<PAGE>

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

                                   -----------

                                    FORM 10-Q

(MARK ONE)

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities 
    Exchange Act of 1934

                 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998

                                       OR

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities 
    Exchange Act of 1934

                         FOR THE TRANSITION PERIOD FROM
                                       TO

                             COMMISSION FILE NUMBER
                                    333-54035

                                MTS, INCORPORATED
             (Exact name of registrant as specified in its charter)

                 CALIFORNIA                              94-1500342
(State or other jurisdiction of incorporation  (I.R.S. Employer Identification
             or organization)                              No.)

                       2500 DEL MONTE, WEST SACRAMENTO, CA 95691
                        (Address of principal executive office)

                                  916-373-2500
              (Registrant's telephone number, including area code)

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

<PAGE>



                              MTS, INCORPORATED
                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Part I. Financial Information.............................................    1
 Item 1. Consolidated Financial Statements................................    1
  Consolidated Balance Sheets as of October 31, 1998 and 1997 
     and July 31, 1998....................................................    1
  Consolidated Statements of Income for the three months ended 
     October 31, 1998 and 1997 ...........................................    2
  Consolidated Statements of Cash Flows for the three months ended
     October 31, 1998 and 1997............................................    3
Notes to Consolidated Financial Statements.................................  4-5
Item 2. Management's Discussion and Analysis of Financial Condition 
           and Results of Operations......................................  5-7
Part II. Other Information ...............................................  N/A
Signature.................................................................    8

<PAGE>

                                MTS, INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                 AS OF OCTOBER 31, 1998, 1997 AND JULY 31, 1998
                             (DOLLARS IN THOUSANDS)

                                                                                        UNAUDITED
                                                                                        ---------
                                                                              OCTOBER 31,                      JULY 31,
                                                                 -------------------------------------    ----------------
                                                                       1998                1997                 1998
                                                                 ----------------    -----------------    ----------------
<S>                                                              <C>                 <C>                  <C>
                                                               ASSETS
Current Assets:
   Cash and cash equivalents                                              $31,002               $2,480             $14,609
   Receivables, net                                                        28,685               26,280              23,095
   Merchandise inventories                                                291,486              304,268             261,003
   Prepaid expenses                                                         6,755                9,563               6,619
   Deferred tax assets                                                      8,221                1,319               4,184
                                                                 ----------------    -----------------    ----------------
      Total current assets                                                366,149              343,910             309,510
Fixed assets, net                                                         200,977              185,197             187,586
Deferred tax assets                                                        15,950                7,821              15,076
Other assets                                                               36,041               32,343              33,219
                                                                 ----------------    -----------------    ----------------
      Total assets                                                       $619,117             $569,271            $545,391
                                                                 ----------------    -----------------    ----------------
                                                                 ----------------    -----------------    ----------------

                                                LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
   Current maturities of long-term debt                                    $2,654               $8,354              $2,540
   Accounts payable                                                       159,783              159,466             157,443
   Accrued liabilities                                                     36,625               27,975              30,422
   Income taxes payable                                                     3,208                  504               1,422
   Deferred revenue, current portion                                        3,037                2,915               3,251
                                                                 ----------------    -----------------    ----------------
      Total current liabilities                                           205,307              199,214             195,078

