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 October 2, 1998
                         Commission File Number 2-60487

                              UNITED GROCERS, INC.

               OREGON                                   93-0301970


                     6433 S.E. Lake Road (Milwaukie, Oregon)
                  Post Office Box 22187, Portland, Oregon 97222


Registrant's telephone number, including area code:  (503) 833-1000

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

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

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes  . No X .

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 to this Form 10-K. --X--

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant.

$29,046,121  (computed on basis of 1998 adjusted book value and number of shares
outstanding at January 15, 1999).

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

523,165 shares of common stock, $5 par value, as of January 15, 1999.

Documents incorporated by reference:   None


                                       1
<PAGE>


                                     PART 1
Item 1. Business

        The registrant,  United Grocers, Inc. ("United" or "the Company"), is an
Oregon business corporation  primarily engaged in the wholesale grocery and food
service  distribution  business.  The Company was organized in 1915 and operates
and is taxed as a cooperative.

        The  Company  supplies  groceries  and related  products to  independent
retail grocers located in Oregon, Western Washington and Northern California. In
addition,  the Company and certain of its wholly owned subsidiaries provide many
services needed for the operation of a grocery business.  These services include
marketing assistance, engineering, accounting, and financing.

        During  fiscal  1998,  the Company  sold its Cash & Carry  division  and
insurance  subsidiaries.  Further  information on these transactions is found in
Item 7 of this report.


Membership

        Independent  retail grocers within  United's market area are eligible to
apply for  membership.  All applicants for membership are subject to approval by
United's  board of  directors  on the  basis  of  financial  responsibility  and
operational  ability.  On approval,  and subject to compliance  with  applicable
securities  laws,  applicants are required to purchase shares of United's common
stock  ("Membership  Stock").  United  had 250  members  operating  a  total  of
approximately  353 retail grocery stores at October 2, 1998. At October 3, 1997,
United had 254 members operating 359 retail grocery stores.

        By pooling the buying power of its  members,  United is able to purchase
goods in large quantities at prices lower than the prices generally available to
independent retail grocers. The savings from the bulk purchases are passed along
to members in the form of rebates, allowances and patronage dividends.

        United may also pay its members annual patronage  dividends based on the
overage, or excess of net sales over cost of goods sold, on sales to members for
the year.  Each year United's  board of directors  determines the portion of the
overage which may be distributed as patronage  dividends.  Decisions  concerning
the  portion  of the  overage to be  retained  are based  upon  various  factors
including  United's  future  capital needs and the amount of earnings  available
from  operations not qualifying for  distribution  as patronage  dividends.  The
patronage  dividends,  if any, are allocated  among the members in proportion to
the  contribution  to United's  gross  profit  (before  rebates and  allowances)
attributable  to their  purchases  from United.  Any  patronage  dividends  have
historically been paid partly in cash and partly in Membership Stock.

        No member or other customer of United accounts for as much as 10 percent
of its  sales.  Management  believes  that  the  loss of any one or a few of its
members or other  customers  would not have a material effect on its business or
financial condition.


                                       2
<PAGE>

Member Services

        United  provides a number of retail  services to its  members.  Services
which do not carry a  specific  fee or  charge  include  marketing  information,
merchandising  assistance,  competitive retail price reporting and developmental
services such as store site selection, design and engineering.

        United  also  offers  its  members,  at  a  fee,  complete  bookkeeping,
accounting and tax services for their retail operations.  A computerized payroll
service is also available.  Other miscellaneous  retail services which generally
carry a scheduled fee assessment include customized retail pricing, retail shelf
"unit pricing," and retail information service products.

        Members can receive finance  services from United's  subsidiary,  United
Resources,  Inc.("United Resources").  United Resources makes loans and provides
other financial services to members.  Loans to members are generally made at one
and three  quarters  to two and one  quarter  percentage  points  over the prime
interest  rate.  Such loans  generally  are for terms of one to ten years.  Loan
funds are  obtained  under a note  purchase  agreement  with  National  Consumer
Cooperative  Bank at rates  varying with market  interest  rates.  At October 2,
1998,  the  aggregate  principal  amount of  member  loans  outstanding  due the
subsidiary was $15,744,218.  The subsidiary's  interest income for the year then
ended was  approximately  $1,261,000.  In the normal  course of its  activities,
United  Resources  acquires  retail stores  through  foreclosure or purchase and
operates them on a temporary  basis.  United Resources owned four such stores at
October 2, 1998.  During 1998,  United  Resources  acquired three stores through
foreclosure,  and disposed of three stores through sale or closure. During 1997,
United Resources  acquired two stores through  foreclosure,  and disposed of two
stores through sale or closure.

        United,  where appropriate,  leases retail space and subleases the space
to qualified members to enable them to obtain prime commercial space. At October
2, 1998,  United was obligated on 47 such leases,  compared to 49 such leases at
October 3, 1997.  During 1996, the Company changed its policy of requiring lease
insurance on subleases whereby United is the main lessee, and replaced the lease
insurance with a program whereby United  recognizes  profits on its subleases to
compensate  the  Company  for its  sublease  risk.  See  Notes  to  Consolidated
Financial Statements for more information on these subleases.

Technology

        During  1998,  United  Grocers  strategically  focused  its  Information
Services group on building  systems  platforms to allow for future  growth,  and
doing  maintenance on existing  systems for peak performance and to minimize any
difficulty  with the "Year  2000"  problem.  Further  discussion  of "Year 2000"
preparations is found in Item 7 of this report.

        In the Retail  Systems  area,  United  Grocers  has  continued  to build
strategic  computer system platforms that will assist independent retail grocers
in competing in today's  marketplace against the large chains. To take advantage
of the  economies  of scale  enjoyed  by  retail  chains  with the  development,
purchase,  implementation,  and support of computer systems,  United has taken a
strong leadership role in providing a high-quality,  standard  computing package
for its retail  customers.  This standard  platform has been marketed  under the
name Project Enterprise.

        Project Enterprise bundles software,  hardware, network connections, and
maintenance  together into a single  product  offering.  The Project  Enterprise
platform includes an integrated store processor (I.S.P.), United's U-Link family
of services,  a laser printer, and United's Ready Pay electronic payment system.
This entire  system is placed in the retail  location  and store  personnel  are
trained by United staff. The retailer's only financial  responsibility is to pay
a weekly fee for the use of the system. Project Enterprise has allowed United to
make a strong  computing  system  affordable  to its retailers  while  providing
volume  discounts  for  hardware  and  maintenance.  United  believes it can now
leverage and build upon these systems in a similar  fashion as in a standardized
chain  environment.  The United Retail Systems group has  implemented 10 Project
Enterprise systems this year, resulting in a total of 153 systems implemented at
October 2, 1998.

                                       3
<PAGE>

Food Service Distribution

        The Company's food service  distribution  operations were sold in May of
1998 to a national  operator of "Cash & Carry" type grocery  outlets.  Also sold
during 1998 was a subsidiary,  Rich and Rhine,  Inc.,  which  targeted  sales to
convenience stores. The Company continues to supply products to the Cash & Carry
stores  through an agreement  with the new owner.  Further  discussion  of these
transactions is found in Item 7 of this report.

Insurance

         The Company's  insurance  operations were sold in July of 1998. Results
of  insurance  operations  for the 1997 and 1998  years are  included  under the
heading  "Discontinued  Operations," in the  Consolidated  Financial  Statements
included in this report. Further discussion of this transaction is found in Item
7 of this report.


Competition

         The grocery industry is characterized by intense competition.  United's
wholesale  grocery  marketing  area includes  Oregon,  Northern  California  and
Western  Washington.  United's  principal  competitors are two national  grocery
wholesalers  (which  because of their  operations in other areas are larger than
United) and four regional grocery wholesalers.

         Other competitors include a number of local grocery  wholesalers,  many
of whom are limited to special product lines, such as candy, meat or produce, or
sell only to limited  market  segments,  such as  restaurants  or  institutions.
United also competes with a significant  number of producers  which market their
products directly to retailers and with several chain store  organizations which
control both their wholesale and retail operations.

         Based  on  information  available  to it,  United  estimates  that  its
members,  many  of  whom  are in  competition  with  one  another,  account  for
approximately  14% of the retail grocery market within United's  marketing area.
Although  members are free to purchase from sources  other than United,  members
generally  purchase  goods (except  goods which United does not supply,  such as
beer  and  wine)  principally  from  United.  United  does  not  account  for  a
significant percentage of the national wholesale grocery market.

         Recent  trends in the  results  of the  Company's  member  stores  have
continued.  In general,  members  outside major  metropolitan  areas,  and those
operating newer stores, price oriented or super store formats registered various
gains  in unit  volume.  Members  operating  average-sized  conventional  stores
generally registered smaller unit volume increases. As a result of these trends,
the  Company's  member  unit  volume  in  the  distribution   segment  increased
approximately 3% in 1998 and 2% in 1997.


                                       4
<PAGE>

Employees

         United  employed  approximately  1,200  persons  at  October  2,  1998.
Approximately 810 of its employees are members of Teamster or other unions.

         United's  collective  bargaining  agreements expire in April, 2001. The
Company considers its employee relations to be satisfactory.

Supplies

         United  purchases  goods from a wide  variety of sources  ranging  from
local farmers to large multinational corporations. United attempts to obtain the
lowest possible price by pooling the buying power of its members.  United is not
dependent on any single  supplier and the loss of any single  supplier would not
have a material effect on its business.

         United  is  one of the  six  stockholders  of  Western  Family  Holding
Company, a corporation which pools the buying power of its stockholders in order
to obtain lower cost merchandise. Purchases from Western Family Holding Company,
which  accounted  for about 11% of United's  total  purchases in fiscal 1998 and
fiscal 1997, are distributed under labels such as "Western Family."

         United's  operations are not of a type which  ordinarily  result in the
discharge of  significant  quantities of  pollutants.  United  believes that its
operations   substantially   meet  or  exceed   all   applicable   environmental
regulations.


Income Taxes

         United operates and is taxed as a cooperative.  Accordingly,  patronage
dividends are not included in United's  taxable  income but are instead taxed to
the individual members receiving the patronage  dividends.  The Internal Revenue
Code of 1986, as amended ("Code") requires that not less than 20 percent of each
member's patronage dividend be paid in cash.  United's patronage dividend policy
meets that  requirement,  providing for cash payments of up to 100% of dividends
based on ratios of the value of stock holdings by member stores to their average
weekly purchases, and total number of shares of stock owned. Patronage dividends
not paid in cash are paid in additional  Membership Stock, subject to compliance
with applicable  securities laws.  Members are required to agree to abide by all
United's bylaw provisions, including those applicable to Federal income taxation
of patronage dividends.  Accordingly,  members must report as taxable income the
total amount of patronage  dividends,  whether paid in cash or Membership Stock,
in the year such  patronage  dividends  are  received,  and such amounts are not
taxable to United.

         United is taxed on income  which does not qualify for  distribution  as
patronage  dividends  and on the portion of income which is not  distributed  to
members.  United's  subsidiaries  retain  all  profits  (or  losses)  from their
operations and are part of the consolidated Federal income tax return.


                                       5
<PAGE>

Government Contract Business

         The Company does not generate significant business based upon contracts
with local, state or federal government entities.

Forward-Looking Statements

         Statements   above   regarding   future  events  or   performance   are
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of 1995.  As with all  forward-looking  statements,  the
forward-looking   statements   made  by  the  Company   herein  are  subject  to
uncertainties  that could cause actual results to differ  materially  from those
projected,  including  without  limitation,  uncertainties  inherent in business
plans  and the  changing  of  business  methods,  uncertainties  related  to the
response of  customers  and  suppliers  to  changing  business  strategies,  and
uncertainties concerning the outcome of sales of subsidiaries or divisions.


Item 2.  Properties

         United  operates  four  distribution  centers.  Two of the  centers are
owned; the other two are leased. Its main distribution  center (owned),  located
in  Milwaukie,  Oregon,  contains  over 815,000  square feet of warehouse  space
situated on a 62-acre  site owned by United.  Also at this  location  are 84,900
square feet of office  space,  a  20,000-square-foot  truck repair  shop,  and a
114,000-square-foot frozen food distribution center.

         United's Southern Oregon division distribution center (owned),  located
in Medford,  Oregon,  contains  approximately  200,000  square feet of warehouse
space, plus related office and maintenance  areas. In December 1998, the Company
sold  the  Medford  warehouse  and  will  lease  back  approximately  30% of the
facility.

         Its  California  grocery  distribution  center  (leased),   located  in
Modesto,  California,  contains  over  275,000  square feet of  warehouse  space
situated  on a 30-acre site.  Also at this  location  are 12,900  square feet of
office space, and a 10,000-square-foot truck repair shop.

        United's California refrigerated  distribution center (leased),  located
in Tracy, California, contains approximately 160,000 square feet of refrigerated
warehouse space,  with areas for fresh meats and deli products and frozen foods.
Also at the site are related office and maintenance areas.

         United's   distribution   center  warehouses  are  modern,  one  floor,
sprinklered,  concrete construction buildings. Two of the warehouses are subject
to  various  mortgages,  the terms of which are  summarized  in the Notes to the
Consolidated Financial Statements.

                                       6
<PAGE>

         United and its  subsidiaries  operate a truck fleet  consisting  of 140
tractor cabs and 300 dry freight and refrigerated  semitrailers,  including both
owned and leased units.

         United leases a mainframe  computer,  together with related  peripheral
equipment, under various leases expiring in December 1999.

         United,  as  described  under  "Services,"  is also the prime lessee of
certain retail stores,  which are subleased to members,  totaling  approximately
1.2 million square feet.  Further,  United and its  subsidiaries are the lessees
and operators of three retail stores acquired  through  foreclosure and purchase
totaling an  additional  99,000 square feet.  United owns an  additional  retail
store occupying approximately 70,000 square feet.


         United leases several warehouses with lease terms and rents as follows:

                                    Area in           Lease         Monthly
Facility Type     Location          Square Feet       Expiration    Rent
-------------     --------          -----------       -----------   ----
Warehouse         Santa Rosa, CA      244,000            7/27/05   $80,250
                  Modesto, CA         275,000            7/27/05   $74,250
                  Tracy, CA           160,166            7/27/05   $84,888
                  Portland, OR         16,000            6/30/02   $ 7,236
                  Milwaukie, OR         9,600            9/30/00   $ 2,836
                  Milwaukie, OR        14,097           12/31/02   $15,272
                  Woodland, CA         68,400           10/01/05   $24,640


Item 3.  Legal Proceedings

         The Company is a party to routine  legal  proceedings  not  expected to
have a material effect on its business.


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

         At the  annual  meeting  of the  shareholders  of the  Company  held on
February  25,  1998,  Floyd West,  Peter J. O'Neal,  and Mary J.  McDonald  were
elected to replace those directors whose terms had expired.  The number of votes
received by each of the six nominees was as follows:

                         Floyd West          117
                         Peter J. O'Neal     116
                         Mary McDonald       106
                         Arthur Maybrun       51
                         Richard Harges       35
                         Richard Morgan, Jr.  33

In addition, Ron Mancasola, Robert A. Lamb, Richard L. Wright, James F. Glassel,
Kenneth W.  Findley,  and Gaylon G. Baese  continued  their  terms as  directors
following  the annual  meeting.  In June 1998,  Mr.  Mancasola  resigned and was
replaced by Kenneth Tucker in July 1998.

         At the  annual  meeting  of the  shareholders  of the  Company  held on
January 15,  1999, Kenneth Tucker, Gordon E. Smith, and Richard L. Wright were
elected to replace those directors whose terms had expired.  The number of votes
received by each of the six nominees was as follows:

                         Kenneth Tucker      116
                         Gordon E. Smith      86
                         Richard L. Wright    86
                         Gordon Atterbury     77
                         Ron Ridgway          72
                         William Danielson    47

In addition,  Floyd West, Peter J. O'Neal,  Mary J. McDonald,  James F. Glassel,
Kenneth W.  Findley,  and Gaylon G. Baese  continued  their  terms as  directors
following the annual meeting.

                                        7
<PAGE>

                                     PART II

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

         There   is  no   market   for   United's   Common   Stock,   which   is
non-transferable. The approximate number of holders of United's Membership Stock
as of October 2, 1998, was 250.

         United's  earnings  are  distributed  only  in the  form  of  patronage
dividends.  Accordingly,  no earnings  are  available  for the purpose of paying
dividends on Membership Stock.

