow  programs  and  selected  bid  financing  arrangements.  The Company also
arranges  a wide  variety  of  programs  through  which  third  parties  provide
financing  to  certain  of its  customers.  These  programs  include  floor plan
financing and hardware and software  leasing.  With respect to credit sales, the
Company  attempts to control  its bad debt  exposure  by  monitoring  customers'
creditworthiness  and,  where  practicable,   through  participation  in  credit
associations  that  provide  customer  credit  rating  information  for  certain
accounts.  In  addition,  the Company  purchases  credit  insurance  as it deems
appropriate.


Item 7A. Quantitative and Qualitative Market Risk Disclosure

Investments

At December  31, 1998,  the Company had no  investments,  with the  exception of
$36,341,000 held in overnight, interest-bearing accounts.

Foreign Currency Risk

The Company purchases  forward dollar contracts to hedge short-term  advances to
its Canadian  subsidiary and to hedge commitments to acquire inventory for sale.
The Company does not use the contracts for speculative or trading  purposes.  At
December 31, 1998, the Company had 26 short-term Canadian forward contracts with
a face value of approximately $80,268,000 outstanding. The size of the contracts
ranged from $474,000 to $19,295,000  with a weighted  average  contract value of
approximately  $3,100,000.  Forward rates on the contracts  ranged from 1.516 to
1.553 with the weighted average forward rate approximating  1.550. The contracts
matured at various dates in January and February 1999.

Long-term Debt

The Company is subject to interest  rate risk on its  long-term  fixed  interest
rate debt.  The table  below  provides  information  concerning  long-term  debt
outstanding  at December 31, 1998,  including  principal  amounts  maturing each
year, average interest rate and fair value.

<TABLE>
<CAPTION>
                                                                                                                Total
                               1999        2000        2001      2002     2003        2004         Total      Fair Value
                               ----        ----        ----      ----     ----        ----         -----      ----------
<S>                           <C>         <C>        <C>        <C>      <C>      <C>            <C>          <C>
12.5% Senior Notes               0           0           0         0         0    $125,000,000 $125,000,000    $128,750,000
Average Interest Rate         12.5%       12.5%       12.5%     12.5%     12.5%        12.5%

Fixed rate promissory notes $2,496,000  $461,000  $3,900,000                                  $6,857,000     $  7,009,000    
Average Interest Rate          8.84%       7.20%       7.56%                          
</TABLE>
                          

Asset Securitization

Fees incurred in connection with the sale of trade accounts receivable under the
Company's asset  securitization  agreements  typically are based upon commercial
paper rate. As of December 31, 1998,  the total amount  outstanding  under these
agreements  was  $416,121,000  and  the  average  cost  of  securitization   was
approximately  5.83%.  During  1998,  the total amount  outstanding  under these
agreements   averaged   $303,300,000,   and  the   weighted   average   cost  of
securitization was 5.79%.




<PAGE>

Item 8. Financial Statements and Supplementary Data.


                          INDEPENDENT AUDITORS' REPORT



Merisel, Inc.:

We have audited the accompanying  consolidated  balance sheets of Merisel,  Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related  consolidated
statements of operations,  changes in stockholders'  equity,  and cash flows for
each of the three years in the period ended  December 31, 1998.  Our audits also
included the financial  statement  schedule  listed at Item 14. These  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and financial statement schedule 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,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of Merisel,  Inc. and subsidiaries at
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three  years in the  period  ended  December  31,  1998 in
conformity with generally accepted accounting principles.  Also, in our opinion,
such  financial  statement  schedule,  when  considered in relation to the basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.


DELOITTE & TOUCHE LLP

Los Angeles, California
February 23, 1999



<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                       1997         1998

                                        ASSETS
<S>                                                                              <C>             <C> 

CURRENT ASSETS:
     Cash and cash equivalents ..................................................  $  36,447   $    36,341
     Accounts receivable (net of allowances of $18,549 and $20,476 at December
        31, 1997 and 1998, respectively) ........................................     162,895      202,128
     Inventories ................................................................     462,752      587,317
     Prepaid expenses and other current assets ..................................      12,352       14,193
     Deferred income taxes ......................................................         644          865
                                                                                  ------------ -------------
          Total current assets ..................................................     675,090      840,844
PROPERTY AND EQUIPMENT, NET .....................................................      40,142       79,719
COST IN EXCESS OF NET ASSETS ACQUIRED, NET ......................................      25,381       24,309
OTHER ASSETS ....................................................................       6,498          448
                                                                                  ------------ -------------
     TOTAL ASSETS ...............................................................   $ 747,111    $ 945,320
                                                                                  ============ =============

                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:

     Accounts payable ...........................................................   $ 437,211    $ 623,673
     Accrued liabilities ........................................................      38,963       31,737
     Long-term debt and capitalized lease obligations--current ..................       1,762        3,692
                                                                                  ------------ -------------
          Total current liabilities .............................................     477,936      659,102
LONG-TERM DEBT ..................................................................     131,667      129,360
CAPITALIZED LEASE OBLIGATIONS ...................................................                    2,605

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued or
        Outstanding
     Common stock, $.01 par value;  authorized  150,000,000 shares;  outstanding
        80,078,500 and 80,272,683 shares at December 31, 1997 and 1998,
            respectively ........................................................         801          803
     Additional paid-in capital .................................................     281,701      282,380
     Accumulated deficit ........................................................    (137,005)    (118,495)
     Accumulated other comprehensive income .....................................      (7,989)     (10,435)
                                                                                  ------------ -------------
          Total stockholders' equity ............................................     137,508      154,253
                                                                                  ------------ -------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................   $ 747,111    $ 945,320
                                                                                  ============ =============
</TABLE>


               See  accompanying   notes  to  consolidated financial statements.



<PAGE>
<TABLE>
<CAPTION>


                         MERISEL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share amount)

                                                          For the Years Ended December 31,
                                                         1996          1997           1998
                                                   -----------  --------------   ------------
<S>                                                <C>           <C>              <C>

NET SALES ......................................   $ 5,522,824  $   4,048,972     $4,552,984
COST OF SALES ..................................     5,233,570      3,807,888      4,298,553
                                                   -----------  --------------   ------------
GROSS PROFIT ...................................       289,254        241,084        254,431
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...       295,021        191,406        199,929
IMPAIRMENT LOSSES ..............................        42,033         14,100
                                                   -----------  --------------   ------------
OPERATING (LOSS) INCOME ........................       (47,800)        35,578         54,502
INTEREST EXPENSE ...............................        37,431         26,957         14,671
LOSS ON SALE OF EUROPEAN, MEXICAN AND
   LATIN AMERICAN OPERATIONS ...................        33,455
DEBT RESTRUCTURING COSTS .......................                        5,230
OTHER EXPENSE, NET .............................        20,150         14,992         20,904
                                                   -----------  --------------   ------------
(LOSS) INCOME BEFORE INCOME TAXES ..............      (138,836)       (11,601)        18,927
PROVISION FOR INCOME TAXES .....................         1,539            496            417
                                                   -----------  --------------   ------------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM ....      (140,375)       (12,097)        18,510
EXTRAORDINARY  LOSS ON EXTINGUISHMENT OF DEBT ..                        3,744
                                                   -----------  --------------   ------------
NET (LOSS) INCOME ..............................   $  (140,375)   $   (15,841)   $    18,510

NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED):
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM ....   $     (4.68)   $      (.36)   $       .23
EXTRAORDINARY LOSS .............................                         (.12)
                                                   -----------  --------------   ------------
NET (LOSS) INCOME ..............................   $     (4.68)   $      (.48)   $       .23 
                                                   ===========  ==============   ============
WEIGHTED AVERAGE NUMBER OF SHARES:
       BASIC ...................................        30,001         33,216         80,210
       DILUTED .................................        30,001         33,216         80,485
                                                   ===========  ==============   ============

                                     See  accompanying   notes  to  consolidated financial statements.
</TABLE>




<PAGE>
<TABLE>
<CAPTION>


                                                         MERISEL, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                         (In thousands, except share data)


                                                    
                                                                        Retained      Accumulated   
                                                         Additional     Earnings         Other    
                                                          Paid-in     (Accumulated   Comprehensive                  Comprehensive
                                   Common Stock           Capital        Deficit)         Income         Total          Income
                               -----------------------   -----------  -------------  ----------------  -----------  --------------
                                  Shares      Amount   
                               ------------ ----------
<S>                            <C>          <C>          <C>           <C>           <C>                <C>          <C>       
Balance at December 31, 1995....29,863,500    $299       $141,938        $19,211        $(6,982)         $154,466
    Exercise of stock options ..   215,000       2            362                                             364
    Comprehensive Income:
        Translation Adjustment .                                                            542               542     $     542
        Net loss ...............                                        (140,375)                        (140,375)     (140,375)
                                                                                                                     ------------- 
    Total Comprehensive Loss ...                                                                                      $(139,833)
                               ------------- --------- ------------   -------------  -----------------  ------------ =============
Balance at December 31, 1996....30,078,500     301        142,300       (121,164)        (6,440)           14,997
    Sale of  common stock ...... 4,901,316      49         14,851                                          14,900
    Conversion of Note into
        Common Stock ...........45,098,684     451        124,550                                         125,001
    Comprehensive Income:
        Translation adjustment.                                                           (1,549)          (1,549)    $  (1,549)
        Net loss ...............                                         (15,841)                         (15,841)      (15,841)
                                                                                                                     -------------
Total Comprehensive Loss .......                                                                                      $ (17,390)
                               ------------- --------- ------------   -------------  -----------------  ------------ =============
Balance at December 31, 1997....80,078,500     801        281,701       (137,005)        (7,989)          137,508
   Exercise of stock options
     and other..................   194,183       2            679                                             681
 Comprehensive Income:
        Translation adjustment .                                                         (2,446)           (2,446)    $  (2,446)
        Net income .............                                          18,510                           18,510        18,510
                                                                                                                     -------------
Total Comprehensive Income......                                                                                      $  16,064
                               ------------- --------- ------------   -------------  -----------------  ------------ =============
Balance at December 31, 1998....80,272,683    $803       $282,380      $(118,495)      $(10,435)         $154,253
                               ============= ========= ============   =============  =================  ============

</TABLE>

               See  accompanying   notes  to  consolidated financial statements.