Long-term Liabilities:
   Long-term debt, less current maturities                                288,784              229,390             229,345
   Deferred revenue, less current portion                                     167                  180                 170
                                                                 ----------------    -----------------    ----------------
      Total liabilities                                                   494,258              428,784             424,593
                                                                 ----------------    -----------------    ----------------
Minority equity in subsidiaries                                                 -                3,232                   -
                                                                 ----------------    -----------------    ----------------
Commitments and contingencies
Shareholders' Equity:
   Common stock:
   Class A, no par value; 5,000,000 shares authorized;
      500 shares issued and outstanding at October 31, 1997:
      none at October 31, 1998 and July 31, 1998                                -                    3                   -
   Class B, no par value; 10,000,000 shares authorized;
      500 shares issued and outstanding at October 31, 1997:
      1,000 issued and outstanding at October 31,1998
      and July 31, 1998                                                         6                    3                   6
   Additional paid-in capital                                                   -                  780                   -
   Retained earnings                                                      124,853              136,469             120,792
                                                                 ----------------    -----------------    ----------------
      Total shareholders' equity                                          124,859              137,255             120,798
                                                                 ----------------    -----------------    ----------------
      Total liabilities and shareholders' equity                         $619,117             $569,271            $545,391
                                                                 ----------------    -----------------    ----------------
                                                                 ----------------    -----------------    ----------------
</TABLE>
      The accompanying notes are an integral part of these statements.

                                       1
<PAGE>
                                MTS, INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                                    UNAUDITED
                                                           -----------------------------------------------------------
                                                                       1998                           1997
                                                           ----------------------------    ---------------------------
<S>                                                        <C>                             <C>
Net revenue                                                                   $233,598                       $239,329
Cost of sales                                                                  154,487                        158,763
                                                           ----------------------------    ---------------------------
     Gross profit                                                               79,111                         80,566

Selling, general and administrative expenses                                    61,640                         62,908
Depreciation and amortization                                                    5,690                          5,645
                                                           ----------------------------    ---------------------------
     Income from operations                                                     11,781                         12,013
Other income and (expenses):
     Interest expense                                                           (4,587)                        (3,439)
     Foreign currency translation loss                                         (11,895)                           (93)
     Other income and (expenses)                                                   325                           (543)
                                                           ----------------------------    ---------------------------
     (Loss) income before taxes and minority interest                           (4,376)                         7,938
     (Benefit) provision for income taxes                                       (1,960)                         3,337
                                                           ----------------------------    ---------------------------
     (Loss) income before minority interest                                     (2,416)                         4,601
Minority interest in net income of subsidiaries                                      -                             38
                                                           ----------------------------    ---------------------------
          Net (loss) income                                                    ($2,416)                        $4,563
                                                           ----------------------------    ---------------------------
                                                           ----------------------------    ---------------------------
Basic and diluted earnings per share:
     On net (loss) income                                                    $2,415.80                      $4,563.45
                                                           ----------------------------    ---------------------------
                                                           ----------------------------    ---------------------------
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       2
<PAGE>

                                MTS, INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        UNAUDITED
                                                                  ---------------------------------------------------------
                                                                             1998                          1997
                                                                  --------------------------    ---------------------------
<S>                                                               <C>                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss) income                                                                ($2,416)                         $4,563
   Adjustments to reconcile net (loss) income to net cash
      provided by operating activities:
      Depreciation and amortization                                                    6,947                          7,034
      Provision (recovery) for losses on accounts receivable                             146                             (2)
      Loss on disposal of depreciable assets                                             617                            553
      Exchange loss                                                                   10,973                            115
      Other non-cash expense                                                              50                            264
      Provision for deferred taxes                                                    (5,067)                           641
      Minority interests in net income of subsidiaries                                     -                             37
      (Decrease) increase in cash resulting from changes in:
         Accounts  receivable                                                         (5,590)                        (5,582)
         Inventories                                                                 (30,483)                       (22,253)
         Prepaid expenses                                                               (136)                        (1,459)
         Accounts payable                                                              2,340                         (4,490)
         Accrued liabilities                                                           7,989                           (589)
         Deferred revenue                                                               (217)                            37
                                                                  --------------------------    ---------------------------
            Net cash used in operating activities                                    (14,847)                       (21,131)
                                                                  --------------------------    ---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of fixed assets                                                       (16,994)                        (5,806)
   Acquisition of investments                                                           (844)                        (1,793)
   Increase in deposits                                                                  (57)                          (742)
   Refunds of deposits                                                                    10                             87
   Increase in intangibles                                                              (747)                           (58)
                                                                  --------------------------    ---------------------------
            Net cash used in investing activities                                    (18,632)                        (8,312)
                                                                  --------------------------    ---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Loans to shareholders, officer and employees                                            -                            (48)
   Proceeds from employee loan repayments                                                 78                             69
   Principal payments under long-term financing agreements                              (613)                        (5,523)
   Proceeds from issuance of long-term financing agreements                           40,413                         32,000
                                                                  --------------------------    ---------------------------
            Net cash provided by financing activities                                 39,878                         26,498
                                                                  --------------------------    ---------------------------
Effect of exchange rate changes on cash                                                9,994                         (1,182)
                                                                  --------------------------    ---------------------------
            Net increase (decrease) in cash and cash equivalents                      16,393                         (4,127)