Item 6.  Selected Financial Data

         Consolidated revenues by principal product lines and services appear in
the following table:

                                        For Fiscal Year Ended
                               October 2, 1998          October 3, 1997
                               ===============          ===============
                                        (dollars in thousands) 
                                    Percentage                  Percentage
                                     of Total                    of Total
Product or                 Revenue   Revenue          Revenue    Revenue
Service

Grocery (1)                562,121     47.83            715,340    54.75
Dairy & Deli               137,933     11.74            114,045     8.73
Meat                        73,040      6.21             59,990     4.59
Produce                     50,970      4.34             45,772     3.50
Frozen Foods                80,708      6.87             63,136     4.83
Gen. Merchandise            47,190      4.02             47,044     3.60
Institutional (2)          212,045     18.04            247,509    18.94
Retail Services             10,010      0.84             11,124     0.85
Store Finance                1,262      0.11              2,642     0.21
     Total               1,175,279    100.00          1,306,602   100.00


  (1)  Grocery revenues include sales from retail stores operated on a temporary
       basis.
  (2)  Institutional revenues include sales of all product lines.

                                       8
<PAGE>

         The  following  balance  sheet data at  October 2, 1998 and  October 3,
1997,  and the statement of operations  data for the years ended October 2, 1998
and October 3, 1997,  have been  derived  from  audited  consolidated  financial
statements and notes thereto  appearing  elsewhere in this Annual Report on Form
10-K. The data should be read in  conjunction  with the  consolidated  financial
statements and related notes included elsewhere herein.

                              Fiscal Years Ended
                               Oct 2,      Oct 3,
                                1998        1997
                               -------    -------
                            (dollars in thousands, except per share amounts)

Statement of Operations:
  Net sales and operations $1,175,279  $1,306,602
  Income (loss) from 
  continuing operations
  before members'
  patronage dividends,
  income taxes
  and accounting change        21,194     (21,627)
  Patronage dividends             -0-         -0-
  Net income (loss)            19,760     ( 8,660)
Balance Sheet:
  Working capital              31,152     107,213
  Total assets                233,642     365,427
  Long-term liabilities        85,444     199,079
  Members' equity              31,343      14,651

  Adjusted book value per
  share                        55.52       20.54


Notes to Selected Financial Data

         A.  Data  concerning  net  income  (loss)  per  common  share  and cash
dividends per common share is omitted because United is a cooperative.

         B. Adjusted  book value per share is computed by adding total  members'
equity  at  year  end and  pending  stock  issuances,  less  unrealized  gain on
investments  and  undistributed  equity from  investments  accounted  for on the
equity method and dividing the resulting  number by shares  outstanding  at year
end (including pending issuances).

                                       9
<PAGE>
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Overview

         Fiscal 1998 was a year of major changes for the Company.  These changes
were a result of the  Company's  decision to increase the emphasis on the "core"
business activity, grocery product distribution.  The result of these changes on
the  consolidated  financial  statements  is to  make  some  of the  results  of
operations and balance sheet balances less  comparable when reviewing years side
by side. The effect of these changes on the  consolidated  financial  statements
will be described as part of this discussion in the appropriate sections.

         During fiscal 1997,  the Company  experienced  significant  losses from
one-time adjustments in the areas of reserving for uncollectible receivables and
reserving for losses on retail leases and retail developments.


DISCONTINUED OPERATIONS

         In September  1997,  the  Company's  management  and Board of Directors
approved a plan whereby the insurance  operations  would be sold to an unrelated
party. Accordingly, the results of operations of the insurance segment have been
presented  as  "discontinued  operations"  in  the  accompanying  statements  of
operations.

         The sale was  completed on July 8, 1998 to Orion  Capital  Corporation.
Net proceeds  from the sale of the stock of the Company's  insurance  subsidiary
totaled approximately $35 million,  resulting in a pre-tax gain of approximately
$5.4 million,  which was recorded in the fourth  quarter of fiscal 1998,  and is
shown on the Consolidated Statement of Operations following the heading "Gain on
disposal of insurance  segment."  Proceeds from the sale were used to reduce the
Company's  long-term debt. The sale contract requires that the Company apply for
a change to the zoning of the office building used in the insurance  operations.
If the zoning change is not approved,  the company has agreed to repurchase  the
building for approximately $5.1 million.

The  following  is a summary  of the  assets and  liabilities  of the  insurance
segment as of July 3, 1998:

        Assets:
        Investments                                             $ 45,993,980
        Receivables and other current assets                      28,646,171
        Long-term assets                                             732,676
                                                                ------------
                                                                  75,372,827
        Liabilities:

        Insurance reserves                                        27,762,408
        Accounts payable and other current liabilities            16,393,079
                                                                ------------

        Net investment in insurance segment                     $ 31,217,340
                                                                ============


                                       10
<PAGE>

The sale of the insurance  segment is estimated to have a positive effect on the
income of the Company  during  fiscal 1999 and  beyond.  The overall  decline in
sales and  operating  income will be more than offset by a reduction of interest
expense related to the reduction in debt levels.

SALE OF RETAIL OPERATIONS

On May 1, 1998,  the  Company  completed  the sale of its Rich and  Rhine,  Inc.
subsidiary to Kero Corporation.  The purchase price consisted of $3.5 million in
cash, plus a promissory note of approximately $1.3 million.  The promissory note
is collateralized by a pledge of the common stock of the buyer.

On May 15, 1998, the Company  completed the sale of its Cash & Carry division to
Smart & Final Inc. The net sales  proceeds  consisted of $38.0  million in cash,
plus a $17.5 million, 5-year unsecured note. The gain is shown on the "Gain from
sale of Cash & Carry division" line of the Consolidated Statement of Operations.

The sale of the retail  operations is projected to have a positive effect on the
income of the Company  during  fiscal  1999 and beyond,  in part due to a supply
agreement with the purchaser of the Cash and Carry operations and a reduction in
interest expense related to the reduction in debt levels.

YEAR 2000 PREPARATIONS

This section captioned "Year 2000  Preparations" and other statements about Year
2000  issues are "Year 2000  Readiness  Disclosures"  pursuant  to the Year 2000
Information and Readiness Disclosure Act.

The Company is addressing  possible  Year 2000 (Y2K)  problems with a systematic
approach.  To make a smooth  transition  into the next century,  the Company has
entered into a "Year 2000  Project,"  comprised of four major areas of concern -
(1)  Infrastructure  (Hardware & Operating  System  Software),  (2) Applications
Software, (3) Third Party Suppliers (Trading Partners,  Banks,  Utilities),  and
(4) Process Control and Instrumentation (Embedded Systems).

Area -1- The  Infrastructure  area  consists of hardware  and  operating  system
software.  Updating in this area is on schedule and the Company  estimates  that
approximately 90 percent of the items identified in this area had been completed
as of November 21, 1998. The testing phase is ongoing as the remaining items are
corrected or replaced.

All infrastructure item tasks are expected to be completed by March 31, 1999.

Area -2- The  Application  Software area consists of conversion of software that
is not Year 2000 compliant, and where available the replacement of such software
from the vendor.  The Company has engaged Applied  Decisions USA, Inc. to assist
in project  management,  and in conversion and testing of certain  non-compliant
application software code.

                                       11
<PAGE>

The Company  estimates that the conversion  phase was 95 percent  complete as of
November 21, 1998 and full  conversion  will be completed by March 31, 1999. The
testing phase is progressing in an organized fashion as the software is repaired
or replaced. The testing is ongoing.

The  Company  uses  software  from The  Armature  Company  for  warehousing  and
purchasing functions.  "Year 2000" compliant software installation was completed
on November 21, 1998.

Area  -3- The  Third  Party  Suppliers  area  includes  the  identification  and
prioritizing of critical suppliers,  financial institutions,  and utilities, and
communicating  with them about their plans and progress in  addressing  the Year
2000 issue. The Company has identified and contacted 4,324 suppliers  requesting
information  on their plans and progress on the Year 2000 issue.  As of December
4, 1998,  the Company had received a response from 69 percent of the  identified
suppliers.   Responses  from  the  identified  suppliers  indicate  progress  in
addressing the Year 2000 issue, with a majority of the responses  expecting full
compliance  by  September  30, 1999.  The Company has a follow-up  plan in place
scheduled  through the remainder of 1999.  Contingency  planning in this area is
scheduled to begin in January 1999, with the completed plan in place by June 30,
1999.

Area -4- The Process Control and Instrumentation area consists of identification
and prioritization of hardware and software  associated with embedded chips used
in operation of all  facilities of the Company.  The Company has  identified and
corrected 80 percent of the identified  items.  The remaining 20 percent will be
completed by September 30, 1999.  Contingency planning in this area is scheduled
to begin in January 1999 and completed by September 30, 1999.

The major phases  associated  with the Year 2000  Project are: (A)  Inventory of
potential Year 2000 items;  (B) Assigning  priorities to the items identified as
material  to  the  Company;  (C)  Assessing  the  Year  2000  compliance  of the
inventoried items; (D) Repairing or replacing material items that are determined
not to be year 2000 compliant;  (E) Testing  material items;  and (F) Developing
contingency and business continuation plans for each functional area and Company
location.

On November 21, 1998,  the  Inventory,  Prioritization,  and  Assessment  phases
(phases A, B and C) of the Project were declared completed.

Phase D - Material  items are those  identified  by the Company  that affect the
ability of the Company to perform its core business functions,  that support the
Company's  customer base, or that affect  revenues.  All material items had been
repaired or replaced as of December 31, 1998.

Phase E - Full systems  testing is scheduled  to commence in January  1999,  and
completion is expected by June 30, 1999.  Vendor software  upgrades  continue on
schedule.

Phase F -  Contingency  planning for all areas is ongoing and is to be completed
by June 30, 1999.

                                       12
<PAGE>

         Cost - The  estimated  cost of the Year 2000  Project is  approximately
$5.6 million. The total amount expended on the project through December 31, 1998
was $2.7 million,  of which  approximately  $2.5 million  related to the cost of
conversion or  replacement  of  application  software,  $150,000  related to the
replacement  of hardware,  and $50,000  related to the cost of  identifying  and
communicating  with  Third  Party  Suppliers.   The  estimated  future  cost  of
completing the Year 2000 Project is estimated to be $2.9 million - $ 2.8 million
for replacement of software and related hardware,  and $ 100,000 to identify and
communicate  with  third  party  suppliers,  and to repair or  replace  embedded
systems.

         Risks - The failure to correct  material  Year 2000 issues could result
in interruption in, or failure of, key core business processes.  The most likely
worst case  scenario is business  being  partially  or totally  disrupted  for a
period of a few hours to one week.

         Safety Net  Preparation  - The Y2K team has, as part of their  project,
been identifying  manual or modified processes that would need to be employed in
the unlikely event that some of the upgrades fail.


Net Sales and Operations

         During fiscal year 1998, net sales and  operations  decreased 10.1 % to
$1,175.3 million.  This compares to net sales and operations in 1997 of $1,306.6
million. Income from continuing operations before members' allowances and income
taxes  increased  $46.6  million to $35.3  million  (3.00% of net  sales).  This
compares to a loss of $11.3 million (0.86% of net sales) in 1997.

         During 1998,  the decrease in net sales and  operations  was  primarily
attributable to the distribution  segment which  experienced a decline in sales,
primarily due to the elimination of certain unprofitable  accounts.  The Company
has a supply  agreement  with the purchaser of the Cash & Carry  operations  and
does not expect any reduction of sales during fiscal 1999 related to the sale of
the Cash & Carry division.

         In 1998,  the Company had  increased  profits  within its  distribution
segment  from  one-time  gains on sales of its Cash & Carry  division  and other
businesses and properties,  and lower operating losses at  Company-owned  retail
stores.  These profit gains were offset by increased  operating  expenses in the
distribution segment due to cost inflation and system integration activities.

                                       13
<PAGE>
Gross Operating Income

         Gross  operating  income  (net  sales  less  cost of sales  and  member
allowances)  decreased  to $145.9  million  (12.4% of sales) in 1998 from $162.6
million  (12.4% of sales) in 1997.  The  decline  in gross  operating  income is
consistent  with the decline in net sales  discussed  above.  During  1999,  the
Company expects gross operating income to decline slightly as the sales from the
former Cash & Carry division are reported at a wholesale  level,  which is lower
than the  retail  sale  level,  which was used  through  the time of sale of the
division. 

Operating, Selling, and Administrative Expenses

         In 1998,  operating,  selling,  and  administrative  expenses decreased
$17.7 million to $134.2 million (11.4% of sales).  In 1997,  these expenses were
$151.9 million (11.6% of sales).  The dispositions of the insurance  segment and
the food service  division  are  expected to have a  negligible  effect on these
expenses in fiscal 1999.

The components of these expenses are summarized below:


                                          Percent of Total Net Sales
                                            1998              1997
                                            ----              ----

Salaries and Wages                          6.3                6.0
Rents, Maintenance, and Repairs             2.0                2.0
Taxes, Other Than Income                    0.8                0.8
Utilities, Supplies, and Services           1.0                1.1
Other Expenses                              1.1                0.9
Provision for Doubtful Accounts             0.2                0.8
                                            ---               ----
Total                                      11.4               11.6
                                           ====               ====

         During 1998,  total operating,  selling,  and  administrative  expenses
decreased  primarily  due to lower  unit  volume in the  distribution  segments.

         The provision for doubtful accounts was $2.4 million (0.2% of sales) in
1998. This compares to $9.9 million (0.8% of sales) in 1997. The decrease in the
provision  relates to certain  one-time  adjustments  recorded in fiscal 1997 to
reserve for  uncollectible  accounts.  In 1998,  the reserve  decreased by $11.0
million primarily due to write-offs of amounts previously reserved.

         Interest  expense  decreased  $2.7  million to $13.6  million  (1.2% of
sales) in 1998. This decrease was primarily due to lower debt levels  associated
with sales of assets and the insurance segment.

Net Income and Income Taxes

         In 1998,  income from  continuing  operations  before  income taxes was
$21.2 million compared to a loss of $21.6 million in 1997.

         Discontinued  operations  include net income from the operations of the
insurance segment,  which decreased from $2.5 million in 1997 to $1.4 million in
1998,  primarily due to the sale of the insurance  operations in July,  1998. In
addition, a $3.4 million net gain was realized in 1998 as a result of the sale.

                                       14
<PAGE>

         In 1998, the Company  recognized  $1.7 million,  net of income taxes of
$1.2 million,  as the cumulative effect on prior years of changing the method of
amortizing the  unrecognized  net gain in the Company's  defined benefit pension
plan.  This  change  was  recorded  in the  fourth  quarter  of  fiscal  1998 in
connection with the Company's  decision to utilize a 3-year  amortization of the
unrecognized  gain,  versus the minimum method allowed under generally  accepted
accounting principles. The Company believes the change more currently recognizes
the effects of changes in the actuarial  assumptions and differences between the
assumptions  used and the actual  experience.  The effect of this change on 1998
results if  operations  was to increase  income from  continuing  operations  by
$996,000, net of income taxes of $664,000.

         Net income was $19.8  million  (1.7% of sales) in 1998,  an increase of
$28.4  million  from a loss of $8.7  million  (0.7%  of  sales)  in  1997.

         The  effective  income tax rate  changed from 50.4% in 1997 to 37.8% in
1998. The higher  effective rate in 1997, was due to the reversal of a valuation
allowance.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow From Operating Activities

         In 1998,  the  Company  used  $13.5  million  in cash in its  operating
activities.  A decrease in accounts  payable  partially  offset by a decrease in
inventory  were  the  major  factors  involved.  In 1997,  operating  activities
provided $12.9 million of cash.

Cash Flow From Investing Activities

         In 1998,  the  Company  generated  $88.2  million  from  its  investing
activities,  with the sale of business units, investments and other assets being
the biggest factors.  In 1997, the Company used $1.9 million in investing,  with
the proceeds of asset sales being offset with  purchases of property,  plant and
equipment.

Cash Flow From Financing Activities

         In 1998,  the Company used $83.7 million in its  financing  activities.
Repayments of debt in 1998 were  primarily made using proceeds from sales of the
insurance  segment and Cash & Carry  division.  In 1997,  the Company used $17.3
million in similar efforts.

Capital Resources

         Working capital  decreased $76.1 million from $107.2 million at October
3, 1997 to $31.1  million  at  October  2, 1998.  The  primary  reasons  for the
decrease are the sale of the  insurance  segment and the Cash & Carry  division,
the  proceeds  from which were used to reduce debt.  

         As of October 2, 1998,  the Company had $36.1  million in unused credit
lines available.  Amounts  available under the Company's  credit  facilities are
subject to  reduction by the lender  being  permitted to establish  availability
reserves based upon certain events, conditions,  contingencies or risks which it
may in good faith determine.

         At October 2, 1998,  the Company was in  compliance  with all financial
covenants with its lenders.

                                       15
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

         During  the  first  quarter  of 1998,  the  Company  adopted  Financial
Accounting Standards Board (FASB) SFAS No. 130, Reporting  Comprehensive Income,
which  establishes  requirements  for disclosure of  comprehensive  income.  The
objective  of SFAS No. 130 is to report a measure of all  changes in equity that
result from  transactions  and  economic  events  other than  transactions  with
owners.  Comprehensive income is the total of net income and all other non-owner
changes  in equity.  Comprehensive  income  did not  differ  significantly  from
reported net income in the periods presented.

