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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            ------------------------

                                    FORM 10-K

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

For the fiscal year ended July 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 0-21695

                         MANCHESTER EQUIPMENT CO., INC.
             (Exact name of Registrant as specified in its charter)

             New York                             11-2312854
   (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)                 I. D. Number)

        160 Oser Avenue                                11788
        Hauppauge, New York                          (Zip Code)
   (Address of principal executive offices)   

       Registrant's telephone number, including area code: (516) 435-1199

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                               ------------------

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

Indicate by check mark if the disclosure of delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of October 2, 1998 was $8,621,988  (2,759,036  shares at a closing
sale price of $3.125).

As of October 2, 1998,  8,096,600 shares of Common Stock ($.01 par value) of the
Registrant were issued and outstanding.
                              --------------------

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

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                         MANCHESTER EQUIPMENT CO., INC.

                                    FORM 10-K
                            YEAR ENDED JULY 31, 1998
                                TABLE OF CONTENTS







Part I
                                                                      Page
Item 1.   Business                                                       3
Item 2.   Properties                                                    10
Item 3.   Legal Proceedings                                             11
Item 4.   Submission of Matters to a Vote of Security Holders           11


Part II

Item 5.   Market for the Registrant's Common Stock and Related           11
          Stockholder Matters
Item 6.   Selected Financial Data                                        12
Item 7.   Management's  Discussion  and  Analysis of  Financial          13
          Condition and Results of Operations
Item 8.   Financial Statements and Supplementary Data                    17
Item 9.   Change  In and  Disagreements  with  Accountants  on           17
          Accounting  and  Financial Disclosures

Part III

Item 10.  Directors and Executive Officers of the Registrant             18
Item 11.  Executive Compensation                                         18
Item 12.  Security Ownership of Certain Beneficial Owners and Management 21
Item 13.  Certain Relationships and  Related Transactions                22

Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports            23
          on Form 8-K

Signatures   Chief Executive Officer, Chief Financial Officer,           42
             and Directors 


                                       2

<PAGE>



                                     PART I

This  Report  contains  certain  forward-looking  statements  that are  based on
current expectations.  The actual results of Manchester Equipment Co., Inc. (the
"Company") may differ  materially from the results  discussed herein as a result
of a number of unknown factors.  Such factors  include,  but are not limited to,
there being no assurance that the acquisitions of Electrograph Systems, Inc. and
Coastal   Office   Products,   Inc.  will  continue  to  add  to  the  Company's
profitability,  that the Company will be  successful  in its efforts to focus on
value-added  services,  that the Company will be successful  in  attracting  and
retaining highly skilled technical personnel and sales representatives necessary
to  implement  the  Company's  growth  strategies,  that the Company will not be
adversely  affected by continued intense  competition in the computer  industry,
continued decreases in average selling prices of personal  computers,  a lack of
product availability or deterioration in relationships with manufacturers,  or a
loss or  decline  in sales to any of its major  customers.  See  "Products"  and
"Competition"  in Part I, Item 1 and  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 of this report
for a  discussion  of  important  factors  that could affect the validity of any
forward looking statements.

ITEM 1. Business


General

         Manchester  Equipment  Co., Inc.  ("Manchester"  or the "Company") is a
network  integrator and reseller of computer  hardware,  software and networking
products,  primarily for commercial customers.  The Company offers its customers
single-source  solutions  customized  to  their  information  systems  needs  by
combining value-added services with hardware, software,  networking products and
peripherals from leading vendors. Over the past 25 years, the Company has forged
long-standing relationships with both customers and suppliers and capitalized on
the rapid  developments  in the computer  industry,  including  the shift toward
client/server-based platforms.

         Manchester's marketing focus is on mid- to large-sized companies, which
have become increasingly dependent upon complex information systems in an effort
to gain competitive advantages. While many of these companies have the financial
resources to make the required capital investments in information systems, often
they do not have the  necessary  information  technology  personnel  to  design,
install or maintain complex systems or to incorporate the continuously  evolving
technologies.  As a result,  these  companies are turning to  independent  third
parties to procure,  design,  install,  maintain and upgrade  their  information
systems.

         The Company  offers its  customers a variety of  value-added  services,
such as  consulting,  integration  and support  services,  together with a broad
range of computer  and  networking  products  from leading  vendors.  Consulting
services include systems design,  performance analysis,  and migration planning.
Integration  services include product  procurement,  configuration,  testing and
systems  installation  and  implementation.  Support  services  include  network
management,  "help-desk"  support,  and  enhancement,  maintenance and repair of
computer  systems.  Most of the  Company's  revenues  are derived  from sales to
customers located in the New York Metropolitan  area, with  approximately 71% of
the Company's  revenues  being  generated from its Long Island and New York City
offices.

         The  Company was  incorporated  in New York in 1973 and has four active
wholly-owned   subsidiaries;   Manchester   International,   Ltd.,  a  New  York
corporation,  which sells computer hardware, software and networking products to
resellers  domestically and internationally;  ManTech Computer Services,  Inc. a
New  York  corporation  which  identifies  and  provides  temporary  information
technology  positions  and  solutions  for  commercial  customers;  Electrograph
Systems,   Inc.  a  New  York  corporation,   which  distributes   microcomputer
peripherals  throughout the United States;  and Coastal Office Products,  Inc. a
Maryland  corporation that was acquired by the Company on January 2, 1998, which
is a network  integrator  and  reseller of computer  products in the  Baltimore,
Maryland area.

Industry

         Businesses have become increasingly  dependent upon complex information
systems in an effort to gain competitive  advantages or to maintain  competitive
positions.  Computer technology and related products are continuously  evolving,
making  predecessor  technologies or products obsolete within a few years or, in
some cases, within months. The constant changes in hardware and software and the
competitive pressure to upgrade existing products create significant  challenges
to companies.

         Over the last several  years,  the increase in  performance of personal
computers,  the  development  of a variety of  effective  business  productivity
software  programs and the ability to  interconnect  personal  computers in high
speed  networks  have led to an  industry  shift  away from  mainframe  computer
systems to client/server systems based on personal computer technology.  In such
systems, the client computer,  in addition to its stand-alone  capabilities,  is
able to obtain resources from a central server or servers. Accordingly, personal
computers may share everything from data files to printers.  Recently, networked
applications  such as  electronic  mail and work  group  productivity  software,
coupled with widespread acceptance of Internet technologies,  have led companies
                                       3
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to implement  corporate  intranets (networks that enable end-users (e.g.,
employees)  to share  information).  The use of a  corporate  intranet  allows a
company to warehouse valuable  information,  which may be "mined" or accessed by
employees or other  authorized  users through readily  available  Internet tools
such as Web browsers and other graphical user interfaces.

         With  these  advances  in  information  systems  and  networking,  many
companies are reengineering their businesses using these technologies to enhance
their revenue and productivity.  However,  as the design of information  systems
has become more complex to accommodate the proliferating  network  applications,
the  configuration,  selection and  integration  of the  necessary  hardware and
software products have become increasingly more difficult and complicated. While
many  companies  have  the  financial  resources  to make the  required  capital
investments,  they  often  do not  have  the  necessary  information  technology
personnel to design,  install or maintain complex systems and may not be able to
provide  appropriate  or  sufficient  funding  or  internal  management  for the
maintenance  of their  information  systems.  As a result,  such  companies  are
increasingly turning to independent third parties to procure,  design,  install,
maintain and upgrade  their  information  systems.  By utilizing the services of
such third parties, companies are able to acquire state-of-the-art equipment and
expertise on a cost-effective basis.

The Manchester Solution

         Manchester offers its customers  single-source  solutions customized to
their information  systems needs. The Manchester  solution includes a variety of
value-added  services,  including consulting,  integration,  network management,
"help-desk"  support,  and  enhancement,  maintenance  and  repair  of  computer
systems,  together with a broad range of computer and  networking  products from
leading   vendors.    Manchester   believes   it   provides    state-of-the-art,
cost-effective  information  systems designed to meet its customers'  particular
needs.

         As a result of the Company's  long-standing  relationships with certain
suppliers  and its large volume  purchases,  the Company is often able to obtain
significant  purchase  discounts  which  can  result  in  cost-savings  for  its
customers.   Manchester's   relationships  with  its  suppliers,  its  inventory
management system and industry knowledge  generally enable it to procure desired
products on a timely basis and therefore to offer its customers  timely  product
delivery.

Strategy

         The key elements of the Company's strategy include:

         Emphasizing   Value-added  Services.   Value-added  services,  such  as
consulting,  integration and support  services,  generally provide higher profit
margins than  computer  hardware  sales.  The Company has increased its focus on
providing  these services  through a number of key  strategies.  The Company has
recruited additional  technical personnel with broad-based  knowledge in systems
design and  specialized  knowledge  in different  areas of systems  integration,
including   application  software,   inter-networking   (including  routers  and
switches), database design and management.

         Increasing  Marketing  Focus on  Companies  Outside  the  Fortune  500.
Manchester  has  decided to  increase  its  marketing  focus on those  companies
outside the Fortune 500 in order to increase its value-added  services  revenue.
Manchester's  experience  is that those  companies are  increasingly  looking to
third parties to provide a complete solution to their information  systems needs
from both a service and product standpoint. Such companies often do not have the
necessary  information  technology  personnel  to  procure,  design,  install or
maintain complex systems or to incorporate  continuously evolving  technologies.
Manchester  believes that it can provide these companies with solutions to their
information systems  requirements by providing a variety of value-added services
together with a broad range of computer and networking products.