Cash and cash equivalents, beginning of period                                        14,609                          6,607
                                                                  --------------------------    ---------------------------
Cash and cash equivalents, end of period                                             $31,002                         $2,480
                                                                  --------------------------    ---------------------------
                                                                  --------------------------    ---------------------------
Cash paid for interest expense                                                        $1,597                         $4,333
                                                                  --------------------------    ---------------------------
                                                                  --------------------------    ---------------------------
Cash paid for income taxes                                                            $1,319                         $1,490
                                                                  --------------------------    ---------------------------
                                                                  --------------------------    ---------------------------
</TABLE>
        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>
                                MTS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1- BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of MTS, 
Incorporated and its majority and wholly owned subsidiaries (Company).

In the opinion of the Company's management, the accompanying unaudited 
consolidated financial statements contain all adjustments (consisting of only 
normal recurring adjustments) necessary to present fairly its consolidated 
financial position as of October 31, 1998 and the results of its operations 
and cash flows for the three months then ended. The significant accounting 
policies and certain financial information which are normally included in 
financial statements prepared in accordance with generally accepted 
accounting principles but which are not required for interim reporting 
purposes, have been condensed or omitted. The accompanying consolidated 
financial statements should be read in conjunction with the Company's Annual 
Report on Form 10-K for the fiscal year ended July 31, 1998.

NOTE 2- TRANSLATION OF FOREIGN CURRENCY

The value of the U.S. dollar rises and falls day-to-day on foreign currency 
exchanges. Since the Company does business in several foreign countries, 
these fluctuations affect the Company's financial position and results of 
operations. In accordance with SFAS No. 52, Foreign Currency Translation, all 
foreign assets and liabilities have been translated at the exchange rates 
prevailing at the respective balance sheets dates, and all income statement 
items have been translated using the weighted average exchange rated during 
the respective years. The net gain or loss resulting from translation upon 
consolidation into the financial statements is reported as a separate 
component of retained earnings. Some transactions of the Company and its 
foreign subsidiaries are made in currencies different from their functional 
currency. Translation gains and losses from these transactions are included 
in income as they occur. The Company recorded net transaction losses of $11.9 
million and $.1 million as of October 31, 1998 and 1997 respectively. These 
amounts primarily represent unrealized losses on the Company's 
yen-denominated debt and the strengthening of the yen versus the U.S. dollar.

NOTE 3- INCOME TAXES

The effective income tax rates for the three months ended October 31, 1998 
and 1997 are based on the federal statutory income tax rate, increased for 
the effect of state income taxes, net of federal benefit and foreign taxes.

NOTE 4- NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING 
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN 
ENTERPRISE AND RELATED INFORMATION, were issued in June 1997. The Company 
will adopt both of the statements on their effective date, which will be in 
the Company's fiscal year ending July 31, 1999.

On August 1, 1998, the Company adopted Statement of Financial Accounting 
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This 
establishes standards for the reporting and display of comprehensive income 
and its components in the financial statements. Comprehensive income is 
defined as the change in equity of a business enterprise during a period from 
transactions and other events and circumstances from non-owner sources. For 
the Company, comprehensive income includes net income reported on the income 
statement and changes in the cumulative transaction adjustment reported as a 
separate component of shareholder's equity. The Company's total comprehensive 
income for the period was $4.0 million and $3.3 million as of October 31, 
1998 and 1997, respectively.

