<PAGE>

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998     COMMISSION FILE NUMBER  0-28488

                       MULTIPLE ZONES INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)


                   WASHINGTON                      91-1431894
            (State of Incorporation)           (I.R.S. Employer
                                             Identification Number)

               707 SOUTH GRADY WAY
               RENTON, WASHINGTON                                98055-3233
    (Address of Principal Executive Offices)                     (Zip Code)

                                (425) 430-3000
                             (Registrant's Telephone
                          Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock

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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ X ]

The aggregate market value of the Common Stock held by non-affiliates as of 
March 8, 1999 was approximately $60,346,077 (1), based upon the last sales 
price per share of $11.00 as reported by the NASDAQ National Market.

The number of shares of the registrant's Common Stock outstanding as of March 8,
1999, was 13,227,447.

(1) Excludes value of Common Stock held of record as of March 8, 1999 by
executive officers, directors and 10% shareholders of the registrant. Includes 
Common Stock held of record as of that date by certain depository 
organizations. Exclusion of shares held by any person should not be construed 
to indicate that such person possesses the power, direct or indirect, to direct 
or cause the direction of the management or policies of the registrant, or that 
such person is controlled by or is under common control with the registrant.

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<PAGE>


                       MULTIPLE ZONES INTERNATIONAL, INC.
                             FORM 10-K ANNUAL REPORT
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                                TABLE OF CONTENTS

                                     PART I.
                                     -------
<TABLE>
<CAPTION>
                                                                                                           
                                                                                               10K PAGE NO.
                                                                                               ------------
<S>                                                                                            <C>
Item 1.      Business                                                                                  3

Item 2.      Properties                                                                               12

Item 3.      Legal Proceedings                                                                        12

Item 4.      Submission of Matters to a Vote of Security Holders                                      12

Item 4a.     Executive Officers of the Registrant                                                     12


                                   PART II.
                                   --------

Item 5.      Market for Registrant's Common Equity and Related Shareholder Matters                    13

Item 6.      Selected Financial Data                                                                  14

Item 7.      Management's Discussion and Analysis of Financial Condition and Results of 
             Operations                                                                               15

Item 7a.     Quantitative and Qualitative Disclosures About Market Risk                               20

Item 8.      Financial Statements and Supplementary Data                                              20

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial 
             Disclosure                                                                               21

                                   PART III.
                                   ---------

Item 10.     Directors and Executive Officers of the Registrant                                       21

Item 11.     Executive Compensation                                                                   21

Item 12.     Security Ownership of Certain Beneficial Owners and Management                           21

Item 13.     Certain Relationships and Related Transactions                                           21

                                   PART IV.
                                   --------

Item 14.     Exhibits, Financial Statements and Reports on Form 8-K                                   22

Signatures                                                                                            24
</TABLE>

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<PAGE>


                                    PART I.

ITEM 1.  BUSINESS

GENERAL

Multiple Zones International, Inc. together with its majority owned 
subsidiaries (collectively the "Company") is a leading international direct 
marketer of over 100,000 computer products to businesses and consumers. The 
Company serves customers through its Internet superstore, zones.com, and its 
flagship brands: Zones Business Solutions, zones.com, THE PC ZONE-REGISTERED 
TRADEMARK- and THE MAC ZONE-REGISTERED TRADEMARK- with products from leading 
manufacturers, including IBM, Compaq, Hewlett Packard, Microsoft, Toshiba and 
Apple. The Company began operations in 1988 by advertising in national trade 
publications. Catalog circulation commenced with The Mac Zone in 1990, 
followed by The PC Zone in 1992. International subsidiary operations and 
licensing activities commenced in 1992, and outbound telemarketing 
operations, principally to business accounts, were added in 1993. Internet 
sales and electronic marketing via e-mail began in 1997.

INDUSTRY BACKGROUND

According to industry data published by International Data Corporation 
("IDC"), domestic sales of personal computers were $75.5 billion in 1998 and 
are projected to increase to $103.8 billion in 2002,representing a compounded 
annual growth rate of 8.3%. However, market trends indicate that growth rates 
of the Internet, direct and outbound channels will far exceed that of the 
overall market.

The Company believes that there will continue to be significant growth in 
e-commerce due to increased Internet access, growing user confidence, better 
payment systems, and rapidly improving Internet security. Market trends 
support this assertion.  Worldwide Internet commerce grew by 225%, from $15.5 
billion in 1997 to $50.4 billion in 1998, according to IDC, and are expected 
to grow to $733.6 billion by 2002. The value of consumer purchases via the 
Internet is expected to increase nearly 1,800% between 1997 and 2002, from $5 
billion to $94 billion, according to PricewaterhouseCoopers LLP's 1998 Annual 
Technology forecast.

PricewaterhouseCoopers LLP's 1998 Annual Technology Forecast predicts a 
very rapid increase in business conducted over the Internet. Between 1996 and 
1997, business-to-business trade online doubled every six months and this 
rate was accelerating to doubling every 3 to 4 months as of March, 1998, 
according to the survey.

The Company believes that many individuals and businesses, increasingly familiar
with microcomputers, have become more receptive to direct marketing and now make
their purchase decisions based primarily on product selection, availability,
convenience and price. Direct marketers enjoy efficiencies in the form of
centralized operations and distribution and also the ability to offer a broad
product selection and purchasing convenience. The Company believes direct
marketing efficiencies not only better satisfy many segments of the customer
market but also provide a cost-effective marketing vehicle for product
manufacturers.

Direct marketing channels have historically served a significant share of the
market for Mac products, but a relatively small share of the market for PC
products. However, sales of PC products through these channels are 


<PAGE>

increasing, as consumer familiarity with microcomputer products grows and 
online technologies provide unprecedented levels of information and service. 
Products are becoming increasingly user-friendly, and manufacturers recognize 
the cost-effectiveness of direct channels. As the industry continues to 
evolve, the Company believes that first-time buyers may largely utilize 
retail channels that provide the opportunity to "touch and feel" the 
products, but that a growing number of computer-literate consumers will 
increasingly rely on the convenience and other advantages of direct channels. 
Included in these channels are those manufactures of hardware and software 
that sell directly to the end customer. The manufacturer direct producers are 
having an increased impact on the direct marketing channel, but direct 
resellers have an advantage based on the large variety of products that they 
can offer to the customer. The Company believes the explosion of the 
Internet, coupled with growing acceptance of direct channels in general, 
particularly for PC products, presents a significant opportunity for 
increased sales by direct marketers.

RISK FACTORS

The discussion of the Company's business and operations contained in the 
Annual Report on Form 10-K contains certain forward-looking statements. For 
this purpose, any statements that are not statements of historical fact may 
be forward-looking statements. Without limiting the foregoing, the words 
"believes," "anticipates," "plans," and "expects," and similar expressions 
are intended to identify forward-looking statements. There are number of 
important factors that could cause the Company's actual results to differ 
materially from those indicated by any such forward-looking statements, 
including the risk factors identified below, or other factors of which the 
Company may not yet be aware.

FUTURE GROWTH. The Company's net sales have grown from $80.5 million in 1993 
to $501.4 million in 1998. In 1998, sales increased 4.0% from 1997. The 
Company's business strategy is to pursue additional growth and expand its 
customer base. The Company's future success will depend in part on the 
ability of the Company to manage and grow effectively in the future. There 
can be no assurance that the Company will realize future growth in net sales 
or will not experience decreases in net sales.

DEPENDENCE ON SALES OF MAC PRODUCTS. The Company is largely dependent on sales
of Mac products manufactured by a broad variety of vendors, including Apple. Mac
products represented 52.0% and 54.4% of the Company's gross sales in 1998 and
1997, respectively. Apple Computer has, until recently, been experiencing a
decline in sales, reflecting uncertainties in the Mac marketplace. During 
late 1997 Apple began selling directly to customers. Additionally during 1997 
and 1998, Apple cancelled licenses for clone manufacturers, removing 
competition for CPU production. A further decline in the demand for, or 
availability of, Apple or other Mac products would likely have a material 
adverse effect on the Company's business, financial condition and results of 
operations. The Company intends to expand its presence in the PC market. The 
Company plans to grow its entire PC customer base while focusing on growing 
outbound sales to business, education and corporate accounts. There can be no 
assurance that the Company will be successful in increasing sales of PC 
products or reducing its dependence on sales of Mac products.

COMPETITION. The microcomputer products industry is highly and increasingly
competitive. The Company competes with other national and international direct
marketers. The Company also competes with traditional microcomputer retailers,
computer superstores, consumer electronics and office supply superstores, and
product manufacturers that sell direct to end-users. In addition, a number of
the Company's competitors are increasing the sale of computer products
via the Internet, and several new Internet only competitors have emerged.
Although the Company offers products for sale through the Internet, there can be
no assurance that the Company's Internet based sales will be successful. Some of
the Company's larger competitors compete principally on the basis of price and
may have lower costs than the Company. There can be no assurance that the
Company will be able to compete effectively with existing competitors or any new
competitors that may enter the market, or that the Company's business, financial
condition and results of operations will not be adversely affected by
intensified competition.

PRICE REDUCTIONS. The microcomputer industry has experienced intense price
competition. The Company believes that competition may increase in the future
and that it may be required to reduce its gross margins to 


<PAGE>

remain competitive. In addition, the Company continues its efforts to 
increase its sales of microcomputer hardware products, for which gross 
margins are generally lower than those associated with software products.

VARIABILITY OF OPERATING RESULTS. The Company has experienced significant
fluctuations in its operating results from quarter to quarter as a result of
many factors, including general economic conditions, the condition of the
microcomputer products industry, shifts in demand for microcomputer products and
industry announcements of new products or upgrades. There can be no assurance
that the Company will be profitable on a quarterly or annual basis.

RISKS OF INTERNATIONAL OPERATIONS. The Company currently operates subsidiaries
in 7 foreign countries and also derives royalties from catalog direct marketers
in 6 other foreign countries who sell microcomputer products using the Company's
service marks. The Company's international operations are subject to the general
risks of remote management as well as other risks associated with the conduct of
business in foreign countries, including economic, legal and regulatory
uncertainties; currency fluctuations, which the Company generally does not
attempt to hedge; restrictions on repatriation of earnings; potential
conflicting claims to its service marks; export-import regulations; customs
matters; foreign collection problems; military, political and transportation 
risks; and foreign laws and government regulations.

YEAR 2000. The Company is currently working to resolve the potential impact 
of the year 2000 on the processing of date-sensitive information by the 
Company's computerized information systems. The year 2000 problem is the 
result of computer programs being written using two digits (rather than four) 
to define the applicable year. Computer programs that have time-sensitive 
software may recognize a date using "00" as the year 1900 rather than the 
year 2000, which could result in miscalculations or system failures. If the 
Company, its customers or vendors are unable to resolve such processing 
issues in a timely manner, it could have a material adverse effect on the 
Company's business, financial condition and results of operation.

POTENTIAL DISRUPTION OF BUSINESS. The Company's success is dependent in part on
the quality, reliability and proper utilization of its information,
telecommunication, desktop publishing and other systems, which are used for
marketing, catalog design and production, purchasing, inventory management,
order processing, product distribution, accounts receivable, customer service
and general accounting functions. Any interruption in any of the Company's
systems or telecommunication systems could have a material adverse effect on the
Company's business, financial condition and results of operations.

POTENTIAL INCREASES IN POSTAGE, SHIPPING AND PAPER COSTS. Postage and shipping
costs, as well as the cost of paper for the Company's catalogs, are significant
expenses in the operation of the Company's business. The Company generally mails
its catalogs through the U.S. Postal Service and ships its products to customers
by overnight delivery. Any future increases in postage, shipping rates or paper
costs could have a material adverse effect on the Company's business, financial
condition or results of operations.

CHANGING METHODS OF DISTRIBUTIONS. The market for microcomputer products is
evolving rapidly in terms of product offerings and methods of distribution. New
methods of distribution, such as on-line shopping services and electronic
distribution of software, have emerged. Additionally, some manufacturers sell
their hardware and software product directly to end-users, or to certain
categories of end-users such as corporate accounts. These methods of
distribution have attracted increased patronage and other new methods of
distribution may emerge in the future. The Company will be required to remain
competitive with existing and evolving distribution channels and methods, and to
develop or adopt new methods for distribution in the future. Failure by the
Company to do so could have a material adverse effect on its business, financial
condition and results of operations.

RELIANCE ON VENDOR RELATIONSHIPS. The Company acquires products for resale from
manufacturers, as well as from distributors. Purchases from distributors
constituted 36.7% and 35.9% of the Company's total purchases in 1998 and 1997,
respectively. Certain hardware manufacturers limit the number of product units
available to direct marketers such as the Company. In addition, certain
manufacturers and distributors provide the Company with co-op advertising
support and incentives in the form of rebate dollars, discounts and allowances.
Substantially all of the Company's contracts and arrangements with its vendors
are terminable without notice or 


<PAGE>

upon short notice. Termination, interruption or contraction of the Company's 
relationships with its vendors, in the form of co-op advertising support, 
could have a material adverse effect on the Company's business, financial 
condition and results of operations.