<PAGE>
<TABLE>
<CAPTION>


                         MERISEL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                                        For the Years Ended December 31,
                                                                                       1996            1997           1998
                                                                                  --------------  -------------  --------------- 

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>             <C>              <C> 

    Net (loss) income ..........................................................    $ (140,375)    $  (15,841)     $  18,510
    Adjustments to reconcile net (loss) income to net cash provided by
      operating activities:
        Depreciation and amortization ..........................................        18,789         11,311         10,980
        Provision for doubtful accounts ........................................        17,421          7,361         12,553
        Impairment losses ......................................................        42,033         14,100
               Loss on Sale of European, Mexican and Latin American businesses .        33,455
        Deferred income taxes ..................................................         6,175            162           (221)
               Gain on sale of property and equipment ..........................                       (1,530)
        Changes in assets and liabilities, net of the effects from acquisitions:
            Accounts receivable ................................................       132,480         (8,379)       (51,406)
            Inventories ........................................................        91,059        (70,196)      (124,565)
            Prepaid expenses and other current assets ..........................       (14,612)           654          6,786
            Income taxes receivable ............................................        33,470          2,021
            Accounts payable ...................................................      (179,304)        76,203        186,462
            Accrued liabilities ................................................       (11,342)           906         (6,031)
                                                                                  --------------  -------------  --------------- 
                Net cash provided by operating activities ......................        29,249         16,772         53,068
                                                                                  --------------  -------------  --------------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment .........................................        (9,652)        (7,290)       (50,067)
    Proceeds from sale of property and equipment ...............................         5,975          5,020
        Payment of earn out obligation from ComputerLand acquisition ...........       (13,409)
        Cash proceeds from sale of Australian business .........................         8,515
        Cash proceeds from sale of European, Mexican and Latin American
               businesses ......................................................       110,379
        Other investing activities .............................................          (767)
                                                                                  --------------  -------------  --------------- 
                 Net cash provided by (used for) investing activities ..........       101,041         (2,270)       (50,067)
                                                                                  --------------  -------------  --------------- 
CASH FLOWS FROM FINANCING ACTIVITIES:
    Borrowings under revolving line of credit ..................................     1,448,358        726,308
    Repayments under revolving line of credit ..................................    (1,466,150)      (811,516)
    Repayments under senior notes ..............................................       (43,195)       (56,805)
        Repayments under subordinated debt agreement ...........................        (4,400)       (17,600)
    Repayments under other financing arrangements ..............................       (17,742)        (1,721)        (1,572)
        Net proceeds from the issuance of convertible notes ....................                      125,001
    Proceeds from issuance of common stock .....................................           364         14,900            681
                                                                                  --------------  -------------  --------------- 
                Net cash (used for) provided by financing activities ...........       (82,765)       (21,433)          (891)
                                                                                  --------------  -------------  --------------- 
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................        (4,225)        (1,300)        (2,216)
                                                                                  --------------  -------------  --------------- 
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS ............................        43,300         (8,231)          (106)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................................         1,378         44,678         36,447
                                                                                  --------------  -------------  --------------- 
CASH AND CASH EQUIVALENTS, END OF PERIOD YEAR ..................................   $    44,678    $    36,447    $    36,341
                                                                                  ==============  =============  ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
    Cash paid(received) during the year for:
    Interest ...................................................................   $    30,456    $    33,385    $    14,698
    Income taxes ...............................................................       (36,068)        (3,362)           655
    Noncash activities:
    Capital lease obligations entered into .....................................           187                         4,480

</TABLE>

               See  accompanying   notes  to  consolidated financial statements.



<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS --(Continued)





SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Effective  March 28, 1997, the Company sold  substantially  all of the assets of
its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB"). The recorded sale
price was  $31,992,000,  consisting of the  assumption of  $11,992,000  of trade
payables and accrued  liabilities  and a $20,000,000  extended  payable due to a
third party, in full consideration for the assets (see Note 4 "Dispositions").

On  October  10,  1997,  Phoenix  Acquisition  Company  II,  L.L.C.  ("Phoenix")
exercised  its option to convert,  without any  additional  payment,  $3,296,286
principal amount of a convertible note into 1,084,305 shares of common stock. On
December 19, 1997,  following  receipt of  stockholder  approval,  approximately
$133.8  million  outstanding  principal  amount  of  the  convertible  note  was
converted,  without any additional  payment,  into  44,014,379  shares of common
stock.  The proceeds  from the issuance of the  convertible  note were offset by
professional  fees and other direct costs of  approximately  $12,099,000,  which
were  recorded  as a  reduction  to  additional  paid in  capital at the time of
conversion.

              See  accompanying   notes  to  consolidated financial statements.



<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1996, 1997 and 1998


1. Summary of Significant Accounting Policies

General--Merisel,  Inc., a Delaware  corporation and a holding company (together
with its subsidiaries,  "Merisel" or the "Company"), is a leading distributor of
computer hardware and software products.  Through its main operating subsidiary,
Merisel  Americas,  Inc.  ("Merisel  Americas"),  and  subsidiaries  the Company
operates three distinct  business units:  United States  distribution,  Canadian
distribution  and the Merisel Open Computing  Alliance  (MOCA(TM)).  The Company
markets products and services  throughout the United States and Canada,  and has
achieved operational  efficiencies that have made it a valued partner to a broad
range  of  computer  resellers,   including   value-added   resellers  ("VARs"),
commercial resellers, and retailers.  Through MOCA(TM), the Company supports Sun
Microsystems' UNIX(R)-based products and complementary third-party products.

Risks and Uncertainties --The Company believes that the diversity and breadth of
the  Company's  product  and  service  offerings,  customers,  and  the  general
stability  of the  economies  in the markets in which it operates  significantly
mitigate the risk that a material  adverse impact will occur in the near term as
a result of changes in its customer  base,  competition,  or  composition of its
markets. However, continued pricing pressures, or the loss of a major vendor, or
other  unanticipated  occurrences could result in a materially adverse impact to
the  business.  Although  Merisel  regularly  stocks  products  and  accessories
supplied by more than 500 manufacturers,  73% of the Company's net sales for the
North  American  Business  in 1998 (as  compared to 69% in 1997 and 60% in 1996)
were derived from products supplied by Merisel's ten largest vendors.

The preparation of financial  statements in conformity  with generally  accepted
accounting   principles  requires  management  to  make  certain  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.  Significant
estimates include  collectibility of accounts  receivable,  inventory,  deferred
income taxes,  accounts payable,  sales returns and  recoverability of long-term
assets.

New Accounting  Pronouncements--In June 1998, the Financial Accounting Standards
Board  ("FASB")  issued  Statement  of  Financial  Accounting  Standard No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities"  ("SFAS 133"),
which is effective for financial  statements  issued for periods beginning after
June 15, 1999. The Company will adopt SFAS 133 as required in January 2000. SFAS
133 requires all  derivatives to be recorded on the balance sheet at fair value.
The Company is in the process of  evaluating  the effect that this new  standard
will have on the Company's financial statements.

Revenue  Recognition,  Returns  and  Sales  Incentives--The  Company  recognizes
revenue from hardware and software  sales as products are shipped.  The Company,
subject to certain  limitations,  permits its customers to exchange  products or
receive  credits  against  future  purchases.  The Company  offers its customers
several  sales  incentive  programs  that,  among other  things,  include  funds
available for  cooperative  promotion of product  sales.  Customers  earn credit
under  such  programs  based  upon the  volume of  purchases.  The cost of these
programs  is  partially  subsidized  by  marketing  allowances  provided  by the
Company's manufacturers.  The allowances for sales returns and costs of customer
incentive programs are accrued concurrently with the recognition of revenue.

Cash and Cash  Equivalents--The  Company considers all highly liquid investments
purchased  with  initial   maturities  of  three  months  or  less  to  be  cash
equivalents.

Inventories--Inventories  are  valued  at the lower of cost or  market;  cost is
determined using the average cost method.

Property  and  Depreciation--Property  and  equipment  are  stated  at cost less
accumulated  depreciation.  Depreciation  is  computed  using the  straight-line
method over the  estimated  useful lives of the assets,  generally  three to ten
years.  Leasehold improvements are amortized over the shorter of the life of the
lease or the improvement.

The  Company  capitalizes  all direct  costs  incurred  in the  construction  of
facilities and the  development  and  installation of new computer and warehouse
management systems. Such amounts include the costs of materials and
<PAGE>

                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


other direct  construction  costs,  purchased  computer  hardware and  software,
outside programming and consulting fees, direct employee salaries and interest.

Cost in Excess of Net Assets  Acquired--Cost  in excess of net  assets  acquired
resulted  from  the  acquisition  in  1990  of  Microamerica,  Inc.  Accumulated
amortization  was  $7,672,000  and  $8,477,000 as of December 31, 1997 and 1998,
respectively.  The cost in excess of net assets acquired is being amortized over
a period of 40 years using the straight line method.

Impairment of  Long-Lived  Assets--The  Company  reviews the  recoverability  of
intangible assets and other long lived assets to determine if there has been any
permanent  impairment.  This  assessment  is  performed  based on the  estimated
undiscounted  future  cash flows from  operating  activities  compared  with the
carrying value of the related asset. If the  undiscounted  future cash flows are
less than the carrying value, an impairment loss is recognized,  measured by the
difference  between the carrying  value and  estimated  fair value of the assets
(see Note 2 - "Impairment Losses").

Income  Taxes--Deferred income taxes represent the amounts which will be paid or
received  in future  periods  based on the tax rates that are  expected to be in
effect when the temporary differences are scheduled to reverse.