         In June 1997, the FASB issued SFAS No. 131,  Disclosures about Segments
of an Enterprise  and Related  Information.  This  statement will change the way
public  companies report  information  about segments of their business in their
annual  financial  statements  and  requires  them to  report  selected  segment
information in their quarterly reports issued to shareholders.  It also requires
entity-wide  disclosures about the products and services an entity provides, the
material  countries  in which it holds  assets and earns  revenues and its major
customers.  The statement is effective for fiscal years beginning after December
15, 1997.

         In February 1998, the FASB issued SFAS No. 132, Employers'  Disclosures
about  Pensions  and  Other  Postretirement  Benefits.  This  statement  revises
employers'  disclosures about pension and other postretirement benefit plans. It
does not change the  measurement or  recognition  of those plans.  The statement
suggests  combined formats for presentation of pension and other  postretirement
benefit disclosures. The statement is effective for fiscal years beginning after
December 15, 1997.

         In June 1998,  the FASB issued SFAS No. 133,  Accounting for Derivative
Instruments  and Hedging  Activities.  SFAS No. 133  establishes  accounting and
reporting  standards  requiring that every derivative  instrument be recorded in
the balance  sheet as either an asset or  liability  measured at its fair value.
SFAS No. 133 also  requires  that changes in the  derivative  instrument's  fair
value be recognized  currently in results of operations  unless  specific  hedge
accounting  criteria  are met.  SFAS  No.  133 is  effective  for  fiscal  years
beginning after June 15, 1999.

         The Company's  management has studied the implications of SFAS Nos. 131
and 132,  and based on the initial  evaluation,  expects the adoption to have no
impact on the Company's financial  condition or results of operations,  but will
require revised disclosures when the respective statements become effective. The
Company's  management has studied the  implications of SFAS No. 133 and based on
the initial evaluation,  expects the adoption to have no impact on the Company's
financial condition or results of operations.

                                       16
<PAGE>

FORWARD-LOOKING STATEMENTS

      Statements  above and elsewhere in this Form 10-K regarding  future events
or  performance  are  "forward-looking  statements"  within  the  meaning of the
Private  Securities  Litigation Reform Act of 1995. As with all  forward-looking
statements,  the  forward-looking  statements  made by the  Company  herein  are
subject to  uncertainties  that could cause actual results to differ  materially
from those projected,  including without limitation,  uncertainties  inherent in
business plans and the changing of business  methods,  uncertainties  related to
the response of customers and  suppliers to changing  business  strategies,  and
uncertainties concerning the outcome of sales of subsidiaries or divisions.


Item 7A  Quantitative and Qualitative Disclosures about Market Risk

         The Company does not currently use derivative financial instruments for
speculative  purposes  which expose the Company to market  risk.  The Company is
exposed to cash flow and fair value risk due to changes in  interest  rates with
respect to its long-term debt. Information required by this item is set forth in
Notes  7 and  20 of the  Notes  to  Consolidated  Financial  Statements,  and is
incorporated herein by reference.

                                       17
<PAGE>

Item 8.  Financial Statements and Supplementary Data


                      UNITED GROCERS, INC. AND SUBSIDIARIES
                      -------------------------------------

                        CONSOLIDATED FINANCIAL STATEMENTS

         FOR THE FISCAL YEARS ENDED OCTOBER 2, 1998 AND OCTOBER 3, 1997
         --------------------------------------------------------------

                                TABLE OF CONTENTS
                                -----------------

                                                                            Page
                                                                            ----

Report of independent accountants on financial statements                    F-1
---------------------------------------------------------

Consolidated financial statements
---------------------------------

    Consolidated balance sheets                                              F-2

    Consolidated statements of operations                                    F-3

    Consolidated statements of members' equity                               F-4

    Consolidated statements of cash flows                                    F-5

    Notes to financial statements                                         F-6-32

Report of independent accountants on
         financial statement schedule                                       F-33

Supplemental information
------------------------

Financial statement schedules
-----------------------------

    Schedule II     -    Valuation and qualifying accounts                  F-34


                                       18
<PAGE>
[Graphic - PricewaterhouseCoopers logo]

                                         PRICEWATERHOUSECOOPERS LLP
                                         1300 Southwest Fifth Avenue  Suite 3100
                                         Portland  OR 97201-5638
                                         Telephone (503) 417 2400

                       Report of Independent Accountants
                       ---------------------------------

January 8, 1999

To the Board of Directors
United Grocers, Inc.

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  members'  equity and cash flows present
fairly, in all material respects, the financial position of United Grocers, Inc.
and Subsidiaries (the Company) as of October 2, 1998 and October 3, 1997 and the
results of their  operations  and their cash flows for the years then ended,  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.

As discussed in Note 1 to the consolidated financial statements, during the year
ended  October  2, 1998,  the  Company  changed  its  method of  amortizing  the
unrecognized gains and losses in connection with its defined benefit plan.

                                     PricewaterhouseCoopers LLP

                                      F-1
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 2, 1998 and October 3, 1997
(in thousands, except share data)



<TABLE>
                                ASSETS                                        1998          1997

Current assets:
<S>                                                                         <C>           <C>      
     Cash and cash equivalents                                              $   1,294     $  10,223
     Investments restricted or maintained for insurance reserves                             51,513
     Accounts and notes receivable, net                                        67,269        78,537
     Inventories                                                               68,898       102,333
     Other current assets                                                       5,115         7,037
     Deferred income taxes                                                      1,526         8,147
                                                                            ---------     ---------

       Total current assets                                                   144,102       257,790

Notes receivable, net                                                          29,201        16,498
Investments in affiliated companies                                             3,360         6,971
Other receivables                                                               3,033         4,837
Deferred income taxes                                                                           553
Other assets, net                                                              16,032        17,335
Property, plant and equipment, net                                             37,914        61,443
                                                                            ---------     ---------

                                                                            $ 233,642     $ 365,427
                                                                            =========     =========


                    LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
     Notes payable, current portion                                         $  41,159     $  10,191
     Accounts payable                                                          59,676        97,587
     Insurance reserves                                                                      26,356
     Compensation and taxes payable                                             6,335         8,328
     Other current liabilities                                                  5,780         8,115
                                                                            ---------     ---------

       Total current liabilities                                              112,950       150,577

Notes payable, net of current portion                                          74,434       187,995
Deferred gains on sale-leasebacks                                               1,257         3,650
Deferred income taxes                                                           2,233
Other liabilities                                                               7,520         7,434
                                                                            ---------     ---------

       Total liabilities                                                      198,394       349,656
                                                                            ---------     ---------

Commitments and contingencies

Redeemable members' equity                                                      3,905         1,120
                                                                            ---------     ---------

Members' equity:

     Common stock -- authorized, 10,000,000 shares at $5.00 par value;
     issued and outstanding,
          523,955 and 586,834 shares, respectively                              2,620         2,934
     Additional paid-in capital                                                20,394        22,886
     Retained earnings (accumulated deficit)                                    8,329       (11,431)
     Unrealized gain on investments                                                             262
                                                                            ---------     ---------

       Total members' equity                                                   31,343        14,651
                                                                            ---------     ---------

                                                                            $ 233,642     $ 365,427
                                                                            =========     =========
</TABLE>

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

                                      F-2
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended October 2, 1998 and October 3, 1997
(in thousands)


<TABLE>
                                                                              1998          1997


<S>                                                                        <C>           <C>        
Net sales and operations                                                   $ 1,175,279   $ 1,306,602
                                                                           -----------   -----------

Costs and expenses:
     Cost of sales                                                           1,015,268     1,133,690
     Operating expenses                                                        114,595       129,494
     Selling and administrative expenses                                        19,565        22,425
     Depreciation and amortization                                              10,416        11,483
                                                                           -----------   -----------

                                                                             1,159,844     1,297,092
                                                                           -----------   -----------

Other income (expense):
     Interest expense                                                          (13,585)      (16,307)
     Interest income                                                             2,206           733
     Gain on sale of Cash & Carry division                                      29,033
     Gain (loss) on write-down or disposition of assets, net                     2,213        (5,214)
                                                                           -----------   -----------

                                                                                19,867       (20,788)
                                                                           -----------   -----------

       Income (loss) from continuing operations before members'
       allowances and income taxes                                              35,302       (11,278)

Members' allowances                                                            (14,108)      (10,349)
                                                                           -----------   -----------

       Income (loss) from continuing operations before income taxes             21,194       (21,627)

Income tax benefit (provision)                                                  (7,939)       10,466
                                                                           -----------   -----------

       Income  (loss) from  continuing  operations,  before  cumulative
       effect of a change in accounting principle                               13,255       (11,161)

Discontinued operations:
     Income from operations of insurance segment (less income taxes of
     $903 and $1,666, respectively)                                              1,355         2,501
     Gain on  disposal  of  insurance  segment  (less  income  taxes of
     $2,000 for 1998)                                                            3,403
                                                                           -----------   -----------

       Income   (loss)  before   cumulative   effect  of  a  change  in 
       accounting method                                                        18,013        (8,660)

Cumulative  effect on prior  years (to  October  3,  1997) of  changing
       methods of amortizing the unrecognized net gain in the Company's
       defined benefit pension plan (less income taxes of
       $1,165 for 1998)                                                          1,747
                                                                           -----------   -----------

       Net income (loss)                                                   $    19,760   $    (8,660)
                                                                           ===========   ===========

       Pro forma  net  income  (loss),  assuming  the new  amortization
       method is applied retroactively                                     $    18,013   $    (8,342)
                                                                           ===========   ===========
</TABLE>

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

                                      F-3
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
for the years ended October 2, 1998 and October 3, 1997
(in thousands, except share data)


<TABLE>
                                                                 
                                                                 Retained
                                Common Stock        Additional   Earnings       Unrealized
                              ------------------     Paid-in   (Accumulated      Gain on
                              Shares     Amount      Capital      Deficit)      Investments      Total
                              ------     ------      -------      --------      -----------      -----
<S>                           <C>        <C>        <C>         <C>               <C>          <C>     
Balances, September 27,
1996 (as restated - 
   see Note 2)                638,451    $ 3,192    $ 24,224    $   (1,883)       $  200       $ 25,733

     Common stock issued       13,775         69         780                                        849

     Repurchase of common
     stock                    (34,609)      (173)     (1,152)         (888)                      (2,213)

     Redemptions pending      (30,783)      (154)       (966)                                    (1,120)

     Net loss                                                       (8,660)                      (8,660)

     Change in unrealized
     gain on investments                                                              62             62
                              -------    -------    --------    ----------        ------       --------

Balance, October 3, 1997      586,834      2,934      22,886       (11,431)          262         14,651

     Repurchase  of common
     stock                       (577)        (3)        (18)                                       (21)

     Redemptions pending      (62,302)      (311)     (2,474)                                    (2,785)

     Net income                                                     19,760                       19,760

     Change in  unrealized
     gain on investments                                                            (262)          (262)
                              -------    -------    --------    ----------        ------       --------

Balance, October 2, 1998      523,955    $ 2,620    $ 20,394    $    8,329        $    -       $ 31,343
                              =======    =======    ========    ==========        ======       ========
</TABLE>


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

                                      F-4
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended October 2, 1998 and October 3, 1997
(in thousands)

<TABLE>
                                                                              1998         1997

Cash flows from operating activities:
<S>                                                                        <C>          <C>        
     Net income (loss)                                                     $   19,760   $   (8,660)
     Adjustments to reconcile net income (loss) to net cash provided
     by (used in) operating activities:
       Depreciation and amortization                                           10,522       11,842
       (Gain) loss on write-down or disposition of assets                      (2,213)       5,214
       Gain on disposal of discontinued operations                             (5,403)
       Gain on sale of Cash & Carry division                                  (29,033)
       Equity in earnings of affiliated companies                                 (41)        (107)
       Deferred income taxes                                                    9,407       (8,700)
       Changes in assets and liabilities:
          Accounts receivable                                                  (6,932)      (2,962)
          Inventories                                                           7,900        2,312
          Other assets                                                         (1,731)         (96)
          Accounts payable                                                    (11,465)      14,864
          Insurance reserves                                                    1,406       (3,206)
          Compensation and taxes payable                                       (1,850)       3,306
          Other liabilities                                                    (1,418)      (1,117)
          Members' patronage payable                                                        (2,427)
          Deferred gains on sale-leasebacks                                    (2,393)       2,650
                                                                           ----------   ---------- 

       Net cash flows provided by (used in) operating activities              (13,484)      12,913
                                                                           ----------   ---------- 

Cash flows from investing activities:
     Loans to members                                                          (2,416)     (10,396)
     Collections on member loans                                                3,798        4,988
     Proceeds from sale of member loans                                         2,918       13,205
     Sale of investment in affiliated company                                                6,023
     Purchase of investments restricted or maintained for insurance
     reserves                                                                  (3,167)     (10,226)
     Sale of investments restricted or maintained for insurance
     reserves                                                                   8,685        5,604
     Investment in affiliated companies                                                        (48)
     Proceeds from disposition of assets                                       18,313       11,036
     Purchase of property, plant and equipment                                 (3,677)     (15,607)
     Purchase of other assets                                                  (1,011)      (6,446)
     Proceeds from sale of discontinued operations, net                        26,813
     Proceeds from sale of Cash & Carry division                               37,986
                                                                           ----------   ----------

       Net cash flows provided by (used in) investing activities               88,242       (1,867)
                                                                           ----------   ----------

Cash flows from financing activities:
     Sale of common stock                                                                       76
     Repurchase of common stock                                                   (21)      (2,213)
     Proceeds from notes payable                                            1,171,161      932,370
     Repayments of notes payable                                           (1,253,754)    (947,566)
     Payment of debt issuance costs Redeemable notes and certificates          (1,073)
                                                                           ----------   ----------

       Net cash flows used in financing activities                            (83,687)     (17,333)
                                                                           ----------   ----------

       Net decrease in cash and cash equivalents                               (8,929)      (6,287)

Cash and cash equivalents, beginning of years                                  10,223       16,510
                                                                           ----------   ----------

Cash and cash equivalents, end of years                                    $    1,294   $   10,223
                                                                           ==========   ==========
</TABLE>

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

                                      F-5
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

      ORGANIZATION AND NATURE OF OPERATIONS

      United Grocers,  Inc. (the Parent) and subsidiaries (the Company) operates
      a  distribution  business  primarily in Oregon,  Southern  Washington  and
      Northern  California.  The distribution  business  includes all operations
      relating  to  wholesale   grocery  and  related  product  sales,   service
      department  revenues and financing income and fees. Through July 1998, the
      Company had an additional  operating segment which included all operations
      relating to insurance underwriting, commissions and reinsurance, primarily
      to  provide  workers'  compensation  and  property-casualty  coverage.  As
      discussed in Note 9, the insurance  operations  were sold in July 1998 and
      those operations  discontinued by the Company.

      The  Parent's  stock  is  owned by its  member  customers.  Sales to these
      members  accounted for  approximately 57% and 56% of sales from continuing
      operations  for the years  ended  October  2, 1998 and  October  3,  1997,
      respectively.

      FISCAL YEAR

      The  Company  reports  on a fiscal  years  of 52 or 53 weeks  which is the
      fiscal years of the distribution segment. The Parent's fiscal closing date
      is the Friday nearest  September 30. The fiscal years of the  subsidiaries
      included in the insurance segment ended on September 30.

      PRINCIPLES OF CONSOLIDATION

      The  consolidated  financial  statements  include  the  accounts of United
      Grocers,  Inc.  and its  wholly-owned  subsidiaries  as  follows:  Western
      Passage Express, Inc.; Northwest Process, Inc.; UG Resources, Inc.; United
      Resources,   Inc.;  Western  Security  Services,   Ltd.;  R&R  Liquidating
      Corporation;   and  Bergrens  Market,  Inc.  The  consolidated   financial
      statements also include:  Grocers Insurance Group, Inc., Grocers Insurance
      Agency,  Inc., UGIC, Ltd.,  Grocers Insurance Company and United Workplace
      Consultants, Inc. (collectively, the insurance segment), through July 1998
      (see  Notes 9 and 13);  and Rich and Rhine,  Inc.  through  May 1998.  All
      intercompany   balances  and   transactions   have  been  eliminated  upon
      consolidation.

      CASH AND CASH EQUIVALENTS

      The Company considers all highly liquid debt instruments  purchased with a
      maturity of three months or less to be cash equivalents.

                                      F-6
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      INVESTMENTS

      Investments, which were held by subsidiaries within the insurance segment,
      were classified and accounted for as follows:

      o     Held-to-maturity securities were reported at amortized cost.

      o     Available-for-sale  securities  were  reported at fair  value,  with
            unrealized gains and losses excluded from earnings and reported in a
            separate component of members' equity.