STATE SALES OR USE TAX UNCERTAINTIES. The Company currently collects sales taxes
or similar taxes on sales to customers in the States of Washington and Ohio.
Various states have sought to require direct marketers to collect sales taxes on
sales shipped to their residents. The United States Supreme Court recently
affirmed its position that it is unconstitutional for a state to impose sales or
use tax collection obligations on an out-of-state mail order company whose only
contacts with the state are limited to the distribution of catalogs and other
advertising materials through the mail and the subsequent delivery of purchased
goods by United States mail or by interstate common carrier. However,
legislation that would expand the ability of states to impose sales tax
collection obligations on direct marketers has been introduced in Congress on
many occasions. Due to its presence on various forms of electronic media and
other factors, the Company's contact with various states may exceed the contact
involved in the Supreme Court case. The Company cannot predict the level of
contact that is sufficient to permit a state to impose a sales tax collection
obligation on the Company. If legislation is passed to overturn the Supreme
Court decision, the requirement to collect sales taxes or similar taxes on sales
would result in additional administrative expenses for the Company, could result
in increased prices to customers and could have a material adverse effect on the
Company's business, financial condition or results of operations.

DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend to a
significant extent upon the efforts and abilities of key senior management
personnel. The loss of the services of one or more the Company's senior
management could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's success will depend
on its ability to hire, train and retain skilled personnel in all areas of its
business.

RELIANCE ON OUTSOURCED DISTRIBUTION. Airborne Logistics Services, an affiliate
of Airborne Express, provides and operates a warehouse and distribution center
for the Company in Wilmington, Ohio under a contract that expires in August
1999. Any limitation or interruption of the service being provided by Airborne
Logistics could have a material adverse effect on the Company's business,
financial and results of operations.

RAPID TECHNOLOGICAL CHANGE AND INVENTORY OBSOLESCENCE. The microcomputer
industry is characterized by rapid technological change and frequent
introductions of new products and product enhancements. In order to satisfy
customer demand and obtain greater purchase discounts, the Company may be
required to carry increased inventory levels of certain products, which will
subject it to increased risk of inventory obsolescence. The Company participates
in first-to-market and end-of-life-cycle purchase opportunities, both of which
carry the risk of inventory obsolescence. Special purchase products are
sometimes acquired without return privileges and there can be no assurance that
the Company will be able to avoid losses related to obsolete inventory. In
addition, some vendors provide the Company with co-op advertising support in the
form of products, for which there may be no return privileges. While the Company
seeks to reduce its inventory exposure through a variety of inventory control
procedures and policies, there can be no assurance that the Company will be able
to avoid losses related to obsolete inventory.

BUSINESS STRATEGY

The Company's business objective is to strengthen its position as a leading
direct marketer of brand name competitively priced computer products to the
consumer, small office/home office ("SOHO") and small to medium sized business
markets. The Company is organized to serve these unique customer groups, taking
advantage of web-based technologies to further its direct marketing reach and
offer its customers new ways to solve their computing product needs.

Zones.com is a full service electronic retailer of PC and Mac microcomputers 
and related peripherals and software products to consumers and SOHO 
customers. Zones.com employs a data-driven customer contact strategy that 
matches marketing vehicles, timing and frequency with targeted customer 
segments. Marketing vehicles used by Zones.com include the zones.com online 
superstore, e-mail, e-catalogs (e-mails with product photos that link to the 
Company's web store), external banners, links and online partnerships, THE PC 
ZONE-REGISTERED TRADEMARK-  and THE MAC ZONE-REGISTERED TRADEMARK-  paper 
catalogs, direct mail and print media advertising.


<PAGE>

Zones Business Solutions (ZBS) markets primarily to small and medium-sized
business and education institutions through dedicated teams of outbound account
managers. ZBS reaches its target audience through a combination of outbound
telemarketing, customized web-stores, targeted e-mail, e-catalogs, paper
catalogs, direct mail and print media advertising.

The Company's business strategy is comprised of the following central elements:

ELECTRONIC MARKETING. The Company believes that the Internet offers both market
expansion opportunities and a more cost efficient means of communicating with
and fulfilling the needs of customers. Using the Internet, the Company can
display and offer significantly more products to reach more customers and offer
customers more options for getting information and making purchases. Similarly,
e-mail and e-catalogs offer growth opportunities, cost efficiencies and customer
convenience. The Company uses electronic and "offline" media in an integrated
fashion to optimize customer satisfaction and response.

EXPANSION OF ZONES BUSINESS SOLUTIONS. Sales to corporate and education accounts
represent a strong growth opportunity for the Company. The Company intends to
increase sales to these accounts by expanding its outbound sales team.
Additionally, the Company has established the ZBS brand to provide a focused
offering for small and medium sized businesses. In addition to outbound sales,
ZBS is using dedicated e-marketing and traditional direct marketing vehicles to
acquire new business accounts. ZBS is also providing individually customized 
web stores for its larger corporate customers.

DATABASE MARKETING. The Company uses advanced database marketing techniques to
optimize the use of its marketing vehicles across customer segments and to
maximize customer satisfaction and lifetime value. The Company's core competence
lies in attracting and retaining customers via several distinct but highly
complementary marketing vehicles. The Company's Internet superstore, zones.com,
is the online portal for all the Company's marketing efforts. Zones.com is
structured to capture information about its users that allow the Company to
customize the appropriate contact strategy for each customer and prospective
customer. The Company uses e-mail, e-catalogs, paper catalogs, magazine
advertising, and direct mail to activate new customers and promote existing
customers for both consumer and business customers. In addition, the Company
uses outbound telemarketing to acquire, promote to and meet the needs of
customers in the business and education markets.

INCREASED SALES OF PC PRODUCTS. The Company intends to focus on growth within
the vast PC market. The Company believes that the percentage of PC products sold
through the direct channel is increasing steadily, reflecting the importance of
convenience and broad product selection and availability to a growing number of
PC consumers. A part of this strategy involves increased emphasis on outbound
telemarketing to business accounts which predominantly purchase PC products.

REDUCTION OF OPERATING COSTS. The Company continually seeks ways to work more 
efficiently - the result of which has lowered selling, general and 
administrative expenses from 13.1% of sales in 1993 to 10.4% in the fourth 
quarter of 1998. During 1998 the Company began certain restructuring 
initiatives designed to continue its reduction of administrative costs, 
improve efficiencies and increase sales. A number of these projects are still 
underway, including expanded use of the Internet, electronic data interchange 
and the streamlining of product acquisition.

PRODUCTS AND MERCHANDISING

Through the Company's catalogs, Internet site and consultative sales force, 
the Company can offer the customer access to over 100,000 hardware, software, 
peripheral and accessory products for users of PC and Mac microcomputers from 
over 1,600 manufacturers. The Company is also authorized to sell volume site 
licenses for products of Microsoft, Lotus and Novell.

MICROCOMPUTERS. The Company offers a large selection of desktop, laptop and
notebook personal microcomputer systems from leading manufacturers such as
Apple, Compaq, Hewlett-Packard, IBM, and Toshiba.



<PAGE>

PERIPHERALS AND ACCESSORIES. The Company also sells peripherals and components
such as printers, monitors, keyboards, memory, fax and other add-on circuit
boards, networking and communications products, mass storage devices, modems and
scanners, as well as various accessories and supplies such as toner cartridges,
diskettes and connectors. Brands offered by the Company include 3Com, Apple,
Canon, Epson, Hewlett-Packard, Iomega, Logitech, Motorola, Okidata, Phillips,
Quantum, Sony, SyQuest, ViewSonic and UMAX.

SOFTWARE. The Company sells a wide variety of software packages in the business
and personal productivity, connectivity, utility, language, educational and
entertainment categories. The Company offers products from larger, well-known
manufacturers as well as numerous specialty products from new and emerging
software development companies. Brands offered by the Company include Adobe,
Corel, Filemaker Incorporated, IBM, Intuit, Lotus, Macromedia, Microsoft,
Novell, CUC, and Symantec.

The following table shows the Company's gross sales attributable to various 
product categories during 1996, 1997 and 1998.

<TABLE>
<CAPTION>

                                                                  YEAR ENDED DECEMBER 31,
                                                     -------------------------------------------------
                                                      1998                  1997                  1996
                                                     -----                 -----                 -----
<S>                                                  <C>
Microcomputers                                        32.7%                33.8%                  31.2%
Peripherals and accessories                           49.3                 48.8                   50.6
                                                     -----                -----                  -----
  Total hardware                                      82.0                 82.6                   81.8
Software                                              18.0                 17.4                   18.2
                                                     -----                -----                  -----
    Total                                            100.0%               100.0%                 100.0%
                                                     -----                -----                  -----
                                                     -----                -----                  -----
</TABLE>

The Company's merchandising group determines the manufacturers whose products
are featured in its Internet and catalog offerings and negotiates the terms and
conditions of product coverage. In exchange for product coverage and the benefit
of having information about their products available to the Company's customers,
most manufacturers provide the Company with co-op advertising support, which
significantly defrays the expense of Internet marketing and catalog production.
The merchandising group is also responsible for developing effective advertising
campaigns for manufacturers, managing web-site and catalog design and layout,
and coordinating product procurement and inventory management with the Company's
purchasing group. In addition, the merchandising group works closely with the
purchasing group to capitalize on opportunities for first-to-market and 
end-of-life-cycle product offerings.

The Company is continually trying to increase the number of products which it is
authorized to sell. The Company is authorized by Apple, Compaq, Hewlett-Packard,
IBM, Motorola and Toshiba to offer all or a portion of their product lines. The
availability of these products has allowed the Company to increase its hardware
sales by emphasizing its catalog coverage of these and other hardware products,
particularly desktop, notebook and laptop microcomputers.

The Company has focused on expanding its PC sales. PC sales represented 48.0% of
net sales in 1998, compared to 45.6% and 30.2% of net sales in 1997 and 1996,
respectively. The Company's PC sales grew 5.9% during 1998 over 1997 and
increased 59.5% during 1997 over 1996.

The Company's Mac sales decreased 3.9% during 1998 over 1997 and declined 17.9%
during 1997 over 1996. Sales of Apple branded products alone constituted 19.4%
of gross sales in 1998, compared to 17.1% of gross sales in 1997 and 22.5% of
gross sales in 1996. The Company believes that the percentage of its sales
represented by Mac products is likely to continue to decline over time as a
result of increasing acceptance of the direct marketing channel by PC product
manufacturers and users and the Company's expanded focus on PC product sales. In
addition, the Company will continue its efforts to increase sales to business
and education accounts, which tend to be concentrated more heavily on PC
products.

PURCHASING

The Company acquires products directly from manufacturers such as Apple and IBM
as well as from distributors such as Ingram Micro, Merisel and others. The
Company purchased 36.7% and 35.9% of its products from distributors in 1998 and
1997, respectively. Purchases from Ingram Micro and Apple represented 20.8% and
21.7%, respectively, of the Company's total product purchases in 1998. No other
vendor supplied more than 10.0% of the Company's total product purchases in
1998. The Company seeks to efficiently manage its inventory to achieve high
product availability and fill rates. The Company utilizes sophisticated


<PAGE>

computerized systems that permit real-time monitoring of inventory and assist 
the Company in managing inventory at appropriate levels. The Company has 
30-day return privileges on many of its product purchases, and has agreements 
with many of its vendors providing price protection should a vendor 
subsequently lower its price. The Company had a domestic customer return rate 
of 6.2% and 7.5% of gross saleS in 1998 and 1997, respectively. Product 
returns are closely monitored to identify trends in product offerings, 
enhance customer satisfaction and reduce overall returns.

CATALOGS

The Company markets products primarily through targeted mailings of its flagship
catalogs, THE PC ZONE and THE MAC ZONE, each of which has been published monthly
since January 1995. Customers receive frequent catalog mailings that vary
depending on their purchase activity. A catalog is also included with each order
shipped. Catalogs are mailed periodically to potential customers in the
Company's proprietary database and to prospects obtained from list brokers and
other sources. The following table provides information regarding the number of
editions and total circulation of THE PC ZONE and THE MAC ZONE catalogs
published domestically in 1998, 1997 and 1996.


<TABLE>
<CAPTION>

                                         THE PC ZONE                               THE MAC ZONE
                               --------------------------------         ---------------------------------
                               1998          1997          1996          1998          1997          1996
                               ----          ----          ----          ----          ----          ----
<S>                            <C>           <C>           <C>           <C>           <C>           <C>
Number of editions              12            13            12            12            13            12
Total circulation           22,650,000    20,000,000    14,000,000    22,800,000    29,000,000    28,000,000
</TABLE>

Each edition of the catalogs is typically produced with several cover versions,
which highlight different products of particular interest to specific customer
segments, such as graphics or entertainment products, based on data in
individual customer records. Catalogs may also differ based on the customer
type. The Company believes this highly targeted marketing treatment increases
customer response. The Company also produces a targeted specialty catalog
offering a relatively narrow but deep product line. The catalog, THE LEARNING
ZONE, is targeted at purchasers for primary, secondary and post-secondary
educational institutions. The Company intends to explore opportunities to
further pursue targeted marketing efforts. Each catalog is printed with
full-color photographs, detailed descriptions of product specifications,
benefits and features, as well as pricing and ordering information. The catalogs
are designed and produced in-house by the Company's staff of designers and
production artists using a sophisticated computer-based catalog production
system. The Company believes that in-house preparation of the catalogs
streamlines the production process, provides for greater flexibility and
creativity in catalog production, and results in significant cost savings. The
Company also produces direct mail pieces for highly targeted promotions of
specific products, such as software upgrades, to relevant customers. The
Company's catalogs and direct mail pieces are printed and distributed
commercially.