         Electronic  Ordering  System.  Manchester has implemented an electronic
ordering system. This ordering system enables participating  customers to access
the Company via the  Internet,  review  various  products,  systems and services
offered by the Company and place their orders  on-line.  Customers are also able
to obtain  immediate  customized  information  regarding  products,  systems and
services that meet their specific  requirements.  The ordering system produces a
matrix  of  alternative   fully   compatible   packages,   together  with  their
availability and related costs,  based on parameters  indicated by the customer.
Customers are not granted access to this system without prior credit clearance.

         Increasing Sales Force Productivity. Manchester is addressing a variety
of strategies to increase sales force productivity.  The Company is implementing
an  electronic  sales  information   system  that  allows  the  Company's  sales
representatives to obtain immediate  customized  information  regarding products
and services  that meet the specific  system  requirements  of customers and the
availability  and  related  costs of such  products  and  services.  The Company
believes  that  this  system  will  increase  the   productivity  of  its  sales
representatives  by enabling them to offer rapid and comprehensive  solutions to
their customers' needs.

         The Company provides training of its sales  representatives  in matters
relating to value-added  services,  such as consulting and integration services.
To  facilitate  such  training,   the  Company  constructed  dedicated  training
facilities in one of its Long Island offices and in its New York City office.

         Expanding New York  Metropolitan  Area Presence.  The Company  believes
that it has a  strong  presence  and  wide  name  recognition  in the  New  York
Metropolitan  area,  where  there is a growing  corporate  demand  for  computer
products and services. Manchester is seeking to expand its presence in this area
through  its  enlarged  New York City  office and  increased  sales and  service
capabilities.  The Company believes that these steps will enable it to capture a
                                       4
<PAGE>
greater  percentage of the New York  Metropolitan  area market. In fiscal
1998,  the  Company  relocated  its  New  York  City  office  to  space  that is
approximately double the size of the previous space.

         Expanding into Additional  Business  Centers.  The Company has regional
offices in Newton,  Massachusetts and Boca Raton and Tampa,  Florida, from which
it derived  approximately 10% of its revenues for the fiscal year ended July 31,
1998. During fiscal 1998, the Company expanded into Baltimore,  Maryland through
the  acquisition  on January  2, 1998 of  Coastal  Office  Products,  Inc.  (see
"Acquisitions").

Services and Products

         The Company offers customized single-source solutions to its customers'
information systems requirements,  including consulting, integration and support
services, together with a broad range of computer and networking products from a
variety of leading vendors.  The Company provides its services through a skilled
staff of  engineers  who are  trained  and  certified  in leading  products  and
technology,  including  Microsoft  Windows NT, Novell  NetWare and Cisco Systems
routers and switches.

         Services.  The Company's services include consulting, integration and
support services.

         Consulting.  The Company's staff of senior systems  engineers  provides
consulting  services  consisting  of systems  design,  performance  and security
analysis, and migration planning services.

         Systems design services include network,  communications,  applications
and custom  solutions  design.  Network design  services  involve  analysis of a
customer's   overall   network   needs,   including   access  to  the  Internet;
communications  design services involve analysis and creation of enterprise-wide
networks,  including corporate  intranets;  applications design services include
creation  of  relational   databases   meeting   customers'   specific  business
requirements;  and custom  solutions  design services  include design of storage
systems,   remote  access  systems  and  document   retention  through  scanning
technology.

         Performance  analysis  involves  analyzing  a  customer's   information
systems to assess  potential points of failure,  to determine where  performance
could be increased and to prepare for change and growth.  This service  includes
the evaluation of applications  and their  interaction with the network in order
to maximize existing computer resources.  Through this evaluation process, which
includes a detailed report to the end-user,  a plan for the  optimization of the
customer's   existing  system  is  created,   as  well  as  recommendations  for
enhancements and future systems.

         Security  analysis  involves working with customers to develop security
policies covering network security, as well as risk analysis.  After a policy is
developed, a security strategy is planned and deployed using a variety of tools,
including   physical   firewalls,   packet   filtering,   encryption   and  user
authentication.

         Migration planning involves the performance of a detailed assessment of
existing  mission  critical  systems,  followed by an analysis of the end-user's
future requirements. Working closely with the customer, Manchester's consultants
develop a  migration  strategy  using a defined  project  plan that  encompasses
skills transfer and training,  checking for data integrity,  project  management
and consolidation  and reallocation of resources.  The primary objective of this
service is to rapidly  move the customer  from a slow or  expensive  system to a
newer, more efficient and cost-effective solution.

         Integration.    Integration  services  include  product    procurement,
configuration, testing, installation and implementation.

         The Company  maintains  a  sophisticated  systems  build and test area,
adjacent to its warehousing  facilities,  where computer  systems are configured
and  tested  through  the  use of  automated  systems.  Manchester  manages  the
installation  and  implementation  of its customers'  information  systems,  and
provides  critical path  analysis,  vendor  management  and facility  management
services. Critical path analysis involves the management and coordination of the
various hardware and software networking components of a systems design project.
The Company's  engineers  prepare reports setting forth  coordinated  timetables
with respect to installing and integrating the customer's information systems.

         Support.  The  Company  offers  support  services  for  its  customers'
existing   information  systems,   including  network  management,   "help-desk"
services, and enhancement, maintenance and repair.

         Network  management  consists of  managing  the  compatibility  of, and
communication   between,   the  various   components   comprising  a  customer's
information  system.  The  increased  expense  associated  with the ownership of
information  systems has  encouraged  customers to outsource  the  management of
computer networks, including local area networks ("LANs") and wide area networks
("WANs"). Currently, the Company's engineers provide network management services
on site at customers' facilities.

         "Help-desk"  services  consist of providing  customers  with  telephone
support.  In addition,  the Company's service call management system,  which the
Company is in the process of enhancing,  will enable the  Company's  "help-desk"
technicians  to access an  archive of prior  service  calls  concerning  similar
problems  and  their  solutions,  resulting  in a  more  efficient  response  to
customers' calls.

         Enhancement,  maintenance  and repair services range from broad on-site
coverage to less expensive, basic maintenance and repair of itemized hardware or
                                       5
<PAGE>
software,  as well as enhancements  such as upgrades of existing systems.
Field  representatives  are equipped with notebook  computers to facilitate  the
exchange  of  information  with both the  information  systems at the  Company's
headquarters and with technical databases available on the Internet. The Company
maintains  a  laboratory  at  its  Long  Island  facilities  where  the  Company
prototypes   customer  problems  for  quicker  solutions  without   jeopardizing
customers' information systems.

         Products.  Manchester offers a wide variety of personal computer and 
networking products and peripherals, including:


         Desktop Computers                       Servers
         Internet Access Products                Software
         Modems                                  Storage Subsystems
         Monitors                                Switches
         Network Equipment                       Supplies and Accessories
         Notebook Computers                      Teleconferencing Equipment
         Printers                                Terminals
         Routers                                 Wireless Products
         Scanners                                Workstations

         The Company has long-standing  relationships  with many  manufacturers,
which the Company  believes assist it in procuring  desired products on a timely
basis and on desirable  financial  terms.  The Company sells  products from most
major manufacturers, including:

         Bay Networks, Inc.                         NEC Technologies, Inc.
         Cisco Systems, Inc.                        Novell, Inc.
         Compaq Computer Corporation                Philips Electronics N.V.
         Computer Associates International, Inc.    Seagate Technology, Inc.
         Epson America, Inc.                        3Com Corp.
         Hewlett-Packard Company                    Toshiba America Information 
         Intel Corporation                           Systems, Inc
         Microsoft Corporation                      Viking Components, Inc.

         For the  fiscal  year  ended  July 31,  1998,  sales by the  Company of
products  manufactured  by Compaq,  Toshiba,  and  Hewlett-Packard  collectively
comprised  approximately  49% of the  Company's  revenues.  For the fiscal years
ended July 31, 1997 and 1996,  sales by the Company of products  manufactured by
Compaq,  Toshiba,  Hewlett-Packard and NEC collectively comprised  approximately
56% and 53%, respectively,  of the Company's revenue. In fiscal years ended July
31, 1998, 1997 and 1996, sales of products manufactured by Toshiba accounted for
approximately  18%,  26%,  and  23%,  respectively,  of the  Company's  revenue,
substantially  all of  which  were  sales  of  notebook  computers  and  related
accessories.  Also in these  fiscal  years,  sales of products  manufactured  by
Compaq accounted for 21%, 13% and 13%,  respectively,  of the Company's revenue.
The total dollar volume of products  purchased directly from  manufacturers,  as
opposed to  distributors  or  resellers,  was  approximately  $92 million,  $103
million,  and $117 million for the fiscal  years ended July 31,  1998,  1997 and
1996,  respectively,  and as a  percentage  of total cost of  products  sold was
approximately 55%, 64%, and 72%, respectively.

         The Company has entered into  agreements  with its principal  suppliers
that  include   provisions   providing  for  periodic  renewals  and  permitting
termination by the vendor  without  cause,  generally upon 30 to 90 days written
notice, depending upon the vendor. Toshiba, Hewlett-Packard, NEC and Compaq have
regularly renewed their respective  agreements with the Company,  although there
can be no assurance that the regular renewal of the Company's dealer  agreements
will continue.  The termination,  or non-renewal,  of any or all of these dealer
agreements  would  materially  adversely  affect  the  Company's  business.  The
Company,  however,  is  not  aware  of  any  reason  for  the  termination,   or
non-renewal,   of  any  of  those  dealer   agreements  and  believes  that  its
relationships with Toshiba, Hewlett-Packard, NEC and Compaq are satisfactory.