      The cost of  investments  used in computing  realized  gains or losses was
      determined using the specific identification method.

      REINSURANCE

      The Company  accounted for  reinsurance  transactions  in accordance  with
      Statement  of  Financial  Accounting  Standards  No.  113 (SFAS No.  113),
      Accounting   and  Reporting  for   Reinsurance   of   Short-Duration   and
      Long-Duration Contracts.  SFAS No. 113 requires that transactions relating
      to reinsurance  transactions  be reported at gross amounts rather than net
      amounts.  Net  premiums  earned are  reported as net sales and  operations
      while net losses and loss  adjustment  expenses  are  reported  as cost of
      sales.

      In the normal course of business,  the Company sought to reduce the losses
      that may have resulted from  catastrophes or other events that would cause
      unfavorable  underwriting  results by reinsuring certain levels of risk in
      various areas of exposure with other insurance  enterprises or reinsurers.
      Amounts  recoverable from reinsurers were estimated in a manner consistent
      with the claim  liability  associated with the reinsured  policy.  Amounts
      paid for  prospective  reinsurance  were  reported as prepaid  reinsurance
      premiums and amortized over the remaining contract period in proportion to
      the amount of insurance protection provided.

      INVENTORIES AND COST OF SALES

      Inventories  are stated at the lower of cost or market.  The cost of these
      inventories is determined  under the first-in,  first-out (FIFO) method or
      other methods which approximate FIFO.

      Cost of sales includes primarily the costs of distribution, which includes
      the purchases of product,  net of allowances paid and received and the net
      advertising  department  margins,  plus the  handling  allowances  made to
      members based upon the cost of servicing their accounts.

                                      F-7
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      RESTRICTED ASSETS AND NET ASSETS

      Restricted  assets and net assets  that  could not be  transferred  to the
      Parent in the form of loans,  advances, or cash dividends by the insurance
      subsidiary  without the consent of state insurance  agencies as of October
      3, 1997 were as follows:

         Restricted cash                                  $    401,000
         Investments                                        18,486,000
                                                          ------------

              Total                                       $ 18,887,000
                                                          ============


      In addition,  the balance of the  investments of  $32,626,000  represented
      assets  that had been  accumulated  for the  possible  payment  of  claims
      against the insurance reserves.

      INVESTMENTS IN AFFILIATED COMPANIES

      Investments in affiliated  companies  represent the Company's ownership in
      entities in which it does not have a controlling interest. The investments
      are  accounted  for using  the  equity  method,  in which  carrying  value
      represents  cost plus the Company's  share of earnings since  acquisition,
      less distributions received.

      OTHER ASSETS

      Software costs, non-competition agreements and other intangibles, included
      in other assets in the accompanying  balance sheet, are stated at cost and
      are being  amortized and charged to operating  expenses on a straight-line
      basis over the estimated or contractual lives of three to five years.

      PROPERTY, PLANT AND EQUIPMENT

      Property,  plant and equipment are stated at cost and include expenditures
      for new facilities and those which substantially increase the useful lives
      of the existing plant and equipment. The Company capitalizes interest when
      applicable  as  a  component  of  the  cost  of  significant  construction
      projects.  No interest was capitalized for the years ended October 2, 1998
      and October 3, 1997.

      Depreciation is computed using the straight-line method over the estimated
      useful  lives  of  the  respective  assets.  Estimated  useful  lives  are
      generally as follows:

         Buildings and improvements                               4 - 75 years
         Warehouse equipment                                      5 - 20 years
         Truck equipment                                          3 - 8 years
         Office equipment                                         3 - 10 years

                                       F-8
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      PROPERTY, PLANT AND EQUIPMENT, CONTINUED

      Maintenance and repairs are charged to expense as incurred.  Upon the sale
      or  retirement  of  property,  plant  and  equipment,  any gain or loss on
      disposition is reflected in the  consolidated  statement of operations and
      the related asset cost and accumulated  depreciation  are removed from the
      respective accounts.

      RECOVERABILITY OF LONG-TERM ASSETS

      Management of the Company reviews the carrying value of long-lived  assets
      and certain  identifiable  intangibles  for impairment  whenever events or
      changes in circumstances indicate that the carrying amount of an asset may
      not be recoverable.

      DEBT CLASSIFICATION

      The  Company  classifies  as  current   liabilities  any  line  of  credit
      arrangements which contain a subjective acceleration clause and a lock-box
      arrangement.

      INCOME TAXES

      The Company and its  subsidiaries  file a consolidated  federal income tax
      return.  The Company operates and is taxed as a cooperative.  Accordingly,
      amounts  distributed as qualified  patronage dividends are not included in
      its taxable  income but are instead  taxed to the  patrons  receiving  the
      patronage dividends. Deferred income taxes are recorded to reflect the tax
      consequences  on future  years of the  non-patronage  portion of temporary
      differences  between  the tax bases of assets  and  liabilities  and their
      financial  reporting  amounts at each years-end  based on enacted tax laws
      and statutory tax rates  applicable to the years in which the  differences
      are  expected  to  affect  taxable   income.   Valuation   allowances  are
      established  when  necessary to reduce  deferred  income tax assets to the
      amount  expected to be realized.  Income tax expense is the combination of
      the tax  payable  for the  year  and the  change  during  the  year in net
      deferred tax assets and liabilities.

      EARNINGS PER COMMON SHARE

      The  Company's  policy  is to  distribute  earnings  only  in the  form of
      patronage  dividends.  No dividends  have ever been declared on the common
      stock  of the  Company  and all  earnings  not  distributed  as  patronage
      dividends  have been  retained.  Earnings  per common  share are not shown
      because no earnings are available  for the purpose of paying  dividends on
      the common stock.

      COMMON STOCK

      The  Company's  Board of  Directors'  policy,  subject  to change  without
      notice, requires the Company to repurchase on request the number of shares
      a member owns in excess of 4,000 shares. The excess shares are redeemed in
      exchange  for  cash  or  capital  stock  residual  notes,  payable  over a
      five-year  period.  Beginning  in  fiscal  1998,  the  Company's  Board of
      Directors  temporarily  suspended  redemptions of members'  capital stock.
      Future redemptions will be at the discretion of the Board of Directors.

                                       F-9
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      COMMON STOCK, CONTINUED

      At October  2, 1998 and  October  3,  1997,  there were  93,085 and 30,783
      shares,  in the amount of $3,905,070 and $1,120,000,  respectively,  which
      have been presented by members for redemption,  but which had not yet been
      redeemed.  These shares are included in redeemable  members' equity in the
      accompanying consolidated balance sheet.

      The Company holds  $111,000 to be used for issuance of 5,400 shares to new
      members.

      ADVERTISING COSTS

      The Company  expenses the production  costs of advertising  the first time
      the  advertising  takes place.  Advertising  expense for 1998 and 1997 was
      $443,817 and  $1,734,000,  respectively,  exclusive  of costs  incurred on
      behalf of members for which the Company is reimbursed.

      MEMBERS' ALLOWANCES

      The Company  makes  rebates to members  based on the  respective  members'
      volume of purchases over defined periods of time.

      USE OF ESTIMATES

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

      CHANGE IN METHOD OF ACCOUNTING FOR NET PERIODIC PENSION COSTS

      For the year ended  October 2, 1998,  the  Company  began  amortizing  its
      unrecognized  net gains and losses in connection  with its defined benefit
      pension plan (see Note 14) over a three-year period. In previous years the
      Company used the minimum  amortization  allowed by SFAS No. 87, Employer's
      Accounting  for  Pensions.  The new method was  adopted to more  currently
      recognize the effects of changes in actuarial  assumptions and differences
      between  the  assumptions  used and the actual  experience.  The pro forma
      amounts in the statement of  operations  have been adjusted for the effect
      of the  retroactive  application  of the change on operating  expenses and
      related  income  taxes.  The  effect  of the  change on the  statement  of
      operations  for the year ended  October 2, 1998 was to increase net income
      before  the  cumulative  effect  of the  change  in  accounting  method by
      approximately $996,000.

                                      F-10
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      ACCOUNTING PRONOUNCEMENTS

      During the first quarter of 1998, the Company adopted Financial Accounting
      Standards Board (FASB) SFAS No. 130, Reporting Comprehensive Income, which
      establishes  requirements  for  disclosure of  comprehensive  income.  The
      objective  of SFAS No. 130 is to report a measure of all changes in equity
      that result from  transactions and economic events other than transactions
      with owners. Comprehensive income is the total of net income and all other
      non-owner  changes  in  equity.   Comprehensive   income  did  not  differ
      significantly from reported net income in the periods presented.

      In June 1997, the FASB issued SFAS No. 131,  Disclosures about Segments of
      an Enterprise and Related Information.  This statement will change the way
      public  companies report  information  about segments of their business in
      their annual  financial  statements  and requires them to report  selected
      segment information in their quarterly reports issued to shareholders.  It
      also requires  entity-wide  disclosures about the products and services an
      entity provides, the material countries in which it holds assets and earns
      revenues and its major  customers.  The  statement is effective for fiscal
      years beginning after December 15, 1997.

      In February  1998,  the FASB issued SFAS No. 132,  Employers'  Disclosures
      about Pensions and Other Postretirement  Benefits.  This statement revises
      employers' disclosures  about  pension  and other  postretirement  benefit
      plans.  It does not change the  measurement or recognition of those plans.
      The statement  suggests  combined  formats for presentation of pension and
      other postretirement  benefit disclosures.  The statement is effective for
      fiscal years beginning after December 15, 1997.

      In June 1998,  the FASB  issued SFAS No. 133,  Accounting  for  Derivative
      Instruments and Hedging  Activities.  SFAS No. 133 establishes  accounting
      and reporting  standards  requiring  that every  derivative  instrument be
      recorded in the balance sheet as either an asset or liability  measured at
      its fair value.  SFAS No. 133 also requires that changes in the derivative
      instrument's  fair value be recognized  currently in results of operations
      unless  specific  hedge  accounting  criteria  are met.  SFAS  No.  133 is
      effective  for fiscal years  beginning  after June 15,  1999. 

      The Company's management has studied the implications of SFAS Nos. 131 and
      132, and based on the initial evaluation,  expects the adoption to have no
      impact on the Company's financial condition or results of operations,  but
      will require revised  disclosures  when the respective  statements  become
      effective.  The Company's  management has studied the implications of SFAS
      No. 133 and based on the initial evaluation,  expects the adoption to have
      no impact on the Company's financial condition or results of operations.

                                      F-11
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.    RESTATEMENT:

      The Company previously reported retained earnings as of September 27, 1996
      of $13,843,000. This amount has been restated to an accumulated deficit of
      $1,883,000 in the accompanying  consolidated statement of members' equity.
      The adjustments  which  necessitated the restatement,  and their effect on
      the  Company's  net  income  for the year  ended  September  27,  1996 and
      members' equity as of September 27, 1996 are summarized as follows:

<TABLE>
                                                                                   DECREASE (INCREASE) IN:
                                                                         -----------------------------------------
                                                                           FISCAL 1996            
                                                                           NET INCOME             MEMBERS'EQUITY -
                                                                           (unaudited)           SEPTEMBER 27,1996
                                                                         -------------           -----------------

<S>                                                                       <C>                      <C>         
          Accruals for losses on lease/sublease arrangements              $ (2,258,000)            $  9,614,000
          Write-off of advertising and other receivables                     3,561,000                3,561,000
          Accrual of vendor trust account liabilities                        1,581,000                1,581,000
          Adjustment of carrying value of used store equipment
               to net realizable value                                       1,309,000                1,309,000
          Income taxes                                                         (74,000)              (2,200,000)
          Other                                                              1,602,000                1,861,000
                                                                         -------------             ------------

               Net restatement                                            $  5,721,000             $ 15,726,000
                                                                          ============             ============
</TABLE>

3.    INVESTMENTS RESTRICTED OR MAINTAINED FOR INSURANCE RESERVES:

      The  amortized  costs and  estimated  fair values of  investments  in debt
      securities and other investments at October 3, 1997 are as follows:

<TABLE>
                                                          Gross          Gross
                                          Amortized     Unrealized     Unrealized
                                            Cost          Gains          Losses        Fair Value
                                          -----------   ------------   ------------   ------------

          Available-for-sale securities
          -----------------------------

<S>                                       <C>           <C>            <C>            <C>         
          U.S. Treasury securities        $  3,512,000  $    103,000                  $  3,615,000
          Obligations of states,
          political subdivisions, and
          government agencies                4,410,000       134,000                     4,544,000
          Corporate securities               1,026,000        25,000                     1,051,000
                                          ------------  ------------                  ------------

          Subtotal                           8,948,000       262,000                     9,210,000

          Common stocks                        225,000                                     225,000
                                          ------------  ------------   ------------   ------------

          Total                           $  9,173,000  $    262,000   $          -   $  9,435,000
                                          ============  ============   ============   ============

<PAGE>

          Held-to-maturity securities
          ---------------------------

          U.S. Treasury securities        $ 16,547,000  $    848,000   $    (42,000)  $ 17,353,000
          Obligations of states,
            political subdivisions,
           and government agencies          19,154,000       255,000        (66,000)    19,343,000
          Corporate securities               5,976,000       141,000        (19,000)     6,098,000
                                          ------------  -------------  ------------   ------------
          Total                           $ 41,677,000  $  1,244,000   $   (127,000)  $ 42,794,000
                                          ============  ============   ============   ============

          Restricted assets
          -----------------

          Cash and cash equivalents       $   401,000   $          -   $          -   $    401,000
                                          ===========   ============   ============   ============

          Reconciliation  to  balance sheet:
            Available-for-sale securities, at fair
               value                                                                  $  9,435,000
          Held-to-maturity securities, at
               amortized cost                                                           41,677,000
          Restricted  assets, at fair value                                                401,000
                                                                                      ------------

          Total investments                                                           $ 51,513,000
                                                                                      ============
</TABLE>

                                      F-12
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

3.    INVESTMENTS RESTRICTED OR MAINTAINED FOR INSURANCE RESERVES, CONTINUED:

      Gross realized gains of $3,000 were realized in 1997 from the maturity and
      redemption of  held-to-maturity  securities due to those  securities being
      called by the issuers.  The amortized cost of these securities at the time
      of call was $4,470,000.  There were no realized losses.  Proceeds from the
      sale of available-for-sale  securities were $1,131,000. The gross realized
      losses on these sales were $9,000 in 1997.

4.    ACCOUNTS AND NOTES RECEIVABLE:

      These consist of amounts due principally from members at the balance sheet
      date as follows:

<TABLE>
                                                                            1998            1997

<S>                                                                     <C>              <C>         
         Accounts receivable                                            $ 60,503,000     $ 69,778,000
         Insurance premiums receivable and related balances                                14,521,000
         Less allowance for doubtful accounts                             (1,236,000)      (7,598,000)
                                                                        ------------     ------------

              Net accounts receivable                                     59,267,000       76,701,000
                                                                        ------------     ------------

         Notes receivable, current portion                                 8,002,000        1,977,000
         Less allowance for doubtful notes                                                   (141,000)
                                                                        ------------     ------------

              Net current notes receivable                                 8,002,000        1,836,000
                                                                        ------------     ------------

              Net current accounts and notes receivable                 $ 67,269,000     $ 78,537,000
                                                                        ============     ============

         Notes receivable, non-current portion                          $ 29,515,000     $ 18,886,000
         Less allowance for doubtful notes                                  (314,000)      (2,388,000)
                                                                        ------------     ------------

              Net non-current notes receivable                          $ 29,201,000     $ 16,498,000
                                                                        ============     ============
</TABLE>

During the years ended October 2, 1998 and October 3, 1997, the Company recorded
a  provision  for  doubtful  accounts  and  notes  receivable  of  approximately
$2,440,000 and $9,943,000,  respectively. During the year ended October 2, 1998,
the  Company  wrote  off   approximately  $11  million  of  accounts  and  notes
receivable,  and  adjusted the related  allowance  for  doubtful  accounts,  for
amounts determined to be uncollectible.

                                      F-13
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.    ACCOUNTS AND NOTES RECEIVABLE, CONTINUED:

      The notes  receivable from members are generally for periods of two to ten
      years at annual  interest  rates of 3% to 11%. The notes  receivable as of
      October 2, 1998 include $17.5  million in connection  with the sale of the
      Cash & Carry division (see Note 10). This note carries an annual  interest
      rate of 6.5%.  The annual  maturities of notes  receivable for each of the
      next five fiscal years following October 2, 1998 are as follows:

        YEAR                                               Amount
        ----                                               ------

       1999                                             $  8,002,000
       2000                                                4,349,000
       2001                                                6,859,000
       2002                                                6,632,000
       2003                                                6,562,000
       Thereafter                                          5,113,000
                                                        ------------
                                                        $ 37,517,000
                                                        ============

5.    OTHER ASSETS:

      Other assets consist of the following:          1998             1997

         Software                                 $ 19,999,000     $ 18,356,000
         Prepaid loan fees                           1,073,000
         Other                                       1,941,000        2,570,000
                                                  ------------     ------------

              Subtotal                              23,013,000       20,926,000

         Less accumulated amortization              (6,981,000)      (3,591,000)
                                                  ------------     ------------

              Total other assets, net             $ 16,032,000     $ 17,335,000
                                                  ============     ============


      Amortization  expense for the years  ended  October 2, 1998 and October 3,
      1997 was $4,143,000 and $4,152,000, respectively.