INTERNET COMMERCE

The Company was one of the first participants in the direct marketing channel 
to sell computer products online. The Company has built and maintains one of 
the largest electronic commerce sites on the Internet (zones.com). To drive 
traffic to its Internet sites, the Company leverages the catalog circulation 
by featuring the Internet address throughout the catalogs, including the 
cover. The electronic stores provide the Company with a lower-cost way to 
offer customers detailed product information and the convenience of online 
purchasing. While the Company believes that printed catalogs will remain an 
important tool in the direct marketing of microcomputer products, it also 
believes that its strengths in database marketing and order fulfillment 
should enable it to respond effectively to new and emerging direct marketing 
vehicles.

DATABASE MARKETING

The Company maintains a proprietary database containing 3.0 million customer and
inquirer records, including approximately 1.5 million customers, of which
approximately 573,000 customers have purchased products from the Company during
the last twelve months. The Company attracts new customers and prospective
customers through advertising in major trade publications and through selective
mailing of catalogs to names on mailing lists obtained from list brokers,
product manufacturers, trade magazine publishers and other sources. The 


<PAGE>

Company periodically analyzes and updates its database and other available 
information in order to enhance customer response and order rates. The 
Company tracks the buying patterns of its customers in an attempt to 
anticipate customers' needs and generate additional product orders. The 
Company also strives to improve the size, quality and responsiveness of its 
database through the use of sophisticated modeling techniques. The Company 
believes that by selectively targeting its catalogs to specific groups of 
customers with known product affinities and purchasing characteristics, the 
Company will be able to increase order rates from customers and enhance the 
effectiveness of its catalogs and their desirability as a marketing channel 
for product manufacturers. The Company leverages its database marketing 
capabilities by providing key product manufacturers with marketing research 
such as price sensitivity tests, list response analyses, and database 
marketing consulting services. The Company believes these efforts assist it 
in promoting and preserving positive relationships with these manufacturers.

SALES, TECHNICAL SUPPORT AND CUSTOMER SERVICE

OUTBOUND SALES. At December 31, 1998, the Company had a staff of 142 experienced
account managers and support staff who pursue sales to corporate and education
accounts through outbound telemarketing. These commissioned account managers
develop long-term relationships with business accounts through frequent
telephone contact and by providing individual attention, quality service, and
convenient one-stop shopping. In addition to outbound sales, the Company
utilizes catalog mailings, fax broadcast messaging and other marketing tactics
to enhance sales.

INBOUND SALES. The Company's staff of over 150 inbound telemarketing
representatives are well-trained and knowledgeable. The Company offers toll-free
numbers for inbound sales that are staffed 24 hours a day, seven days a week.
Sophisticated systems allow the Company's representatives to quickly access a
customer's record and billing information and review details of past purchases.
For most products sold, the systems also contain an extensive on-line database
of information on product specifications, benefits and features; compatibility
of related products; and system requirements for software programs. In addition,
the systems automatically prompt telemarketing representatives to offer
customers the latest upgrades and complementary software and peripherals.

CUSTOMER SERVICE/TECHNICAL SUPPORT. The Company's customer service
representatives respond to questions regarding order status and related matters
as well as assist customers with product returns. Most vendors offer an
unconditional 30-day return policy on their products. The Company also has a
staff of dedicated technical support personnel who assist customers with the
installation and operation of the products they purchase and are available
toll-free during regular business hours. These personnel also offer customers
support with customized configuration of their microcomputer systems.

INTERNATIONAL OPERATIONS

The Company has subsidiaries and licensees located in 13 countries worldwide. 
The Company's subsidiaries are located in Austria, France, Germany, India, 
Mexico, Switzerland, and The United Kingdom. The Company's licensees are 
located in 6 other foreign countries.

The Company's international sales were $79.8 million in 1998, $70.7 million in
1997 and $59.2 million in 1996, representing increases of 12.9%, 19.5%, and
125.1%, respectively, over the comparable prior periods. The catalogs of the
Company's subsidiaries and licensees are published under THE PC ZONE and THE MAC
ZONE service marks, but are designed and produced locally in the native
language, which allows them to be customized both in presentation and product
mix to suit local needs. The Company's headquarters provides ongoing support in
database marketing, catalog design, establishing relationships with product
manufacturers, and product merchandising. The international catalogs attract
manufacturers seeking broad international exposure for marketing of their
microcomputer hardware, software and peripheral products.

Some of the minority shareholders of the Company's subsidiaries have the right
to require the Company to purchase their shares at a price calculated by a
pre-determined formula based on performance of the business. Typically, a
licensee will pay a one-time license fee plus a percentage royalty on ongoing
sales revenues. Many 



<PAGE>

of the licensees have granted the Company a right of first refusal in the 
event of any proposed sale of their business.

SYSTEMS

The Company has committed significant resources to the development of
sophisticated management information, telecommunication, catalog production and
other systems, which are employed in virtually all aspects of its business. The
Company's primary computer systems consist of a Hewlett-Packard 3000 Model
987/200, shadowed by a redundant Hewlett-Packard 3000 Model 995 for disaster
recovery, an IBM AS/400, and a widely-used mail order and catalog management
software package. The primary computer systems are used for marketing,
purchasing, inventory management, order processing, product distribution,
accounts receivable, customer service and general accounting functions.

DISTRIBUTION CENTER

Airborne Logistics provides and operates a full-service warehouse and
distribution center for the Company at the Airborne Commerce Park in Wilmington,
Ohio under a contract that expires in August 1999. Employees of Airborne
Logistics utilize the Company's systems, policies and procedures to receive, log
and warehouse inventory shipments from product vendors, fill and ship domestic
customer orders, and return inventory to product vendors when requested by the
Company. The Company pays a flat rate for each order filled. Domestic orders
received by the Company are electronically transmitted on a dedicated data line
to its computer equipment at the Airborne Logistics distribution center, where a
packing slip is printed out for order fulfillment and inventory availability is
automatically updated on all of the Company's information systems. All inventory
items are bar coded and located in computer-designated areas that are easily
identified on the packing slip. All items are checked with bar code scanners
prior to final packing, which helps to ensure that orders are filled correctly.
Orders accepted by 1:00 a.m. Eastern Time can generally be delivered overnight
via Airborne Express. Upon request, orders may also be shipped for Saturday
delivery or by ground service or other overnight delivery services.

COMPETITION

The microcomputer products industry is highly competitive. The Company competes
with other national and international direct marketers, including
MicroWarehouse, Inc., CDW Computer Centers, Inc., Insight Enterprises, Inc. and
Creative Computers, Inc. The Company also competes with product manufacturers
that sell direct to end-users; specialty microcomputer retailers; microcomputer
and general merchandise superstores; consumer electronic and office supply
stores. Many of these competitors rely heavily on the Internet as a marketing
and sales channel. Additional competition may arise if other new methods of
distribution, such as interactive television, emerge in the future. The Company
competes not only for customers, but also for co-op advertising support from
microcomputer product manufacturers. The Company believes that product
selection, availability and price are the three most important competitive
factors.

EMPLOYEES

At December 31, 1998, the Company had 659 employees in its domestic operations,
and over 200 persons were employed by the Company's foreign subsidiaries. The
Company considers its employee relations to be good. The Company has never had a
work stoppage and no employees are represented by a labor organization. The
Company emphasizes the recruiting and training of high quality personnel and, to
the extent possible, promotes people to positions of increased responsibility
from within the Company. Each employee receives training appropriate to his or
her position and a complete new hire orientation. The training programs include:
New Hire Orientation, Sales Training and Management Development. New
telemarketing representatives participate in an eight-week training program to
introduce them to the Company's systems and familiarize them with the available
products and services.


<PAGE>



TRADEMARKS

The Company conducts its business in the United States primarily under the 
service marks THE PC ZONE-REGISTERED TRADEMARK-  and THE MAC ZONE-REGISTERED 
TRADEMARK-  registered with the United States Patent and Trademark Office. 
These registrations have an indefinite term, so long as the service marks are 
used in connection with the Company's business activities. The Company 
believes its service marks have significant value and are an important factor 
in the marketing of its products. The Company intends to take appropriate 
steps to protect and renew its service mark registrations.

REGULATORY AND LEGAL MATTERS

In addition to federal, state and local laws applicable to all corporations and
employers in general, the direct marketing business as conducted by the Company
is subject to the Federal Trade Commission's Merchandise Mail Order Rule and
related regulations. The Company is also subject to laws and regulations
relating to truth-in-advertising and other fair trade practices. The Company has
implemented programs and systems to promote ongoing compliance with these laws
and regulations.

ITEM 2.  PROPERTIES

The Company currently leases approximately 132,000 square feet of space for 
its corporate headquarters, including its telemarketing operations, in 
Renton, Washington and approximately 18,000 square feet of space for its 
return warehouse facility in Henderson, Nevada. The Company also leases 
approximately 36,000 square feet of office space in Bellevue, Washington, 
which has been sublet. Additionally, the Company operates sales and 
distribution facilities in Austria, France, Germany, India, Mexico, 
Switzerland and the United Kingdom.

ITEM 3.  LEGAL PROCEEDINGS

Various claims and actions considered normal to the Company's business have been
asserted and are pending against the Company. The Company believes that such
claims and actions should not have a material adverse effect upon the Company's
financial position or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted during the fourth quarter of 1998 to a vote of
security holders.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

FIROZ H. LALJI, age 52, has served as the Company's President and Chief 
Executive Officer since May of 1998. He was appointed to the additional 
office of Chairman of the Board in March 1999. Mr. Lalji has served as a 
director of the Company since March 1990. From 1985 to 1998, Mr. Lalji was 
President and Chief Executive Officer of Fana Group of Companies. Fana Group 
of Companies owns real estate and hotels in the United States and Canada. 
From 1981 to 1997, he was also President and Chief Executive Officer of Kits 
Cameras, Inc., which operates over 140 camera specialty stores in eight 
western states.

LORNE G. RUBIS, age 48, was appointed Chief Operating Officer in February of
1999. Mr. Rubis joined the Company and served as the Executive Vice President of
Sales since July of 1997. From 1996 to 1997, Mr. Rubis was the Vice President of
Business Operations for the Los Angeles Kings Hockey Club. From 1992 to 1996,
Mr. Rubis held the position of Vice President, reporting to the Chairman and
CEO, at U.S. WEST, Inc., a Fortune 50 telecommunications/multimedia corporation.

PETER J. BIERE, age 42, was appointed Senior Vice President - Finance and Chief
Financial Officer in October 1995. He joined the Company as Controller in 1993
and served as Vice President - Finance, Controller and Treasurer from 1994 until
his promotion.


<PAGE>

MARK A. BRADLEY, age 33, was Senior Vice President of Merchandising from January
of 1998 to February of 1999. From 1994 to 1998, Mr. Bradley held various
management positions with MicroAge, Inc., most recently serving as Vice
President of Hardware Strategy. Mr. Bradley was a National Account Sales Manager
from 1991 to 1994 at NEC.

CHRIS G. HAUSER, age 48, was appointed Senior Vice President of MIS/Operations
in January of 1998. He joined the Company in June of 1996 and served as Vice
President of Operations until his promotion. From 1994 to 1996, Mr.
Hauser was the Director of Distribution for the Fingerhut Companies, Inc.

GUIO G. BARELA, age 46, joined the Company in November of 1998 as Senior Vice
President of Corporate Development. From 1997 to 1998, Mr. Barela was Vice
President at Insight Enterprises, Inc. From 1996 to 1997, Mr. Barela was CEO and
Founder of ICXpress. From 1995 to 1997, he served as Vice President of Supplier 
Relations of Tandy Procurement Alliance, a Tandy Corporation.


<PAGE>


                                    PART II.


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's Common Stock is traded on the NASDAQ National Market under the
symbol MZON. The following table sets forth the range of high and low sales
prices for the Common Stock as reported by the NASDAQ National Market.

<TABLE>
<CAPTION>

                                                  YEAR ENDED DECEMBER 31,
                                          ----------------------------------------
                                                1998                  1997
                                                ----                  ----
                                          HIGH        LOW        HIGH        LOW
                                          ----       -----      -----       -----
<S>                                       <C>        <C>        <C>         <C>
                 First quarter            5 3/8      3 1/2      12 3/8      8 3/4
                 Second quarter           4 1/4      2 11/16    11 1/2      4 1/2
                 Third quarter            4 1/4      2 11/16     7 1/4      4 9/16
                 Fourth quarter            56        2 3/4       6 11/16    3 1/2
</TABLE>

As of the March 8th record date the Company had approximately 8,900 holders 
of record of its Common Stock. The Company has never paid and has no present 
plans to pay a cash dividend on its Common Stock. The Company intends to 
retain its earnings to finance the expansion of its business.