Concentration of Credit Risk--Financial  instruments that subject the Company to
credit risk consist  primarily of cash equivalents,  trade accounts  receivable,
and forward foreign  currency  exchange  contracts.  Credit risk with respect to
trade accounts  receivable is generally not concentrated due to the large number
of  entities  comprising  the  Company's  customer  base  and  their  geographic
dispersion.  The Company performs  ongoing credit  evaluations of its customers,
maintains  an  allowance  for  potential  credit  losses  and  maintains  credit
insurance.  The Company actively evaluates the creditworthiness of the financial
institutions with which it conducts business.

Fair Values of Financial  Instruments--The fair values of financial instruments,
other than long-term debt,  closely  approximate their carrying value because of
their  short-term  nature.  The estimated fair value of long-term debt including
current maturities, based on reference to quoted market prices, was greater than
its carrying value by  approximately  $3,750,000 and  $10,000,000 as of December
31, 1998 and 1997, respectively.

Foreign Currency  Translation--Assets  and liabilities of the Company's Canadian
subsidiary  are  translated  into United States  dollars at the exchange rate in
effect at the close of the period.  Revenues and expenses are  translated at the
average exchange rate during the period. The aggregate effect of translating the
financial  statements at the above rates is included in a separate  component of
stockholders'  equity  entitled  Accumulated  Other  Comprehensive   Income.  In
addition,  the Company  advances funds to its Canadian  subsidiary in the normal
course of business that are not expected to be repaid in the foreseeable future.
Translation  adjustments  resulting  from these  advances  are also  included in
Accumulated Other Comprehensive Income.

Foreign Exchange Instruments--The Company's use of derivatives is limited to the
purchase of foreign  exchange  contracts in order to minimize  foreign  exchange
transaction gains and losses.  The Company purchases forward dollar contracts to
hedge short-term advances to its Canadian subsidiary and to hedge commitments to
acquire  inventory for sale and does not use the contracts for trading purposes.
The Company's foreign exchange rate contracts minimize the Company's exposure to
exchange  rate  movement  risk,  as any gains or losses on these  contracts  are
offset by gains and losses on the transactions  being hedged. As of December 31,
1997,  there were  approximately  $42,000,000  in outstanding  foreign  exchange
contracts and  $80,268,000  outstanding as of December 31, 1998. In 1996,  1997,
and 1998, the Company recorded net foreign currency  transaction  gains (losses)
of  $161,000,  ($351,000)  and  ($1,885,000),  respectively.  These  amounts are
included in other expense.

Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending on
the  Saturday  nearest to  December  31 and its fiscal  quarters  are the 13- or
14-week periods ending on the Saturday  nearest to March 31, June 30,  September
30 and  December  31. For clarity of  presentation,  the  Company has  described
fiscal years presented as
<PAGE>

                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


if the years  ended on  December  31 and  fiscal  quarters  presented  as if the
quarters ended on March 31, June  30,September  30 and December 31. The 1996 and
1998 fiscal years were 52 weeks in  duration.  The 1997 fiscal year was 53 weeks
in duration.  All quarters presented for 1996, 1998 and the first three quarters
of 1997 were 13 weeks in  duration.  The fourth  quarter of 1997 was 14 weeks in
duration.

2. Impairment Losses

In 1993,  the Company  undertook  the process of converting  its North  American
Operations to SAP.  Although  this process was completed in Canada in 1995,  the
Company  delayed  the  implementation  in the  United  States  and  recorded  an
impairment  charge of  $19,500,000.  In the fourth  quarter of 1997, the Company
renewed  its  implementation  efforts.  As  part of this  process,  the  Company
reviewed  previously  capitalized  costs and determined  that a portion of these
costs no longer  provided  value to the Company  primarily due to changes in the
SAP  implementation  strategy  and the  planned  implementation  of a  different
version of SAP. As a result, a $14,100,000 impairment charge was recorded.

In the quarter ended  September 30, 1996, the Company  determined that a portion
of the carrying value for certain of its  identifiable  intangible  assets would
not be recovered from their use in future operations.  Accordingly, these assets
were written down to their fair values as of September  30, 1996.  An impairment
was recognized on the intangible  assets of Merisel FAB, due to declining  sales
growth, margins and earnings, and the resulting negative trend in projected cash
flows.  The  intangible  assets of Merisel FAB were acquired in January 1994 and
had a net book value of $87,500,000 in 1995 prior to the impairment  losses.  In
the fourth quarter of 1995, the fair value of the intangible assets was measured
by discounting  future  expected cash flows,  which resulted in a required write
down of  $30,000,000.  Another  impairment  charge of $40,000,000 was recognized
against these assets in the third quarter of 1996 on the same basis. In December
1996, the Company recorded an additional $2,033,000 charge to adjust Merisel FAB
assets to their fair value based on the provisions of a definitive  agreement to
sell such assets in the first quarter of 1997. (See Note 4 "Dispositions.")

 3. Debt Restructuring and Equity Investment

On  September  19,  1997,  the  Company  and  Merisel  Americas  entered  into a
definitive Stock and Note Purchase  Agreement with Phoenix  Acquisition  Company
II, L.L.C.  ("Phoenix"),  a Delaware limited liability company whose sole member
is Stonington  Capital  Appreciation  1994 Fund, L.P.  Pursuant to the Stock and
Note Purchase  Agreement,  on September 19, 1997 Phoenix  acquired a Convertible
Note for $137,100,000  (the  "Convertible  Note") and 4,901,316 shares of Common
Stock (the  "Initial  Shares")  for  $14,900,000.  The  Convertible  Note was an
unsecured obligation of the Company and Merisel Americas and provided that, upon
the  satisfaction  of  certain  conditions,   including  obtaining   stockholder
approval,  the  Convertible  Note would  automatically  convert into  45,098,684
shares of Common Stock (the "Conversion Shares").

The Company used  substantially  all of the  $152,000,000  in proceeds  from the
issuance of the Initial Shares and the Convertible Note to repay indebtedness of
its  operating   subsidiaries   consisting  of  $80,697,000   principal   amount
outstanding under a revolving credit agreement,  $53,798,000 principal amount of
its 11.5% senior notes, and $13,200,000  principal amount of subordinated notes.
In connection with these repayments,  the Company recorded an extraordinary loss
on the  extinguishment  of debt of $3,744,000.  This amount consisted of a "make
whole" premium of $960,000 required to be paid with respect to the prepayment of
the   subordinated   notes,   unamortized   prepaid   financing   fees  totaling
approximately  $2,546,000 and other costs totaling $238,000.  Additionally,  the
Company  incurred  $5,230,000 in other expenses in 1997 related to the Company's
efforts to effect a restructuring of its debt. These costs include $4,380,000 of
professional  fees and other costs  associated with the termination of a Limited
Waiver  Agreement  with the holders of its 12-1/2% Senior Notes due 2004 ("12.5%
Notes") and  $850,000  in costs that were  incurred as a result of the change in
control that occurred upon the conversion of the Convertible Note. Additionally,
selling,  general  and  administrative  expenses  in 1997  include  compensation
charges of $1,950,000  incurred  pursuant to employment  contracts of $1,950,000
incurred pursuant to employment  contracts of certain executive  officers of the
Company related to the debt restructuring.

<PAGE>

                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


On October  10,  1997,  Phoenix  exercised  its option to  convert,  without any
additional  payment,  $3,296,286  principal  amount of the Convertible Note into
1,084,305 shares of Common Stock,  representing the maximum amount that could be
converted  prior to  obtaining  stockholder  approval.  On  December  19,  1997,
following  receipt  of  stockholder  approval,  the  remaining  portion  of  the
Convertible  Note was converted into Common Stock.  The $152,000,000 in proceeds
from the issuance of the Initial Shares and the  Convertible  Note was partially
offset by  professional  fees and other direct costs  related  thereto  totaling
approximately $12,099,000, which were recorded as a reduction to additional paid
in capital at the time of  conversion.  As of December 31, 1998,  Phoenix  owned
50,000,000  shares of Common Stock,  or  approximately  62.3% of the outstanding
Common Stock.

4.  Dispositions

On October 4, 1996,  Merisel  completed  the sale of its  European,  Mexican and
Latin American  subsidiaries ("EML") to CHS Electronics,  Inc. ("CHS"). The sale
was effective as of September 27, 1996. A loss of  $33,455,000,  which  includes
approximately  $7,400,000 of direct costs  related to the sale,  was recorded on
such sale. The sale price,  computed based on the combined closing balance sheet
of EML, was  $147,631,000,  consisting  of (i)  $110,379,000  in cash,  (ii) the
assumption of Merisel's  European asset  securitization  agreement against which
$26,252,000 was  outstanding at closing and (iii) a receivable for  $11,000,000,
which has since been collected.

As of March 28, 1997, the Company completed the sale of substantially all of the
assets of  Merisel,  FAB to a wholly  owned  subsidiary  of  SYNNEX  Information
Technologies,  Inc. ("Synnex"). The sale price, computed based upon the February
21, 1997 balance sheet of Merisel FAB, was  $31,992,000  consisting of the buyer
assuming $11,992,000 of trade payables and accrued liabilities and a $20,000,000
extended payable due to Vanstar  Corporation.  In connection with this sale, the
Company  recorded  an  impairment  charge  in the  fourth  quarter  of 1996  for
$2,033,000 to adjust Merisel FAB's assets to their fair value.

Following are summarized pro forma operating  results  assuming that the Company
had sold EML and Merisel FAB as of January 1, 1996.