                                      F-14
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.    PROPERTY, PLANT AND EQUIPMENT:

      Property, plant and equipment consists of the following:
<TABLE>
                                                              1998             1997

<S>                                                        <C>             <C>           
        Land                                               $  2,163,000    $    3,865,000
        Buildings and improvements                           42,996,000        55,999,000
        Warehouse and truck equipment                        24,022,000        31,316,000
        Office equipment                                     14,432,000        14,185,000
        Construction in progress                                466,000         5,069,000
                                                           ------------    --------------

             Total property, plant and equipment             84,079,000       110,434,000

        Less accumulated depreciation                       (46,165,000)      (48,991,000)
                                                           ------------    --------------

             Property, plant and equipment, net            $ 37,914,000    $   61,443,000
                                                           ============    ==============
</TABLE>

Depreciation expense for the years ended October 2, 1998 and October 3, 1997 was
$6,379,000  and  $7,690,000,  respectively,  including  $106,000  and  $359,000,
respectively,  related to discontinued operations. During the year ended October
3, 1997,  the  Company  recorded a loss of  approximately  $1.8  million for the
estimated impairment in the carrying value of a retail store.

                                      F-15
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7.    NOTES PAYABLE:

      Notes payable consists of the following:

<TABLE>
                                                                                    1998             1997

<S>                                                                              <C>             <C>         
      Line of credit  with  financial  institution                               $ 34,315,000    $ 69,000,000

      Notes payable with financial institution:
           Term loan, interest at 7.344%,  payable in four equal annual payments
             beginning May 1999                                                    10,000,000
           Real estate  term loan,  interest at 7.344%,  payable in  one-hundred
             twenty equal  monthly  principal  and interest  payments  beginning
             February 1999                                                         25,000,000

      Notes payable, other:
           Capital   stock   residual   notes,   payable  in  twenty   quarterly
             installments plus interest at a variable interest rate based on the
             current capital investment note rate                                   2,327,000       4,071,000

           Capitalized  equipment leases,  payable in monthly  installments of $
             43,853,   including   interest   at  12%  to   20%   through   2005
             (collateralized by equipment)                                          1,563,000       2,276,000
           Other notes payable                                                        281,000       1,495,000
      Redeemable notes and certificates:
           Capital investment notes  (subordinated),  interest at 7.5%,
             maturity dates through 2005                                           39,277,000      41,745,000

           Registered redeemable building notes (subordinated),  interest at 8%,
             no fixed maturity date                                                 2,830,000       3,088,000
           Credit agreement notes, interest from 7.0875% to 7.1875%                                42,915,000
      Senior notes payable to insurance companies, interest at 8.42% and 9.15%                     29,999,000
      Mortgage notes payable, interest at 7.25%                                                     3,597,000
                                                                                 ------------    ------------

                  Total                                                           115,593,000     198,186,000

      Less current portion                                                        (41,159,000)    (10,191,000)
                                                                                 ------------    ------------

                  Total notes payable, net of current portion                    $ 74,434,000    $187,995,000
                                                                                 ============    ============

      Maturities of notes payable are as follows:

      Fiscal Year                                                                                    Amount
      -----------                                                                                ------------

      1999                                                                                       $ 41,159,000
      2000                                                                                          7,942,000
      2001                                                                                          9,984,000
      2002                                                                                          9,206,000
      2003                                                                                          6,200,000
      Thereafter                                                                                   41,102,000
                                                                                                 ------------

                                                                                                 $115,593,000
                                                                                                 ============
</TABLE>

                                      F-16
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7.    NOTES PAYABLE, CONTINUED:

      The Company has a credit agreement with a financial  institution providing
      for a line of credit of $100 million for revolving loans and $35.0 million
      for term loan  facilities.  The  agreement was entered into in August 1998
      and matures in February 2002. The agreement  provides for letter of credit
      accommodations up to $11 million.

      The amount of  borrowings  available  under the  revolving  line of credit
      based upon a lending formula applied to accounts and notes  receivable and
      inventory was $70.4 million as of October 2, 1998.  The revolving  line of
      credit  bears  interest  at LIBOR plus 1.75% or at prime rate  (7.125% and
      8.50%  respectively  at October 2, 1998).  The  Company had $34.3  million
      outstanding  under the  revolving  loans,  $20  million at LIBOR and $14.3
      million at prime.  The term loans bear  interest at LIBOR plus 1.75% as of
      October  2,  1998.  The  revolving  line of  credit  and  term  loans  are
      collateralized by accounts receivable, inventory and other assets.

      The  Company,  as of October 2, 1998,  had letters of credit  totaling $11
      million,  $1.0 million  required by certain real  property  leases and $10
      million  required  under its cash  management  agreement  with a bank. The
      revolving and term loans and letters of credit are cross collateralized by
      essentially all assets of the borrowers  (United Grocers,  Inc. and United
      Resources, Inc.) and are guaranteed by all subsidiaries.

      The Company's most restrictive covenants maintain certain minimum adjusted
      net  worth,  minimum  accounts  receivable  turnover  and fill  rates  (as
      defined).  The  Company is in  compliance  with  covenants  related to its
      credit agreement as of October 2, 1998.

      Amounts  available  under  the  credit  agreement  and  letter  of  credit
      accommodations  are subject to reduction by the lender being  permitted to
      establish  availability  reserves based upon certain  events,  conditions,
      contingencies or risks which it may in good faith determine.

                                      F-17
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.    INCOME TAXES:

      The income tax  (provision)  benefit,  including  amounts  associated with
      discontinued   operations  and  the  cumulative  effect  of  a  change  in
      accounting  method,  for the years  ended  October 2, 1998 and  October 3,
      1997, respectively, consists of the following:

<TABLE>
                                                                                           1998              1997
          Current:
<S>                                                                                    <C>                <C>        
             Federal                                                                   $ (2,6OO,000)      $   100,000
                                                                                       ------------       -----------
           Deferred:
             Federal                                                                     (8,135,000)        7,493,000
             State                                                                       (1,272,000)        1,207,000
                                                                                       ------------       -----------

                                                                                         (9,407,000)        8,700,000
                                                                                       ------------       -----------
               Total                                                                   $(12,007,000)      $ 8,800,000
                                                                                       ============       ===========


      The current provision for the year ended October 2, 1998 primarily relates
      to the gain on disposal of the insurance segment.

      The  reconciliation  of the  statutory  Federal tax rate to the  effective
      income tax rate for the years  ended  October 2, 1998 and October 3, 1997,
      is as follows:

                                                                                           1998                 1997

          Statutory income tax rate (34%)                                              $(10,801,000)       $ 5,937,000
          State income taxes, net of Federal income tax benefit                          (1,272,000)           797,000
          Reversal of valuation allowance due to tax planning strategy                                       3,568,000
          Patronage-related book/tax differences                                                            (1,502,000)
          Other                                                                              66,000
                                                                                       ------------        -----------
               Total                                                                   $(12,007,000)       $ 8,800,000
                                                                                       ============        ===========
</TABLE>

                                      F-18
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8.    INCOME TAXES, CONTINUED:

      The significant  components of deferred income taxes as of October 2, 1998
      and October 3, 1997 are as follows:

<TABLE>
                                                                                          1998              1997
         Deferred income taxes, current asset:
<S>                                                                                  <C>                <C>          
            Insurance reserves                                                                         $    1,359,000
            Inventories                                                              $       309,000          362,000
            Allowance for doubtful accountS                                                  253,000        1,650,000
            Accrued employee benefits                                                        168,000          192,000
            Capitalized lease insurance                                                      244,000          244,D00
            Nonpatronage net operating loss carryforward                                                    4,128,000
            Alternative minimum tax credit                                                   178,000          150,000
            Other                                                                            374,000           62,000
                                                                                     ---------------    -------------

              Net current deferred tax asset                                               1,526,000        8,147,000
                                                                                     ---------------    -------------

      Deferred income taxes, non-current asset (liability):
            Accumulated depreciation                                                      (3,088,000)      (2,561,000)
            Impairment reserve                                                                                689,000
            Lease accrual                                                                  1,302,000        1,474,000
            Prepaid pension cost                                                            (738,000)
            Deferred income on sale-leaseback transactions                                                    845,000
            Deferred compensation                                                            291,000          106,000
                                                                                     ---------------    -------------

              Net non-current deferred tax asset (liability)                              (2,233,000)         553,000
                                                                                     ---------------    -------------

              Total                                                                  $      (707,000)   $   8,700,000
                                                                                     ===============    =============

9.    DISCONTINUED OPERATIONS:

      In  September  1997,  the  Company's  management  and  board of  directors
      approved  a plan  whereby  the  insurance  operations  would be sold to an
      unrelated  party.  The sale of the insurance  operations  was completed in
      July 1998. Accordingly, the results of operations of the insurance segment
      for the  years  ended  October  2,  1998 and  October  3,  1997  have been
      presented as "discontinued  operations" in the  accompanying  statement of
      operations.

                                      F-19
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9.    DISCONTINUED OPERATIONS, CONTINUED:

      The following is a summary of the assets and  liabilities of the insurance
      segment as of October 3, 1997:

        Assets:
<S>                                                                                 <C>                  <C>         

            Investments                                                                                  $ 51,513,000
            Receivables and other current assets                                                           22,070,000
            Long-term assets                                                                                1,328,000
                                                                                                         ------------

                                                                                                           74,911,000
          Liabilities:
            Insurance reserves supported by investments                                                    26,356,000
            Accounts payable and other current liabilities                                                 19,544,000
                                                                                                         ------------
          Net investment in insurance segment                                                            $ 29,011,000
                                                                                                         ============

10.   SALE OF CASH & CARRY DIVISION:

      On May 15, 1998,  the Company  sold to an  unrelated  party the assets and
      liabilities  of its  Cash & Carry  division,  consisting  of 40  wholesale
      grocery stores.  The net sales proceeds  included a $17,500,000  note from
      the buyer. The Company realized a gain on the sale, as follows:

         Net sales proceeds                                                                              $ 55,486,000
                                                                                                         ------------
         Net investment in Cash & Carry division:
           Current assets                                                                                  26,589,000
           Non-current assets                                                                               5,864,000
           Current liabilities                                                                             (6,000,000)
                                                                                                         ------------

                                                                                                           26,453,000
                                                                                                         ------------

                                                                                                         $ 29,033,000
                                                                                                         ============

      The accompanying consolidated statements of operations for the years ended
      October 2, 1998  (through  May 15,  1998) and October 3, 1997  include the
      following amounts with respect to the Cash & Carry division:

                                                                                       1998                1997

         Net sales and operations                                                   $  22,797,000        $ 37,530,000
         Costs and expenses                                                           (22,380,000)        (34,551,000)
         Other income                                                                   1,519,000           1,179,000
                                                                                    -------------        ------------
              Income before income taxes                                            $   1,936,000        $  4,158,000
                                                                                    =============        ============
</TABLE>

                                      F-20
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11.   MEMBERS' PATRONAGE DIVIDENDS:

      The  Company's  income  from sales to  members,  before  income  taxes and
      patronage  dividends,  is  available,  at the  discretion  of the Board of
      Directors,  to be  returned  to the  members  in  the  form  of  patronage
      dividends. No patronage earnings were available to pay patronage dividends
      for the years ended October 2, 1998 and October 3, 1997.

12.   REINSURANCE:

      Reinsurance  contracts do not relieve the Company from its  obligation  to
      policyholders.  Failure of  reinsurers  to honor their  obligations  could
      result in losses to the  Company.  The  Company  evaluates  the  financial
      condition of its  reinsurers  and monitors  concentrations  of credit risk
      arising  from  similar  geographic   regions,   activities,   or  economic
      characteristics  of the reinsurers to minimize its exposure to significant
      losses from reinsurer insolvencies.

      The Company limits the maximum net loss that can arise from large risks or
      risks in  concentrated  areas of exposure by reinsuring  (ceding)  certain
      levels of risk with other insurers or  reinsurers,  either on an automatic
      basis  under  general  reinsurance  contracts  known as  "treaties"  or by
      negotiation on substantial  individual risks. Ceded reinsurance is treated
      as the risk and liability of the assuming companies.

      Reinsurance  amounts  reflected in the financial  statements as of and for
      the year ended October 3, 1997 are as follows:

          For the balance sheet:
<TABLE>
<S>                                                                                                   <C>             
            Reinsurance recoverable                                                                   $      9,440,000
            Prepaid reinsurance premiums                                                                     3,746,000
                                                                                                      ----------------

              Total                                                                                   $     13,186,000
                                                                                                      ================
          For the statement of operations:
            Premiums written:
              Gross                                                                                   $     31,198,000
              Assumed                                                                                          742,000
              Ceded                                                                                        (10,331,000)
                                                                                                      ----------------

              Net premiums written                                                                    $     21,609,000
                                                                                                      ================
            Premiums earned:
              Gross                                                                                   $     29,596,000
              Assumed                                                                                          682,000
              Ceded                                                                                         (9,698,000)
                                                                                                      ----------------

              Net premiums earned                                                                     $     20,580,000
                                                                                                      ================
            Expenses:
              Losses and loss adjustment expenses                                                     $     16,610,000
              Reinsurance recoveries                                                                        (3,142,000)
                                                                                                      ----------------

              Net losses and loss adjustment expenses                                                 $     13,468.000
                                                                                                      ================
</TABLE>

                                      F-21
<PAGE>

United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued

13. SEGMENT REPORTING:

       A  summary  of  information   about  the  Company's   operations  by  the
       distribution and insurance segments for the year ended October 3, 1997 is
       as follows:

          Net sales and operations:
            Distribution                                        $ 1,306,602,000
            Insurance (1)                                            22,231,000
                                                                ---------------

                Total                                           $ 1,328,833,000
                                                                ===============

          Income (loss) before income taxes:
            Distribution                                        $   (21,627,000)
            Insurance (1)                                             4,167,000
                                                                ---------------

                Total                                           $   (17,460,000)
                                                                =============== 

          Depreciation and amortization expense:
            Distribution                                        $    11,483,000
            Insurance (1)                                               359,000
                                                                ---------------

                Total                                           $    11,842,000
                                                                ===============

          Capital expenditures, including software:
            Distribution                                        $    21,974,000
            Insurance                                                    79,000
                                                                ---------------

                Total                                           $    22,053,000
                                                                ===============

          Total assets at October 3, 1997:
            Distribution                                        $   290,516,000
            Insurance                                                74,911,000
                                                                ---------------

                Total                                           $   365,427,000
                                                                ===============

      (1) Reported as discontinued operations.

                                      F-22
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.   RETIREMENT PLANS:

      The Company has a Company-sponsored pension plan that covers substantially
      all of its salaried employees.  The Company has made annual  contributions
      to the plan equal to the amount annually accrued for pension expense.  The
      Company's  funding  policy is to satisfy the funding  requirements  of the
      Employees' Retirement Income Security Act.

      In  determining  the  actuarial  present  value of the  projected  benefit
      obligation,  a  discount  rate of 6.75%  and  7.75% was used for the years
      ended  October 2, 1998 and  October 3,  1997,  respectively,  and a future
      maximum  compensation  increase  rate of 2.75%  and 3.75% was used for the
      years  ended  October  2, 1998 and  October  3,  1997,  respectively.  The
      expected long-term rate of return on assets was 8%.

      Pension costs for the plan consist of the following:

<TABLE>
                                                                                            1998                1997
          Company-sponsored:
<S>                                                                                      <C>                <C>       

            Service costs of benefits earned                                             $ 1,184,000       $ 1,155,000
            Interest cost on the projected benefit obligation                              1,856,000         1,788,000
            Expected return on plan assets                                                (2,616,000)       (2,197,000)
            Amortization of:
               Unrecognized net asset                                                       (168,000)         (168,000)
               Unrecognized net gain                                                      (4,962,000)         (100,000)
               Unrecognized prior service cost                                                61,000            61,000
                                                                                         -----------        ----------

               Net periodic pension cost (benefit)                                       $(4,645,000)       $  539,000
                                                                                         ===========        ==========
</TABLE>

      Amortization  of the  unrecognized  net gain for the year ended October 2,
      1998, includes the cumulative effect of a change in accounting method (see
      Note 1) of $2,912,000.