         The Company is dependent upon the continued supply of products from its
suppliers, particularly Toshiba,  Hewlett-Packard,  NEC and Compaq. Historically
certain  suppliers  occasionally  experience  shortages of select  products that
render them unavailable or necessitate product allocations among resellers. Each
fiscal year, the Company has experienced product shortages, particularly related
to newer models. The Company believes that product  availability issues are as a
result of the present  dynamics of the  personal  computer  industry as a whole,
which include high customer  product demand,  shortened  product life cycles and
increased  frequency of new product  introductions  into the marketplace.  While
there can be no assurance that product unavailability or product allocation,  or
both,  will not increase in fiscal 1999, the impact of such an  interruption  is
not expected to be unduly troublesome due to the breadth of alternative  product
lines available to the Company.

         The Company seeks to obtain volume  discounts for large customer orders
directly from manufacturers and through aggregators and distributors.

         Most  of  the  Company's  major  product  manufacturers  provide  price
protection for a limited time period as well as stock balancing  rights,  by way
of credits or refunds, against price reductions by the supplier between the time
of the initial sale to the Company and the subsequent sale by the Company to its
customers. During fiscal 1998 certain manufacturers reduced the period for which
they  provide  price  protection  and stock  balancing  rights.  There can be no
assurance  that   manufacturers  will  not  further  limit  or  eliminate  price
protection and stock balancing rights in the future.
                                       6
 <PAGE>
Customers

         The Company grants credit to customers meeting  specified  criteria and
maintains a centralized  credit  department  that reviews  credit  applications.
Accounts are regularly  monitored for  collectibility  and appropriate action is
taken upon indication of risk.

         The  Company   believes  that  it  benefits   from  its   long-standing
relationships with many of its customers,  providing opportunities for continued
sales and services.  Manchester  believes  that its broad range of  capabilities
with respect to both  products and  services is  attractive  to companies of all
sizes.  Although  Manchester is planning to target companies outside the Fortune
500 as one part of its  strategy,  it has  sold,  and  anticipates  that it will
continue to sell, to some of the largest companies in the United States. For the
fiscal years ended July 31, 1998, 1997 and 1996,  approximately  7%, 15% and 16%
of the Company's total revenues,  respectively,  were derived from United Parcel
Service of America,  Inc. Some of the  Company's  other  significant  commercial
customers currently include Bysis Fund Services,  Inc.,  Cabletron Systems Inc.,
National  Broadcasting  Company Inc.,  Sterling Doubleday  Enterprises (New York
Mets),   Reuters  America  Inc.,  Vytra  Choice  Care,   Inc.,   United  Nations
International  Children's  Emergency Fund and the United States  Merchant Marine
Academy.

         The  Company's  return  policy  generally  allows  customers  to return
hardware and unopened software,  without restocking  charges,  within 30 days of
the  original  invoice  date,  subject to advance  approval  and  certain  other
conditions.  The  Company  is  generally  able to return  defective  merchandise
returned from customers to the vendor.

Sales and Marketing

         The  Company's  sales are  generated  primarily  by its 75 person sales
force. These sales representatives  generally are responsible for meeting all of
their customers'  product and service needs and are supervised by sales managers
with  significant  industry  experience.  The sales managers are responsible for
overseeing  sales  representative  training,  establishing  sales objectives and
monitoring account management  principles and procedures.  Sales representatives
attend seminars  conducted by  manufacturers'  representatives  at the Company's
facilities,  at  which  the  Company's  new and  existing  product  and  service
offerings are discussed.

         The Company's sales representatives are assisted by technical personnel
who support and supplement the sales efforts.  The responsibilities of technical
support  personnel  include  answering   preliminary  inquiries  from  customers
regarding  systems  design,  and on-site  visits to  customers'  facilities.  At
customers'  facilities,  the technical personnel gather information necessary to
assist  customers  in making  informed  decisions  regarding  their  information
systems.  Such data  include the nature of the  customer's  current  information
systems, the existing hardware and networking environment,  the customer's level
of expertise and its applications needs.

         Manchester  believes  that  its  name is  widely  recognized  for  high
quality, competitively priced products and services. Manchester recently adopted
a new logo that appears on all of the  Company's  marketing  materials and other
corporate literature.  The logo includes the phrase "Manchester,  the Answer" to
emphasize our position as a  knowledgeable  resource for networking and computer
solutions for our customers.  The Company promotes name recognition and the sale
of its  products and  services  through  regional  business  directories,  trade
magazine advertisements, radio advertisements,  direct mailings to customers and
participation in computer trade shows and special events. The Company advertises
at numerous sporting events in the New York metropolitan region,  including full
page  four-color  advertisements  in yearbooks  and/or program guides for sports
teams such as the New York Mets,  the New York Knicks and the New York  Rangers.
The Company also  promotes  interest in its  products  and services  through its
website on the Internet,  and has expanded its website information to provide an
electronic  catalog of its products and services.  Several  manufacturers  offer
market  development  funds,   cooperative   advertising  and  other  promotional
programs,  on which the Company relies to partially fund many of its advertising
and promotional campaigns.

         Sales force  training is an integral part of the Company's  strategy to
increase its focus on providing  value-added  services.  As  client/server-based
systems,  applications and network capabilities grow in complexity, the need for
technically  knowledgeable  sales  personnel  becomes  critical  to the  sale of
value-added  services.  Accordingly,  the  Company  has  expanded  its  training
capabilities at one of its Long Island  facilities to conduct seminars for sales
representatives. The seminars address such topics as general developments in the
computer industry,  systems  integration  services and the Company's  management
information  systems.  The Company  utilizes its technical  personnel to conduct
such seminars and may hire additional dedicated trainers as needed.

Management Information Systems

         The  Company  currently  uses  an  IBM  AS/400  integrated   management
information system,  which is an on-line system enabling  instantaneous  access.
The Company maintains a proprietary  inventory management system on its computer
system pursuant to which product purchases and sales are continually tracked and
analyzed. The Company's computer system is also used for accounting, billing and
invoicing.

         The Company's  information  system  assists  management in  maintaining
controls over the  Company's  inventory and  receivables.  Manchester's  average
inventory  turnover  was 17, 17 and 18 times for the fiscal years ended July 31,
1998, 1997 and 1996,  respectively,  and Manchester experienced bad debt expense
of less than .3% of revenues in each of these years.
                                       7
 <PAGE>
         During the fiscal year ended July 31, 1998, the Company invested in its
management information systems, including upgrading and expanding the IBM AS/400
system,  implementing a client/server-based  management system to track services
rendered for customers,  and upgrading servers and network  infrastructures  for
its headquarters. The Company utilizes experienced in-house technical personnel,
assisted by the Company's senior engineers,  to upgrade and integrate additional
functions into the Company's management information systems.

Competition

         The computer industry is characterized by intense competition primarily
in the area of price,  product  availability  and breadth of product  line.  The
Company directly competes with local, regional and national systems integrators,
value-added  resellers  and  distributors  as  well  as  with  certain  computer
manufacturers  that market  through  direct sales  forces.  While the  Company's
competitors vary depending upon the particular market,  some of the national and
regional  competitors of the Company include Alphanet Solutions,  Inc., CompuCom
Systems,  Inc., Dell Computer Corporation,  EnPointe  Technologies,  Inc., Entex
Information  Services,  Inc.,  Pomeroy  Computer  Resources,  Inc.,  and Vanstar
Corporation. The computer industry has recently experienced a significant amount
of consolidation through mergers and acquisitions, and manufacturers of personal
computers may increase  competition  by offering a range of services in addition
to their current product and service  offerings.  In the future, the Company may
face further  competition from new market entrants,  possible  alliances between
existing  competitors,  as well as competition from certain manufacturers who do
not  currently  market  through  direct  sales  forces.  Some  of the  Company's
competitors have, or may have, greater financial, marketing and other resources,
and may offer a broader range of products and services,  than the Company.  As a
result, they may be able to respond more quickly to new or emerging technologies
or changes in customer requirements,  benefit from greater purchasing economies,
offer more aggressive  hardware and service pricing or devote greater  resources
to the promotion of their products and services.

         The Company's  ability to compete  successfully  depends on a number of
factors such as breadth of product and service  offerings,  sales and  marketing
efforts,  product and service pricing,  and quality and reliability of services.
In addition,  product margins may decline due to pricing to win new business and
increasing  pricing pressures from competition.  The Company believes that gross
margins  will  continue  to  be  reactive  to  industry-wide   changes.   Future
profitability  will  depend  on the  Company's  ability  to  increase  focus  on
providing technical service and support to customers, competition,  manufacturer
pricing  strategies,  as well as the  Company's  control of operating  expenses,
product availability, and effective utilization of vendor programs. It will also
depend on the ability to attract and retain quality service  personnel and sales
representatives while effectively managing the utilization of such personnel and
representatives.  There can be no  assurance  that the  Company  will be able to
attract and retain such skilled  personnel  and  representatives.  The loss of a
significant  number  of the  Company's  existing  technical  personnel  or sales
representatives  or  difficulty  in hiring  or  retaining  additional  technical
personnel or sales  representatives or  reclassification  of the Company's sales
representatives  as  employees  could  have a  material  adverse  effect  on the
Company's business, results of operations and financial condition.