                                              (Unaudited)
                                  (in thousands except per share data)
                                   For the Years Ended December 31,
                                      1996                 1997
                                 -------------      ---------------
      Net Sales                  $  3,441,343        $   3,846,795
      Gross Profit                    179,238              233,406
      Net income (loss)               (60,751)             (17,994)
                                 =============      ===============
      Net income (loss) per
      basic & diluted share      $      (2.02)       $       (0.54)
                                 =============      ===============
      Weighted Average
      Shares Outstanding       
         Basic                         30,001                33,216
         Diluted                       30,001                33,216
                                 =============      ===============
                               

EML is not an incorporated entity for which historical financial statements were
prepared. The historical balances used in preparing the above pro forma balances
represent  combined  balances  obtained  from the separate  unaudited  financial
statements for the  individual  entities  comprising  EML. The pro forma results
include adjustments for general and administrative  expenses that would not have
been eliminated due to the sale of EML. The pro forma  adjustments  also include
adjustments for  amortization of intangible  assets and for interest  expense on
debt repaid with a portion of the proceeds  from the sale,  net of the effect of
an interest rate increase resulting from the



<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


renegotiation  of certain debt  agreements  as a result of the sale.  Historical
balances  obtained from the unaudited  financial  statements of Merisel FAB were
also used in preparing the pro forma balances above.

5. Sale of Accounts Receivable

The Company's wholly owned subsidiary, Merisel Americas, sells trade receivables
on an ongoing basis to its wholly owned subsidiary Merisel Capital Funding, Inc.
("Merisel  Capital  Funding").  Pursuant to an agreement  with a  securitization
company (the "Receivables  Purchase and Servicing  Agreement"),  Merisel Capital
Funding,  in turn,  sells such receivables to the  securitization  company on an
ongoing basis, which yields proceeds of up to $500,000,000 at any point in time.
Merisel  Capital  Funding's  sole business is the purchase of trade  receivables
from Merisel  Americas.  Merisel Capital Funding is a separate  corporate entity
with its own separate  creditors,  which in the event of its liquidation will be
entitled to be satisfied out of Merisel  Capital  Funding's  assets prior to any
value in Merisel Capital Funding becoming available to Merisel Capital Funding's
equity holders. This facility expires in October 2003.

Effective  December 15, 1995,  Merisel Canada,  Inc.  ("Merisel Canada") entered
into a receivables  purchase agreement with a securitization  company to provide
funding for Merisel Canada.  In accordance  with this agreement,  Merisel Canada
sells receivables to the securitization  company, which yields proceeds of up to
$150,000,000  Canadian  dollars  at any  point in  time.  The  facility  expires
December 12, 2000, but is extendible by notice from the securitization  company,
subject to the Company's approval.

Under these  securitization  facilities,  the receivables are sold at face value
with payment of a portion of the purchase price being  deferred.  As of December
31, 1998 the total amount  outstanding  under these facilities was $416,121,000.
Fees incurred in connection  with the sale of accounts  receivable for the years
ended  December  31,  1996,  1997 and 1998  were  $16,029,000,  $16,030,000  and
$17,564,000, respectively, and are recorded as other expense.

6. Property and Equipment

Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>

                                                          Estimated
                                                            Useful
                                                             Life
                                                          (in Years)        December 31,
                                                                           1997      1998
     <S>                                                 <C>          <C>        <C>   
                                                                                
     Land...............................................               $  2,440   $   3,324
     Building...........................................      20          3,880       8,883
     Equipment..........................................    3 to 7       66,455      71,225
     Furniture and fixtures.............................    3 to 5        6,733       9,177
     Leasehold improvements.............................    3 to 20       8,166       8,941
     Construction in progress...........................                 14,589      45,811
                                                                        --------    ---------
     Total..............................................                102,263     147,361
     Less accumulated depreciation and amortization.....                (62,121)    (67,642)
                                                                        --------    ---------
     Property and equipment, net........................               $ 40,142   $  79,719
                                                                        ========    =========
</TABLE>






<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Income Taxes

The  components of (loss) income before income taxes  consisted of the following
(in thousands):
<TABLE>
<CAPTION>

                                                        For the Years Ended December 31,
                                                      1996          1997             1998  
                                                    -----------   ----------     ----------
    <S>                                             <C>            <C>            <C>     
     Domestic...............................        $(100,139)     $(14,202)      $ 19,661
     Foreign................................          (38,697)        2,601           (734)
                                                    -----------   ----------     ----------             
     Total..................................        $(138,836)     $(11,601)      $ 18,927
                                                    ===========   ==========     ==========
</TABLE>


The  (benefit)  provision  for  income  taxes  consisted  of the  following  (in
thousands):

<TABLE>
<CAPTION>
                                                        For the Years Ended December 31,
                                                         1996          1997         1998
                                                    -----------   ----------     ----------
    <S>                                            <C>            <C>            <C> 
     Current:
          Federal................................    $  (1,706)
          State..................................          360       $   312       $   360
          Foreign................................       (3,290)          346           278
                                                    -----------   ----------     ----------
          Total Current..........................       (4,636)          658           638
                                                    -----------   ----------     ----------
     Deferred:
          Domestic...............................         4,659
          Foreign................................         1,516         (162)         (221)                      
                                                    -----------   ----------     ----------
          Total deferred.........................         6,175         (162)         (221)                     
                                                    -----------   ----------     ----------
          Total provision........................     $   1,539          496        $  417
                                                    ===========   ==========     ==========
</TABLE>


Deferred  income tax  liabilities and assets were comprised of the following 
(in thousands):

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                 1997               1998
                                                            ------------       -------------
         <S>                                                 <C>                <C>      
          Net operating loss..........................       $  51,744          $  48,400
          Expense accruals............................          16,164             17,184
          State taxes.................................             109                (27)             
          Property and goodwill.......................          (4,361)           (11,665)               
          Other, net..................................           2,315
                                                            ------------       -------------
                                                                65,971             53,892
          Valuation allowances........................         (65,327)           (53,027)
                                                            ------------       -------------
               Total..................................        $    644          $     865         
                                                            ============       =============
     Net deferred tax asset...........................        $    644          $     865
                                                            ============       =============
</TABLE>

                                                                 


<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The major elements  contributing to the difference between the federal statutory
tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>

                                                                              For the Years Ended
                                                                                 December 31,  
                                                                   --------------------------------------------
                                                                      1996             1997            1998
                                                                    ----------    -------------    -----------
    <S>                                                             <C>            <C>              <C>  
     Statutory rate..............................................    (35.0)%           (35.0)%        35.0%
     Change in valuation allowance...............................     27.3              32.7         (36.7)
     State income taxes, less effect of federal deduction........       .2               1.3           1.2
     Goodwill amortization.......................................       .2               1.5            .6
     Foreign losses with benefits at less than statutory rate....      7.2                             1.4
     Utilization of net operating losses of foreign subsidiary...     (1.0)              1.2            .3
     Other.......................................................      2.2               1.5            .4
                                                                    ----------    -------------    -----------
     Effective tax rate..........................................      1.1%              3.2%          2.2%
                                                                    ==========    =============    ===========
</TABLE>

Upon the issuance of the Conversion Shares, the Company experienced an ownership
change for Federal income tax purposes, resulting in an annual limitation on the
Company's  ability to utilize its net  operating  loss  carryforwards  to offset
future taxable income.  The annual  limitation was determined by multiplying the
value of the Company's equity before the change by the long-term tax exempt rate
as defined by the  Internal  Revenue  Service.  The  Company  has  adjusted  its
deferred tax asset to reflect the estimated limitation. At December 31, 1997 and
1998, the Company had available net operating loss carryforwards of $125,378,000
and $126,892,000,  after adjusting for the estimated limitation, which expire at
various dates beginning December 31, 2010. As of December 31, 1998, $106,055,000
of the net  operating  loss  carryforwards  is  restricted  as a  result  of the
ownership  change and  $20,837,000  is not. The restricted net operating loss is
limited to $7,070,000 per year.

8. Debt

At December  31, 1998,  Merisel,  Inc. had  outstanding  $125,000,000  principal
amount of the 12.5% Notes.  The 12.5% Notes,  which mature on December 31, 2004,
provide for an interest rate of 12.5% payable semi-annually. The 12.5% Notes are
redeemable,  in whole or in part, at the option of the Company at any time on or
after  December  31,  1999,  initially  at  106.25% of  principal  amount and at
redemption  prices  declining to 100% of principal  amount for redemptions on or
after December 31, 2002. By virtue of being an obligation of Merisel,  Inc., the
12.5% Notes are  effectively  subordinated  to all  liabilities of the Company's
subsidiaries,  including  trade  payables,  and are not guaranteed by any of the
Company's  subsidiaries.  The  indenture  relating to the 12.5%  Notes  contains
certain  covenants  that,  among  other  things,  limit  the type and  amount of
additional  indebtedness  that  may be  incurred  by the  Company  or any of its
subsidiaries and impose limitations on investments,  loans,  advances,  sales or
transfers of assets, the making of dividends and other payments, the creation of
liens, sale-leaseback transactions with affiliates and certain mergers.

At December 31,  1998,  the Company had  promissory  notes  outstanding  with an
aggregate  balance of  $6,857,000.  Such notes provide for interest at a rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. Payments
due under these notes are $1,846,000 in 1999, $1,111,000 in 2000, and $3,900,000
in 2001. The notes are  collateralized by certain of the Company's real property
and equipment.

Merisel Americas entered into a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security  Agreement")  with a subsidiary  of Bank of America
NT&SA  ("BA"),  acting as agent,  that  provides for  borrowings  on a revolving
basis.  Effective  April 1,  1999,  the  obligations  of BA  under  the Loan and
Security  Agreement  will be  assumed  by Bank of  America  NT&SA.  The Loan and
Security Agreement permits  borrowings of up to $100,000,000  outstanding at any
one time  (including  face  amounts of letters  of  credit),  subject to meeting
certain  availability  requirements  under a  borrowing  base  formula and other
limitations.  Borrowings under the Loan and Security  Agreement are secured by a
pledge of substantially all of the inventories held by Merisel Americas.

<PAGE>

                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Borrowings  bear interest at the rate of LIBOR plus a specified  margin,  or, at
the Company's option, the agent's prime rate. An annual fee of 0.375% is payable
with  respect to the unused  portion of the  commitment.  The Loan and  Security
Agreement has a termination  date of June 30, 2003. No amounts were  outstanding
under the Loan and Security Agreement as of December 31, 1998.