                                      F-23
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.   RETIREMENT PLANS, CONTINUED:

      The following table sets forth the plan's funded status as of years end:

<TABLE>
                                                                                         OCTOBER 2,         OCTOBER 3,
                                                                                            1998               1997
          Actuarial present value of benefit obligations:
<S>                                                                                    <C>                <C>         
            Vested                                                                     $ 27,082,000       $ 17,200,000
            Non-vested                                                                      841,000          1,137,000
                                                                                        -----------       ------------

               Accumulated benefit obligation                                            27,923,000         18,337,000

            Effect of projected future compensation levels                                2,125,000          5,268,000
                                                                                        -----------       ------------

               Projected benefit obligation                                              30,048,000         23,605,000
          Plan assets at fair value, primarily listed stocks, fixed income and
               bond and equity funds                                                     33,919,000         33,541,000
                                                                                        -----------       ------------

               Excess of plan assets over projected benefit obligation                   3,871,000          9,936,000

          Unrecognized net asset                                                         (1,225,000)        (1,393,000)
          Unrecognized net gain                                                            (976,000)        (9,064,000)
          Unrecognized prior service cost                                                    271,000            594,000
                                                                                        -----------       ------------

               Prepaid pension cost                                                     $ 1,941,000       $     73,000
                                                                                        ===========       ============
</TABLE>

      The Company also participates in several  multi-employer pension plans for
      the benefit of its employees  who are union  members.  The data  available
      from  administrators  of the  multi-employer  plans is not  sufficient  to
      determine  the  accumulated  benefits  obligation,   nor  the  net  assets
      attributable  to the  multi-employer  plans in which the  Company's  union
      employees participate.  The Company's costs for these multi-employer plans
      for the years ended  October 2, 1998 and  October 3, 1997 were  $3,965,000
      and $3,874,000, respectively.

      In addition to providing  pension  benefits,  the Company provides certain
      medical  benefits  for  certain  salaried  retirees,  spouse and  eligible
      dependents.  Employees  who were hired prior to January 1, 1989,  the last
      eligibility date, and have met the Company's minimum service requirements,
      become eligible for these benefits.  The post-retirement  medical benefits
      available are  non-contributory in nature and it is the Company's practice
      to fund these benefits as incurred.

                                      F-24
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.   RETIREMENT PLANS, CONTINUED:

      The following table presents the status of the plan and amounts recognized
      for post-retirement  benefits in the Company's financial  statements as of
      and for the years ended October 2, 1998 and October 3, 1997:

<TABLE>
                                                                                            1998              1997
         Accumulated post-retirement benefit obligation:
<S>                                                                                     <C>               <C>         
           Retirees                                                                     $  2,515,000      $  1,810,000
           Fully eligible active plan participants                                         1,111,000         1,578,000
           Other active plan participants                                                     370,000           927,000
                                                                                        ------------      ------------

              Total accumulated post-retirement benefit obligation                         3,996,000         4,315,000

         Unrecognized net transition obligation                                           (3,075,000)       (3,331,000)
                                                                                        ------------      ------------

              Accrued post-retirement benefit obligation                                $    921,000      $    984,000
                                                                                        ============      ============

         Net periodic post-retirement benefit cost includes the following
              components for the years ended October 2, 1998 and
              October 3, 1997:
           Service cost                                                                 $     24,000      $     52,000
           Interest cost                                                                     246,000           271,000
           Amortization of transition obligation                                             178,000           169,000
                                                                                        ------------      ------------

              Net periodic post-retirement benefit cost                                 $    448,000      $    492,000
                                                                                        ============      ============
</TABLE>

      The assumed  health care cost trend rate used to measure the expected cost
      of benefits was 11% in year one,  decreasing 1% per year to a minimum rate
      of 4%. The effect of a 1% increase  in the assumed  health care cost trend
      rate on the aggregate of the service and interest  cost  components of the
      net   periodic   post-retirement   benefit   cost   and  the   accumulated
      post-retirement  benefit  obligation would be to increase these amounts by
      approximately $12,000 and $170,000,  respectively.  The discount rate used
      in determining the accumulated  post-retirement benefit obligation was, 8%
      at the beginning and 7% at the end of the year ended October 3, 1998.

      The Company also has two separate  Company-sponsored  401(k) plans. In one
      plan,  all  salaried  non-union  employees  are  eligible to  participate.
      Contributions  by the  Company  are  at the  discretion  of the  Board  of
      Directors. In the other plan, union employees are eligible to participate,
      but the  Company  makes no  matching  contributions.  For the years  ended
      October  2,  1998  and  October  3,  1997,   the  Company  made   matching
      contributions  to  the  401(k)  plans  totaling   $262,000  and  $305,000,
      respectively.

                                      F-25
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

15.   LEASES:

      The Company has various  operating  leases for  buildings  and  equipment,
      certain of which are  subleased to affiliated  companies and members.  The
      leases expire at various dates through 2022.  Rental  expense  consists of
      the following:

<TABLE>
                                                                                          1998              1997

<S>                                                                                    <C>              <C>         
          Minimum rentals                                                              $ 25,768,000     $ 24,551,000
          Less sublease income                                                           (8,844,000)     (10,506,000)
                                                                                       ------------     ------------
               Net rental expense                                                      $ 16,924,000     $ 14,045,000
                                                                                       ============     ============
</TABLE>

       The following is a schedule by years showing future minimum rentals under
       operating  leases that have  initial or  remaining  non-cancelable  lease
       terms in excess of one year as of October 2, 1998 and October 3, 1997:

<TABLE>
                                                                    (a)                 (b)
                                                                  Minimum             Minimum                Net
                                                                  Payments            Receipts             Minimum
                                                                -------------        ------------       ------------
            Fiscal Year
          ---------------
<S>       <C>                                                   <C>                  <C>                <C>         
          1999                                                  $  21,486,000        $  8,890,000       $ 12,596,000
          2000                                                     19,408,000           8,143,000         11,265,000
          2001                                                     17,016,000           7,689,000          9,327,000
          2002                                                     15,616,000           7,247,000          8,369,000
          2003                                                     13,786,000           6,567,000          7,219,000
          Thereafter                                               82,695,000          57,044,000         25,651,000
                                                                -------------        ------------       ------------

               Total                                            $ 170,007,000        $ 95,580,000       $ 74,427,000
                                                                =============        ============       ============

          Summary:
            Building leases                                     $ 141,073,000        $ 89,266,000       $ 51,807,000
            Equipment leases                                       28,934,000           6,314,000         22,620,000
                                                                -------------        ------------       ------------

               Total                                            $ 170,007,000        $ 95,580,000       $ 74,427,000
                                                                =============        ============       ============
</TABLE>

          (a) Minimum  payments are those required by the Company over the terms
          of significant leases.
          (b) Minimum  receipts  are those to be  received  by the Company  from
          sublease agreements.

                                      F-26
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

15.   LEASES, CONTINUED:

      The Company has accrued  $7,751,000  and  $7,310,000 as of October 2, 1998
      and October 3, 1997, respectively,  for the estimated losses on subleasing
      arrangements,   $5,896,000  and  $5,505,000,  respectively,  of  which  is
      included in other liabilities and $1,855,000 and $1,805,000, respectively,
      of which is  included in other  current  liabilities  in the  accompanying
      consolidated balance sheet.

      The Company  has  entered  into  sale-leaseback  transactions  for various
      supermarket properties,  which resulted in deferred gains of approximately
      $1,257,000  and  $3,650,000  as of  October  2, 1998 and  October 3, 1997,
      respectively.  The deferred  gains are being  amortized over the leaseback
      periods  of  twenty  years.  The total  remaining  lease  commitments  are
      approximately  $7,877,000  over  nineteen  years with an annual  rental of
      approximately $336,000.

16.   SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
                                                                                          1998              1997
          Supplemental disclosures:
            Cash paid during the years for:
<S>                                                                                    <C>             <C>       
               Interest                                                                $ 12,738,000    $ 16,342,000
               Income taxes, net of refunds of $1,200,000 in 1998                         4,800,000         151,000
            Supplemental schedule of noncash investing and financing activities:
               Sale of insurance segment in exchange for note receivable                  4,000,000
               Sale of Cash & Carry  division  and  other  assets  in exchange for
                    notes receivable                                                     18,846,346
               Members' allowances paid in common stock                                                     773,000
               Exchange of member account receivable for equity interest
                    in affiliate                                                                            362,000
               Exchange of investment in affiliate for note
                    receivable                                                            4,550,000
</TABLE>

17.   AFFILIATED COMPANIES:

      The Company owns  interests in  affiliates  which are accounted for on the
      equity method. One affiliate is a vendor that provides private label brand
      merchandise.  The other  affiliates  operate retail grocery stores and are
      also  members  of  the  Company.   R.A.F.  Limited  Liability  Company  is
      controlled by a member of the Company's Board of Directors.

                                      F-27
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

17.   AFFILIATED COMPANIES, CONTINUED:

      An  approximate  summary  of  aggregate  balances  and  transactions  with
      affiliates  in which the  Company  had an  interest  as of  year-end is as
      follows:

<TABLE>
                                                                                    1998                   1997
          Balance sheet:
<S>                                                                             <C>                   <C>          
            Equity interest                                                     $   3,360,000         $   6,971,000
            Accounts receivable                                                     2,651,000             2,898,000
            Notes receivable                                                                                428,000
            Accounts payable                                                        4,079,000             7,046,000
          Statement of operations:
            Sales                                                                   2,933,000           137,029,000
            Purchases                                                             119,495,000           118,268,000
            Volume incentive rebate for purchases from affiliated
                  company                                                           4,361,000             3,909,000
            Refunds, rebates and member allowances to affiliated
                  companies                                                            34,000             1,985,000
            Equity in earnings of affiliated companies                                169,000               107,000
</TABLE>

      These  affiliates and the Company's net  investments as of October 2, 1998
      and October 3, 1997 and  percentages  of ownership  during the years ended
      October 2, 1998 and October 3, 1997 are as follows:

<TABLE>
                                                                                           NET          PERCENTAGE
           1998                                                                        INVESTMENT       OWNERSHIP
           ----                                                                        ----------       ---------

<S>                                                                                     <C>                  <C>
         Western Family Holding Company                                                 $ 2,143,000          22%
         R.A.F. Limited Liability Company                                                 1,081,000          94%
         Other                                                                              136,000
                                                                                        -----------

                                                                                        $ 3,360,000
                                                                                        ===========
           1997
           ----

         Western Family Holding Company                                                 $ 1,974,000          22%
         C & K Market, Inc. (sold July 1997)                                                                 22%
         R.A.F. Limited Liability Company                                                 1,081,000          94%
         North State Grocery, Inc.                                                        3,623,000          26%
         Other                                                                              293,000
                                                                                        -----------
                                                                                        $ 6,971,000
                                                                                        ===========
</TABLE>

                                      F-28
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

17.   AFFILIATED COMPANIES, CONTINUED:

      Combined  unaudited  financial  information  of the  affiliated  entities,
      including third-party interests, is as follows:

<TABLE>
                                                           OCTOBER 2,          OCTOBER 3,
                                                              1998                 1997
                                                         -------------       -------------

<S>                                                    <C>                  <C>           
            Current assets                             $    41,903,000      $   55,359,000
            Non-current assets                               4,185,000          13,559,000
            Current liabilities                             35,905,000          49,193,000
            Non-current liabilities                                              3,872,000
            Owners' equity                                  10,184,000          15,853,000

                                                           YEAR ENDED           YEAR ENDED
                                                            OCTOBER 2,          OCTOBER 3,
                                                               1998                1997
                                                         -------------       -------------

            Revenues                                     $ 525,514,000       $ 633,124,000
            Gross profit                                    19,550,000          46,506,000
            Net income (loss)                                  (77,000)            220,000
</TABLE>

      All of these  affiliates  are privately  held companies for which no ready
      market values are available. In management's opinion, the equity interests
      as stated are equal to or less than the fair market value of the Company's
      interests in these affiliates.

18.   RELATED PARTY TRANSACTIONS:

      The Company is owned by its primary customers,  and its board of directors
      consists  entirely of members  who are also  customers;  accordingly,  the
      nature of the Company's  business involves a significant number of related
      party  transactions.  Such  transactions  with  members,  some of whom are
      directors,   include  leasing  and  sub-leasing  arrangements,   sales  of
      merchandise  and  related  extensions  of  trade  credit,   extensions  of
      long-term credit for members' purchases of fixed assets,  notes payable to
      members for  capital  stock and  capital  investment  notes and payment of
      purchase  incentives  (see  "members'   allowances"  in  the  accompanying
      consolidated  statement of  operations)  in the form of cash and shares of
      the Company's stock.

                                      F-29
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

19.   CONCENTRATIONS OF CREDIT RISK:

      Financial instruments that potentially subject the company to significant
      concentrations  of  credit  risk  consist  principally  of cash  and  cash
      equivalents,   investments,  store  financing  loans  and  trade  accounts
      receivable.

      The Company holds its cash and cash  equivalents  in several banks located
      in the Pacific  Northwest  and a zero balance bank account  located in the
      Midwest.  Each bank is covered by Federal Depositors Insurance Corporation
      insurance; balances in excess of coverage are not insured.

      As a  cooperative,  the  majority  of the  Company's  accounts  receivable
      represent  sales to its  members who are  located  throughout  the Pacific
      Northwest  and  Northern  California.  These  accounts  are not  generally
      collateralized  but each member has stock  holdings in the Company as well
      as  patronage  rebates  which the  Company  could  apply  against  account
      balances.

      The Company  makes  store  financing  loans to members  from time to time,
      mainly  to  finance  the  acquisition  of  grocery  store  properties  and
      equipment.  These  loans are  represented  by notes  receivable  which are
      collateralized with personal property, securities and guarantees.

      The Company performs ongoing credit  evaluations of its members' financial
      condition and maintains allowances for potential credit losses.

20.   FAIR VALUE OF FINANCIAL INSTRUMENTS:

      The  following  disclosure  of  the  estimated  fair  value  of  financial
      instruments is made in accordance  with the  requirements of SFAS No. 107,
      Disclosures About Fair Value of Financial Instruments.  The estimated fair
      value amounts have been determined by the Company using  available  market
      information and appropriate valuation methodologies.

      The  following  methods  and  assumptions  were  used  by the  Company  in
      estimating its fair value disclosures for financial instruments:

      Cash and cash  equivalents and long-term notes  receivables - the carrying
      amounts  reported in the balance sheet for cash and cash  equivalents  and
      long-term receivables approximate their fair value.

      Investments restricted or maintained for insurance reserves - see Note 4.

      Investment  in  and  accounts  with  affiliated  companies  -  it  is  not
      practicable to estimate the fair value of an investment  representing  the
      common stock of a privately-held  company because the stock is not traded;
      thus, the investments are carried at original cost plus equity in earnings
      to date in the consolidated balance sheet. Such investments are subject to
      review for possible impairment.

                                      F-30
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

20.   FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:

      Notes payable - the carrying  amounts of  variable-rate  debt  instruments
      approximate their fair value. The fair values of fixed-rate long-term debt
      are estimated  using  discounted cash flow analyses based on the Company's
      incremental  borrowing rates for similar types of borrowing  arrangements.
      The assumed  incremental  borrowing rates used to determine the fair value
      of fixed-rate long-term debt were 8% to 11% for 1998 and 1997.

      The  carrying  amounts  and  approximate  fair  values  of  the  Company's
      financial instruments at the balance sheet date are as follows:

<TABLE>
                                                                                      CARRYING              FAIR
             1998                                                                     AMOUNTS              VALUES
          ----------                                                               ---------------        -----------

<S>                                                                                <C>                    <C>        
          Cash and cash equivalents                                                $     1,294,000        $ 1,294,000
          Long-term notes receivable, including the current portion, net
               of allowance for doubtful notes                                          32,686,000         32,686,000
          Investment in and accounts with affiliated companies                           3,360,000          3,360,000
          Notes payable                                                                115,593,000        112,688,000

             1997
          ----------

          Cash and cash equivalents                                                   $ 10,223,000       $ 10,223,000
          Long-term notes receivable, including the current portion, net
               of allowance for doubtful notes                                          18,334,000         18,334,000
          Investment in and accounts with affiliated companies                           6,971,000          6,971,000
          Notes payable                                                                198,186,000        193,886,000
</TABLE>

21.   COMMITMENTS AND CONTINGENCIES:

      The Company  has  entered  into  various  agreements  under which it sells
      certain of its notes  receivable from members subject to limited  recourse
      provisions.   These  notes  are   collateralized  by  personal   property,
      securities and guarantees.  The Company in turn receives a monthly service
      fee.  The Company  recognizes  the net present  value of the excess of the
      future service fees over the estimated service cost as a service asset and
      related gain upon the sale of a loan.  The service asset is amortized over
      the life of the related note agreement. In the years ended October 2, 1998
      and  October 3,  1997,  the  Company  sold  notes  totaling  approximately
      $1,518,000  and  $13,205,000,  respectively,  and  recognized  $20,000 and
      $1,734,000,   respectively,  of  gains  on  the  sales.  The  balances  of
      transferred notes that were outstanding and subject to recourse provisions
      were  approximately  $24,426,000  and  $39,313,000  at October 2, 1998 and
      October 3, 1997, respectively. The unamortized service asset as of October
      2, 1998 and October 3, 1997 was $1,281,000 and  $1,969,000,  respectively.
      In the event the  Company is in default of other  credit  agreements,  the
      buyer of these notes has the right to demand collection of the outstanding
      notes balances from the Company.