Acquisitions

         Electrograph Systems, Inc.

         On April 25,  1997,  the Company,  through a newly formed  wholly-owned
subsidiary,  acquired  substantially  all  of the  assets  and  assumed  certain
liabilities of Electrograph  Systems, Inc.  ("Electrograph").  Electrograph is a
specialized  distributor  of  microcomputer  peripherals,  throughout the United
States.  The purchase price and transaction costs aggregated  approximately $2.6
million. The major categories of products presently  distributed by Electrograph
include printers and monitors.  Electrograph does not stock significant  amounts
of  inventory  relative to the number of  different  products  it carries.  Most
products are stocked to provide a 30-day supply.

         Electrograph  provides  technical  assistance to customers  through its
Hauppauge, New York office.  Electrograph ships returns of defective products to
the manufacturer or to an authorized  repair center.  Returns have  historically
been  approximately 3% of Electrograph's  revenue.  The Company does not believe
that such a  breakdown  or the dollar  amounts of product  returns is  material,
however,  as substantially  all of these costs are reimbursed to Electrograph by
its suppliers through credits or replacements. As a result, Electrograph's costs
charged to operations for such returns have been minimal.

         Products are selected by  Electrograph  to minimize  competition  among
suppliers' products while maintaining some overlap to provide protection against
product shortages and discontinuations and to provide different price points for
certain  items.  Management  believes  Electrograph's   relationships  with  its
suppliers are enhanced by providing feedback to suppliers on products,  advising
suppliers of customer  preferences,  working with suppliers to develop marketing
programs,  and  offering  suppliers  the  opportunity  to provide  seminars  for
Electrograph's customers.

         Like most of its  competitors,  Electrograph  distributes  products for
manufacturers  throughout  the United  States on a  non-exclusive  basis without
geographic  restrictions.  Electrograph has supplier agreements with many of its
suppliers which it believes are in a form customarily used by each manufacturer.
These  agreements  usually contain  provisions which allow  termination  without
cause, by the supplier generally upon 30 to 60 days notice.

         None of Electrograph's material supplier agreements require the sale of
specified  quantities of products or restrict  Electrograph from selling similar
products manufactured by competitors.  Electrograph,  therefore, has the ability
to  terminate or curtail  sales of one product line in favor of another  product
line as a result  of  technological  change,  pricing  considerations,  customer
demand or supplier  distribution policy.  Electrograph has never been terminated
by any of its suppliers. 
                                       8
<PAGE>
         Most of  Electrograph's  major suppliers provide price protection for a
limited time period, by way of credits, against price reductions by the supplier
between the time of the initial sale to Electrograph  and the subsequent sale by
Electrograph to its customer.  Additionally,  most of  Electrograph's  suppliers
accept defective  merchandise  returned within 12 to 15 months after shipment to
Electrograph.  Some  suppliers  permit  Electrograph  to rotate its inventory by
returning slow moving inventory for other inventory.  Credits,  refunds or other
payments  to which  Electrograph  was  entitled  by reason of price  protection,
advertising  allowances,  stock rotations and refunds for defective  merchandise
totaled approximately 1% of revenue for fiscal 1998.

         While  Electrograph  distributes  products  of more than 15  suppliers,
approximately 40% and 30% of  Electrograph's  revenue in fiscal 1998 was derived
from products  manufactured  by Fujitsu and Mitsubishi,  Electrograph's  largest
suppliers.

         Electrograph's distribution operations are currently conducted from two
distribution  centers  in  Hauppauge,  New  York  and  Long  Beach,  California.
Electrograph  also maintains sales offices in Baltimore,  Maryland,  Northville,
New York and Long Beach, California.

         Credit is extended in most  circumstances,  and is generally limited to
30-day payment terms.

Coastal Office Products, Inc.

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal  Office  Products,  Inc.  ("Coastal"),  a reseller  and  provider  of
microcomputer  servers and peripherals in the greater Baltimore,  Maryland area.
The acquisition, which has been accounted for as a purchase, consisted of a cash
payment of approximately $3.1 million plus future contingent payments.

Employees

         At August 31, 1998, the Company had 322 full-time employees  consisting
of 44 sales representatives, 38 management personnel, 84 technical personnel and
156 distribution and clerical  personnel.  In addition,  at August 31, 1998, the
Company had 31 independent sales representatives.  The Company is not a party to
any  collective  bargaining  agreements  and  believes  its  relations  with its
employees are good.

Intellectual Property

         The Company owns one federally  registered service mark with respect to
its name and logo. Most of the Company's  various dealer  agreements  permit the
Company to refer to itself as an  "authorized  dealer" of the  products of those
manufacturers  and to  use  their  trademarks  and  trade  names  for  marketing
purposes.  The Company  considers the use of these trademarks and trade names in
its marketing to be important to its business.

                                       9
<PAGE>



ITEM 2. Properties

Properties

         The Company currently has ten sales branches  nationwide  including the
corporate  headquarters  located in Hauppauge,  New York.  The  following  table
identifies the principal leased facilities. 
<TABLE>
 <CAPTION>

                                                          Approximate
                                                          Square Footage                    Lease
Facility              Location                       Office            Warehouse        Expiration Date
<S>                  <C>                             <C>                <C>            <C>                      

Corporate             160 Oser Avenue (1)
Headquarters          Hauppauge, NY                  30,000                 -           July 2000

Warehouse and         40 and 50 Marcus Blvd. (1)                                        October 2005 (40)
Service Center        Hauppauge, NY                  20,000            43,000           January 2008 (50)


New York City         469 Seventh Avenue
Sales office          New York, NY                   13,000                 -           October  2007


Boca Raton            185 N.W. Spanish River Blvd.
Sales Office          Boca Raton, FL                   6,000                -           November 2002

Boston                25-27 Christina Street           3,000                -           October 2002
Sales office          Newton, MA

Tampa                 6304 Benjamin Road
Sales office          Tampa, FL                        1,200                -           December 1998

Electrograph          175 Commerce Drive
Corporate HQ          Hauppauge, NY                    5,000            5,000           June 2002

Baltimore             57 W. Timonium Rd.                  650               -           Month to month
Sales Office          Timonium, MD

Coastal               3832 Falls Rd.                  8,000             2,000           January 2002
Corporate HQ          Baltimore, MD
</TABLE>

(1)  Leased  from  entities  controlled  by or  affiliated  with  certain of the
Company's executive officers,  directors and principal  shareholders.  Effective
with the consummation of the Company's initial public offering in November 1996,
the leases with  related  parties were amended to provide  terms  comparable  to
those that could be obtained from independent third parties.

                                       10

<PAGE>

ITEM 3. Legal Proceedings

         On January  12,  1998,  the  Company  announced  that it had reached an
agreement  in  principle  settling  the  Shareholder   Securities  Class  Action
("Lawsuit") filed against the Company and certain of its officers in March 1997.
The  settlement,  which was approved by the Court on June 15, 1998,  resulted in
the  distribution  of  $1,350,000  minus  approved  attorney's  fees and related
expenses,  to purchasers of the Company's common stock in the Company's  initial
public  offering,  and during the period of November  26,  1996 to February  13,
1997. The entire $1,350,000 cash settlement was paid by the Company's  insurance
carrier.

         The  settlement  included a release of all claims that were asserted or
that could  have been  asserted  in the  Lawsuit  against  the  Company  and its
officers and directors. The Company agreed to the settlement solely to avoid the
expense,  burdens and uncertainties of further  litigation and continues to deny
that it has any liability on account of the matters  asserted in the  litigation
or that the Plaintiffs' claims have merit.

         The Company is involved in various claims and legal actions  arising in
the ordinary course of business.  In the opinion of management,  based on advice
from its legal counsel,  the ultimate disposition of these matters will not have
a material adverse effect.

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

No matters were  submitted to a vote of the security  holders  during the fourth
quarter of the fiscal year ended July 31, 1998.

                                     PART II

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

The Company's Common Stock commenced  trading on November 26, 1996 at $10.00 and
is traded on the NASDAQ  National  Market under the symbol MANC.  The  following
table sets forth the quarterly  high and low sale prices for the Common Stock as
reported by the NASDAQ National Market.

       Fiscal Year 1997                                  High             Low
       Second Quarter (starting November 26, 1996)       10-1/2          6-1/4
       Third Quarter                                      7              3-1/4
       Fourth Quarter                                     4-1/2          3-3/8

       Fiscal Year 1998
       First Quarter                                      5-1/4          4-1/8
       Second Quarter                                     4-7/16         3-1/2
       Third Quarter                                      4-1/8          3-1/4
       Fourth Quarter                                     4-1/4          3-1/8

On October 2, 1998 the closing  sale price for the  Company's  Common  Stock was
$3-1/8 per share.  As of October 2, 1998 there were 38 shareholders of record of
the Company's  Common Stock. The Company believes that here are in excess of 500
beneficial holders of its common stock.

Manchester  has never  declared or paid any dividends to  shareholders.  At this
time the Company  intends to continue its policy of  retaining  earnings for the
continued development and expansion of its business.