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

The following table sets forth the selected historical consolidated income 
and balance sheet data of Multiple Zones International, Inc. and its 
subsidiaries. The balance sheet data at December 31, 1998 and 1997 and the 
statement of operations data for the years ended December 31, 1998, 1997 and 
1996 have been derived from the audited financial statements and notes 
thereto included in this Annual Report on Form 10-K. The balance sheet data 
for the years ended December 31, 1996, 1995 and 1994 and the statement of 
operations data for the years ended December 31, 1995 and 1994 have been 
derived from audited consolidated financial statements and notes thereto not 
included in this Annual Report on Form 10-K. This information should be read 
in conjunction with the consolidated financial statements and notes thereto 
included in Item 8 and Item 7 "Management's Discussion and Analysis of 
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>

                                                              YEAR ENDED DECEMBER 31,
                                             1998         1997          1996         1995         1994
                                             ----         ----          ----         ----         ----
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
<S>                                          <C>          <C>           <C>          <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                    $501,441     $490,025      $457,007     $242,587     $113,456
Cost of sales (1,2)                           447,005      431,905       393,998      211,037       98,211
                                             --------     --------      --------     --------     --------
Gross profit                                   54,436       58,120        63,009       31,550       15,245
Selling, general and administrative
  expenses (1,2)                               63,409       62,910        44,613       25,425       14,411
                                             --------     --------      --------     --------     --------
Income (loss) from operations                  (8,973)      (4,790)       18,396        6,125          834
Other expense, net (1)                          3,474        1,618         1,397        1,086          215
                                             --------     --------      --------     --------     --------
Income (loss) before income taxes             (12,447)      (6,408)       16,999        5,039          619
Provision for (benefit from) income
  taxes                                        (4,114)        (965)        6,125        1,847          207
                                             --------     --------      --------     --------     --------
Net income (loss) (1,2)                      $ (8,333)    $ (5,443)     $ 10,874      $ 3,192       $  412
                                             --------     --------      --------     --------     --------
                                             --------     --------      --------     --------     --------

Diluted earnings (loss) per share (1,2)     $   (0.64)    $  (0.42)     $   0.91     $   0.32      $  0.04

Shares used in computation of diluted
  earnings (loss) per share                    13,079       12,965        11,912        9,460        9,431

BALANCE SHEET DATA:
Working capital                              $ 27,601     $ 35,057      $ 39,809      $ 7,750       $  525
Total assets                                  133,047      104,810       149,801       79,392       25,705
Short-term debt                                 2,943        3,045         3,960       12,757        3,617
Long-term debt, net of current portion            338          892         1,748        1,665          791
Series B preferred stock                                                                6,461
Total shareholders' equity                     37,350       44,971        49,469        4,736        1,705

SELECTED OPERATING DATA: (3)
Catalogs distributed                       46,300,000   50,500,000    44,000,000   29,000,000   15,000,000
Number of shipments (4)                     1,189,000    1,266,000     1,229,000      859,000      522,000
Average order size (4)                         $  378       $  358        $  352       $  273       $  212
Customer and inquirer database (5)          3,317,000    2,970,000     2,504,000    1,908,000    1,626,000
</TABLE>

(1)  During 1998, the Company recorded charges related to the write-off of 
     inventory, the closure of international subsidiaries, staffing reductions 
     and the disposal of unproductive computer hardware and software. 
     Excluding the effect of these charges, the Company would have reported a 
     net loss of $(2,600,000) or $(0.20) per share. 

(2)  During 1997, the Company recorded charges related to the write-off
     of goodwill, accounts receivable, inventory and the closure of three
     international subsidiaries. Excluding the effect of these charges, the 
     Company would have reported net income of $2,713,000 or $0.21 per share. 

(3)  Selected operating data exclude international operations. 

(4)  Number of shipments is the number of domestic outbound shipments to 
     customers from the third-party distribution center utilized by the 
     Company. Average order size is calculated by dividing domestic gross 
     sales by the number of domestic shipments. 

(5)  The database includes customer and inquirer records. Customers are 
     people who have purchased or received products from the Company. 
     Inquirers are people who have requested a catalog or product information 
     for the Company.


<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition 
and results of operations contains certain forward-looking statements. For 
this purpose, any statements contained herein that are not statements of 
historical fact may be deemed to be forward-looking statements. Without 
limiting the foregoing, the words "believes," "anticipates," "plans," 
"expects" and similar expressions are intended to identify forward-looking 
statements. There are a number of important factors that could cause the 
Company's actual results to differ materially from those indicated by any 
such forward-looking statements. These factors include, without limitation, 
those items set forth in Item 1 above under the caption "Risk Factors."

The following discussion and analysis should be read in conjunction with the
Company's Selected Consolidated Financial and Operating Data and the
Consolidated Financial Statements and Notes included in this Annual Report on
Form 10-K.

GENERAL

Multiple Zones International, Inc. together with its majority owned 
subsidiaries (collectively the "Company") is a leading international direct 
marketer of over 100,000 computer products to businesses and consumers. The 
Company serves customers through its Internet superstore, zones.com, and its 
flagship brands: Zones Business Solutions, Zones.com, The PC Zone-Registered 
Trademark- and The Mac Zone-Registered Trademark- with products from leading 
manufacturers, including IBM, Compaq, Hewlett Packard, Microsoft, Toshiba 
and Apple. The Company began operations in 1988 by advertising in national 
trade publications. Catalog circulation commenced with The Mac Zone in 1990, 
followed by The PC Zone in 1992. International subsidiary operations and 
licensing activities commenced in 1992, and outbound telemarketing 
operations, principally to business accounts, were added in 1993. Internet 
sales and electronic marketing via e-mail began in 1997.

The Company's revenues consist primarily of sales of microcomputer hardware,
software, peripherals and accessories, as well as license fees and royalties
from foreign licensees. Net sales reflect the effects of product returns. Gross
profit consists of net sales less product and freight costs. Selling, general
and administrative ("SG&A") expenses include advertising expense net of co-op
advertising recovery, warehousing, selling commissions, order processing,
telephone and credit card fees and other costs such as administrative salaries,
depreciation, rent and general overhead expenses. Other expense represents
interest expense net of non-operating income and minority interests in the
Company's foreign subsidiaries.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected items from
the Company's Consolidated Statements of Operations expressed as a percentage of
net sales.

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                        ------------------------------------
                                           1998        1997         1996
                                        ----------- ------------ -----------
<S>                                     <C>         <C>          <C>
   Net sales                                100.0%      100.0%       100.0%
   Cost of sales                             89.1        88.1         86.2
                                        ----------- ------------ -----------
   Gross profit                              10.9        11.9         13.8
   SG&A expenses                             12.6        12.8          9.8
                                        ----------- ------------ -----------
   Income (loss) from operations             (1.8)       (0.9)         4.0
   Other expense                              0.7         0.3          0.3
                                        ----------- ------------ -----------
   Income (loss) before income taxes         (2.5)       (1.2)         3.7
   Provision for (benefit from)              
     income taxes                            (0.8)       (0.2)         1.3
                                        ----------- ------------ -----------
   Net income (loss)                         (1.7)%      (1.0)%        2.4%
                                        ----------- ------------ -----------
                                        ----------- ------------ -----------
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997

NET SALES. Net sales increased 2.3% to $501.4 million in 1998 from $490.0
million in 1997. The increase resulted primarily from an increase in the
Company's Zones Business Solutions ("ZBS") division, which grew 22.2% to $176.3
million in 1998. The Company's Zones.com division, which is comprised of the
Internet and 


<PAGE>

inbound catalog operations declined 6.4% to $243.9 million in 1998. Internet 
sales increased 386.8% to $47.5 million in 1998.

Net domestic PC product sales increased 11.2% to $202.6 million in 1998 from 
$182.2 million in 1997 (excluding $9.2 million in fourth quarter 1997 PC 
Product sales to corporate resellers, which have been discontinued). The 
increase was due primarily to an increase in the number of ZBS outbound 
account managers to 142 at year-end, compared with 91 at the end of 1997. 
Sales to business and education accounts increased 14.8% to $176.3 million 
from $144.2 million in 1997. PC product sales represented 56.3% and 54.4% of 
the sales to business and education accounts in 1998 and 1997, respectively.

Net domestic Mac product sales decreased 3.9% to $219.0 million in 1998 from 
$228.0 million in 1997. Sales of Mac products to business and education 
accounts through ZBS increased 17.5% during 1998 to $77.0 million, due 
primarily to the increased number of outbound account managers. Sales of Mac 
products through the combined catalog and Internet operations of Zones.com 
declined 13.6% to $142.0 million, reflecting a continued overall decline in 
consumer demand for Mac products.

International subsidiary net sales in 1998 were $79.8 million, an increase of
12.9% over the comparable period. The increase resulted primarily from sales
growth in the Company's operations in Germany, France, and the United Kingdom.

GROSS PROFIT. Gross profit decreased to $54.4 million in 1998 from $58.1 million
in 1997, and declined to 10.9% of net sales in 1998 from 11.9% of net sales in
1997. During the second quarter of each period, the Company recorded inventory
adjustments totaling $2.9 million and $2.5 million, respectively, primarily
related to allowances for obsolete and non-returnable inventory. In addition to
these adjustments, gross margin declined due to increased price competition,
lower average unit selling prices, and an increase in PC product sales and sales
to business and education accounts which generally carry a lower average gross
margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to $63.4
million in 1998 from $62.9 million in 1997, but declined as a percentage of net
sales between periods to 12.6% from 12.8%. During the second quarter of 1998,
the Company recorded charges totaling $2.3 million primarily related to staffing
reductions and the closure or sale of certain international operations. During
the second quarter of 1997 the Company recorded charges totaling $2.5 million
primarily related to uncollectable advertising receivables and staffing
reductions.

OTHER EXPENSE. Other expense increased to $3.4 million in 1998 from $1.6 million
in 1997. During the second quarter the Company recorded charges to income of
$3.5 million related to the disposal of certain unproductive computer hardware
and software costs.

INCOME TAX (BENEFIT)/EXPENSE. The income tax benefit for 1998 was $4.1 million.
The income tax benefit for 1997 was $965,000. As of December 31, 1998 and 1997,
the Company had deferred tax assets attributable to foreign subsidiaries.

NET LOSS.  As a result of the above factors, a net loss of $8.3 million 
or 1.7% of net sales was incurred in 1998.  Net loss for 1997 was $5.4 million 
or 1.0% of net sales.

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996

NET SALES. Net sales increased 7.2% to $490.0 million in 1997 from $457.0
million in 1996. The increase resulted primarily from an increase in domestic PC
product sales partially offset by a decrease in domestic Mac product sales.

Net domestic PC product sales increased to $191.4 million in 1997 from $120.0
million in 1996. The increase is due to an increase in PC catalog circulation,
in addition to growth in sales to business and education accounts. PC catalog
circulation increased to 20.0 million in 1997 from 14.0 million in the
comparable period. Sales to business and education accounts increased 53.9% to
$153.5 million in 1997 from $99.7 million in 1996. PC 


<PAGE>

product sales represent 57.3% and 42.6% of the sales to business and 
education accounts in 1997 and 1996, respectively.

Net domestic Mac product sales decreased to $228.0 million in 1997 from 
$277.9 million in 1996, a decrease of 18.0%. The decrease in the domestic Mac 
product sales reflected the declining overall demand for Mac products.

International subsidiary net sales in 1997 were $70.7 million, an increase of
19.5% over 1996. The increase in international subsidiary net sales resulted
primarily from the addition of subsidiaries in Sweden, Venezuela and India, as
well as sales growth in the Company's operations in France and Mexico.

GROSS PROFIT. Gross profit decreased to $58.1 million in 1997 from $63.0 million
in 1996, and decreased to 11.9% of net sales in 1997 from 13.8% in 1996. During
the second quarter of 1997, the Company recorded inventory allowances totaling
$2.5 million in connection with slow moving and excess inventories. During the
third quarter of 1997, the Company recorded $356,000 of inventory write-downs
related to its Belgium, Australia, and Holland subsidiaries. In addition to
these adjustments, gross margin declined due to increased price competition,
lower average unit selling prices, and an increase in PC product sales and sales
to business and education accounts which generally carry a lower average gross
margin.

SELLING,GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to $62.9
million in 1997 from $44.6 million in 1996, and increased as a percentage of net
sales between periods to 12.8% from 9.8%. During the second quarter of 1997, the
Company recorded several charges to income. These include $2.5 million related
to allowances for uncollectable vendor co-op receivables, $1.4 million related
to the write-off of international goodwill, severance expense of $490,000,
write-off of other assets totaling $378,000, write-off of $234,000 related
primarily to asset valuation adjustments for the Company's subsidiary in Holland
and additional professional fees of $243,000. During the third quarter of 1997,
the Company recorded a $1.6 million charge to income related to the closure of
its Belgium, Australia, and Holland subsidiaries. The charges related to the
write-off of accounts receivable, legal expenses, and other operating expenses.
In addition to these adjustments, SG&A expense increased due to costs of
focusing on growing the PC and outbound sales businesses, higher salary costs,
professional fees, and depreciation.

OTHER EXPENSE. Other expense increased to $1.6 million in 1997 from $1.4 million
in 1996, primarily as a result of the $284,000 loss on disposal of assets
recorded in the second and third quarters of 1997.

INCOME TAX (BENEFIT)/EXPENSE. The income tax benefit for 1997 was $965,000. The
income tax expense for 1996 was $6.1 million. As of December 31, 1997, the
Company had deferred tax assets attributable to foreign subsidiaries. As the
realization of these deferred tax assets is uncertain, the Company established a
valuation allowance of $1.4 million. The valuation allowance has decreased the
income tax benefit.

NET INCOME.  As a result of the above factors, a net loss of $5.4 million or 
1.0% of net sales was incurred in 1997. Net income for 1996 was $10.9 million 
or 2.4% of net sales.

TRENDS

During the quarter ended December 31, 1998, sales through the Company's Internet
superstore, zones.com, grew to $18.5 million, or 15.2% of domestic sales, an
increase of 284.5% over the fourth quarter of 1997 and 36.2% over the third
quarter of 1998. This increase was facilitated by a variety of website
improvements during the year, including hardware upgrades to increase system
capacity, improvements to the web-site's user-friendliness, and the addition of
expanded software-delivery capabilities. The Company plans to further customize
its website to provide more efficient access and improved product selection for
its business and education customers. The Company also promotes Internet sales
by offering telephone sales assistance to its online customers. About 70% of
sales dollars through the Company's Internet store are phone-assisted, which
affords additional sales opportunities and results in increased order sizes.