                                      F-31
<PAGE>

UNITED GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

21.   COMMITMENTS AND CONTINGENCIES, CONTINUED:

      The Company is guarantor of a covenant not to compete and loans by members
      as of  October  2, 1998  totaling  approximately  $6,740,000  with  annual
      payments of approximately $837,000. 

      The  Company is a party to various  litigation  and claims  arising in the
      ordinary  course of business.  While the  ultimate  effect of such actions
      cannot be predicted with  certainty,  the Company expects that the outcome
      of these  matters  will not  result in a  material  adverse  effect on the
      Company's consolidated  financial position,  results of operations or cash
      flows.

      The Company is guarantor of a letter of credit a customer has with a bank.
      The letter of credit is  $1,500,000,  of which no amount has been drawn at
      October 2, 1998.

                                      F-32
<PAGE>

[Graphic - PricewaterhouseCoopers logo]

                                         PRICEWATERHOUSECOOPERS LLP
                                         1300 Southwest Fifth Avenue  Suite 3100
                                         Portland  OR 97201-5638
                                         Telephone (503) 417 2400

                       REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE


January 8, 1999

To the Board of Directors
United Grocers, Inc.

Our audits of the consolidated  financial  statements  referred to in our report
dated January 8, 1999 appearing in this Form 10-K of United  Grocers,  Inc. also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K.  In our opinion,  this  financial  statement  schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

                                      F-33
<PAGE>

                UNITED GROCERS, INC. AND SUBSIDIARIES SCHEDULE II
                      -------------------------------------
                        VALUATION AND QUALIFYING ACCOUNTS
             FOR THE YEARS ENDED OCTOBER 2, 1998 AND OCTOBER 3, 1997
             -------------------------------------------------------

<TABLE>
Column A                          Column B            Column C               Column D        Column E
-----------                    ------------  -------------------------------------------------------

                               Balance at            Charged to             Deductions       Balance at
                               beginning             costs and                                 end of
Description                    of period              expenses                                  period

<S>                             <C>                    <C>                  <C>              <C>
1998:
Reserves deducted in
 balance sheet from asset
 to which it applies -
 Allowance for doubtful
 accounts for:
  Accounts receivable            $ 7,598,000            $ 1,440,000           $(7,802,000)   $ 1,236,000
  Notes receivable                 2,529,000              1,000,000            (3,215,000)       314,000
                                 -----------            -----------          ------------    -----------
             Total               $10,127,000            $ 2,440,000          $(11,017,000)   $ 1,550,000
                                 ===========            ===========          ============    ===========


1997:
Reserves deducted in
 balance sheet from asset
 to which it applies -
 Allowance for doubtful
 accounts for:
  Accounts receivable            $ 1,140,000            $ 7,000,000          $(   542,000)   $ 7,598,000
  Notes receivable                 1,110,000              2,943,000           ( 1,524,000)     2,529,000
                                 -----------            -----------          ------------    -----------
             Total               $ 2,250,000            $ 9,943,000          $( 2,066,000)   $10,127,000
                                 ===========            ===========          ============    ===========
</TABLE>

The report of independent accountants on the financial statement schedule should
be read with this supplemental schedule.


                                       F-34
<PAGE>

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

    On June 17, 1997, the Board of Directors of the Company  engaged the firm of
PricewaterhouseCoopers  LLP  (formerly  Coopers  &  Lybrand  LLP) to  audit  the
financial  information  for the year ended  October 3, 1997.  The firm of DeLap,
White and Raish was  dismissed  on the same  day.  This  change in  Registrant's
certifying accountant was reported by submission of a current report on Form 8-K
on June 24,  1997.  The Company has had no  disagreements  with its  independent
accountants on accounting and financial disclosure matters.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

    A. Identification of Directors

         Name          Age    Principal Occupation
         ----          ---    --------------------

    Directors whose terms expired in 1999:

    Kenneth Tucker     51     President, Evergreen Markets, Inc.
    Robert A. Lamb     58     Partner, Lamb Lasko Partnership
    Richard L. Wright  61     President, Wright's Foodliner, Inc.

    Directors whose terms began in 1997 and expire in 2000:

    James F. Glassel   58     President, Fatewell, Inc.
    Kenneth W. Findley 59     President, Bales for Food, Inc.
    Gaylon G. Baese    61     President, Howards on Scholls, Inc.

    Directors whose terms began in 1998 and expire in 2001:

    Peter J. O'Neal    54     President, Estacada Foods, Inc.
    Mary McDonald      64     President, M & S Grocers, Inc.
    Floyd West         58     President, Pioneer Super Save, Inc.

    Directors elected in 1999 for terms expiring in 2002:

    Gordon Smith       53     President, Marlea Foods, Inc.
    Kenneth Tucker     51     President, Evergreen Markets, Inc.
    Richard L. Wright  59     President, Wright's Foodliner, Inc.


    B. Identification of Executive Officers at October 2, 1998

       Name               Age     Offices Held                Officer Since
       ----               ---     ------------                -------------
       Charles E. Carlbom 64     President, Secretary, Treas.      1997
                                 Chief Executive Officer
       Terrence W. Olsen  58     Executive Vice President/Chief
                                 Operating Officer
                                 Asst. Secretary                   1997
       Paula Anctil       42     Senior Vice President             1996
       Mark Tweedie       40     Chief Financial Officer,
                                 Vice President                    1998
       Robin Thomas       49     Vice President                    1998

    C. Identification of Certain Significant Employees

       None.

    D. Family Relationships

       None.

                                       19
<PAGE>
    E. Business Experience

       All  executive  officers  have been  employed in the grocery  industry in
various  management and executive  capacities for more than the past five years.
Prior to employment with the Company, the officers were employed as indicated in
the following table:

    Officer                Former Employer                   Position(s)
Charles E. Carlbom    Western Family Foods, Inc.             President
Terrence W. Olsen     United A.G Coop, Inc.                  President
Paula Anctil          Brown & Cole, Inc.                     Vice President
                       Fleming Companies                     Asst Vice President
Mark Tweedie          Foodland Distributors                  Director of Finance
Robin Thomas          SUPERVALU                              Marketing Director

                The  former  employers  of the  officers  named  above were of a
similar  size (with the  exception  of Brown & Cole,  Inc.,  which is a regional
operator of supermarkets) to the Company.  The duties and responsiblities of the
named  officers  were of  similar  scope to those  they are  performing  for the
Company.  The Company has an equity interest in the parent company of the former
employer of Mr. Carlbom,  Western Family Foods, Inc., and purchases product from
Western Family Foods, Inc. in the normal course of business.

       All  directors  have  been  principally  engaged  in the  retail  grocery
business for more than the past five years with the firms shown  opposite  their
names.  Except as  described  in Item 13 below,  none of such firms is a parent,
subsidiary or other affiliate of United.

       No director is a director in another  company with a class of  securities
registered  pursuant  to Section 12 of the  Securities  Exchange  Act of 1934 or
subject  to the  requirements  of  Section  15(d)  of  such  Act or any  company
registered as an investment company under the Investment Company Act of 1940.

    F.  Involvement in Certain Legal Proceedings

        None.

Item 11.  Executive Compensation

    A.  Summary Compensation Table

       The  following  table shows the  compensation,  during each of the fiscal
years in the three year  period  ended  October  2, 1998,  earned by each of the
Company's  executive  officers in fiscal 1997 or fiscal 1998 whose total  annual
salary and bonus for fiscal 1997 or fiscal  1998  exceeded  $100,000.  The table
excludes  individuals  who were not  officers at fiscal year end,  but  includes
individuals who served as chief executive officer at any time during fiscal 1997
or fiscal  1998.  The Company  does not provide  long term  compensation  to its
executive officers other than retirement benefits, as discussed below.


Name of
Individual                       Annual Compensation            All
and                                                           Other
Principal                                                   Compen-
Position              Year      Salary        Bonus         sation (2)
----------             ----      ------       -----        -----------
Charles E. Carlbom    1998     $180,000      $200,000        $ 2,908
President, Secretary, 1997       55,385           -0-            -0-
Treasurer (Chief
Executive Officer)

Terrence W. Olsen     1998      150,000        25,000          3,462
Executive Vice-       1997       11,077           -0-            -0-
President and Chief   
Operating Officer

Mark Tweedie          1998      120,000        10,000            -0-
Chief Financial       1997       79,644           -0-            -0-
Officer


                                       20
<PAGE>

Paula Anctil          1998      114,385          -0-          1,917
Senior Vice President 1997       92,111          -0-            -0-


Alan Jones(1)         1998          -0-          -0-        325,877
Former Secretary,     1997      229,200          -0-        119,457
Treasurer, Chief      1996      268,676        60,000        37,228
Executive Officer     

(1) Mr. Jones'  employment  terminated in July 1997. He received payments in the
amount  of  $275,000  in 1998 and  $45,800  in 1997  pursuant  to the  severence
provisions of an employment contract in place at the time his employment ceased,
which  amounts are  included  under "All Other  Compensation"  above.  Beginning
October 3,  1998,  the  Company  is  obligated  to pay Mr.  Jones  approximately
$137,500 per year through February 2003, plus certain insurance benefits.

(2) Includes amounts paid pursuant to the employment contract with Mr. Jones and
other programs generally  available to employees of the Company as follows:  Mr.
Carlbom, $2,908; Mr. Olsen, $3,462; Ms. Anctil, $1,917; and Mr. Jones $29,957 in
1997. Also includes $43,700 paid in 1998, $43,700 paid in 1997, and $30,000 paid
in 1996 for the benefit of Mr. Jones as insurance benefits. The Company provides
Mr.  Jones with a Company car and  provided  him with a social  membership  at a
local golf club through 1997. See note (1) above.

C.  Retirement Plan

       The Company's  retirement  plan is an actuarially  funded defined benefit
plan.  The following  table shows the  estimated  annual  benefits  payable upon
retirement  (assuming  normal  retirement  at age 65) for employees at specified
annual salary levels (based upon the highest average of five consecutive  years)
with various years of service.

Annual                                  Pension Plan Table
Remuneration                            Years of Service *
------------                            -------------------
                   10      15         20        25        30         35

    $50,000   $ 7,432  $11,148    $14,863   $18,579    $22,295   $26,011
    $75,000   $12,057  $18,085    $24,113   $30,142    $36,170   $42,198
    100,000   $16,682  $25,022    $33,363   $41,704    $50,045   $58,386
    125,000   $21,306  $31,960    $42,613   $53,267    $63,920   $74,573
    150,000   $25,932  $38,898    $51,863   $64,829    $77,795   $90,791

* Under the present terms of the Company's  retirement  plan, the maximum salary
level and number of years of service  considered for the purposes of determining
benefits are $150,000 and 35 years, respectively.


The number of years of service under the plan for the officers listed under Item
10 is as follows:

                                                    Years of
                         Person                     Service
                         ------                     --------
                     Charles E. Carlbom                 1
                     Terrence W. Olsen                  1
                     Paula Anctil                       2
                     Mark Tweedie                       1
                     Robin Thomas                       0

       The amount of  compensation  used in calculation of pension  benefits for
all officers is the dollar amount shown under  "salary" and "bonus,"  subject to
plan limitations, in the table for Item 11, Section A. above.

     Amounts  payable  under the plan are not  subject to  deduction  for social
security or other offset amounts.

       D.   Remuneration of directors

Directors,  except the Chairman of the Board,  received $10, plus expenses,  for
each board meeting attended.  The Chairman received $25, plus expenses, for each
board  meeting  attended  and for each  additional  day spent on the  conduct of
United's business.

                                       21
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management

       A.   Security Ownership of Certain Beneficial Owners

       The  following  table sets forth  information  as of December  28,  1998,
regarding each person known to United to be the beneficial  owner of more than 5
percent of United's Common Stock.


Title of Class    Name and address    Amount and nature of   Percent of
                of beneficial owner   beneficial ownership      class
--------------  -------------------   --------------------   ----------

United Grocers,  Raymond L. Nidiffer      57,650 shares *   11.0% of class
Inc., Common     P. O. Box 730
Stock            Brookings, OR  97415



*   Mr.  Nidiffer  has sole  voting and  investment  power with  respect to the
shares indicated in the table.


       B.   Security Ownership of Management.

            As of December 28, 1998, the directors of United owned the indicated
amounts of United's Common Stock, United's only class of voting security.

                                Amount of                      
                                Beneficial            Percent
          Beneficial Owner      Ownership (1)(2)      of class
          ----------------      ------------------    --------
          Directors:

          Kenneth Tucker           526 shares           .1%(3)
          Floyd West             3,273 shares           .6 (3)
          Peter J. O'Neal          683 shares           .1 (3)
          Mary McDonald          4,212 shares           .8 (3)
          Gaylon G. Baese        4,216 shares           .8 (3)
          Kenneth W. Findley    11,499 shares          2.2 (5)
          Robert A. Lamb        13,749 shares          2.6 (4)
          James Glassel          1,155 shares           .2 (3)
          Richard L. Wright     25,033 shares          4.8 (3)

          Directors and
            officers as
            a group             64,346 shares         12.3

          The following directors, elected January 15, 1999, owned the indicated
amounts of United's Common Stock.

      *   Richard Wright
      *   Kenneth Tucker
          Gordon Smith           4,698 shares           .9 (6)

      *   Incumbent director, share data included under director table

(1)       According to the bylaws, each stockholder of record is entitled to one
          vote and one vote only, irrespective of number of shares owned. All of
          the  above-named  individuals  have only one vote,  except for Messrs.
          O'Neal,  Wright, Lamb and Findley, who may be deemed to have more than
          one vote because  they have  interests  in various  entities  that own
          shares.

                                       22
<PAGE>

(2)       Except as indicated  below,  all of the above-named  individuals  have
          sole voting and investment  power with respect to the shares indicated
          in the table.

(3)       These  shares are owned  jointly by the person named and his spouse or
          by a corporation  whose stock is owned jointly by the person named and
          his spouse.

(4)       These shares are owned by a corporation and a partnership in which
          Mr. Lamb has an equity or voting interest.

(5)       These shares are owned by two  corporations in which Mr. Findley has a
          voting interest.

(6)       These shares are owned by two corporations in which Mr. Smith
          has an equity interest.

  C.   Changes in Control.     

       None.

Item 13.  Certain Relationships and Related Transactions.

  A.   Transactions with Management and Others

       All directors (or their firms), as members of United,  purchase groceries
and related  products  from United in the ordinary  course of business at prices
available to members generally.

       In the ordinary  course of business,  United enters into prime leases and
subleases  property  to  qualified  members.  United  presently  is a  party  to
subleases with entities  affiliated  with Richard L. Wright,  Gaylon Baese,  and
Robert  Lamb,  directors  of United.  At October 2, 1998,  monthly  payments due
pursuant to the subleases were as follows:

       Wright                           $62,903
       Baese                            $20,625
       Lamb                             $95,452

       Pursuant to a stock purchase  agreement dated September 17, 1997,  United
sold  145,256  shares  of  stock  of C & K  Market,  Inc.  ("C&K")  to  C&K  for
$6,023,000.  The purchase price was determined by negotiation between United and
C&K. United had acquired the shares from C&K in 1994 for $5,750,000.  Raymond L.
Nidiffer,  a holder of more than five  percent of United's  common  stock,  is a
controlling shareholder of C&K.

       United sold a retail store and real property in Cloverdale, California to
C&K pursuant to an agreement  dated September 17, 1997, for a net purchase price
of approximately $4.7 million.  The purchase price was determined by negotiation
between  United and C&K.  United had acquired the real  property in 1994 and had
constructed  the store and related  improvements.  United  recognized  a loss of
approximately $500,000 in connection with the transaction in fiscal year 1997.

  B.   Certain Business Relationships

       During fiscal year 1998, RAF, LLC., a corporation  controlled by Wright's
Foodliner,  Inc. and the Registrant,  purchased  groceries and other products in
the ordinary  course of business  from United in the amount of  $2,933,180.  The
terms of sale for these  products were identical to terms offered to all members
of United.  United owns a 94% equity interest in RAF, LLC.  Wright's  Foodliner,
Inc. is controlled by Richard L. Wright, a director of the Registrant.