                                       11


<PAGE>


ITEM 6.  Selected Financial Data

                      SELECTED CONSOLIDATED FINANCIAL DATA
                    (in thousands, except per share amounts)

         The selected  consolidated  financial data presented  below are derived
from  the  audited  consolidated   financial  statements  of  the  Company.  The
Consolidated  Financial  Statements as of July 31, 1998 and 1997 and for each of
the years in the three-year period ended July 31, 1998 and the report thereon of
KPMG Peat  Marwick LLP,  independent  auditors,  are included  elsewhere in this
Report.  The data should be read in conjunction with the Consolidated  Financial
Statements  and Notes  thereto  and  "Management's  Discussion  and  Analysis of
Financial  Condition  and  Results of  Operations"  included  elsewhere  in this
Report.
 <TABLE>
 <CAPTION>

                                               Fiscal Year Ended July 31,
                                       1998           1997          1996            1995         1994
<S>                                    <C>            <C>          <C>          <C>            <C>   

Income Statement Data:
  Revenue                              $202,530       $187,801    $ 189,659      $ 170,818     $ 137,361
  Cost of revenue                       171,930        161,186      163,128        146,323       117,377
  Gross profit                           30,600         26,615       26,531         24,495        19,984
  Selling, general and
    administrative expenses              27,414         21,023       22,598         21,280        17,380
Income from operations                    3,186          5,592        3,933          3,215         2,604
Interest and other income
  (expenses), net                           546            395         (365)          (392)         (172)
Provision for income taxes                1,560          2,450        1,430(1)       1,160         1,042
Cumulative effect of change in
  accounting for income taxes                 -              -            -              -           386
Net income                               $2,172         $3,537    $   2,138(1)   $   1,663     $   1,776
Net income per share:
    Basic                                $0.26           $0.45    $    0 .34(1)   $   0.27    $    0.28
   Diluted                               $0.26           $0.45    $    0 .34(1)   $   0.27    $    0.28
Weighted average shares of common stock outstanding:
    Basic                                 8,494          7,779        6,247          6,263         6,263
    Diluted                               8,499          7,779        6,247          6,263         6,263
</TABLE>
<TABLE>
<CAPTION>


                                                                July 31,
                                           1998           1997         1996           1995        1994
                                           ----           ----         ----           ----        ----
<S>                                    <C>             <C>          <C>            <C>           <C>

Balance Sheet Data:
  Working capital                       $26,112        $30,578      $ 9,841        $ 9,189       $ 7,701
  Total assets                           56,894         58,208       37,761         31,635        25,879
  Short-term debt, including
    current maturities of
    capital lease obligation                 82          1,637        6,952          5,600         5,400
  Capital lease obligation, excluding
     current maturities                       -             77          175              -             -
  Redeemable common stock(2)                  -              -        4,739          5,210         5,210
  Shareholders' equity                   37,345         36,877        8,175          6,037         4,374

</TABLE>

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

(1)      Pro forma  provision  for  income  taxes,  pro forma net income and pro
         forma  basic and diluted net income per share for the fiscal year ended
         July 31,  1996  would  have been  $2,835,  $4,246  and $.68 per  share,
         respectively,  after  giving  effect to the  assumed  reduction  of (i)
         $3,209  in  officers'  compensation  payable  to  the  Company's  Chief
         Executive Officer, Executive Vice President and Chief Financial Officer
         to an aggregate of $1,125,  exclusive  of fringe  benefits,  to reflect
         adjustments  commencing  in fiscal 1997 to (A) the annual  compensation
         that the Company's Chief Executive Officer and Executive Vice President
         have   agreed   to   receive   without   any   diminished   duties   or
         responsibilities,  and (B) the  reduction  from the  amount  of  annual
         compensation  paid to the former Chief Financial  Officer to the annual
         compensation  payable to the present Chief  Financial  Officer,  net of
         applicable  income taxes, and (ii) $304 in rent paid to related parties
         to amounts  stipulated in leases,  net of applicable  income taxes. See
         "Management" and "Certain Transactions."

(2)      Represents  the  aggregate  amounts  payable  by the  Company to redeem
         shares  of  common   stock   under  the   shareholder   put  right  and
         shareholders'  agreements between the Company and certain shareholders.
         See Note 12 of notes to the consolidated financial statements.

                                       12
<PAGE>



ITEM 7. Management's  Discussion And Analysis Of Financial Condition And Results
        Of Operations

         The  following  discussion  and  analysis of  financial  condition  and
results of  operations  of the Company  should be read in  conjunction  with the
Consolidated  Financial  Statements of the Company and Notes  thereto  appearing
elsewhere  in  this  Report.   The   following   discussion   contains   certain
forward-looking  statements  within  the  meaning of  Securities  Act of 1933 as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
which are not historical  facts and involve risks and  uncertainties  that could
cause actual results to differ materially from the results  anticipated in those
forward-looking  statements.  These risks and uncertainties include, but are not
limited to those set forth below and the risk factors described in the Company's
other filings from time to time with the Securities and Exchange Commission.

General

         Manchester is a network  integrator and reseller of computer  hardware,
software and  networking  products,  primarily  for  commercial  customers.  The
Company  offers  its  customers  single-source  solutions  customized  to  their
information  systems  needs by combining  value-added  services  with  hardware,
software,  networking  products and peripherals from leading  vendors.  To date,
most of the Company's revenues have been derived from product sales. The Company
generally does not develop or sell software products.  However, certain computer
hardware  products  sold by the Company are loaded  with  pre-packaged  software
products.

         As a result of intense price  competition  within the computer industry
as well as other industry  conditions,  the Company has  experienced  increasing
pressure on per unit prices as well as on its gross profit and operating margins
with respect to the sale of products.  Manchester's strategy includes increasing
its focus on providing  value-added  services  with  operating  margins that are
higher than those obtained with respect to the sale of products. The Company has
experienced  a  significant  increase  in selling,  general  and  administrative
expenses, primarily in the form of increased personnel costs, in connection with
the  implementation  of this strategy.  The Company's  future  performance  will
depend in part on its ability to manage  successfully a continuing  shift in its
operations towards value-added services.

         The Company directly competes with local, regional and national systems
integrators,  value-added  resellers  ("VARs") and  distributors as well as with
certain computer  manufacturers  that market through direct sales forces. In the
future,  the Company may face further  competition  from new market entrants and
possible alliances between existing competitors.  In addition, certain suppliers
and  manufacturers may choose to market products directly to end users through a
direct sales force rather than or in addition to channel  distribution.  Some of
the Company's  competitors have, or may have,  greater  financial  marketing and
other  resources,  and may offer a broader range of products and services,  than
the  Company.  As a result,  they may be able to respond  more quickly to new or
emerging technologies or changes in customer requirements,  benefit from greater
purchasing  economies,  offer more  aggressive  hardware and service  pricing or
devote greater resources to the promotion of their products and services.  There
can be no assurance that the Company will be able to compete successfully in the
future with these or other current or potential future competitors.

         The Company's  business is dependent upon its relationships  with major
manufacturers  in the  computer  industry.  There can be no  assurance  that the
pricing and related  terms  offered by major  manufacturers  will not  adversely
change in the future. The failure to obtain an adequate supply of products,  the
loss of a major  manufacturer,  the deterioration of the Company's  relationship
with a major  manufacturer  or the Company's  inability in the future to develop
new relationships with other  manufacturers could have a material adverse effect
on the Company's business, results of operations and financial condition.

         The Company's largest customer  accounted for approximately 7%, 15% and
16% of the Company's revenues for the fiscal years ended July 31, 1998, 1997 and
1996,  respectively,  substantially  all of which revenues were derived from the
sale of hardware  products.  There can be no  assurance  that the  Company  will
continue to derive substantial revenues from this customer.

         The Company's  profitability has been enhanced by its ability to obtain
volume discounts from certain manufacturers,  which has been dependent, in part,
upon  Manchester's  ability to sell large  quantities  of  products  to computer
resellers,  including  VARs.  There can be no assurance that the Company will be
able to continue to sell  products to resellers  and thereby  obtain the desired
discounts from  manufacturers or that the Company will be able to increase sales
to end-users to offset the need to rely upon sales to resellers.

         The markets for the Company's  products and services are  characterized
by rapidly  changing  technology and frequent  introductions of new hardware and
software   products  and   services,   which  render  many   existing   products
noncompetitive,  less  profitable  or obsolete.  The Company  believes  that its
inventory  controls have  contributed  to its ability to respond  effectively to
these  technological  changes.  As of July 31, 1998, 1997 and 1996,  inventories
represented  16%, 17% and 24% of total assets,  respectively.  During these same
fiscal years, the Company's average inventory  turnover was 17, 17 and 18 times,
respectively.  The failure of the Company to anticipate  technology trends or to
continue  to  effectively  manage its  inventory  could have a material  adverse
effect on the Company's business, results of operations and financial condition.

         The  Company   believes  its  controls  on  accounts   receivable  have
contributed  to its  profitability.  The Company's bad debt expense  represented
 .2%,  .2% and .1% of total  revenues  for the fiscal  years ended July 31, 1998,
1997 and 1996, respectively.

         The  Company's  quarterly  revenue and  operating  results  have varied
significantly in the past and are expected to continue to do so in the future.
                                    13
<PAGE>
Quarterly revenues and operating results generally  fluctuate as a result of the
demand for the Company's products and services, the introduction of new hardware
and software  technologies  with  improved  features,  the  introduction  of new
services  by the  Company  and its  competitors,  changes  in the  level  of the
Company's operating expenses, competitive conditions and economic conditions. In
particular,  the Company currently is increasing  certain of its fixed operating
expenses, including a significant increase in personnel, as part of its strategy
to  increase  its  focus  on  providing  higher  margin,  value-added  services.
Accordingly,  the Company  believes  that  period-to-period  comparisons  of its
operating  results  should  not  be  relied  upon  as an  indication  of  future
performance. In addition, the results of any quarterly period are not indicative
of results to be expected for a full fiscal year.