Outbound sales to business and education accounts grew to $50.2 million 
during the fourth quarter, an increase of 1% and 9.3% over the fourth quarter 
of 1997 and third quarter of 1998, respectively. This growth was achieved 

<PAGE>

through a combination of process based productivity improvements and the 
Company's successful efforts to expand its outbound account executive 
headcount. The Company had 142 account executives at December 31, 1998, 
representing a 22.4%increase during the fourth quarter, and intends to 
continue its aggressive efforts to expand outbound sales personnel.

Inbound sales resulting from the circulation of the Company's catalogs, by
contrast, declined year over year to $52.5 million during the fourth quarter,
representing a 22.0% decrease from inbound sales in the fourth quarter of 1997.
The Company believes that the rapid growth of its Internet sales has been a
significant factor in the flattening of its inbound catalog sales, as increasing
numbers of catalog recipients choose to place their orders electronically rather
than over the phone. Approximately 60% of customers placing orders through the
Internet store have migrated from the Company's inbound catalog sales division.
The Company encourages this transition by featuring its Internet superstore
prominently throughout its catalogs and by making its inbound telephone sales
personnel available to assist online customers. The Company intends to continue
to adapt and adjust the size, content and circulation of its outbound sales
catalogs in an effort to optimize the combined sales of its inbound and Internet
divisions.

Gross product margins have continued to decline industry-wide, primarily due to
falling average unit selling prices and increased price competition. The
Company's average order size in the fourth quarter of 1998 has grown to $414, an
increase of 9.9% and 5.5% over the fourth quarter of 1997 and the third quarter
of 1998, respectively. This increase is due primarily to the increase in
outbound sales to business and education accounts which support a higher average
order. Although this increase in order size has roughly offset the recent
declines in gross margin percentage on an average order, the Company expects
that there may be further declines in gross product margins, and that continued
growth in order size, as well as continued cost reductions, will likely be
required to improve profitability.

The Company uses cooperative advertising funds to substantially offset the costs
associated with its catalog circulation and other marketing activities. The
amount of funding available from the Company's vendor-partners has generally
declined since 1997, both in dollars and as a percentage of sales. The Company's
domestic net cost of advertising totaled $3.3 million in 1998, or 0.8% of
domestic net sales. Domestic net advertising costs were $3.9 million in 1997 and
$2.0 million in 1996. Net advertising costs may continue to fluctuate or rise in
the future, as the Company continues to adapt and adjust its catalog
circulation, Internet and other marketing activities to optimize sales and
profitability in light of changing market conditions.

INDUSTRY

The market for microcomputer products is characterized by rapid changes and
frequent introductions of new products and product enhancements. These changes
result in rapid price fluctuations and have led to continued average price
reductions and lower margin dollars per transaction. A number of Internet-based
competitors are selling computer products at cost plus a transaction fee. In
order to remain competitive, the Company may be required to reduce its prices.
Such a reduction in prices could have a material adverse effect on the Company's
future results of operations.

SEASONAL FACTORS

Seasonal factors cause sales of microcomputer software and hardware products
through the direct marketing channel to be somewhat stronger in the fourth
calendar quarter than in the other periods. Sales during the fourth quarter tend
to be stronger as manufacturers make year-end introductions of new products and
increase marketing activities related to the holiday season, and as corporate
purchasing activities increase at the end of budgetary cycles.


<PAGE>

INFLATION

The Company does not believe that inflation has had a material impact on its
results of operations. However, there can be no assurance that inflation will
not have such an effect in future periods.

LIQUIDITY AND CAPITAL RESOURCES

On July 2, 1996, the Company completed an initial public offering of its Common
Stock resulting in net proceeds to the Company of $27.3 million. The Company
paid off bank debts totaling $20.8 million by using funds generated by its
initial public offering. The remaining proceeds were used to finance ongoing
working capital requirements.

The Company had total assets of $133.0 million at December 31, 1998, of which
$120.8 million were current assets. At December 31, 1998 and 1997, the Company
had cash and cash equivalents of $19.1 million and $1.6 million respectively,
and working capital of $27.6 million and $35.1 million, respectively. Net cash
provided by operating activities was $20.5 million in 1998 and $10.8 million in
1997, respectively, compared to net cash used by operating activities of $11.2
million in 1996. The cash inflows during 1998 were primarily due to higher
accounts payable offset by increased inventories and accounts receivable. The
cash inflow in 1997 was primarily due to lower inventory, prepaid expenses and
other assets, and accounts receivable, partly offset by decreased accounts
payable. The cash outflow in 1996 was primarily due to higher accounts
receivable resulting from growing sales to business accounts, and to investment
in increased inventories necessary to support rapidly growing sales.

Cash outlays for capital expenditures were $3.1 million in 1998 and $5.7 
million for both 1997 and 1996, respectively. In addition, the Company incurred 
capital lease obligations during 1998, 1997 and 1996 of $38,000, $420,000 and 
$1.1 million, respectively. These expenditures were primarily for information 
systems and software, leasehold improvements, telecommunication system 
enhancements and furniture and equipment.

The Company has a domestic revolving line of credit of $15.0 million from a
commercial bank collateralized by accounts receivable. At December 31, 1998,
there were no borrowings outstanding under the facility. The facility contains
certain restrictive covenants related to leverage, current ratios and subsidiary
investments. Additionally, at December 31, 1998, the Company had $2.5 million 
of unused letters of credit.

In May 1997, the Company obtained an additional $20.0 million line of credit
from a commercial lender collateralized by inventory.

The net amount of vendor credit outstanding at December 31, 1998 was $79.7 
million of which $31.4 million was drawn from a $35.0 million inventory 
financing facility between the Company and a commercial lender, which 
provides financing for, and is collateralized by, inventory purchased from 
certain participating vendors. The facility contains various restrictive 
covenants relating to profitability, tangible net worth, leverage, 
dispositions and use of collateral, other asset dispositions, and merger and 
consolidation of the Company.

The Company believes that its existing available cash and cash equivalents,
operating cash flow and existing credit facilities will be sufficient to satisfy
its operating cash needs for at least the next 12 months. However, if working
capital or other capital requirements are greater than currently anticipated,
the Company could be required to seek additional funds through sales of equity,
debt or convertible securities or increased credit facilities. There can be no
assurance that additional financing will be available or that, if available, the
financing will be on terms favorable to the Company and its shareholders.

OTHER MATTERS

The year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Possible
effects of this issue could include disruption of operations including inability
to ship orders, process invoices and order product.



<PAGE>

The Company established a Y2K assessment team in late 1997 to review all of its
information technology ("IT") systems and non-IT systems for Y2K compliance. The
Company has contacted and received response from approximately 90% of its
domestic systems and service suppliers. All major hardware and software systems
have been reviewed. The Company believes that most of its systems, including its
enterprise software system, are Y2K compliant. The Company has identified
several systems it believes may not be compliant, including its phone system
operating software and various computer workstations and servers. Additionally,
a number of critical service providers have not indicated that they are 
currently compliant, including local and long distance phone providers, and
several small software solution providers.

A plan to mitigate currently known compliance issues was completed during the 
fourth quarter of 1998. Testing to verify compliance is scheduled for 
completion during the second quarter of 1999. The Company will utilize both 
internal and external resources to reprogram and test applications for 
compliance. The Company has a project underway to upgrade its enterprise 
software system and expects to complete this project early in the third 
quarter of 1999. Although its current software version is Y2K compliant, 
several minor software attachments will be replaced and brought into 
compliance in the process. Compliance costs for repairing known systems and 
software issues are estimated to be $400,000. Additionally, other minor 
software compliance costs are expected to total less than $100,000. 
Compliance testing costs are estimated to be $150,000.

The Company's assessment of the potential impact of Y2K issues on its foreign 
subsidiaries is continuing, and the Company believes that it's subsidiaries 
will be compliant before the end of 1999. The Company has not yet completed 
testing to verify compliance for its domestic systems and accordingly has not 
completed contingency planning. Once completed contingency plans and related 
cost estimates will be continually refined, as additional information becomes 
available. The Company cannot provide any assurance that it will be able to 
achieve timely Y2K compliance, or that its critical service providers and 
suppliers will not have service disruptions associated with the Y2K problem. 
Failure of the Company or any of its critical service providers to achieve 
Y2K compliance could result in serious disruptions of the Company's 
operations, such as preventing the Company from receiving or processing 
customer orders. Such disruptions would likely have a material adverse effect 
on the Company's results of operations, liquidity or financial condition.

The activities associated with Y2K compliance have not had a material impact on
other critical IT or non-IT initiatives, and efforts to bring the Company's
non-compliant systems into compliance are not expected to delay any project or 
impact financial results in any material way.

In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, SFAS No. 133 requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133
becomes effective for the Company beginning January 1, 2000. The Company is
currently assessing the impact, if any, to its financial position or results of
operations.

Management believes that the adoption of this new standard will not have a 
material impact on the Company's financial position or results of operations.


<PAGE>

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal 
course of business, primarily as a result of its short-term borrowing and 
investment activities which generally bear interest at variable rates. Because 
the short-term borrowings and investments have maturities of three months or 
less, the Company believes that the risk of material loss is low.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in this report beginning at
page 28.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.

                                  PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 1999 Annual Meeting of
Shareholder under the caption "Proposal No. 1: Election of Directors," and
"Section 16(a) Beneficial Ownership Reporting Compliance." See also the
information concerning executive officers of the Company included in Item 4a of
Part I in this Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 1999 Annual Meeting of
Shareholders under the caption "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 1999 Annual Meeting of
Shareholders under the caption "Stock Ownership of Management and Certain Other
Holders."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.



<PAGE>

                                    PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) 1.  Financial Statements:

         The financial statements of Multiple Zones International, Inc. and
         subsidiaries and Report of Independent Accountants are included herein
         beginning on page 25.

     (a) 2.  Financial Statement Schedules:

         Schedules are omitted since the required information is not present or
         is not present in amounts sufficient to require submission of the
         schedule, or because the information required is included in the
         Consolidated Financial Statements and Notes thereto.

     (a) 3.  Exhibits required by Securities and Exchange Commission Regulation
             S-K, Item 601:

  Number                                           Description
-------------------------------------------------------------------------------
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
     3.1        Restated Articles of Incorporation (incorporated by reference
                from exhibit 3.1 to the Registrant's Registration Statement on
                Form S-1 filed on June 5, 1996 (File No.
                333-04458))
     3.2        Amended and Restated Bylaws
EXHIBIT NO. 10: MATERIAL CONTRACTS

COMPENSATION PLANS AND AGREEMENTS
     10.1       Multiple Zones International, Inc. 1993
                Stock Incentive Plan, as amended (incorporated by reference 
                from exhibit 10.1 to the Registrant's Registration Statement on 
                Form S-1 filed on June 5, 1996 (File No. 333-04458))
     10.2       Stock Option Agreement between the Registrant and Peter J. Biere
                for stock option granted August 9, 1994 (incorporated by
                reference from exhibit 10.2 to the Registrant's Registration
                Statement on Form S-1 filed on June 5, 1996 (File No.
                333-04458))
     10.3       Form of Stock Option Agreement (used for all other stock options
                granted to executive officers prior to April 1, 1996)
                (incorporated by reference from exhibit 10.3 to the Registrant's
                Registration Statement on Form S-1 filed on June 5, 1996 (File
                No. 333-04458))
     10.4       Form of Stock Option Agreement (used for all other stock options
                granted to executive officers after March 31, 1996)
                (incorporated by reference from exhibit 10.4 to the Registrant's
                Registration Statement on Form S-1 filed on June 5, 1996 (File
                No. 333-04458))
     10.5       Form of Stock Option Agreement (used for all stock options
                granted to outside directors) (incorporated by reference from
                exhibit 10.16 to the Registrant's Registration Statement on Form
                S-1 filed on June 5, 1996 (File No. 333-04458))
     10.6       Multiple Zones International, Inc. 401(k) Plan (incorporated
                by reference from exhibit 10.5 to the Registrant's Registration
                Statement on Form S-1 filed on June 5, 1996 (File No.
                333-04458))
     10.7       Multiple Zones International, Inc. Employee Stock Purchase Plan
                (incorporated by reference from exhibit 10.6 to the Registrant's
                Registration Statement on Form S-1 filed on June 5, 1996 (File
                No. 333-04458))
     10.8       Multiple Zones International, Inc. Management Incentive Plan
                (incorporated by reference from exhibit 10.7 to the Registrant's
                Registration Statement on Form S-1 filed on June 5, 1996 (File
                No. 333-04458))
     10.9       Form of Indemnification Agreement (entered into with each of
                Peter J. Biere and the Registrant's outside directors)
                (incorporated by reference from exhibit 10.15 to the
                Registrant's Registration Statement on Form S-1 filed on June 5,
                1996 (File No. 333-04458))