9. Commitments and Contingencies

The Company leases certain of its facilities and equipment  under  noncancelable
operating leases.  Future minimum rental payments under leases that have initial
or remaining  noncancelable  lease terms in excess of one year are $8,046,000 in
1999,  $6,041,000 in 2000, $4,831,000 in 2001, $2,742,000 in 2002, $1,250,000 in
2003,  and  $421,000  thereafter.   Certain  of  the  leases  contain  inflation
escalation   clauses  and  requirements  for  the  payment  of  property  taxes,
insurance,  and maintenance  expenses.  Rent expense for 1996, 1997 and 1998 was
$16,284,000, $10,487,000 and $10,947,000, respectively.

The Company also leases certain computer  equipment under capitalized leases and
has the option to purchase the equipment  for a nominal cost at the  termination
of the lease.

         Property and equipment  includes the following  amounts for leases that
have been capitalized:
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                                    1998
                                                                                  --------   
         <S>                                                                  <C>       
         Computer equipment............................................          $4,489,000
         Less accumulated depreciation.................................             567,000
                                                                             --------------------
             Total.....................................................          $3,922,000


         Future minimum payments for capitalized leases were as follows at December 31, 1998.

         1999..........................................................          $1,409,000
         2000..........................................................           1,666,000
         2001..........................................................           1,174,000
                                                                             --------------------
         Total minimum lease payments..................................           4,249,000
         Less amount representing interest.............................             448,000
                                                                             --------------------
         Present value of net minimum lease payments...................           3,801,000
         Less current maturities.......................................           1,196,000
                                                                             --------------------
              Long-term obligation.....................................          $2,605,000
                                                                             ====================
</TABLE>



The Company  has  arrangements  with  certain  finance  companies  that  provide
inventory and accounts  receivable  financing  facilities for its customers.  In
conjunction  with these  arrangements,  the  Company  has  inventory  repurchase
agreements  with the  finance  companies  that would  require  it to  repurchase
certain  inventory if repossessed  from the customers by the finance  companies.
Such repurchases have been insignificant in the past.

In June 1994, Merisel and certain of its officers and/or directors were named in
putative  securities class actions filed in the United States District Court for
the  Central  District  of  California,  consolidated  as  In re  Merisel,  Inc.
Securities Litigation.  The parties executed a Stipulation of Settlement,  which
was approved by the district court judge on December 21, 1998. The judge entered
a judgment to dismiss the case with  prejudice  and such  judgment  was final on
January 20,  1999.  Under the  settlement,  Merisel was not required to make any
material payment.



<PAGE>

                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Effective  April 14, 1997, the Company  entered into a Limited Waiver and Voting
Agreement (the "Limited Waiver  Agreement") with holders of more than 75% of the
outstanding principal amount of the Company's 12.5% Notes. Pursuant to the terms
of the Limited Waiver  Agreement,  upon the  fulfillment of certain  conditions,
holders of the 12.5% Notes would exchange (the "Exchange") their 12.5% Notes for
common  stock  of  the  Company  (the   "Common   Stock"),   which  would  equal
approximately  80% of the outstanding  shares of Common Stock  immediately after
the Exchange. The Limited Waiver Agreement also provided that, immediately after
the  consummation of the Exchange,  the Company would issue certain  warrants to
the existing  holders of Common Stock.  The  conditions to the Exchange were not
met and, on September  19, 1997,  the Limited  Waiver  Agreement  terminated  in
accordance  with its  terms.  Prior to the  termination  of the  Limited  Waiver
Agreement on September 19, 1997, certain disagreements arose between the Company
and  certain  holders of the  Company's  12.5%  Notes  ("Noteholders")  over the
interpretation of the Company's  obligations under the Limited Waiver Agreement,
including that the Limited Waiver  Agreement did not require either the Board of
Directors  of the  Company  (the  "Board") or the  Company to  recommend  to its
stockholders  proposals relating to the proposed debt restructuring in which the
Noteholders  would  have  exchanged  their  12.5%  Notes for  Common  Stock (the
"Noteholder  Restructuring")  and that the  Company  was not  obligated  to seek
confirmation  of  a  "prepackaged  plan"  of  reorganization  by  means  of  the
"cramdown"  provisions of the Bankruptcy Code. On September 4, 1997, the Company
filed  suit in  Delaware  Chancery  Court  (the  "Delaware  Action")  seeking  a
declaratory  judgment  with  respect to these  issues.  The  Company  intends to
vigorously  prosecute  its  claim  in  the  Delaware  Action.  There  can  be no
assurance,  however, that the Company will ultimately be successful with respect
to its claims.

On September  11, 1997,  certain  Noteholders  filed an answer to the  Company's
complaint in the Delaware  Action as well as a counterclaim  against the Company
asserting claims for breach of the Limited Waiver  Agreement,  unjust enrichment
and a declaratory  judgment (the  "Noteholder  Suit").  The Noteholder Suit also
asserts  a claim  for  unjust  enrichment  against  Dwight  A.  Steffensen,  the
Company's Chief Executive  Officer.  The Noteholder Suit seeks damages in excess
of $100 million from the Company. The Company's alleged breaches include,  among
other  things,  that the  Board  changed  its  recommendation  with  respect  to
proposals  relating  to  the  Noteholder  Restructuring.  The  Company  and  Mr.
Steffensen  filed  motions  for  judgment  on the  pleadings  on October 7, 1997
seeking to have the Noteholder Suit dismissed.  On January 5, 1998, the Delaware
Chancery  Court (the "Court")  denied both motions.  In January 1999 the Company
and Mr. Steffensen filed motions for summary  judgment.  If the Court denies the
motion, in whole or in part, as currently scheduled, trial will commence on June
1, 1999. The Company and Mr.  Steffensen  believe that they have strong defenses
to each of the claims asserted and intend to defend themselves vigorously. There
can be no assurance, however, as to the ultimate outcome of these claims.

On March 16, 1998, the Company  received a summons and  complaint,  filed in the
Superior  Court of  California,  County of Santa  Clara,  in a matter  captioned
Official  Unsecured  Creditors  Committee  of Media Vision  Technology,  Inc. v.
Merisel,  Inc. The plaintiff  alleges that certain  executive  officers of Media
Vision Technology,  Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision  through,  inter alia, the improper  recognition and
reporting of sales, revenue and income and the failure to properly recognize and
report product returns during 1993 and 1994,  thereby  overstating the financial
condition of Media Vision as reflected in its financial statements for 1993. The
plaintiff further alleges that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision  executives.  The plaintiff
seeks to recover compensatory damages, including interest thereon, exemplary and
punitive  damages,  and costs  including  attorneys'  fees. On May 6, 1998,  the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive  damages  prayer.  In its  opposition  to the
Company's  motion to strike,  the  plaintiff  withdrew  its prayer for  punitive
damages.  In  response  to the  motions,  the  plaintiff  filed a first  amended
complaint on August 31, 1998, adding a claim for unfair business practices under
California Business & Professions Code ss. 17200 and additional allegations. The
plaintiff's  filing  of an  amended  complaint  mooted  the  Company's  original
motions.  The Company filed a motion to dismiss the amended complaint on various
grounds and a motion to strike the punitive damages prayer. On January 15, 1999,
the Court issued an Order staying  prosecution  of the action under the doctrine
of  exclusive  concurrent  federal  jurisdiction.  It  is  unknown  whether  the
plaintiff  will proceed  further  with its action in any forum.  The Company has
defended itself vigorously against this claim and will continue to do so.


<PAGE>

                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The  Company is  involved  in certain  other  legal  proceedings  arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.

10. Employee Stock Options and Benefit Plans

On December 19, 1997, the Company's  stockholders approved the Merisel Inc. 1997
Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"). Under the
Stock Award and Incentive Plan,  incentive stock options and nonqualified  stock
options  as well as  other  stock-based  awards  may be  granted  to  employees,
directors, and consultants.  The plan authorized the issuance of an aggregate of
8,000,000  shares of Common Stock less the number of shares of Common Stock that
remain  subject to  outstanding  option grants under any of the Company's  other
stock-based  incentive  plans for employees  after December 19, 1997 and are not
either  canceled  in  exchange  for  options  granted  under the Stock Award and
Incentive  Plan or  forfeited.  At December  31,  1998,  1,983,683  options were
available for grant under the Stock Award and  Incentive  Plan.  The  optionees,
option prices,  vesting provisions,  dates of grant and number of shares granted
under the plans  are  determined  primarily  by the  Board of  Directors  or the
committee  authorized  by the  Board of  Directors  to  administer  such  plans,
although  incentive  stock  options  must be granted at prices which are no less
than the fair market value of the  Company's  Common Stock at the date of grant.
On December  22, 1997,  the Company  granted  options  under the Stock Award and
Incentive  Plan in exchange for previously  granted  employee stock options that
were then  outstanding  and that had an  exercise  price  greater  than the then
market price of the Common  Stock,  subject to the agreement of each optionee to
cancel the  outstanding  options.  As of December  31, 1998,  1,025,106  options
remain  outstanding  under the  Company's  other  employee  stock option  plans,
however,  no new options may be issued  under  these  plans.  In addition to the
shares  issuable  under the Stock Award and  Incentive  Plan,  50,000 shares are
reserved  for  issuance   under  the  Company's   1992  Stock  Option  Plan  for
Non-Employee  Directors.  The following summarizes the aggregate activity in all
of the Company's plans for the three years ended December 31, 1998:

<TABLE>
<CAPTION>
                                       1996                             1997                             1998
                            ----------------------------     ---------------------------     ------------------------------
                                            Weighted                         Weighted                           Weighted
                                             Average                          Average                            Average
                               Shares      Exer. Price         Shares       Exer. Price         Shares         Exer. Price
                            ------------- --------------     ------------   ------------     -----------     ---------------
<S>                          <C>          <C>                 <C>           <C>             <C>              <C>
Outstanding at                
   Beginning of year         3,191,289         7.30             1,368,345       7.48         6,673,525            4.10
Granted                        354,500         2.45             6,146,323       3.86           583,400            3.29
Exercised                     (215,000)         .67                                            (77,750)           2.16
Canceled                    (1,962,444)        7.04              (841,143)      6.41        (1,232,025)           5.32
                            -----------                        -----------                  -------------          
Outstanding at end                          
   of year                   1,368,345         7.48             6,673,525       4.10         5,947,150            3.79
                            -----------                        -----------                  -------------          
Option price range for
  Exercised shares                      $0.01-$2.20                            $0.00                       $1.63-$2.63
                                        -----------                          --------                      -----------
                                                                                                         