         As a result of the rapid changes which are taking place in computer and
networking  technologies,  product  life  cycles  are  short.  Accordingly,  the
Company's  product offerings change  constantly.  Prices of products change with
generally  higher prices early in the life cycle of the product and lower prices
near the end of the product's life cycle.  Recently,  the computer  industry has
experienced rapid declines in average selling prices of personal  computers.  In
some  instances,  the Company has been able to offset these price  declines with
increases  in units  shipped.  There can be no assurance  that  average  selling
prices will not  continue to decline or that the Company  will be able to offset
declines in average selling prices with increases in units shipped.


         Most of the personal computers shipped by the Company utilize operating
systems  developed by Microsoft  Corporation.  The United  States  Department of
Justice has brought an antitrust action against Microsoft, which could delay the
introduction   and   distribution   of   Microsoft   products.   The   potential
unavailability of Microsoft products could have a material adverse effect on the
Company's business, results of operations and financial condition.

         The  Company's  Chief  Executive  Officer  entered  into an  employment
agreement  with the Company  under which he received  $550,000 in  compensation,
exclusive of fringe benefits,  for each of the fiscal years ending July 31, 1997
and 1998. In addition,  the Company's  Executive  Vice  President  received base
compensation,  exclusive  of fringe  benefits,  of $450,000 for the fiscal years
ending  July 31,  1997 and 1998.  These  officers  agreed that they would not be
entitled to any bonuses for fiscal 1997 and that any bonus  payable to either of
these  officers in fiscal 1998 would  require the  approval of a majority of the
independent  directors of the Company. No bonuses were paid to these officers in
fiscal 1997 or 1998.  The Company  leases  certain  warehouses  and offices from
entities that are owned or controlled  by the  Company's  majority  shareholder.
Each of the leases with  related  parties has been  amended  effective  with the
closing of the Company's  initial public offering in December 1996 to reduce the
rent payable under that lease to then current market rates.

Year 2000 Issue

         Many  existing  computer  systems,  including  certain of the Company's
internal systems as well as those that the Company sells to customers,  use only
the last two digits to  identify  years in the date  field.  As a result,  those
systems may not accurately  distinguish  years in the 21st century from years in
the 20th century,  or may not function properly when faced with years later than
1999. This problem is generally  referred to as the "Year 2000 Issue."  Computer
systems that are able to deal correctly with dates after 1999 are referred to as
"Year-2000-Compliant."

         The Company has undertaken a complete and thorough review of all of its
operations to determine  those  aspects  which  involve or are dependent  upon a
computer  application.  The Company is  reviewing  the  software  and  operating
systems for each such application to determine if it is Year-2000-Compliant. Any
such system or application which is not Year-2000-Compliant is being modified or
upgraded to assure our continued ability to operate without  interruption.  This
process has been  underway  since  before  January 1, 1998 and is  currently  on
schedule for completion before January 1, 1999. The Company is in the process of
obtaining  assurances  regarding Year 2000  compliance from other companies upon
which we may rely for products or services.

         The  Company  expects  to  implement   successfully   the  systems  and
programming  changes  necessary  to address the Year 2000 Issue.  Moreover,  the
Company  does not expect the costs  associated  with that  implementation  to be
material to the Company's financial position or results of operations.

         With  respect to  products  sold to  customers,  the  Company  does not
warrant any products sold as  Year-2000-Compliant.  Instead,  the Company refers
customers to warrantees provided by the product's manufacturers.

         The statements  above describing the Company's plans and objectives for
handling the Year 2000 Issue and the  expected  impact of the Year 2000 Issue on
the Company are forward-looking  statements.  Those statements involve risks and
uncertainties  that could cause  actual  results to differ  materially  from the
results discussed above. Factors that might cause such a difference include, but
are not limited to, delays in executing the plan outlined above and increased or
unforeseen  costs  associated  with  the  implementation  of the  plan  and  any
necessary  changes to the  Company's  systems.  Any inability on the part of the
Company to implement necessary changes in a timely fashion could have an adverse
effect  on  future  results  of  operations.   Moreover,  even  if  the  Company
successfully  implements  the changes  necessary to address the Year 2000 Issue,
there can be no assurance that the Company will not be adversely affected by the
failure of others to become Year-2000-Compliant.


Recent Acquisition

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal Office  Products,  Inc.  ("Coastal"),  a Maryland  corporation  and a
reseller and provider of microcomputer  services and peripherals to companies in
                                       14
<PAGE>
the greater  Baltimore,  Maryland area. The  acquisition,  which has been
accounted for as a purchase,  consisted of a cash payment of approximately  $3.1
million plus potential  future  contingent  payments.  The cash payment was made
from the Company's  cash  balances.  Contingent  payments of up to $1,050,000 in
each of calendar 1998 and 1999 will be determined  based upon achieving  certain
agreed upon  increases in revenues and pretax  income for calendar 1998 and 1999
over calendar 1997 amounts.  Contingent payments,  if any, would be paid in cash
(or,  under certain  conditions,  in Company common stock) on March 15, 1999 and
March 15, 2000.  Operating  results of Coastal are included in the  Consolidated
Statements of Income from the date of acquisition.  The acquisition  resulted in
goodwill of $2,965,000 which is being amortized on the straight-line  basis over
20 years.

Results of Operations

         The following table sets forth, for the periods indicated,  information
derived from the  Company's  consolidated  statements  of income  expressed as a
percentage of related revenue or total revenue.
 <TABLE>
 <CAPTION>
                                                       Percentage of Revenue
                                                       the Year Ended July 31,
                                                       -----------------------
                                                    1998      1997       1996
                                                    ----      ----       ----
<S>                                                <C>       <C>         <C> 

Revenue                                             
         Products                                   97.4%     98.7%      100.0
         Services                                    2.6       1.3         -
                                                     ---       ---       -----     

                                                   100.0%    100.0%      100.0%
                                                   -----     -----       ----- 
Cost of revenue
         Products                                   85.2      86.2        86.0
         Services                                   72.1      54.4          -  
                                                    ----      ----        ----    

                                                    84.9      85.8       86.0
                                                    ----      ----       ----

Product gross profit                                14.8      13.8       14.0
Services gross profit                               27.9      45.6        -  
                                                    ----      ----       ----
         Gross profit                               15.1      14.2       14.0

Selling, general and administrative expenses        13.5      11.2       11.9
                                                    ----      ----       ----
Income from operations                               1.6       3.0        2.1
Interest and other income (expenses), net            0.3       0.2       (0.2)
                                                     ---       ---       ---- 
Income before income taxes                           1.9       3.2        1.9
                                                     ---       ---        ---
Provision for income taxes                           0.8       1.3        0.8
Net income                                           1.1%      1.9%       1.1%
                                                     ===       ===        === 
</TABLE>

Year Ended July 31, 1998 Compared to Year Ended July 31, 1997

         Revenue.  The Company's  revenue  increased  $14.7 million or 7.8% from
$187.8  million in fiscal 1997 to $202.5  million for fiscal 1998.  Revenue from
product  sales  increased  by $11.8  million  (6.4%)  primarily  due to  revenue
generated  from  the  Company's  new  wholly-owned  subsidiaries,   Electrograph
Systems, Inc.  ("Electrograph") which was acquired on April 25, 1997 and Coastal
Office  Products,  Inc.,  which  was  acquired  on  January  2,  1998 as well as
increases in the number of personal  computers  shipped.  These  increases  were
partially  offset by lower revenue from the Company's  major  customer and lower
average selling prices for personal  computers.  Services  revenue  increased by
$2.9  million,  or  122.0%,  reflecting  the  Company's  continued  emphasis  on
providing value-added services.

         Gross  Profit.  Cost of revenue  includes  the direct costs of products
sold,  freight and the  personnel  costs  associated  with  providing  technical
services,  offset  in part by  certain  market  development  funds  provided  by
manufacturers.  All other operating  costs are included in selling,  general and
administrative  expenses.  Gross profit  increased by $4.0 million or 15.0% from
$26.6  million for fiscal 1997 to $30.6  million for fiscal  1998.  Gross profit
from the sale of products  increased by $3.6  million or 14.1% due  primarily to
increases in revenue as well as favorable  changes in the mix of products  sold.
Gross profit generated through service offerings  increased by $394,000 or 36.0%
reflecting  improved  service revenue,  as discussed above,  partially offset by
greater  expenditures  in salaries and other  personnel  costs  associated  with
providing technical services. Fiscal 1998 costs of services reflect the costs of
technical  and  engineering  personnel  added  during  the year as a part of the
Company's strategy to grow higher margin service related business.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased  $6.4 million or 30.4% from $21.0 million in
fiscal 1997 to $27.4  million in fiscal 1998.  This  increase is  principally  a
result of higher salaries and personnel costs related to the Company's increased
emphasis on providing value added services as well as additional operating costs
associated with the Company's new  subsidiaries,  Electrograph  and Coastal.  In
addition, the Company incurred higher commission, depreciation and amortization,
training and professional costs.