<PAGE>

    10.10       Employment Agreement dated as of April 1, 1996 between the
                Registrant and Sadrudin J. Kabani (incorporated by reference
                from exhibit 10.13 to the Registrant's Registration Statement on
                Form S-1 filed on June 5, 1996 (File No. 333-04458))
    10.11       Employment Agreement dated as of July 14, 1997 between the
                Registrant and Lorne G. Rubis (incorporated by reference from
                exhibit 10.13 to the Annual Report on Form 10-K filed on March
                31, 1998 (File No. 000-28488))
    10.12       Consulting Agreement between the Registrant and Carol L. Miltner
                (incorporated by reference from exhibit 10.17 to the
                Registrant's Registration Statement on Form S-1 filed on June 5,
                1996 (File No. 333-04458))
OTHER MATERIAL CONTRACTS
    10.13       Standard Office Lease-Gross dated October 4, 1993 between the
                Registrant and Hewlett-Packard Company (incorporated by
                reference from exhibit 10.23 to the Registrant's Registration
                Statement on Form S-1 filed on June 5, 1996 (File No.
                333-04458))
    10.14       Office Lease dated April 1, 1996 between the Registrant and
                Renton Talbot Delaware, Inc. (incorporated by reference from
                exhibit 10.24 to the Registrant's Registration Statement on
                Form S-1 filed on June 5, 1996 (File No. 333-04458))
    10.15       Industrial Real Estate Lease dated April 10, 1997 between the
                Registrant and Pacific Industrial Park LLC (incorporated by
                reference from exhibit 10.18 to the Annual Report on Form 10-K
                filed on March 31, 1998 (File No. 000-28488))
    10.16       Ingram Micro Resale Agreement dated April 1, 1996 between Ingram
                Micro and the Registrant (incorporated by reference from exhibit
                10.25 to the Registrant's Registration Statement on Form S-1
                filed on June 5, 1996 (File No. 333-04458))
    10.17       Authorized Apple Catalog Reseller Sales Agreement between the
                Apple Computer, Inc. and the Registrant (incorporated by
                reference from exhibit 10.26 to the Registrant's Registration
                Statement on Form S-1 filed on June 5, 1996 (File No.
                333-04458))
    10.18       Storage and distribution Agreement dated September 28, 1992
                between the Registrant and Advanced Logistics Services Corp., as
                amended (incorporated by reference from exhibit 10.27 to the
                Registrant's Registration Statement on Form S-1 filed on June 5,
                1996 (File No. 333-04458))
    10.19       Amendment to Storage and Distribution Agreement dated December
                30, 1997 between the Registrant and Advanced Logistics Services
                Corp.
    10.20       Agreement for Wholesale Financing dated January 15, 1996, as
                amended, between the Registrant and Deutsche Financial Services
                Corporation (incorporated by reference from exhibit 10.19 to the
                Registrant's Registration Statement on Form S-1 filed on June 5,
                1996 (File No. 333-04458))
    10.21       Amendment to Agreement for Wholesale Financing dated April 23,
                1997, between the Registrant and Deutsche Financial Services
                Corporation (incorporated by reference from exhibit 10.24 to the
                Annual Report on Form 10-K filed on March 31, 1998 (File No.
                000-28488))
    10.22       Business Loan Agreement dated February 28, 1999, between the
                Registrant and U.S. Bank of Washington, National Association
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
     21.1       Subsidiaries of the Registrant
EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSELS
     23.1       Consent of  PricewaterhouseCoopers LLP
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
     27.1       Financial Data Schedule (December 31, 1998)


<PAGE>

                                   SIGNATURES


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


                                        Multiple Zones International, Inc.


      Date:  March 31, 1999
                                        BY:    /S/ FIROZ H. LALJI
                                           ----------------------------------
                                           Firoz H. Lalji, Chairman and
                                           Chief Executive Officer


                                        BY:   /S/     PETER J. BIERE
                                           ----------------------------------
                                           Peter J. Biere, Chief
                                           Financial 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 date indicated.

<TABLE>
<CAPTION>
          Signature                         Title                     Date
-------------------------------            --------               --------------
<S>                                        <C>                    <C>
/S/     JOHN H. BAUER                      Director               March 31, 1999
-------------------------------
John H. Bauer

/S/     JOHN T. CARLETON                   Director               March 31, 1999
-------------------------------
John T. Carleton

/S/     RICHARD E. CARTER                  Director               March 31, 1999
-------------------------------
Richard E. Carter

/S/     FIROZ H. LALJI                     Director               March 31, 1999
-------------------------------
Firoz H. Lalji

/S/     KATHLEEN S. PUSHOR                 Director               March 31, 1999
-------------------------------
Kathleen S. Pushor
</TABLE>


<PAGE>

               MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

Consolidated Balance Sheets
December 31, 1998 and 1997                                           26

Consolidated Statements of Operations and Comprehensive Income
Twelve months ended December 31, 1998, 1997 and 1996                 27

Statements of Shareholders' Equity
Twelve months ended December 31, 1998, 1997 and 1996                 28

Consolidated Statements of Cash Flows
Twelve months ended December 31, 1998, 1997 and 1996                 29

Notes to Consolidated Financial Statements                           30

Report of Independent Accountants                                    41


<PAGE>

               MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                       ----------------------
                                                                         1998          1997
                                                                       --------      --------
<S>                                                                    <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents                                            $ 19,092      $  1,645
  Receivables, net                                                       43,687        42,944
  Inventories, net                                                       48,543        40,169
  Prepaid expenses                                                        3,632         4,012
  Income taxes receivable                                                 2,460         1,127
  Deferred income taxes                                                   3,353         1,889
                                                                       --------      --------
    Total current assets                                                120,767        91,786
Property and equipment, net                                              10,384        12,417
Other assets                                                              1,896           607
                                                                       --------      --------
    Total assets                                                       $133,047      $104,810
                                                                       --------      --------
                                                                       --------      --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank lines of credit                                                  $ 2,032      $  2,084
  Accounts payable                                                       79,659        44,067
  Accrued liabilities and other                                           9,364         9,059
  Current portion of capital lease obligations                              911           961
  Income taxes payable                                                    1,200           540
                                                                       --------      --------
    Total current liabilities                                            93,166        56,711
Capital lease obligations, net of current portion                           338           892
Other                                                                     1,695         1,608
                                                                       --------      --------
    Total liabilities                                                    95,199        59,211
                                                                       --------      --------
Minority interest                                                           498           628
                                                                       --------      --------
Commitments and contingencies
Shareholders' equity:
  Common stock, no par value, 45,000,000 authorized
   and 13,173,692 shares issued and outstanding at
   December 31, 1998 and 13,041,464 shares at
   December 31, 1997                                                     38,434        37,751
  Retained earnings                                                        (982)        7,256
  Foreign currency translation adjustment                                  (102)          (36)
                                                                       --------      --------
    Total shareholders' equity                                           37,350        44,971
                                                                       --------      --------
    Total liabilities and shareholders' equity                         $133,047      $104,810
                                                                       --------      --------
                                                                       --------      --------
</TABLE>

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

<PAGE>

               MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                    (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                          ------------------------------------
                                                            1998          1997          1996
                                                          --------      --------      --------
<S>                                                       <C>           <C>           <C>
Net sales                                                 $501,441      $490,025      $457,007
Cost of sales                                              447,005       431,905       393,998
                                                          --------      --------      --------
Gross profit                                                54,436        58,120        63,009

Selling, general and administrative                         63,409        62,910        44,613
                                                          --------      --------      --------
Income (loss) from operations                               (8,973)       (4,790)       18,396
                                                          --------      --------      --------
Interest expense                                               598         1,096         1,500
Other (income) expense                                       2,774           414          (298)
Minority interest                                              102           108           195
                                                          --------      --------      --------
                                                             3,474         1,618         1,397
                                                          --------      --------      --------
Income (loss) before taxes                                 (12,447)       (6,408)       16,999
Provision (benefit) for income taxes                        (4,114)         (965)        6,125
                                                          --------      --------      --------
Net income (loss)                                         $ (8,333)     $ (5,443)     $ 10,874
                                                          --------      --------      --------
                                                          --------      --------      --------
Other comprehensive income (expense), net of tax:
  Foreign currency translation adjustment                      (11)           47           (81)
  Reclassification for gains included in net
   income                                                      (55)
                                                          --------      --------      --------
  Other comprehensive income (expense)                         (66)           47           (81)
                                                          --------      --------      --------
Comprehensive income (loss)                               $ (8,399)     $ (5,396)     $ 10,793
                                                          --------      --------      --------
Net income (loss) attributable to basic earnings
 per share                                                $ (8,333)     $ (5,443)     $ 10,415
Basic earnings (loss) per share                           $  (0.64)     $  (0.42)     $   0.94
Shares used in computing basic earnings (loss)
 per share                                                  13,079        12,965        11,104
Diluted earnings (loss) per share                         $  (0.64)     $  (0.42)     $   0.91
Shares used in computing diluted earnings (loss)
 per share                                                  13,079        12,965        11,912
</TABLE>

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

<PAGE>

               MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                            Foreign
                                                                               Retained     Currency
                                                        Common Stock           Earnings    Translation
                                                     Shares        Amount      (Deficit)   Adjustment      Total
                                                   ----------      -------     ---------   -----------    -------
<S>                                                <C>             <C>         <C>         <C>            <C>
Balance, January 1, 1996                            9,374,999      $ 2,750      $ 1,988       $  (2)      $ 4,736
Accretion of Series B Redeemable Convertible
  Preferred Stock                                                                 (459)                      (459)
Issuance of common stock                            2,537,106       27,303                                 27,303
Conversion of Series B Redeemable Convertible
  Preferred Stock                                     918,711        6,920                                  6,920
Exercise of stock options                              45,800           15                                     15
Net income                                                                       10,874                    10,874
Tax effect of stock options exercised                                               161                       161
Translation adjustments                                                                         (81)          (81)
                                                   ----------      -------      -------       -----       -------
Balance, December 31, 1996                         12,876,616       36,988       12,564         (83)       49,469
Issuance of common stock                               33,748          196                                    196
Exercise of stock options                             131,100          567                                    567
Net loss                                                                         (5,443)                   (5,443)
Tax effect of stock options exercised                                               135                       135
Translation adjustments                                                                          47            47
                                                   ----------      -------      -------       -----       -------
Balance, December 31, 1997                         13,041,464       37,751        7,256         (36)       44,971
Issuance of common stock                               33,223           96                                     96
Exercise of stock options                              53,695          242                                    242
Exercise of warrants                                   45,310          345                                    345
Net loss                                                                         (8,333)                   (8,333)
Tax effect of stock options exercised                                                95                        95
Translation adjustments                                                                         (66)          (66)
                                                   ----------      -------      -------       -----       -------
Balance, December 31, 1998                         13,173,692      $38,434      $  (982)      $(102)      $37,350
                                                   ----------      -------      -------       -----       -------
                                                   ----------      -------      -------       -----       -------
</TABLE>



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

<PAGE>

               MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                            1998          1997         1996
                                                          --------      --------     ---------
<S>                                                       <C>           <C>          <C>
Cash flows from operating activities:
  Net income (loss)                                       $ (8,333)     $ (5,443)    $  10,874
  Adjustments to reconcile net income to net
   cash from operating activities:
    Depreciation and amortization                            3,641         2,943         1,651
    Allowance for inventory and receivables                  2,197         3,528           669
    Write off of goodwill                                                  1,233
    Deferred income taxes                                   (2,179)       (1,246)         (567)
    Loss on disposal of assets                               3,651           376
    Minority interest                                         (102)          108           229
    Tax effect of stock options exercised                       95           135           161
    Changes in assets and liabilities excluding
     effect of acquisitions:
      Accounts receivable                                   (4,233)        4,626       (26,734)
      Inventory                                            (10,936)       35,157       (35,251)
      Prepaid expenses and other assets                       (466)        5,016        (1,968)
    Accounts payable                                        37,043       (36,044)       37,039
    Accrued liabilities                                        872         1,807         3,068
    Income taxes payable                                      (796)       (1,387)         (371)
                                                          --------      --------     ---------
        Net cash provided by (used in) operating
         activities                                         20,454        10,809       (11,200)

Cash flows from investing activities:
  Purchases of property and equipment                       (3,064)       (5,664)       (5,725)
  Acquisitions of subsidiaries                                                            (479)
  Other                                                                       51
                                                          --------      --------     ---------
       Net cash used in investing activities                (3,064)       (5,613)       (6,204)

Cash flows from financing activities:
  Payments under line of credit agreement                  (13,190)      (76,215)     (110,918)
  Borrowings under line of credit agreement                 13,202        75,372       101,853
  Net change in book overdrafts                                244        (2,985)         (260)
  Payments on capital leases                                  (641)       (1,250)         (769)
  Net proceeds from sale of common stock                       683           763        27,317
  Other                                                       (130)         (264)           12
                                                          --------      --------     ---------
       Net cash provided by (used in) financing
        activities                                             168        (4,579)       17,235

Effect of exchange rate on cash and cash equivalents          (111)           52           (70)
Net increase (decrease) in cash and cash equivalents        17,447           669          (239)
Cash and cash equivalents at beginning of period             1,645           976         1,215
                                                          --------      --------     ---------
Cash and cash equivalents at end of period                $ 19,092      $  1,645     $     976
                                                          --------      --------     ---------
                                                          --------      --------     ---------
Supplemental cash flow information:
  Cash paid during the period for interest                     598      $  1,095     $   1,500
  Cash paid for income taxes                              $ (1,356)     $    992     $   6,796
  Noncash investing and financing activity:
    Capital leases to finance purchases of  equipment     $     38      $    420     $   1,064
</TABLE>


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

<PAGE>

           MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS

Multiple Zones International, Inc. and its majority owned subsidiaries
(collectively the "Company") are international direct marketers of
microchip-based hardware, software, peripherals and accessories for users of
both the PC/Wintel ("PC") and Macintosh ("Mac") operating systems. The Company
has licensed its trade name to independent licensees that operate in a number of
countries worldwide.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and of its majority owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.

CASH EQUIVALENTS

Cash equivalents are all highly liquid investments with initial maturities of
three months or less.