SFAS No. 131 requires that the Company report financial and descriptive 
information about its reportable operating segments using the "management 
approach" model. Under the management approach model, segments are defined 
based on the way the Company's management internally evaluates segment 
performance and decides how to allocate resources to segments.

                                       4
<PAGE>

The Company is in the process of evaluating the impact of this pronouncement 
on its segment disclosures.

In June 1998, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No.133, Accounting for Derivative Instruments 
and Hedging Activities. The Statement establishes accounting and reporting 
standards requiring that every derivative instrument (including certain 
derivative instruments embedded in other contracts) be recorded in the 
balance sheet as either an asset or liability measured at its fair value. The 
Statement requires that changes in the derivative's fair value be recognized 
currently in earnings unless specific hedge accounting criteria are met. 
Special accounting for qualifying hedges allows a derivative's gains and 
losses to offset related results on the hedged item in the income statement, 
and requires that a company must formally document, designate, and assess the 
effectiveness of transactions that receive hedge accounting.

Statement 133 is effective for fiscal years beginning after June 15, 1999. A 
company may also implement the Statement as of the beginning of any fiscal 
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and 
thereafter). Statement 133 cannot be applied retroactively. Statement 133 
must be applied to (a) derivative instruments and (b) certain derivative 
instruments embedded in hybrid contracts that were issued, acquired, or 
substantively modified after December 31, 1997 (and at the company's 
election, before January 1, 1998).

The Company has not yet quantified the impacts of adopting Statement 133 on 
its financial statements nor determined the timing of or method of our 
adoption of Statement 133. However, the Statement could increase volatility 
in earnings and other comprehensive income.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following information should be read in conjunction with the unaudited 
interim consolidated financial statements and the notes thereto included in 
Item 1 of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This report contains forward-looking statements (as such term is defined in 
the Private Securities Litigation Reform Act of 1995) that involve known and 
unknown risks and uncertainties. The statements contained in this report that 
are not purely historical are forward-looking statements within the meaning 
of Section 27A of the Securities Act of 1933 and Section 21E of the 
Securities Exchange Act of 1934. Use of the words "anticipates," "believes," 
"estimates," "expects," "intends," "plans" and similar expressions, as they 
relate to the Company or the management of the Company, identify 
forward-looking statements. Such statements reflect the current views of the 
Company with respect to future events, the outcome of which is subject to 
certain risks, including among others general economic and market conditions, 
significant leverage and debt service obligations, restrictive debt 
covenants, changing economic conditions including decreased consumer 
spending, risks relating to international operations, increased or 
unanticipated costs or effects associated with year 2000 compliance by the 
Company or its service or supply providers, effects of competition, higher 
interest rates, and other factors which may be outside of the Company's 
control. Actual results or outcomes may differ materially from those 
expressed or implied by such forward-looking statements as a result of 
certain factors described herein and in other documents. Readers are 
cautioned that all forward-looking statements involve risks and uncertainty. 
Readers should also carefully review the risk factors described in the other 
documents the Company files from time to time with the Securities and 
Exchange Commission and the Company assumes no obligation to update any such 
forward-looking statements.

NET REVENUE

Net revenues were $233.6 million for the three months ended October 31, 1998, 
a decrease of $5.7 million (or an increase of $7.0 million excluding the 
unfavorable effects of the U.S. dollar-Japanese yen exchange rate movements), 
from $239.3 million for the three months ended October 31, 1997. Management 
attributed the flat sales growth to, among other things, a 1.2% decline in 
same store sales growth and a decrease in the number of popular new releases.