          Other  Income  (Expense).  Interest  expense  decreased  due to  lower
borrowings by the Company. Interest income is generated by the investment of the
Company's excess cash balances.
<PAGE>
         Provision for Income Taxes.  The  Company's  effective  income tax rate
increased  from 40.9% in fiscal 1997 to 41.8% in fiscal 1998 due to higher state
and local  taxes in new and  existing  jurisdictions  as well as  non-deductible
amortization of goodwill associated with the Coastal acquisition.

Year Ended July 31, 1997 Compared to Year Ended July 31, 1996

         Revenue.  The  Company's  revenue  decreased  $1.9 million or 1.0% from
$189.7  million in fiscal 1996 to $187.8 in fiscal  1997.  This  decrease is due
primarily  to  lower  shipments  to the  Company's  major  customer  as  well as
generally lower prices for personal computers,  partially offset by increases in
units  shipped  and $5.1  million of  revenue  from the  Company's  Electrograph
subsidiary, which was acquired on April 25, 1997.

         Gross  Profit.  Gross  profit  increased  by $84,000 or 0.3% from $26.5
million  in fiscal  1996 to $26.6  million  in fiscal  1997.  Gross  profit as a
percentage  of revenues  increased  from 14.0% in fiscal 1996 to 14.2% in fiscal
1997. The improvement in gross profit as a percentage of revenue reflects a more
favorable product mix. Competitive  pressures,  changes in the types of products
or services sold and product availability result in fluctuations in gross profit
from period to period.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  decreased  $1.6 million or 7.0% from $22.6  million in
fiscal 1996 to $21.0  million in fiscal 1997.  This decrease is primarily due to
lower officer  salaries and rents paid to related parties due to agreements that
were entered into in connection  with the  Company's  initial  public  offering,
partially offset by higher salaries,  legal expenses, bad debts and depreciation
costs as well as  additional  operating  expenses  incurred  as a result  of the
acquisition of Electrograph  Systems,  Inc. on April 25, 1997.  Giving pro forma
effect to the changes in officers'  compensation  and rents to related  parties,
the pro forma  selling,  general  and  administrative  expenses  would have been
approximately  $19.1  million or 10.1% of  revenues  for the year ended July 31,
1996.

         Interest Income. Interest income increased significantly in 1997 due to
earnings on short term  investments  made with certain of the proceeds  from the
Company's initial public offering.

         Provision For Income Taxes.  The effective tax rate increased slightly
from 40.1% in fiscal 1996 to 40.9% in fiscal 1997.

Liquidity and Capital Resources

       The  Company's  primary  sources of  financing  in fiscal  1998 have been
internally  generated  working capital from profitable  operations and a line of
credit from a financial institution.

       For the year ended July 31, 1998,  cash provided by operating  activities
was $2,340,000 consisting primarily of net income, decreased inventory and sales
of trading investments  partially offset by increases in accounts receivable and
a decrease in accounts  payable and accrued  expenses.  The  Company's  accounts
receivable and accounts  payable and accrued expenses  balances,  as well as its
investment in inventory, can fluctuate significantly from one period to the next
due to the receipt of large customer orders or payments or variations in product
availability and vendor shipping patterns at any particular date. Generally, the
Company's  experience is that  increases in accounts  receivable,  inventory and
accounts  payable and accrued  expenses will coincide with growth in revenue and
increased  operating levels.  In addition,  during the year ended July 31, 1998,
the Company  used  approximately  $3.0  million for capital  expenditures,  $2.9
million (net of cash acquired) for the purchase of Coastal, $1.8 million for the
purchase of treasury stock and $1.9 million for the repayment of debt.

       The  Company  and a  subsidiary  have  available  lines  of  credit  with
financial  institutions  in the aggregate  amount of $15.0 million.  At July 31,
1998, no amounts are outstanding under this line.

       On December 2, 1996, the Company completed the IPO of 2,325,000 shares of
its common  stock  resulting in net  proceeds to the  Company,  after  deducting
underwriting  discount and expenses, of approximately $20.4 million. The Company
utilized  $7.7  million  of the  proceeds  from  the IPO to  repay  the  balance
outstanding at that date under its line of credit with a financial institution.

       The  Company  believes  that  its  current  balances  in  cash  and  cash
equivalents and  investments,  expected cash flows from operations and available
borrowings  under  the lines of  credit  will be  adequate  to  support  current
operating levels for the foreseeable future,  specifically  through at least the
end of fiscal 1999. The Company has entered into  commitments for the renovation
and expansion of certain of its sales and service  facilities which is currently
underway and  expected to be  completed in the first  quarter of the next fiscal
year.  The aggregate  commitment for these  projects is  approximately  $500,000
which will be paid out of the Company's  available  cash  balances.  The Company
currently has no other material  commitments  for capital  expenditures.  Future
capital  requirements  of the  Company  include  those for the growth of working
capital  items such as  accounts  receivable  and  inventory,  the  purchase  of
equipment and expansion of facilities, potential contingent acquisition payments
of  $2,100,000,  as well as the  possible  opening of new offices and  potential
acquisitions.
                                       16
<PAGE>



New Accounting Standards

       The Financial  Accounting  Standards Board issued  Statement of Financial
Accounting  Standards No. 131,  "Disclosure  About Segments of an Enterprise and
Related  Information,"  which is  effective  for fiscal  years  beginning  after
December  15,  1997.   This  statement   establishes   standards  for  reporting
information about operating segments, and related disclosures about products and
services,  geographic areas and major customers.  The Company has not determined
the impact that the adoption of this new  accounting  standard  will have on its
consolidated  financial  statement  disclosures.  The  Company  will  adopt this
statement  effective  August 1, 1998, as required.  Interim  information  is not
required  until  the  second  year of  application,  at which  time  comparative
information is required.

Inflation

       The Company does not believe that inflation has had a material  effect on
the Company's operations.

ITEM 8.  Financial Statements and Supplementary Data

See Item 14.

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

None.

                                       17
<PAGE>



                                    PART III

ITEM 10.  Directors and Executive Officers of the Registrant

         The  following  table sets  forth  information  concerning  each of the
directors and executive officers of the Company:

Name                                 Age               Position
----                                 ---               --------

Barry R. Steinberg                   56    Chairman of the Board, President,
                                           Chief Executive Officer and Director

Joel G. Stemple, Ph.D                56    Executive Vice President, Secretary 
                                           and Director

Joseph Looney                        41    Chief Financial Officer

Joel Rothlein, Esq.                  69    Director

Bert Rudofsky                        64    Director

Michael E. Russell                   51    Director

Julian Sandler                       54    Director

     Barry R. Steinberg,  the founder of the Company, has served as its Chairman
of the Board,  President  and Chief  Executive  Officer and as a director  since
Manchester's  formation in 1973. Mr.  Steinberg  previously  served as a systems
analyst for Sleepwater, Inc. and Henry Glass and Co.

     Joel G.  Stemple,  Ph.D.  has  served as  Executive  Vice  President  since
September  1996 and as Vice  President and as a director  since August 1982. Dr.
Stemple previously  performed consulting services for the Company and, from 1966
to 1982,  served as Assistant and Associate  Professor of  Mathematics at Queens
College, City University of New York.

     Joseph Looney has served as the Company's Chief Financial Officer since May
1996.  From 1984  until  joining  the  Company,  Mr.  Looney  served in  various
positions with KPMG Peat Marwick LLP,  including Senior Audit Manager at the end
of his tenure at such firm.  Mr.  Looney is a  Certified  Public  Accountant,  a
member of the AICPA, the New York State Society of Certified Public  Accountants
and the Institute of Internal Auditors.

     Joel Rothlein,  Esq. has been a director of the Company since October 1996.
Mr.  Rothlein  is a partner in the law firm of Kressel  Rothlein & Roth,  Esqs.,
Massapequa,  New York, where he has practiced law since 1955. Kressel Rothlein &
Roth,  Esqs. and its predecessor  firms have acted as outside general counsel to
the Company since the Company's inception.

     Bert  Rudofsky  became a director  on July 15,  1998.  Mr.  Rudofsky is the
founder and president of Bert Rudofsky and Associates,  a management  consulting
firm  specializing in the computer  industry.  Mr. Rudofsky was a founder of MTI
Systems  Corp.,  a leading edge,  technical,  value-added  distribution  company
specializing in computer and data communications  products. Mr. Rudofsky was CEO
of MTI from 1968 until MTI was sold in 1990.

     Michael E.  Russell  became a director  on July 15,  1998.  Mr.  Russell is
presently a senior vice president at Prudential Securities  Incorporated and has
held several distinguished positions as a member of the business community, as a
member of the New York State Metropolitan  Transportation Authority (1997-1989),
as commissioner of the New York State Commission on Cable Television (1989-1991)
and  as  Special  Assistant  to  the  New  York  State  Senate  Majority  Leader
(1991-1994).

     Julian  Sandler became a director on December 2, 1996. Mr. Sandler is Chief
Executive  Officer of  Rent-a-PC,  Inc., a  full-service  provider of short-term
computer  rentals,  which Mr.  Sandler  founded in 1984. Mr. Sandler is also the
founder  and was the  President  from 1974 to 1993 of  Brookvale  Associates,  a
national  organization  specializing in the remarketing of hardware manufactured
by Digital Equipment  Corporation.  Mr. Sandler also co-founded and from 1970 to
1973 was Vice President of Periphonics Corporation, a developer and manufacturer
of voice response systems.
                                       18
<PAGE>
Section 16(a) Beneficial Reporting Compliance

         Section 16 of the Securities Exchange Act of 1934, as amended, requires
that  officers,  directors  and  holders  of more than 10% of the  Common  Stock
(collectively,  "Reporting  Persons")  file  reports  of  their  trading  in the
Company's equity securities with the Securities and Exchange  Commission.  Based
on a review of Section 16 forms filed by the Reporting Persons during the fiscal
year ended July 31,  1998,  (a) Bert  Rudofsky  and  Michael  E.  Russell,  each
Reporting Persons,  filed Form 3 approximately one and one-half months late; and
(b) Barry R.  Steinberg,  a Reporting  Person,  filed his Form 4  reporting  the
acquisition of additional shares of the Common Stock  approximately three months
late.  Except as noted, the Company  believes that the Reporting  Persons timely
complied with all applicable Section 16 filing requirements.