CONCENTRATION OF CREDIT RISK

Cash balances subject to credit risk consist of cash balances held in one
financial institution in the United States and cash balances held in foreign
financial institutions. The Company has not experienced any losses associated
with cash balances and believes that there is minimal risk associated with the
cash balances. Concentration of credit risk with respect to trade receivables is
limited due to the Company's diverse customer base. The Company closely monitors
extensions of credit but does not require collateral.

INVENTORIES

Inventories consist primarily of computer software and hardware. Inventories are
valued at the lower of first-in, first-out (FIFO) cost or market. Balances at
December 31, 1998 and 1997 are net of allowances of approximately $3,834,000 and
$2,400,000 respectively.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation is based on the
straight-line method over the estimated useful lives of the related assets.
Depreciation for computer hardware and software is generally over 3 to 5 years.
Other property and equipment is depreciated over 3 to 10 years. Amortization of
capital leases is based on the straight-line method over the estimated useful
lives of the related assets or lease life, whichever is shorter, generally 3 to
10 years. Expenditures for maintenance and repairs are charged to expense as
incurred, while additions, renewals and betterments are capitalized. Gains or
losses from sales or retirements are included in other income and expense. The
Company evaluates the carrying value of long-lived assets based upon current and
anticipated undiscounted cash flows, and recognizes an impairment when it is
probable that such estimated future net income and/or cash flows will be less
than the asset carrying value. During the year ended December 31, 1997, the
Company evaluated the carrying value of goodwill on its foreign subsidiaries and
deemed the assets impaired. The Company's foreign subsidiaries are heavily
dependent on the Mac marketplace and with the weakness and uncertainty in this
market it was determined that the goodwill should be written off. The Company
recorded a charge of $1,400,000, included in Selling, general and administrative
expenses, to eliminate the goodwill.

INCOME TAXES

Deferred income taxes are provided based on the estimated future tax effects of
temporary differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

USE OF ESTIMATES

<PAGE>

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

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's foreign subsidiaries are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date and
revenues and expenses are translated at weighted average rates during the
period. The resulting translation adjustment is reflected as a separate
component of shareholders' equity on the balance sheet.

REVENUE RECOGNITION

Revenue on product sales is recognized at the time of shipment. The Company
generally allows its customers to return products within 30 days of purchase. An
allowance for product returns is established based on experience.

LICENSE FEES AND ROYALTIES

The Company records revenues from license fees in net sales when licenses are
granted. Royalty income from licensees is recorded in net sales based on a
percentage of the licensees' gross sales in the period sales are made.

CATALOG COSTS AND REVENUES

The Company produces and distributes catalogs at various intervals throughout
the year. Costs to produce and distribute individual catalogs, including paper,
printing, postage, production and design costs, are capitalized and amortized to
selling expense during the period in which the catalogs are generating
substantial sales (generally one month). At December 31, 1998 and 1997
$2,257,000 and $2,294,000, respectively, of capitalized advertising costs were
included with prepaid expenses. The Company receives market development funds
and cooperative advertising revenues from most vendors who have placed
advertisements in the Company's catalogs. These revenues are recognized as a
reduction of selling expense in the same period in which the corresponding
catalog cost is recognized as selling expense. Advertising expense net of co-op
advertising recovery is included in selling, general and administrative expenses
and totaled $3,300,000, $3,852,000 and $2,026,000 for the years ended December
31, 1998, 1997 and 1996, respectively.

The Company provides advertising in its catalogs in exchange for products or
services to be received from its vendors. These transactions are reported at the
estimated fair market value of the advertising provided by the Company, which
approximates the value of products or services received in exchange. Barter
revenues are recorded when the catalogs are published and receivables are
recorded for the products or services to be received. Barter expenses are
recorded when the products or services are used.

DEPENDENCE ON SALES OF MAC PRODUCTS

The Company is largely dependent on sales of Mac products manufactured by a
broad variety of vendors, including Apple. A decline in the demand for, or
availability of, Apple or other Mac products would likely have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company intends to pursue increased sales of PC
products to reduce its dependence on sales of Mac products, there can be no
assurance that the Company will be successful in doing so.

SEGMENT REPORTING

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. The Company will adopt the
statement in 1998. This statement, which is based on the management approach to
segment reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the major countries in which the Company holds
assets and reports revenues. The Company has determined it's business has two
segments, The United States and International.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, SFAS No. 133 requires that entities recognize

<PAGE>

all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Gains and losses
resulting from changes in the fair values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS No. 133 becomes effective for the Company beginning
January 1, 2000. The Company is currently assessing the impact, if any, to its
financial position or results of operations

Management believes that the adoption of this new standard will not have a
material impact on the Company's financial position or results of operations.

3.  FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain financial instruments, including cash, cash equivalents and bank
lines of credit, the carrying value approximates fair value.

4.  RECEIVABLES

    Receivables consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                     --------------------
                                                       1998         1997
                                                     -------      -------
    <S>                                              <C>          <C>
    Trade                                            $40,153      $32,381
    Co-op advertising                                  4,105        4,510
    Licensees                                            289          506
    Returns, rebates and other                         3,912        8,423
                                                     -------      -------
                                                      48,459       45,820
    Less allowances                                   (4,772)      (2,876)
                                                     -------      -------
                                                     $43,687      $42,944
                                                     -------      -------
                                                     -------      -------
</TABLE>

5.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              1998       1997
                                                            --------   --------
    <S>                                                     <C>        <C>
    Equipment                                               $  7,845   $  5,169
    Computer hardware and software under capital leases        3,915      6,773
    Computer software                                          3,742      3,995
    Furniture and fixtures and leasehold improvements          3,022      3,654
                                                             -------    -------
                                                              18,524     19,591
    Less accumulated depreciation and
     Amortization                                             (8,140)    (7,174)
                                                             -------    -------
              Property and equipment, net                    $10,384    $12,417
                                                             -------    -------
                                                             -------    -------
</TABLE>

Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1998 and 1997 of
$2,861,000 and $3,020,000, respectively.

<PAGE>

6.  BANK LINES OF CREDIT

At December 31, 1998, the Company had a $15,000,000 revolving bank line of
credit expiring August 31, 1999. Interest is charged at the prime lending rate
7.75% and 8.50% at December 31, 1998 and 1997, respectively. At December 31,
1998 and 1997 no borrowings were outstanding. The line is collateralized by the
Company's accounts receivable.

In May 1997 the Company obtained an additional $20,000,000 bank line of credit.
This line is collaterized by the Company's inventories. No amounts were
outstanding at December 31, 1998 or 1997.

The line of credit agreements contain certain covenants and restrictions
requiring, among other things, a minimum tangible net worth and certain other
financial ratios and restrictions. The Company has complied with the restrictive
covenants contained in the agreements.

Bank lines of credit also included $2,032,000 and $2,084,000 of borrowings by
the Company's foreign subsidiaries at December 31, 1998 and 1997, respectively.

The lines of credit are used by the Company under its cash management system to
cover checks presented for payment in excess of cash balances. As of December
31, 1998 and 1997 the Company had book overdrafts of $3,227,000 and $2,983,000
respectively, which are included with accounts payable.

7.  TRADE CREDIT ARRANGEMENT

In 1996, the Company entered into agreements with Deutsche Financial Services
("Deutsche") to facilitate the purchase of inventory from various suppliers
under certain terms and conditions. The agreement allows a collateralized
position in inventory financed by Deutsche up to an aggregate of $35,000,000. At
December 31, 1998, accounts payable included $31,421,000 owed to Deutsche.
Amounts purchased under these agreements generally require payment within a
period of 45 days, and no interest is charged. Interest will accrue on amounts
not paid by the end of this period at variable rates.

8.  INCOME TAXES

The income tax provision consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                    ------------------------------
                                                      1998        1997       1996
                                                    -------     -------     ------
    <S>                                             <C>         <C>         <C>
    Current                                         $(1,935)    $   281     $6,692
    Deferred                                         (2,496)     (2,671)      (567)
    Valuation allowance for deferred tax asset          317       1,425
                                                    -------     -------     ------
    Total                                           $(4,114)    $  (965)    $6,125
                                                    -------     -------     ------
                                                    -------     -------     ------
</TABLE>

<PAGE>

The components of deferred taxes were as follows (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           --------------------
                                                            1998         1997
                                                           -------      -------
    <S>                                                    <C>          <C>
    Assets:
      Allowance for doubtful accounts                      $ 1,413      $   738
      Inventory allowances                                   1,261          643
      Inventory capitalization                                  50           63
      Property and equipment depreciation                       75
      Deferred rent                                            624          593
      Accrued liabilities and other                            835          445
      Net operating losses                                   1,849        1,579
      Valuation allowance                                   (1,708)      (1,391)
                                                           -------      -------
                                                           $ 4,399      $ 2,670
                                                           -------      -------
    Liabilities:
      Property and equipment depreciation                               $  (423)
                                                           -------      -------
                                                                        $  (423)
                                                           -------      -------
    Net deferred tax asset                                 $ 4,399      $ 2,247
                                                           -------      -------
                                                           -------      -------
</TABLE>

The net deferred tax asset is recognized in the accompanying balance sheet as
follows (in thousands):

<TABLE>
    <S>                                                    <C>         <C>
    Current deferred tax asset                             $3,353      $1,889
    Non-current deferred income tax asset,
     net of valuation allowance of $1,708
     in 1998 and $1,391 in 1997.                            1,046         358
                                                           ------      ------
    Net deferred tax asset                                 $4,399      $2,247
                                                           ------      ------
                                                           ------      ------
</TABLE>

The deferred tax asset valuation allowance is primarily related to deferred tax
assets of foreign operations, including net operating loss carryforwards in
several foreign markets. Although realization is not assured, management
believes it is more likely than not that the unreserved deferred tax asset will
be realized through future taxable income or taxable loss carrybacks. The
Company's foreign net operating losses begin expiring in 2002. In certain
countries the losses never expire.

A reconciliation of the effective income tax rate on income before taxes with
the federal statutory rate follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                     1998      1997     1996
                                                     ----     -----     ----
    <S>                                              <C>      <C>       <C>
    Statutory rate                                   35.0%     35.0%    35.0%
    State income tax                                  1.4       1.4      1.4
    Other                                             0.9       0.9     (0.4)
    Valuation allowance for deferred tax assets      (2.5)    (22.2)
                                                     ----     -----     ----
    Effective tax rate                               33.0%     15.1%    36.0%
                                                     ----     -----     ----
                                                     ----     -----     ----
</TABLE>

<PAGE>

9.  COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases its office and returns warehouse space under noncancelable
operating leases which expire through 2003. Under the terms of certain leases,
the Company is responsible for its share of taxes, insurance and common area
charges. At December 31, 1998, future minimum payments under operating leases
were as follows (in thousands):

<TABLE>
     <S>                                        <C>
     1999.....................................  $2,007
     2000.....................................   1,884
     2001.....................................   1,846
     2002.....................................   1,752
     2003.....................................   1,006
                                                ------
          Total...............................  $8,495
                                                ------
                                                ------
</TABLE>

Rental expense totaled $2,657,000, $2,522,000 and $1,532,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.

OBLIGATIONS UNDER CAPITAL LEASES

The Company leases equipment and software under various long-term capital
leases. Future lease payments as of December 31, 1998 were as follows (in
thousands):

<TABLE>
     <S>                                          <C>
     1999.......................................  $  962
     2000.......................................     255
     2001.......................................      93
                                                  ------
     Total future minimum lease payments           1,310
     Less amount representing interest               (61)
                                                  ------
     Present value of net minimum lease payments   1,249
     Less current portion                           (911)
                                                  ------
     Noncurrent portion                           $  338
                                                  ------
                                                  ------
</TABLE>

DISTRIBUTION CENTER

The Company has contracted with a freight company to provide and operate its
primary distribution center under a contract that expires August 31, 1999. Under
this contract, the Company pays a flat rate for each order filled.

LETTERS OF CREDIT

The Company had unused letters of credit totaling $2,526,000 at December 31,
1998.

ACQUISITIONS

Certain of the purchase agreements relating to the Company's acquisitions of
foreign subsidiaries allow the minority owners to sell their remaining interests
to the Company at the end of three years. The purchase price for the remaining
interests is based on a multiple of the subsidiaries' net income for the
three-year period. On February 25, 1999, the minority shareholders of the 
Company's German subsidiary exercised their option to sell their minority 
shares to the Company, which the Company accepted. The Company is currently 
valuing the purchase price of the minority shares, the range of which is 
estimated to be between $1,300,000 and $3,300,000.

LEGAL PROCEEDINGS

Various claims and actions, considered normal to the Company's business, have
been asserted and are pending against the Company. The Company believes that
such claims and actions should not have a material adverse effect upon the
Company's financial position or results of operations.

10.  SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK

On October 27, 1995, the Company completed a sale of 612,476 shares of Series B
Preferred Stock for $7,000,000. Each share of Series B Preferred Stock was
entitled to a cumulative annual dividend of $1.14 per share, payable only to the
extent that dividends were declared to common shareholders. Voluntary and
involuntary liquidation value of each preferred share was $11.43 plus accrued
and unpaid dividends. Offering costs related to the sale were $691,992. Upon
consummation of the initial public offering all outstanding shares

<PAGE>

of Series B Preferred Stock converted to 918,711 shares of common stock.

Prior to the conversion of the Series B Preferred Stock to Common Stock the
difference between the issuance price, net of offering costs, of the Series B
Preferred Stock and the redemption value was accreted periodically by a charge
to retained earnings. The carrying value of the Series B Preferred Stock was
also increased for accrued but unpaid dividends.