Weighted average fair
   value  at date of grant,
    of options  granted             
    during the year                           $1.61                            $2.55                             $2.13
                                        ------------                         ---------                     ------------
</TABLE>

                                                           



<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The following table summarizes  information  about stock options  outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                                        Options Outstanding                        Options Exercisable

                            --------------------------------------------   ------------------------------------
                                               Weighted
                                               Average       Weighted                             Weighted
                                Number        Remaining      Average             Number           Average
         Range of             Outstanding        Life        Exercise         Exercisable         Exercise
      Exercise Prices         at 12/31/98      In Years       Price           at 12/31/98          Price
     <S>                     <C>              <C>            <C>              <C>                <C>    

         $3.0000 to $3.0000          32,156       3             $3.0000                27,156          $3.0000
       $11.3750 to $11.3750           2,000       4            $11.3750                 2,000         $11.3750
       $11.7500 to $11.7500           2,000       5            $11.7500                 2,000         $11.7500
       $15.0000 to $15.0000           2,000       6            $15.0000                 2,000         $15.0000
         $5.8750 to $6.3125          26,500       7             $6.2795                20,375          $6.2696
         $1.8750 to $2.6250         172,500       8             $2.3752                87,250          $2.3694
         $1.6250 to $4.3100       5,136,244       9             $3.8761             2,559,788          $3.6214
         $2.6875 to $4.0600         573,750       10            $3.2771                     0               $0
                               -------------                                      ------------
        $1.6250 to $15.0000       5,947,150                                         2,700,569
                               =============                                      ============
</TABLE>


The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation."
Accordingly,  no  compensation  cost has been  recognized  for the stock  option
plans.  Had  compensation  cost  for  the  Company's  stock  option  plans  been
determined  based on their fair value at the grant date for  options  granted in
1996,  1997 and  1998  consistent  with the  provisions  of SFAS  No.  123,  the
Company's net (loss) income and (loss) income per share would have been adjusted
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>


                                                            (In thousands, except per share amounts)
                                                            1996              1997                1998
                                                        -----------      -----------           ------------
   <S>                                                   <C>              <C>                    <C>    
    Net (Loss) Income - As Reported                      $(140,375)       $( 15,841)             $18,510
    Net (Loss) Income - Pro Forma                        $(140,994)       $( 16,914)             $17,348

    Net (Loss) Income Per Share (Basic & Diluted)
    As Reported                                          $   (4.68)       $    (.48)             $  0.23
    Pro Forma                                            $   (4.70)       $    (.51)             $  0.22
</TABLE>



The fair value of each option granted during 1996, 1997 and 1998 is estimated on
the  date of  grant  using  the  Black-Scholes  option  pricing  model  with the
following weighted average assumptions:

                                      1996              1997             1998
                                   ---------         ----------       ----------
    Expected life                     5.0                5.0               5.0
    Expected volatility             72.69%             73.84%            76.97%
    Risk-free interest rate          6.32%              5.76%             5.35% 
    Dividend Yield                   0.00%              0.00%             0.00% 
                                                                        




<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The Company  offers a 401(k)  savings plan under which all  employees who are 21
years of age with at least 30 days of service are eligible to  participate.  The
plan permits eligible employees to make contributions up to certain limitations,
with  the  Company  matching  certain  of  those  contributions.  The  Company's
contributions vest 25% per year. The Company  contributed  $506,000 and $892,000
to the plan during the years ended December 31, 1997 and 1998, respectively. The
contributions  to the 401(k) plan were in the form of newly issued shares of the
Company's  common stock for 1997, and cash which was used to purchase  shares of
the  Company's  common stock on the open market,  for 1998.  The Company did not
make any matching contributions on behalf of its employees in 1996.

11. Segment Information

In 1998, the Company implemented  Statement of Financial Accounting Standard No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131").  SFAS 131 requires  disclosure  of certain  information  about  operating
segments,  geographic areas in which the Company operates,  major customers, and
products and services.  In accordance  with SFAS 131, the Company has determined
it has three operating  segments:  the United States distribution  segment,  the
Canadian  distribution segment, and MOCA. Each of these segments has a dedicated
management team and is managed separately primarily because of geography (United
States and Canada) and differences in product categories,  marketing  strategies
and customer base (MOCA).

The Company does not maintain separate stand-alone financial statements prepared
in accordance  with  generally  accepted  accounting  principles for each of its
operating  segments.  In accordance  with SFAS 131, the Company has prepared the
following  tables which present  information  related to each operating  segment
included in internal management reports.

<TABLE>
<CAPTION>
                                                                        1998
                                                                   (in thousands)
                                -------------------------------------------------------------------------------------

                                          United                                   Other
                                          States          MOCA        Canada   International    Eliminations         Total
                                        ---------        ------       -------  -------------    -------------        ------
<S>                                   <C>           <C>           <C>           <C>              <C>              <C>
Net sales to external customers       $ 3,096,317   $   603,350   $   853,317                                      $ 4,552,984
Depreciation and amortization               7,870                       3,110                                           10,980
Segment profit contribution (A)                          25,843 (A)                                                     25,843 (A)
Segment operating profit (A)               20,237 (A)                   8,422 (A)                                       28,659
Long-lived assets                          74,548                       5,171                                           79,719
Total segment assets (B)                1,186,944       235,384       180,234                  $  (657,242)            945,320
Capital expenditures                       44,505                       5,562                                           50,067
                                                             
</TABLE>


<TABLE>
<CAPTION>
                                                                        1997
                                                                   (in thousands)
                                -------------------------------------------------------------------------------------

                                          United                                    Other
                                          States          MOCA       Canada    International    Eliminations         Total
                                        ---------        ------       -------  -------------    -------------        ------
<S>                                  <C>             <C>           <C>           <C>             <C>              <C> 
Net sales to external customers      $ 2,844,107     $  444,134    $ 760,731                                      $4,048,972
Depreciation and amortization              9,200                       2,111                                          11,311
Segment profit contribution (A)                          26,910(A)                                                    26,910(A)
Segment operating profit (A)                 757 (A)                   7,911 (A)                                       8,668
Long-lived assets                         35,870                       4,272                                          40,142
Total segment assets (B)               1,032,701           130,666   151,662                    $  (567,919)         747,110    
Capital expenditures                       5,864                       1,426                                           7,290

</TABLE>




<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



<TABLE>
<CAPTION>

                                                                        1996
                                                                   (in thousands)
                                -------------------------------------------------------------------------------------

                                        United                                       Other
                                        States           MOCA       Canada        International  Eliminations      Total
                                      ---------        -------     --------      --------------  -------------    ---------
<S>                               <C>              <C>              <C>            <C>           <C>               <C>        
Net sales to external customers   $ 3,473,833      $   345,090      $   643,730    $ 1,060,171                  $ 5,522,824
Depreciation and amortization          12,788                             2,787          3,214                       18,789
Segment profit contribution (A)                         24,047(A)                                                    24,047(A)
Segment operating profit (A)          (71,851) (A)                       (5,406) (A)     5,410                      (71,847)
Long-lived assets                      56,438                             4,992                                      61,430
Total segment assets (B)            1,246,056                           139,789                 $(654,806)          731,039
Capital expenditures                    4,814                             1,136          3,702                        9,652
</TABLE>


Geographical Area Net Sales:
                                   1996              1997             1998
                            ------------------ --------------- -----------------
United States                $  3,818,923       $3,288,241      $  3,699,667
Canada                            643,730          760,731           853,317
Other International             1,060,171                
                            ================== =============== =================
Total Net Sales              $  5,522,824       $4,048,972      $  4,552,984
                            ================== =============== =================


Note A: For each of its operating  segments,  the Company evaluates  performance
based upon operating profit or profit  contribution.  However,  the Company does
not  allocate  corporate  overhead,  depreciation  and  amortization,  or shared
operating  expenses  to the MOCA  operating  segment.  As a result,  the Company
believes that the segment profit contribution for MOCA in the tables above would
be  substantially  lower than the  amounts  shown if such costs were  allocated.
Corporate overhead,  amortization and shared operating expenses are allocated to
Canada.  Segment  profit for the United States  business  includes all corporate
overhead and amortization not allocated to Canada.

Note B: The Company  only  identifies  direct  assets  associated  with the MOCA
operating segment,  primarily trade accounts receivable and inventory.  No other
assets are allocated to MOCA. In 1996,  the Company did not identify  assets for
the MOCA operating segment for purposes of internal reporting.


12.      Earnings Per Share

The Company  calculates  earnings per share ("EPS") in accordance with Financial
Accounting  Standard No. 128, "Earnings Per Share".  Basic earnings per share is
calculated  using  the  average  number of common  shares  outstanding.  Diluted
earnings  per share is  computed  on the basis of the  average  number of common
shares  outstanding  plus the  effect of  outstanding  stock  options  using the
"treasury  stock"  method.  In the year ended  December  31,  1998,  there is no
material  difference between the primary earnings per share reported  previously
by the  Company,  and basic  earnings  per share or diluted  earnings  per share
methods adopted currently.