GROSS PROFIT

Gross profit was $79.1 million for the three months ended October 31, 1998, a 
decrease of $1.5 million or 1.2%, from $80.6 million for the three months 
ended October 31, 1997. Gross profit as a percentage of net revenues 
increased to 33.9% for the three months ended October 31, 1998 as compared to 
33.7% for the three months ended October 31, 1997. The Company believes that 
the primary factor contributing to the slight increase was the weakening 
dollar relative to the yen and pricing in Japan keeping pace with the 
decreased cost of dollar-sensitive product.

                                       5
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $61.6 million for the three 
months ended October 31, 1998, a decrease of $1.3 million or 2.1% from $62.9 
million for the three months ended October 31, 1997. Selling, general and 
administrative expense as a percentage of net revenues increased to 26.4% for 
the three months ended October 31, 1998, as compared to 26.3% for the three 
months ended October 31, 1997. Management believes the decrease in selling 
and administrative costs was primarily attributed to the Company's continued 
cost containment efforts.

INCOME FROM OPERATIONS

Income from operations was $11.8 million for the three months ended October 
31, 1998, a decrease of $.2 million from $12.0 million for the three months 
ended October 31, 1997. As a percentage of net revenues, income from 
operations remained constant at 5.0 % for the three months ended October 31, 
1998 as compared to October 31, 1997.

INTEREST EXPENSE

Interest expense was $4.6 million for the three months ended October 31, 
1998, an increase of $1.2 million from $3.4 million for the three months 
ended October 31, 1997. As a percentage of net revenues, interest expense 
increased to 2.0% for the three months ended October 31, 1998 from 1.4% for 
the three months ended October 31, 1997. Management attributes the increase 
in interest expense to the higher borrowing costs associated with the Senior 
Subordinated Debt Issuance on April 23, 1998.

FOREIGN CURRENCY TRANSLATION LOSS

Foreign currency translation loss totaled $11.9 million for the three months 
ended October 31, 1998 versus $.1 million for the three months ended October 
31, 1997. The increase in the account primarily represents an unrealized loss 
due to yen denominated debt and the strengthening of the yen versus the U.S. 
dollar.

BENEFIT PROVISION FOR INCOME TAXES

The benefit for income taxes for the three months ended October 31, 1998 was 
$2.0 million compared with a provision for income taxes of $3.3 million for 
the three months ended October 31, 1997. The tax benefit for the three months 
ended October 31, 1998 was based upon management's estimate of the Company's 
annualized effective tax rate.

NET LOSS

As a result of the factors discussed above, the Company reported a 
consolidated net loss of $2.4 million for the three months ended October 31, 
1998, a decrease of $7 million from $4.6 million for the three months ended 
October 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of working capital are borrowings under its 
senior credit facility, net cash flows from operating activities and 
short-term vendor financing.

The Company's cash and cash equivalents were $31.0 million as of October 31, 
1998 compared with $2.5 million as of October 31, 1997. Net cash used by 
operating activities was $14.8 million and $21.1 million for the three months 
ended October 31, 1998 and 1997, respectively with cash provided from 
operations of $33.5 million in fiscal 1998 and $52.2 million in fiscal 1997. 
For the three months ended October 31, 1998 inventory merchandise increased 
$30.5 million as the Company positions itself for the holiday season compared 
to a $22.3 million increase for the three months ended October 31, 1997. The 
decrease in cash from operations for the three month period ended October 31, 
1998 compared to the three month period ended October 31, 1997 was primarily 
due to an increase in net operating liabilities.

                                       6
<PAGE>

The Company's investing activities consist principally of capital 
expenditures for new store construction, system enhancements and store 
relocations/remodels. Capital expenditures totaled $17.0 million and $5.8 
million during the three months ended October 31, 1998 and October 31, 1997, 
respectively.

Total debt increased to $279.5 million as of October 31, 1998, from $237.8 
million as of October 31, 1997. Borrowings under the Company's senior 
revolving credit facility were $169.5 million for October 31, 1998. The 
increased borrowings were largely due to translation of yen denominated debt 
to U.S. dollars and financing operating activities. Unused availability under 
the $275.0 million revolving senior credit facility as of October 31, 1998 
was $58.2 million.