11.  SHAREHOLDERS' EQUITY

COMMON STOCK

On January 2, 1996, the number of authorized shares of common stock was
increased to 45,000,000. On June 3, 1996, the Company declared a common stock
split which had the effect of increasing the shares issued and outstanding to
9,374,999. All share amounts have been restated to give effect to these stock
splits.

On July 2, 1996, the Company issued 2,200,000 shares of Common Stock at $12.00
per share in an initial public offering. On July 12, 1996, an additional 330,000
shares were issued pursuant to the underwriters' over-allotment option. The
proceeds to the Company were $27,237,000, net of the underwriting discount and
other direct expenses of $3,123,000. In connection with the offering, the
Company also issued warrants for the purchase of 45,310 shares of common stock
exercisable at $7.62 per share. The warrants were exercised during the fourth
quarter of 1998.

STOCK OPTIONS

In 1993, the Company adopted a Stock Incentive Plan (the "Plan") whereby the
Company may issue incentive or nonqualified stock options, restricted shares,
stock units or stock appreciation rights to key employees. As of December 31,
1997, only stock options have been granted under the plan. Stock options are
granted solely at the discretion of the Board of Directors and are generally
issued at a price equal to the estimated fair market value of the stock at the
date of grant. The term of each option granted is for such period as determined
by the Board of Directors, but not more than ten years from date of grant.
Options may generally be exercised based on a vesting schedule determined by the
Board of Directors, and the plan provides for acceleration of outstanding
options under certain conditions, including certain changes in control of the
Company. Grants are nontransferable, and shares acquired upon exercise of
options may be subject to repurchase at the option of the Company under certain
conditions. The maximum number of shares to be granted under the Plan was
1,650,000 at December 31, 1998.

In addition, the Company has granted options to the Board of Directors. 
Options outstanding to these individuals at December 31, 1998, were 93,125 
shares at option prices of $2.75 -$10.50 per share. 

On June 1, 1998, the Board of Directors adopted a resolution for all 
employees below the level of vice-president, repricing all options granted 
and unexercised prior to June 1, 1998 to that day's fair market value, or 
$3.13 per share. The total number of shares re-priced was 344,672. While the 
vesting periods were not affected, employees must wait one year to exercise 
vested shares at the new price.

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 the fair value at the grant date of the awards, consistent
with the provisions of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                      ---------------------------------
                                                        1998         1997        1996
                                                      -------      -------      -------
<S>                                                   <C>          <C>          <C>
Net earnings (loss) - as reported                     $(8,333)     $(5,443)     $10,874
                                                      -------      -------      -------
                                                      -------      -------      -------
Net earnings (loss) - pro forma                       $(8,575)     $(6,816)     $10,200
                                                      -------      -------      -------
                                                      -------      -------      -------
Diluted earnings (loss) per share - as reported       $ (0.64)     $ (0.42)     $  0.91
                                                      -------      -------      -------
                                                      -------      -------      -------
Diluted earnings (loss) per share - pro forma         $ (0.66)     $ (0.53)     $  0.86
                                                      -------      -------      -------
                                                      -------      -------      -------
</TABLE>

<PAGE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: expected
volatility of 98%, 75% and 66%; risk-free interest rate of 5.1%, 6.2% and 6.5%;
and expected lives of 4 years.

Information regarding the stock option plans is as follows:

<TABLE>
<CAPTION>
                                                              WEIGHTED-AVERAGE
                                                    OPTIONS     EXERCISE PRICE
                                                 ----------    ---------------
<S>                                              <C>          <C>
Outstanding, January 1, 1996                        456,000            $ 3.48
  Granted                                           789,500             11.66
  Exercised                                         (45,800)             0.32
  Cancelled                                        (104,940)             3.77
                                                 ----------    --------------
Outstanding, December 31, 1996                    1,094,760              9.21
  Granted                                         1,422,816              9.43
  Exercised                                        (131,100)             4.33
  Cancelled                                        (717,851)            10.29
                                                 ----------    --------------
Outstanding, December 31, 1997                    1,668,625              9.32
  Granted                                         1,212,905              3.53
  Exercised                                         (53,695)             4.11
  Cancelled                                      (1,582,539)             8.58
                                                 ----------    --------------
Outstanding, December 31, 1998                    1,245,296            $ 4.84
                                                 ----------    --------------
                                                 ----------    --------------
1998 option price range for exercised shares                   $0.33 - $11.13
1998 weighted-average fair value of options
 granted during the year                                               $ 2.23
</TABLE>

The following tables summarize information about fixed-price stock options
outstanding at December 31, 1998.

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING
       -----------------------------------------------------------------------
                                                 WEIGHTED-
                                NUMBER              AVERAGE          WEIGHTED-
              RANGE OF     OUTSTANDING            REMAINING            AVERAGE
       EXERCISE PRICES     AT 12/31/98    CONTRACTUAL YEARS     EXERCISE PRICE
       ---------------     -----------    -----------------     --------------
       <S>                 <C>            <C>                   <C>
         $0.33 - $3.13         610,255                 9.00              $2.94
         $3.38 - $5.75         427,460                 9.04               4.48
        $6.67 - $25.88         207,581                 7.81              11.17
       ---------------     -----------    -----------------     --------------
        $0.33 - $25.88       1,245,296                 8.82              $4.84
       ---------------     -----------    -----------------     --------------
       ---------------     -----------    -----------------     --------------
</TABLE>

<TABLE>
<CAPTION>
                                 OPTIONS EXERCISABLE
              --------------------------------------------------------
                     RANGE OF            NUMBER       WEIGHTED-AVERAGE
              EXERCISE PRICES       AT 12/31/98         EXERCISE PRICE
              ---------------       -----------       ----------------
              <S>                   <C>               <C>
                $0.33 - $3.13            61,765                  $2.68
                $3.38 - $5.75            56,125                   4.66
               $6.67 - $25.88            79,234                  11.71
              ---------------       -----------       ----------------
               $0.33 - $25.88           197,124                  $6.86
              ---------------       -----------       ----------------
              ---------------       -----------       ----------------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In December 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which was effective upon the completion of the public offering.
Under the terms of the Purchase Plan, employees other than officers and
employees of the Company's subsidiaries may purchase a total of up to 450,000
shares of common stock. The purchase price per share is 85% of the lower of the
market value per share of common stock determined as of the beginning or end of
the quarterly purchase period specified in the Purchase Plan.

<PAGE>

12.  EARNINGS PER SHARE

The Company has 45,000,000 common shares issued, with 13,173,692 outstanding at
December 31, 1998. The Company has also granted options and warrants to purchase
common shares to the employees and directors of the Company and had also issued
convertible preferred stock. The options, warrants and preferred stock may have
a dilutive effect on the calculation of earnings per share. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations as required by SFAS 128 (in thousands).

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                    1998         1997        1996
                                                  -------      -------      -------
<S>                                               <C>          <C>          <C>
BASIC EARNINGS PER SHARE:
Net income (loss)                                 $(8,333)     $(5,433)     $10,874
Less: Series B accretion and dividends                                         (459)
                                                  -------      -------      -------
Income available to common shareholders           $(8,333)     $(5,433)      10,415
                                                  -------      -------      -------
                                                  -------      -------      -------
Weighted average shares outstanding                13,079       12,965       11,104
                                                  -------      -------      -------
                                                  -------      -------      -------
Basic earnings (loss) per share                   $ (0.64)     $ (0.42)     $  0.94
                                                  -------      -------      -------
                                                  -------      -------      -------
DILUTED EARNINGS PER SHARE:
Net income (loss)                                 $(8,333)     $(5,433)     $10,874
Weighted average shares outstanding                13,079       12,965       11,104
Series B Preferred stock                                                        461
Stock options and warrants                                                      347
                                                  -------      -------      -------
Total commons shares and dilutive securities       13,079       12,965       11,912
                                                  -------      -------      -------
                                                  -------      -------      -------
Dilutive earnings (loss) per share                $ (0.64)     $ (0.42)     $  0.91
                                                  -------      -------      -------
                                                  -------      -------      -------
</TABLE>

All options and warrants to purchase common stock were excluded from the 
computation of diluted earnings per share for the year ended December 31, 1998 
and 1997 because the effect of the options and warrants on the calculation 
would have been antidilutive.

13.  DEFERRED INCOME 401(k) PLAN

The Company offers a deferred income 401(k) plan to substantially all full time
employees with a minimum of six months of service. Participants may make
tax-deferred contributions of up to 15% of annual compensation subject to
certain limitations specified by the Internal Revenue Code.

14.  RELATED PARTY TRANSACTIONS

Related party transactions for 1998, 1997 and 1996 were as follows (in
thousands):

<TABLE>
<CAPTION>
                                    YEAR ENDED DECEMBER 31,
                                  ---------------------------
                                   1998      1997       1996
                                  ------    ------     ------
     <S>                          <C>       <C>        <C>
     Sales to licensees           $1,009    $1,660     $2,586
</TABLE>

15.  SEGMENT INFORMATION

The Company has determined its reportable segments based on geographic areas 
of operation. The Company's reportable segments are the United States and 
International. The Company's international operations consist of majority 
owned subsidiaries primarily concentrated in Europe. Intersegment revenues 
are eliminated as the operations of the segments are consolidated.

<PAGE>

A summary of the Company's operations by geographic area follows (in thousands):

<TABLE>
<CAPTION>
                                     UNITED STATES     INTERNATIONAL     ELIMINATIONS        TOTAL
<S>                                  <C>               <C>               <C>              <C>
YEAR ENDED DECEMBER 31, 1998
Net sales                                 $421,625          $ 80,838         $(522)       $501,441
Depreciation and amortization               (3,246)             (395)                       (3,641)
Income from operations                     (10,369)            1,396                        (8,973)
Interest revenue (expense)                     245              (322)                          (77)
Total assets                               121,178            15,239        (3,369)        133,047

YEAR ENDED DECEMBER 31, 1997
Net sales                                 $419,360          $ 71,552         $(887)       $490,025
Depreciation and amortization               (2,677)             (266)                       (2,943)
Income from operations                      (1,616)           (3,174)                       (4,790)
Interest revenue (expense)                    (702)             (381)                       (1,083)
Total assets                                89,710            17,311        (2,211)        104,810

YEAR ENDED DECEMBER 31, 1996
Net sales                                 $397,653          $ 60,743       $(1,589)       $457,077
Depreciation and amortization               (1,431)             (220)                       (1,651)
Income from operations                      16,972             1,424                        18,396
Interest revenue (expense)                  (1,087)             (130)                       (1,217)
Total assets                               137,999            16,926        (5,124)        149,801
</TABLE>


<PAGE>

16.  SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED)

The following information is for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
(in thousands, except per share data)
                                                     First        Second          Third        Fourth
DECEMBER 31, 1998                                  Quarter       Quarter        Quarter       Quarter
                                                  --------      --------       --------      --------
<S>                                               <C>           <C>            <C>           <C>
Net sales                                         $117,809      $112,872       $124,329      $146,431
Cost of sales                                      103,891       102,740        110,199       130,175
                                                  --------      --------       --------      --------
Gross profit                                        13,918        10,132         14,130        16,256
SG&A expenses                                       15,908        18,364         13,877        15,260
                                                  --------      --------       --------      --------
Income (loss) from operations                       (1,990)       (8,232)           253           996
Other expense                                          (32)        3,465             27            14
                                                  --------      --------       --------      --------
Income (loss) before income  taxes                  (1,958)      (11,697)           226           982
Provision  (benefit from) for  income taxes           (724)       (3,930)            77           463
                                                  --------      --------       --------      --------
Net income (loss)                                 $ (1,234)     $ (7,767)      $    149      $    519
                                                  --------      --------       --------      --------
                                                  --------      --------       --------      --------
Diluted earnings (loss) per  share(1)             $  (0.09)     $  (0.59)      $   0.01      $   0.04
                                                  --------      --------       --------      --------
                                                  --------      --------       --------      --------
</TABLE>

<TABLE>
<CAPTION>
                                                     First        Second          Third        Fourth
DECEMBER 31, 1997                                  Quarter       Quarter        Quarter       Quarter
                                                  --------      --------       --------      --------
<S>                                               <C>           <C>            <C>           <C>
Net sales                                         $122,755      $108,043       $115,725      $143,502
Cost of sales                                      106,208        97,057        102,694       125,946
                                                  --------      --------       --------      --------
Gross profit                                        16,547        10,986         13,031        17,556
SG&A expenses                                       12,928        18,285         15,279        16,418
                                                  --------      --------       --------      --------
Income (loss) from operations                        3,619        (7,299)        (2,248)        1,138
Other expense                                          389           317            326           586
                                                  --------      --------       --------      --------
Income (loss) before income  taxes                   3,230        (7,616)        (2,574)          552
Provision  (benefit from) for  income taxes          1,164        (1,979)          (236)           86
                                                  --------      --------       --------      --------
Net income (loss)                                 $  2,066      $ (5,637)      $ (2,338)     $    466
                                                  --------      --------       --------      --------
                                                  --------      --------       --------      --------
Diluted earnings (loss) per  share                $   0.16      $  (0.44)      $  (0.18)     $   0.04
                                                  --------      --------       --------      --------
                                                  --------      --------       --------      --------
</TABLE>

(1) Net income (loss) per share is computed independently for each of the 
quarters presented therefore, the sum of the quarterly net income (loss) per 
share does not equal the total computed for the year due to shares issued each 
quarter.

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


Board of Directors
Multiple Zones International, Inc.
Renton, Washington

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Multiple Zones International, 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. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


PRICEWATERHOUSECOOPERS LLP

Seattle, Washington
February 8, 1999