<PAGE>


                         MERISEL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The following table is a  reconciliation  of the weighted average shares used in
the  computation  of basic and  diluted  EPS for the  income  statement  periods
presented herein:
<TABLE>
<CAPTION>

                                                                      (in thousands)
                                                                    For the Years Ended
                                                                       December 31,
         Weighted average shares outstanding                 1996           1997           1998
                                                             ----           ----           ----
<S>                                                         <C>              <C>            <C>   
Basic                                                       30,001           33,216         80,210
Assumed exercises of stock options                                                             275
                                                          ------------     -----------   -----------
Diluted                                                     30,001           33,216        80,485
                                                          ============     ===========   ===========
</TABLE>


13. Quarterly Financial Data (Unaudited)

Selected  financial  information for the quarterly  periods for the fiscal years
ended 1997 and 1998 is presented below (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                             1997   
                                      -------------------------------------------------------
                                         March 31       June 30     September 30   December 31
                                        ----------     ----------  ------------- ------------- 
<S>                                      <C>             <C>          <C>         <C>       
     Net sales......................     $1,113,100      $895,754     $965,238    $1,074,880
     Gross profit...................         64,977        55,654       58,508        61,945
        Net income (loss) before
           extraordinary item.......          1,130         2,046      (5,333)       (9,939)
     Net income (loss)..............          1,130         2,046      (9,077)       (9,939)
        Net income (loss) per basic
        and diluted share before
        extraordinary item..........            .04           .07        (.17)         (.24)
     Net income (loss) per
          basic and diluted share...            .04           .07        (.29)         (.24)

</TABLE>
<TABLE>
<CAPTION>

                                                             1998   
                                      -------------------------------------------------------
                                         March 31       June 30     September 30   December 31
                                        ----------     ----------  ------------- ------------- 
<S>                                      <C>           <C>          <C>           <C>       
     Net sales......................     $1,101,670    $1,096,439   $1,144,317    $1,210,558
     Gross profit...................         61,751        61,703       67,275        63,702
     Net income.....................          3,636         5,108        7,604         2,162
     Net income per
          Basic and diluted share...            .05           .06          .09           .03
</TABLE>



In the third  quarter of 1997,  the  Company  recorded  $9,324,000  in  expenses
related to its debt restructuring efforts. These expenses included $1,950,000 in
compensation  to  executive  officers  of the  Company  in  connection  with the
successful  restructuring,  $3,630,000 related to the termination of the Limited
Waiver  Agreement  with  certain  holders  of the  Company's  12.5%  Notes,  and
$3,744,000 in extraordinary  loss on the  extinguishment  of debt. In the fourth
quarter of 1997, the Company recorded  additional  charges of $1,600,000 related
to the conversion of the Convertible  Note and the resulting  change of control.
The Company also recognized an asset impairment  charge in the fourth quarter of
1997 for $14,100,000  against  capitalized  costs associated with the previously
scheduled  implementation  of the SAP information  system in the U.S., which was
delayed in 1996 and resumed in the fourth quarter of 1997.

<PAGE>

                                   SCHEDULE II

                         MERISEL, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

                        DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>

                                              Balance at     Charged to                   Balance at
                                             December 31,     Costs and                   December 31,
                                                1995          Expenses        Deductions      1996 
                                            --------------   -------------   ------------ --------------
<S>                                             <C>            <C>           <C>            <C>        
Accounts receivable--Doubtful accounts.....     $20,199,000    $17,421,000   $17,858,000    $19,762,000
Accounts receivable--Other (1).............       4,587,000     14,355,000    15,020,000      3,922,000

                                              Balance at     Charged to                   Balance at
                                             December 31,     Costs and                   December 31,
                                                1996          Expenses        Deductions      1997 
                                            --------------   -------------   ------------ --------------
Accounts receivable--Doubtful accounts.....     $19,762,000     $7,361,000   $10,521,000    $16,602,000
Accounts receivable--Other (1).............       3,922,000     16,232,000    18,207,000      1,947,000

                                              Balance at     Charged to                   Balance at
                                             December 31,     Costs and                   December 31,
                                                 1997         Expenses        Deductions      1998 
                                            --------------   -------------   ------------ -------------- 
Accounts receivable--Doubtful accounts.....     $16,602,000    $12,553,000   $10,358,000   $ 18,797,000
Accounts receivable--Other (1).............       1,947,000     13,104,000    13,372,000      1,679,000

</TABLE>

(1) Accounts  receivable--Other  includes  allowances  for net sales returns and
uncollectible cooperative advertising credits.

Item 9. Changes In and Disagreements with Accountants on Accounting and 
        Financial Disclosure

               None.



<PAGE>


                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

The  information  required by this item is  incorporated  herein by reference to
information  contained in the Company's  definitive proxy statement for its 1999
annual meeting of stockholders  (the "1999 Proxy  Statement") under the captions
"Election  of  Directors   Information  Regarding  Nominees  and  the  Board  of
Directors,"  "Election  of  Directors - Executive  Officers"  and  "Election  of
Directors Section 16(a) Beneficial Ownership Reporting Compliance."

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the
information  contained in the 1999 Proxy Statement under the captions  "Election
of Directors - Executive Compensation - Summary Compensation Table; - Options in
1998; - Compensation Committee Interlocks and Insider Participation,"  "Election
of Directors - Employment and  Change-in-Control  Arrangements" and "Election of
Directors - Director Compensation."

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is incorporated herein by reference to the
information contained in the 1999 Proxy Statement under the caption "Election of
Directors - Ownership of Common Stock."

Item 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated herein by reference to the
information contained in the 1999 Proxy Statement under the caption "Election of
Directors - Certain Relationships and Related Transactions."


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

    (a) List of documents filed as part of this Report:

          (1) Financial Statements included in Item 8:

              Independent Auditors' Report.

              Consolidated Balance Sheets at December 31, 1997 and 1998.

              Consolidated  Statements of Operations for each of the three years
              in the period ended December 31, 1998.

              Consolidated  Statements  of Changes in  Stockholders'  Equity for
              each of the three years in the period ended December 31, 1998.

              Consolidated  Statements of Cash Flows for each of the three years
              in the period ended December 31, 1998.

              Notes to Consolidated Financial Statements.

          (2) Financial Statement Schedules included in Item 8:

              Schedule II--Valuation and Qualifying Accounts.



<PAGE>




             Schedules  other  than that  referred  to above  have been  omitted
             because  they are not  applicable  or are not  required  under  the
             instructions contained in Regulation S-X or because the information
             is included elsewhere in the Consolidated  Financial  Statements or
             the Notes thereto.

          (3)   Exhibits

             The exhibits listed on the accompanying Index of Exhibits are filed
as part of this Annual Report.

    (b) The  Following  Reports on Form 8-K were filed during the quarter  ended
December 31, 1998:

              None.


<PAGE>



                                   SIGNATURES

Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities  Act of
1934,  the  Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

Date: March 30, 1999
                                            MERISEL, INC.

                                     By     /s/Timothy N. Jenson
                                            -----------------------
                                            Timothy N. Jenson

                                         Chief Financial Officer and
                                        Senior Vice President, Finance
                                    (Principal Financial and Accounting Officer)

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>
<CAPTION>
                                                                  
            Signature                                        Title                                 Date

<S>                                 <C>                                                      <C>  

/s/Dwight A. Steffensen              Chairman of the Board of Directors and Chief Executive    March 30,1999
-----------------------------------           Officer (Principal Executive Officer)
 Dwight A. Steffensen


/s/James E. Illson                       Director, President and Chief Operating Officer       March 30,1999
-----------------------------------
James E. Illson

/s/Timothy N. Jenson                   Chief Financial Officer and Senior Vice President,      March 30,1999
-----------------------------------   Finance (Principal Financial and Accounting Officer)
Timothy N. Jenson

/s/Albert J. Fitzgibbons III                                Director                           March 30,1999
-----------------------------------
Albert J. Fitzgibbons III


/s/Bradley J. Hoecker                                       Director                           March 30,1999
-----------------------------------
Bradley J. Hoecker


/s/Dr. Arnold Miller                                        Director                           March 30,1999
-----------------------------------
Dr. Arnold Miller


/s/Thomas P. Mullaney                                       Director                           March 30,1999
-----------------------------------
 Thomas P. Mullaney


/s/Lawrence J. Schoenberg                                   Director                           March 30,1999
-----------------------------------
Lawrence J. Schoenberg

</TABLE>


<PAGE>


                                                                 EXHIBIT INDEX


3.1        Restated Certificate of Incorporation of Merisel,  Inc., filed as an 
           exhibit to the Form S-1 Registration  Statement of Softsel Computer 
           Products,  Inc., No. 33-23700.**

3.2        Amendment to  Certificate of  Incorporation  of Merisel,  Inc. dated 
           August 22, 1990,  filed as exhibit 3.2 to the Company's Quarterly 
           Report on Form 10-Q for the quarter ended September 30, 1990.**

3.3        Amendment to  Certificate of  Incorporation  of Merisel,  Inc.  dated
           December 19, 1997,  filed as Annex I to the Company's Schedule 14A 
           dated October 6, 1997.**

3.4        Bylaws,  as amended,  of Merisel,  Inc, filed as exhibit 3.1 to the 
           Company's  Quarterly Report on Form 10-Q for the quarter
           ended June 30, 1991.**

4.1        Indenture   dated  October  15,  1994  between   Merisel,   Inc.  and
           NationsBank  of Texas,  N.A.,  as Trustee,  relating to the Company's
           12.5% Senior Notes Due 2004,  including the form of such Senior Notes
           attached as Exhibit A thereto,  filed as exhibit 4.1 to the Company's
           Quarterly  Report on Form 10-Q for the quarter  ended  September  30,
           1994.**

4.2        Form of Limited  Waiver and Voting  Agreement,  dated as of April 11,
           1997,  by and among  Merisel,  Inc.  and the  holders  of the 12 1/2%
           Senior  Notes due  December  31,  2004,  filed as exhibit 4.10 to the
           Company's  Annual Report on Form 10-K for the year ended December 31,
           1996.**

4.3        Form of Limited  Waiver and  Agreement to Amend dated as of April 14,
           1997 by and  among  Merisel,  Inc.,  Merisel  Europe,  Inc.,  and the
           holders  of the  Revolving  Credit  Agreement  and  the  Senior  Note
           Purchase  Agreement,  filed as exhibit 4.11 to the  Company's  Annual
           Report on Form 10-K for the year ended December 31, 1996.**