Based upon the Company's current operating levels and expansion plans, 
management believes net cash flows from operating activities and the capacity 
under its $275 million senior credit facility will be sufficient to meet the 
Company's working capital and debt service requirements and support the 
development of its short- and long-term strategies for at least the next 
twelve months.

OTHER MATTERS

SEASONALITY

Retail music sales in the United States are typically higher during the 
calendar fourth quarter as a result of consumer purchasing patterns due to 
increased store traffic and impulse buying by holiday shoppers. As a result, 
the majority of U.S. music retailers and, more specifically, the mall-based 
retailers rely heavily on the calendar fourth quarter to achieve annual sales 
and profitability results. The Company has had reduced seasonal reliance due 
to its deep catalog merchandising approach. In addition, international 
markets exhibit less fourth quarter seasonality than U.S. markets and the 
Company's international presence has historically reduced this reliance on 
the U.S. holiday shopping season.

FOREIGN EXCHANGE MANAGEMENT

The Company has substantial operations and assets located outside the United 
States, primarily in the United Kingdom and Japan. With respect to 
international operations, principally all of Tower's revenues and costs 
(including borrowing costs) are incurred in the local currency, except that 
certain inventory purchases are tied to U.S. dollars. The Company's financial 
performance on a U.S. dollar-denominated basis has historically been affected 
by changes in currency exchange rates. Changes in certain exchange rates 
could adversely affect the Company's business, financial condition and 
results of operations.

YEAR 2000 COMPLIANCE

Many currently installed information technology and non-information 
technology systems and products are coded to accept only two digit entries in 
the date code field. Beginning in the year 2000, these date code fields will 
need to accept and recognize four digit entries to distinguish 21st century 
dates from 20th century dates. As a result, within the next two years 
computer systems and/or software used by many companies may need to be 
upgraded to comply with such "Year 2000" requirements. The Company has 
developed an overall plan to assist with the Year 2000 problem resolution 
process.  This plan is being used for both information technology (mainly 
financial programs) and non-information technology programs (stereos, tv's, 
vcr's, escalators, elevators, etc.). The main components of the plan are as 
follows: awareness of the problem, preparation of an inventory check list, 
assessment of complexity, remediation, validation testing and implementation. 
With respect to information technology systems the Company has already 
finished all phases through implementation for the majority of its financial 
systems and expects to have 100% compliance by mid 1999. The non-information 
technology systems and products have been completed through the assessment of 
complexity phase and the Company expects to have 100% compliance by the 
middle of 1999. The Company is still in the process of obtaining year 2000 
compliance certificates from its third parties but due to the fact the 
Company does not have a material relationship with any one vendor it does not 
anticipate any possible business interruption due to non-compliance with 
third parties. As of October 31, 1998, the Company has incurred $.2 million in 
remediation cost and estimates it will require an additional $1.0 million to 
complete all year 2000 compliance work. These costs include but are not 
limited to costs directly related to fixing year 2000 issues, such as 
modifying software and hiring year 2000 solution providers. Although it is 
not certain what the worst case Year 2000 scenario would be, management 
believes that any computer generated work, i.e. inventory tracking, point of 
sale at cash register, could be done manually as had been the case before the 
in-store processing programs were implemented in 1994. In the unlikely event 
that a contingency plan is needed due to a year 2000 system failure, the 
Company would revert back to manual "offline" processing of its sales and 
inventory systems until the problem is resolved.

                                       7
<PAGE>


                                   SIGNATURES

     Pursuant to the requirements 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.

                           MTS, INCORPORATED
                           By:         /s/ DeVaughn D. Searson
                               ------------------------------------------------
                                           DeVaughn D. Searson
                           EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                               (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

Dated: December 15, 1998

                                 EXHIBIT INDEX

EXHIBIT NO.        EXHIBIT
   27.             Financial Data Schedule.



                                       8