                                       23
<PAGE>

  C.   Indebtedness of Management

       The following  directors,  officers,  or related persons or entities were
indebted to United  during the fiscal year ended  October 2, 1998, or thereafter
and prior to the date of this report:

                               Largest
                              aggregate
                            amount of debt
                             outstanding                           # of
                                during           Balance at        Notes
                              year ended        November 30,     & Rate of
Name of Debtor                October 2,            1998          Interest
                                 1998
--------------              ---------------     ------------       ---------

Lambko, LLC                                                        One Note;
  Robert Lamb, Director         $184,000          $156,328         Variable

       The above loan was for purchase of  equipment  and is  collateralized  by
real estate. The variable rate loan bears interest at prime plus 2 percent.

       In  addition to the direct  loan  above,  the  Company  has entered  into
various  agreements  under which it sells certain of its notes  receivable  from
members,  including  directors,  subject to limited recourse  provisions.  These
notes are collateralized by personal property, securities, and guaranties.

                                       24
<PAGE>

                                  PART IV

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

    (a)   Documents filed as part of the report

    1. The following financial statements are filed as part of this report:

    Independent Accountant's Report on Financial Statements
    Consolidated Balance Sheets
    Consolidated Statements of Operations
    Consolidated Statements of Members' Equity
    Consolidated Statements of Cash Flows
    Notes to Consolidated Financial Statements
    Independent Accountant's Report on Financial Statement Schedule

    2.  The  following  financial  statement  schedule  is filed as part of this
report:

Schedule II -     Valuation and qualifying accounts

    3. Exhibits.  The exhibits listed on the accompanying  index to exhibits are
filed as part of this report.

    (b)   Reports on Form 8-K

          None.

                                   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.

                                            UNITED GROCERS, INC.
                                                  (Registrant)



Dated:    January 15, 1999                 By:  /s/ Charles E. Carlbom

                                                Charles E. Carlbom
                                                President and C.E.O.


                                       25
<PAGE>

   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


   Name                       Title                                 Date
   ----                       -----                                 ----

/s/ Charles E Carlbom       President, Secretary and              1-14-99
Charles E. Carlbom          Treasurer (Principal
                            executive officer)

/s/ Terrance W. Olsen       Executive Vice President,             1-14-99
Terrence W. Olsen           Asst. Secretary(Principal
                            operating officer)

/s/ Mark Tweedie            Vice President                        1-14-99
Mark Tweedie               (Principal financial officer
                            and principal accounting officer)


/s/ Robert A. Lamb          Director                              1-14-99
Robert A. Lamb


/s/ Peter J. O'Neal         Director                              1-14-99
Peter J. O'Neal


/s/ Kenneth W. Findley      Director                              1-14-99
Kenneth W. Findley


/s/ James F. Glassel        Director                              1-14-99
James F. Glassel


/s/ Richard L. Wright       Director                              1-14-99
Richard L. Wright


/s/ Gaylon G. Baese         Director                              1-14-99
Gaylon G. Baese


/s/ Mary Mc Donald          Director                              1-14-99
Mary McDonald


/s/ Floyd West              Director                              1-14-99
Floyd West


/s/ Kenneth Tucker          Director                              1-14-99
Kenneth Tucker

                                       26
<PAGE>

Supplemental  Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.

   Four copies of the annual report covering the company's last fiscal year will
be provided as supplemental information to the Commission.

   Enclosed with this report is a copy of proxy soliciting  material,  including
the form of proxy, sent to United's shareholders for the January 15, 1999 annual
meeting.

   The enclosed proxy soliciting material and, when provided,  the annual report
for the last fiscal year are, or will be,  furnished to the  Commission  for its
information  and shall not be deemed  filed  with the  Commission  or  otherwise
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934,
except to the extent  that the  Company  specifically  incorporates  them in its
annual report on this form by reference.

                                       27
<PAGE>

                              EXHIBIT INDEX

2.A               Copy of  agreement  for sale and  purchase of business  assets
                  dated July 8, 1998,  between the  registrant and Orion Capital
                  Corporation,   relating  to  the  sale  of  the   registrant's
                  insurance subsidiaries.

2.B               Copy of asset purchase  agreement dated May 15, 1998,  between
                  the registrant and Smart & Final Inc., relating to the sale of
                  the  registrant's  Cash &  Carry  operation  (incorporated  by
                  reference to Exhibit 10.A to the registrant's quarterly report
                  on Form 10-Q for the period ended July 3, 1998).

2.C               Copy of asset  purchase  agreement  dated  as of May 1,  1998,
                  among the  registrant,  Kero  Investments,  Inc,  Rich & Rhine
                  Acquisition Corp., and Rich and Rhine,  Inc.,  relating to the
                  sale of the business of Rich and Rhine, Inc.  (incorporated by
                  reference to Exhibit 10.B to the registrant's quarterly report
                  on Form 10-Q for the period ended July 3, 1998).

3.A               Copy of the registrant's  restated  articles of incorporation,
                  as amended  (incorporated  by  reference to Exhibit 4-E to the
                  registrant's   registration   statement   on  Form  S-2,   No.
                  33-26631).

3.B               Copy of the registrant's  bylaws, as amended  (incorporated by
                  reference to Exhibit 3 to the registrant's quarterly report on
                  Form 10-Q for the period ended March 29, 1996).

4.A               Copy of  indenture  dated as of February 1, 1978,  between the
                  registrant  and United  States  National  Bank of  Oregon,  as
                  trustee, relating to the registrant's Capital Investment Notes
                  (incorporated  by reference to Exhibit 4-I to the registrant's
                  registration statement on Form S-1, No. 2-60488).

4.B1              Copy of supplemental  indenture dated as of December 15, 1984,
                  between the  registrant  and United  States  National  Bank of
                  Oregon, as trustee,  relating to the registrant's  Series D 5%
                  Subordinated Redeemable Capital Investment Notes (incorporated
                  by reference to Exhibit 4-F to the  registrant's  registration
                  statement on Form S-2, No. 33-95213).

4.B2              Copy of supplemental  indenture dated as of December 15, 1986,
                  between the  registrant  and United  States  National  Bank of
                  Oregon, as trustee,  relating to the registrant's  Series E 5%
                  Subordinated Redeemable Capital Investment Notes (incorporated
                  by reference to Exhibit 4-G to the  registrant's  registration
                  statement on Form S-2, No. 33-11212).

4.B3              Copy of  supplemental  indenture dated as of January 27, 1989,
                  between the  registrant  and United  States  National  Bank of
                  Oregon, as trustee,  relating to the registrant's  Series F 5%
                  Subordinated Redeemable Capital Investment Notes (incorporated
                  by reference to Exhibit 4-G to the registrant's  Form 10-K for
                  the fiscal year ended September 30, 1989).

4.B4              Copy of  supplemental  indenture dated as of January 22, 1991,
                  between the  registrant  and United  States  National  Bank of
                  Oregon, as trustee,  relating to the registrant's  Series G 5%
                  Subordinated Redeemable Capital Investment Notes (incorporated
                  by reference to Exhibit 4-D to the  registrant's  registration
                  statement on Form S-2, No. 33-38617).

4.B5              Copy of  supplemental  indenture  dated  as of  July 6,  1992,
                  between the  registrant  and United  States  National  Bank of
                  Oregon, as trustee,  relating to the registrant's  Series H 5%
                  Subordinated Redeemable Capital Investment Notes (incorporated
                  by reference to Exhibit 4-C to the  registrant's  registration
                  statement on Form S-2, No. 33-49450).

4.B6              Copy of  supplemental  indenture  dated as of January 9, 1995,
                  between the registrant and First Bank National Association, as
                  trustee, relating to the registrant's Series J 5% Subordinated
                  Redeemable Capital Investment Notes (incorporated by reference
                  to Exhibit 4-C to the registrant's  registration  statement on
                  Form S-2, No. 33-57199).

                                       28
<PAGE>

4.B7              Copy of  supplemental  indenture dated as of January 21, 1997,
                  between the registrant and First Bank National Association, as
                  trustee, relating to the registrant's Series K 5% Subordinated
                  Redeemable Capital Investment Notes (incorporated by reference
                  to Exhibit 4-C to the registrant's  registration  statement on
                  Form S-2, No. 333-26285).

4.C               Copy of credit  agreement of August 25, 1998 between  Congress
                  Financial Corporation and the registrant.

4.D1              Copy of Loan Purchase and Servicing  Agreement dated as of May
                  13,  1994,  among  United  Resources,   Inc.,  as  Seller  and
                  Servicer, the registrant,  as Guarantor, and National Consumer
                  Cooperative  Bank, as Buyer,  relating to the selling of loans
                  originated by the registrant's  subsidiary,  United Resources,
                  Inc.  (incorporated  by  reference  to  Exhibit  4.F1  to  the
                  registrant's Form 10-K for the fiscal year ended September 30,
                  1994).

4.D2              Copy  of  First  Amendment  to  Loan  Purchase  and  Servicing
                  Agreement  of May 13, 1994,  dated as of July 15, 1994,  among
                  United Resources,  Inc., the registrant, and National Consumer
                  Cooperative Bank (incorporated by reference to Exhibit 4.F2 to
                  the registrant's Form 10-K for the fiscal year ended September
                  30, 1994).

4.D3              Copy of  Second  Amendment  to  Loan  Purchase  and  Servicing
                  Agreement  of May 13, 1994,  dated as of  September  28, 1995,
                  among United  Resources,  Inc., the  registrant,  and National
                  Consumer  Cooperative   Bank (incorporated   by  reference  to
                  Exhibit 4.F3 to the registrant's Form 10-K for the fiscal year
                  ended September 29, 1995).

4.D4              Copy  of  Loan  Purchase  and  Servicing  Agreement  (Holdback
                  Program)  dated  as of  September  28,  1995,  between  United
                  Resources, Inc., as Seller and Servicer, and National Consumer
                  Cooperative  Bank, as Buyer,  and related  guaranty  agreement
                  between  the  registrant  and  National  Consumer  Cooperative
                  Bank (incorporated   by  reference  to  Exhibit  4.F4  to  the
                  registrant's Form 10-K for the fiscal year ended September 29,
                  1995).

Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the registrant is not filing
certain  instruments  with  respect to its  long-term  debt  because  the amount
authorized  under any such  instrument  does not  exceed 10 percent of the total
consolidated  assets of the registrant at October 2, 1998. The registrant agrees
to  furnish  a copy  of any  such  instrument  to the  Securities  and  Exchange
Commission upon request.

10.A*             Copy of United Grocers, Inc., pension plan and trust agreement
                  dated as of  October 1, 1985  (incorporated  by  reference  to
                  Exhibit  10-A to the  registrant's  registration  statement on
                  Form S-2, No. 33-11212).

10.B*             Copy of first amendment to United Grocers,  Inc., pension plan
                  and trust agreement dated as of October 1, 1987  (incorporated
                  by reference to Exhibit 10-B to post-effective amendment No. 1
                  to the  registrant's  registration  statement on Form S-2, No.
                  33-11212).

10.C*             Copy of binder of insurance  notifications with respect to the
                  indemnification of officers and directors.

10.D1             Typical forms  executed in  connection  with loans to members,
                  including directors:

10.D1a            Installment note (Stevens-Ness form 217).

10.D1b            Promissory note (Stevens-Ness form 216).

10.D1c            Installment note.

                                       29
<PAGE>

10.D1d            Renewal note for fixed rate loan (incorporated by reference to
                  Exhibit  10-D1d to the  registrant's  Form 10-K for the fiscal
                  year ended September 29, 1995).

10.D1e            Loan agreement for subsequent notes

10.D1f            Loan agreement

10.D1g            Amendment  to   installment   note  and  security   agreements
                  (incorporated   by   reference   to  Exhibit   10-D1i  to  the
                  registrant's Form 10-K for the fiscal year ended September 29,
                  1995).

10.D1h            Security agreement (Stevens-Ness form 1201).

10.D1i            Purchase money security agreement (Stevens-Ness form 1202).

10.D1j            Security agreement for equipment (Stevens-Ness form 1203).

10.D1k            Inventory  loan  and  security  agreement  (Stevens-Ness  form
                  1206).

10.D1l            Security agreement (Equipment and Inventory).

10.D1m            Security   agreement  for  subsequent   notes  (Equipment  and
                  Inventory).

Pursuant to  Instruction 2 to Item 601 of  Regulation  S-K, the  registrant  has
filed the forms listed above in lieu of filing each copy  executed in connection
with loans to directors.  A schedule  showing the principal  amount and interest
rate of each director loan at October 2, 1998, appears in Item 13.C of this Form
10-K.  The  registrant  agrees to furnish a copy of any omitted loan document to
the Securities and Exchange Commission upon request.

10.D2             Typical form of residual  stock  redemption  note  executed in
                  connection with redemption of common stock from members.

Pursuant to  Instruction 2 to Item 601 of  Regulation  S-K, the  registrant  has
filed the form listed above in lieu of filing each copy executed in transactions
with directors.  The registrant agrees to furnish a copy of any omitted document
to the Securities and Exchange Commission upon request.

10.E*             Employment  Agreement  between the  registrant and Terry Olsen
                  dated October 1, 1998.

10.F1             Copy of sublease  agreement for Troutdale store dated December
                  15, 1993,  between the  registrant  and a partnership in which
                  Robert A. Lamb,  a director  of the  registrant,  is a partner
                  (incorporated   by   reference   to   Exhibit   10-F1  to  the
                  registrant's Form 10-K for the fiscal year ended September 29,
                  1995).

10.F2             Copy of sublease  agreement for  Wilsonville  store dated June
                  25, 1991,  between the  registrant  and a partnership in which
                  Robert A. Lamb,  a director  of the  registrant,  is a partner
                  (incorporated   by   reference   to   Exhibit   10-F2  to  the
                  registrant's Form 10-K for the fiscal year ended September 29,
                  1995).

10.F3             Copy of sublease  agreement for Portland  store dated July 30,
                  1997, between the registrant and a corporation in which Robert
                  A. Lamb, a director of the registrant, has an interest.

                                       30
<PAGE>

10.F4             Copy  of  sublease   agreement   for   equipment   located  at
                  Wilsonville store dated June 25, 1991,  between the registrant
                  and a  partnership  in which Robert A. Lamb, a director of the
                  registrant, is a partner.

10.G              Copy of sublease  agreement  for Tigard store dated August 28,
                  1991, between the registrant and a corporation in which Gaylon
                  G. Baese, a director of the registrant, has an interest.

10.H1             Copy of sublease  agreement for Eugene store dated October 27,
                  1991,  between  the  registrant  and a  corporation  in  which
                  Richard  L.  Wright,  a  director  of the  registrant,  has an
                  interest.

10.H2             Copy of  sublease  agreement  for  Cottage  Grove  store dated
                  October 27, 1990,  between the registrant and a corporation in
                  which Richard L. Wright, a director of the registrant,  has an
                  interest.

10.H3             Copy of sublease  agreement for Albany store dated February 1,
                  1994,  between  the  registrant  and a  corporation  in  which
                  Richard  L.  Wright,  a  director  of the  registrant,  has an
                  interest.

10.I1             Copy of sublease  agreement for Gold Beach store dated July 6,
                  1979, between the registrant and Raymond L. Nidiffer, a holder
                  of  more  than  five   percent  of  the   registrant's   stock
                  ("Nidiffer")  (incorporated  by reference to Exhibit  10-Q3 of
                  the  registrant's  registration  statement  on Form  S-2,  No.
                  33-26631).

10.I2             Copy of  assignment  of lease and  related  documents  for Mt.
                  Shasta store between the registrant and C & K Market, Inc., an
                  affiliate  of Nidiffer  (incorporated  by reference to Exhibit
                  10-Q4 of the registrant's  registration statement on Form S-2,
                  No. 33-26631).

10.I3             Copy of loan guaranties  dated June 12, 1980 and September 30,
                  1988,  given by  registrant  for the  benefit of C & K Market,
                  Inc., an affiliate of Nidiffer  (incorporated  by reference to
                  Exhibit  10-I12 to the  registrant's  Form 10-K for the fiscal
                  year ended September 30, 1989).

10.I4             Copy of stock  purchase  agreement  dated as of June 20, 1994,
                  between the registrant and C & K Market, Inc., an affiliate of
                  Nidiffer  (incorporated  by reference to Exhibit  10.F8 to the
                  registrant's Form 10-K for the fiscal year ended September 30,
                  1994).

10.I5             Copy  of   Agreement   for   Purchase   and  Sale  and  Escrow
                  Instructions  dated September 17, 1997, between the registrant
                  and C & K Market, Inc., an affiliate of Nidiffer.

10.I6             Stock Purchase Agreement dated November 17, 1997, by and among
                  the registrant and C & K Market, an affiliate of Nidiffer.

12                Statement of Computation of Ratio of Adjusted  Income to Fixed
                  Charges.

18                Letter   from   PricewaterhouseCoopers   LLP  re   changes  in
                  accounting principles.

21                Subsidiaries of the registrant.

27                Financial Data Schedule.

* Denotes management contract or compensatory plan or arrangement.

                                       31