*10.1      1983 Employee Stock Option Plan of Softsel Computer  Products,  Inc.,
           as amended,  together with Form of Incentive  Stock Option  Agreement
           and Form of Nonqualified  Stock Option  Agreement under 1983 Employee
           Stock Option Plan,  filed as exhibits 4.4, 4.5 and 4.6,  respectively
           to the Form S-8 Registration  Statement of Softsel Computer Products,
           Inc., No. 33-35648, filed with the Securities and Exchange Commission
           on June 29, 1990.**

*10.2      1991 Employee Stock Option Plan of Merisel,  Inc.  together with Form
           of Incentive Stock Option  Agreement and Form of  Nonqualified  Stock
           Option  Agreement under the 1991 Employee Stock Option Plan, filed as
           exhibit 10.1 to the Company's  Quarterly  Report on Form 10-Q for the
           quarter ended June 30, 1991.**

*10.3      Amendment to the 1991 Employee  Stock Option Plan of Merisel,  Inc. 
           dated  January 16, 1997,  filed as exhibit 10.67 to the Company's 
           Annual Report on Form 10-K for the year ended December 31, 1996.**

*10.4      Merisel, Inc. 1992 Stock Option Plan for Nonemployee  Directors,  
           filed as exhibit 10.1 to the Company's Quarterly Report on
           Form 10-Q for the quarter ended June 30, 1992.**

*10.5      Softsel  Computer  Products,  Inc.  Executive  Deferred  Compensation
           Plan,  filed as exhibit 10.35 to the Company's Annual
           Report on Form 10-K for the year ended December 31, 1991.**

*10.6      Merisel, Inc. 1997 Stock Award and Incentive Plan, filed as Annex II 
           to the Company's Schedule 14A dated October 6, 1997.**

*10.7      Form of Nonqualified  Stock Option  Agreement under the Merisel, Inc.
           1997 Stock Award and Incentive Plan, filed as exhibit 10.7 to the 
           Company's Annual Report on Form 10-K for the year ended December 31,
           1997.**

10.8       Amended  and  Restated  Receivables  Transfer  Agreement  dated as of
           September 27, 1996 by and between Merisel Americas,  Inc. and Merisel
           Capital  Funding,  Inc.,  filed as  exhibit  10.53  to the  Company's
           Current Report on Form 8-K, dated April 17, 1996.**

10.9       Amended and Restated  Receivables  Purchase and  Servicing  Agreement
           dated as of  September  27,  1996,  by and  between  Merisel  Capital
           Funding,  Inc., Redwood  Receivables  Corporation,  Merisel Americas,
           Inc. and General Electric Capital Corporation, filed as exhibit 10.54
           to the Company's Current Report on Form 8-K, dated April 17, 1996.**

10.10      Annex X to Receivables  Transfer  Agreement and Receivables  Purchase
           and Servicing Agreement dated as of October 2, 1995, filed as exhibit
           10.3 to the Company's  Quarterly  Report on Form 10-Q for the quarter
           ended September 30, 1995.**


<PAGE>

10.11      Amendment  No. 1 and  Waiver  to  Amended  and  Restated  Receivables
           Purchase and Servicing  Agreement  dated as of November 7, 1996 among
           Merisel  Capital  Funding,  Inc.,  Redwood  Receivables  Corporation,
           Merisel  Americas,  Inc. and General  Electric  Capital  Corporation,
           filed as exhibit 2.5 to the Company's  Annual Report on Form 10-K for
           the year ended December 31, 1996.**

10.12      Amendment  No. 1 and  Waiver  to  Amended  and  Restated  Receivables
           Transfer  Agreement  dated  as of  November  7,  1996 by and  between
           Merisel  Americas,  Inc. and Merisel Capital Funding,  Inc., filed as
           exhibit 2.6 to the Company's  Annual Report on Form 10-K for the year
           ended December 31, 1996.**

10.13      Amendments  to  Securitization  Agreements,  dated as of December 19,
           1997, among Merisel Americas,  Inc.,  Merisel Capital Funding,  Inc.,
           Redwood   Receivables   Corporation  and  General   Electric  Capital
           Corporation, filed as exhibit 10.19 to the Company's Annual Report on
           Form 10-K for year ended December 31,1997.**

10.14      Amendments to Securitization  Agreements,  dated as of July 31, 1998,
           among Merisel Americas,  Inc., Merisel Capital Funding, Inc., Redwood
           Receivables  Corporation and General  Electric  Capital  Corporation,
           filed as exhibit 10.5 to the Company's  Quarterly Report on Form 10-Q
           for the quarter ended June 30, 1998.**

10.15      Amendment No. 4 and Waiver to Purchase  Agreement,  dated of as 
           February 22, 1999,  among Merisel  Americas,  Inc.,  Merisel
           Capital Funding, Inc., Redwood Receivables Corporation and General 
           Electric Capital Corporation.

10.16      Loan and Security  Agreement,  dated as of June 30,  1998,  among the
           financial   institutions  listed  on  the  signature  pages  thereof,
           BankAmerica  Business Credit, Inc. and Merisel Americas,  Inc., filed
           as exhibit 10.6 to Amendment No. 1 to the Company's  Quarterly Report
           on Form 10-Q for the quarter ended June 30, 1998.**

10.17      Form of Security  Agreement between Merisel  Properties,  Inc. and 
           Heller Financial,  Inc. dated December 29, 1995, filed as exhibit 
           10.36 to the Company's Annual Report on Form 10-K for the year ended
           December 31, 1995.**

10.18      Deed of Trust,  Security Agreement,  Assignment of Leases and Rents 
           and Fixture Filing between Merisel Properties,  Inc. and Heller 
           Financial,  Inc.  dated December 29, 1995,  filed as exhibit 10.37 to
           the Company's  Annual Report and Form 10-K for the year ended 
           December 31, 1995.**

*10.19     Employment  Agreement between Dwight A. Steffensen and Merisel,  Inc.
           dated February 12, 1997, filed as exhibit 10.66 to the Company's 
           Annual Report on Form 10-K for the year ended December 31, 1996.**

*10.20     First  Amendment to  Employment  Agreement  dated as of December 15,
           1997 between  Merisel,  Inc. and Dwight A.  Steffensen, filed as 
           exhibit 10.26 to the Company's Annual Report on Form 10-K for year 
           ended December 31, 1997.**

*10.21     Employment  Agreement between Merisel,  Inc. and James Illson dated 
           August 19, 1996, filed as exhibit 10.61 to the Company's
           Current Report on Form 8-K, dated October 18, 1996.**

*10.22     First  Amendment to  Employment  Agreement  dated as of July 26, 1997
           between Merisel,  Inc., Merisel Americas,  Inc., and James E. Illson,
           filed as exhibit 10.1 to the Company's  Quarterly Report on Form 10-Q
           for the quarter ended September 30, 1997.**

*10.23     Change of Control Agreement dated as of July 26, 1997 between 
           Merisel,  Inc., Merisel Americas,  Inc. and Timothy N. Jenson,
           filed as exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
           for the quarter ended September 30, 1997.**

*10.24     Change of Control Agreement dated as of June 23, 1997 between 
           Merisel,  Inc.,  Merisel Americas,  Inc. and Karen A. Tallman,
           filed as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
           for the quarter ended September 30, 1997.**

*10.25     Offer of  Employment  Letter to Kristin M. Rogers dated April 13, 
           1998,  filed as exhibit  10.1 to the  Company's  Quarterly
           Report on Form 10-Q for the quarter ended June 30, 1998.**

*10.26     Change of Control  Agreement dated as of May 11, 1998 between Kristin
           M. Rogers and Merisel  Americas,  Inc.,  filed as exhibit 10.2 to the
           Company's  Quarterly  Report on Form 10-Q for the quarter  ended June
           30, 1998.**

*10.27     Offer of Employment  Letter to Ronald S. Smith dated June 2, 1998,  
           filed as exhibit 10.3 to the Company's  Quarterly Report
           on Form 10-Q for the quarter ended June 30, 1998.**


<PAGE>

*10.28     Waiver and Release  Agreement  between  Robert J. McInerney and 
           Merisel,  Inc. dated as of April 30, 1998,  filed as exhibit
           10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
           ended June 30, 1998.**

10.29      Stock and Note Purchase  Agreement,  dated September 19, 1997,  among
           Phoenix  Acquisition  Company II,  L.L.C,  Merisel,  Inc. and Merisel
           Americas, Inc., filed as exhibit 99.2 to the Company's Current Report
           on Form 8-K, dated September 19, 1997.**

10.30      Convertible  Promissory Note dated September 19, 1997 of Merisel, 
           Inc. and Merisel Americas,  Inc., filed as exhibit 99.3 to
           the Company's Current Report on Form 8-K, dated September 19, 1997.**

10.31      Registration Rights Agreement, dated September 19, 1997, by and among
           Merisel, Inc., Merisel Americas, Inc. and Phoenix Acquisition Company
           II, L.L.C,  filed as exhibit 99.4 to the Company's  Current Report on
           Form 8-K, dated September 19, 1997.**

10.32      Revolving Credit  Agreement and Convertible  Promissory Note due July
           2, 1998, between Merisel,  Inc.,  Merisel Americas,  Inc. and Bankers
           Trust Company  dated  January 26, 1998,  filed as exhibit 99.1 to the
           Company's Current Report on Form 8-K, dated January 26, 1998.**

10.33      Letter  Agreement dated January 26, 1998,  between Merisel  Americas,
           Inc. and  Stonington  Financing,  Inc.,  filed as exhibit 99.2 to the
           Company's Current Report on Form 8-K, dated January 26, 1998.**

21         Subsidiaries of the Registrant.

23         Consent of Deloitte & Touche, Independent Accountants.

27         Financial Data Schedule for the year ended December 31, 1998.
--------
*Management contract or executive compensation plan or arrangement.
**Incorporated by reference.