ITEM 11.      Summary Compensation.

         The following  table sets forth a summary of the  compensation  paid or
accrued by the Company  during the fiscal  years ended July 31,  1998,  1997 and
1996 to the Company's Chief Executive  Officer and the other executive  officers
whose compensation exceeded $100,000: 
<TABLE>
 <CAPTION>

                                                      Summary Compensation Table
                                                          Annual Compensation
                                                          -------------------
                                                                                   Long Term
                                                                                   Compensation
                                                                                   ------------
                                                                                   Common Stock
Name and                                                      Other Annual         Underlying       All Other
Principal Position           Year     Salary     Bonus        Compensation(5)      Options(4)     Compensation
------------------           ----     ------     -----        ---------------      ----------     ------------
<S>                          <C>    <C>          <C>            <C>                  <C>           <C>

Barry R. Steinberg,          1998    $550,000             -      $37,031(1)                 -            -
 President  and Chief        1997    $550,000             -      $59,252(1)                 -            -
 Executive Officer           1996    $271,800    $1,816,439      $59,210(1)                 -            -

Joel G. Stemple, Executive   1998    $450,000             -      $22,194(2)                 -            -
 Vice President and          1997    $450,000             -      $33,050(2)                 -            -
  Secretary                  1996    $251,800    $1,669,193      $29,000(2)                 -            -

Joseph Looney, Chief         1998    $140,394       $40,000      $13,677                    -            -
 Financial Officer(3)        1997    $125,489       $47,500       $7,610               70,000            -
                             1996    $ 31,250       $10,000       $1,275                    -            -
</TABLE>

Other than set forth above,  no  restricted  stock  awards,  stock  appreciation
rights or long-term incentive plan awards (all as defined
in the proxy regulations  promulgated by the Securities and Exchange Commission)
were awarded to, earned by, or paid to the Named  Executive  Officers during the
fiscal year ended July 31, 1998.
------------------
(1)   Includes  $32,081 in 1998 and $50,000 in each of 1997 and 1996 of premiums
      paid by the Company for a whole life  insurance  policy in the name of Mr.
      Steinberg having a face value of $2,600,000 and under which his daughters,
      on the one hand, and the Company, on the other hand, are beneficiaries and
      share equally in the death benefits payable under the policy.

(2)   Includes  $17,394 of premiums in 1998 and $25,000 in each of 1997 and 1996
      paid by the Company for a whole life  insurance  policy in the name of the
      executive  officer  having a face value of $1,300,000  and under which his
      spouse and the Company are  beneficiaries and are entitled to $600,000 and
      $700,000, respectively, of the death benefits payable under the policy.

(3) Began employment with the Company on May 2, 1996.
(4) See Option  Grant  Table  below for the  exercise  price and  vesting of Mr.
    Looney's options.

(5)   Includes in fiscal 1998 employer  matching  contributions to the Company's
      defined  contribution  plan of  $4,950,  $4,800  and  $3,577  for  Messrs.
      Steinberg,  Stemple,  and Looney,  respectively,  and fiscal 1997 employer
      matching  contributions  to the  Company's  defined  contribution  plan of
      $6,252,  $6,675 and $2,510 for  Messrs.  Steinberg,  Stemple  and  Looney,
      respectively.

                                       19
<PAGE>
         Barry R.  Steinberg  has agreed with the  Company  that his annual base
salary  for  services  rendered  to the  Company  in his  current  positions  as
President  and Chief  Executive  Officer shall be $550,000 in each of the fiscal
years ending July 31, 1997 and 1998.  Mr.  Steinberg has agreed that he will not
be eligible  to receive any bonus in fiscal 1997 and that any bonus  payable for
fiscal 1998 will require the approval of a majority of the independent directors
of the  Company.  No bonus was paid for fiscal 1997 or 1998.  The  Company  will
continue to make  available to him the car allowance  and deferred  compensation
benefits  that he is currently  receiving.  Mr.  Steinberg  will also be able to
participate in other benefits that the Company makes generally  available to its
employees,  such as medical and other insurance,  and Mr. Steinberg will be able
to  participate  under  the  Company's  stock  option  plan.  In the  event  Mr.
Steinberg's  employment  with the  Company  were  terminated,  he  would  not be
precluded from competing with the Company.

         The Company has an employment  agreement  with Joel G. Stemple,  Ph.D.,
under which Dr. Stemple receives a base salary of $450,000 in each of the fiscal
years ending July 31, 1997 and 1998. Under the employment agreement, Dr. Stemple
is not eligible to receive any bonus in fiscal 1997 and any bonus payable to Dr.
Stemple  for  fiscal  1998 must be  approved  by a majority  of the  independent
directors of the Company.  No bonus was paid for fiscal 1997 or 1998.  Under the
employment  agreement,  the Company  provides Dr. Stemple with an automobile and
certain deferred compensation benefits and provides Dr. Stemple with medical and
other benefits  generally  offered by the Company to its employees.  Dr. Stemple
also is able to participate  in the Company's  stock option plan. The employment
agreement is terminable  by either party on 90 days' prior notice.  In the event
the Company so terminates Dr. Stemple's employment, or the Company elects not to
renew his employment  agreement,  he is entitled to severance equal to 12 months
of his then current base salary.  This  severance  will be payable in accordance
with the Company's customary payroll practices.  Under the employment agreement,
if Dr.  Stemple  terminates  his  employment,  or  the  Company  terminates  his
employment for cause, Dr. Stemple is prohibited, for a two-year period from such
termination,  from  competing with the Company in the eastern half of the United
States.

         The  Compensation   Committee  of  the  Company's  Board  of  Directors
determines  compensation  for the Company's  executive  officers.  The Company's
objective is to provide a  competitive  compensation  program that reflects both
the Company and individual performance.

         Effective  August  1,  1998,  based  upon  the  recommendation  of  the
Compensation Committee,  the annual base salaries of Mr. Steinberg,  Mr. Stemple
and Mr.  Looney were set at $650,000,  $450,000 and $200,000,  respectively.  In
addition, an incentive  compensation program for fiscal 1999 has been adopted by
the Company whereby the executive officers would share in a predetermined  bonus
pool in the event that the  Company's  operating  earnings  exceed  fiscal  1998
amounts by 25% or more.

Option Grants in the Last Fiscal Year

         The following table sets forth the  information  with respect to grants
of stock  options to purchase the Company's  common  stock,  par value $0.01 per
share (the "Common Stock"),  pursuant to the Company's Amended and Restated 1996
Incentive and Non-Incentive  Stock Option Plan (the "Plan") granted to the Named
Executive  Officers  during the fiscal  year ended July 31, 1998 and all options
outstanding to the named Executive Officers as of July 31, 1998.
<TABLE>
<CAPTION>

                                                           Individual Grants
                                                           -----------------
                        Number of      Percent of                                      Potential Realizable
                        Securities     Total Options                                   Value at Assumed   
                        Underlying     Granted to                                      Annual Rates of Stock
                        Options        Employees in    Exercise      Expiration        Price Appreciation
                        Granted        Fiscal year     Price         Date              For Option Term(1)
                        -------        -----------     -----         ----              ------------------
          Name                (#)                        ($/sh)                               5%          10%
         ----                ---                        ------                               --          ---
<S>                       <C>            <C>           <C>          <C>                 <C>           <C>

Joseph Looney              50,000(2)     6.3%          $3.8125       2/03/2007           $105,000     $259,000
                           20,000(3)     2.5%          $3.8125       3/26/2007            $42,000     $104,000
</TABLE>

         No options  outstanding  for all executive  officers were  exercised or
exercisable during the fiscal year ended July 31, 1998 or as of July 31, 1998.
There were no  in-the-money  exercisable  or  unexercisable  options at July 31,
1998.
--------------
(1) Amounts  reported in this column represent  hypothetical  values that may be
    realized upon exercise of the options immediately prior to the expiration of
    their term,  assuming the specified  compounded rates of appreciation of the
    Common  Stock over the term of the  options.  These  numbers are  calculated
    based on rules promulgated by the Securities and Exchange Commission. Actual
    gains,  if any,  in  option  exercises  are  dependent  on the  time of such
    exercise and the future performance of the Common Stock.
(2) Exercisable cumulatively at the rate of 20% per annum commencing February 3,
1999. (3) Exercisable  cumulatively at the rate of 25% per annum  commencing May
5, 1999.

                                       20
<PAGE>



Compensation Committee Interlocks and Insider Participation
    
     The members of the Company's Compensation Committee are Joel Rothlein, Esq.
and  Julian  Sandler,  and,  effective  July 15,  1998,  Bert  Rudofsky.  George
Bagetakos was a member of the Compensation  Committee until he resigned from the
Board of Directors in July,  1998. Mr. Rothlein is a partner of Kressel Rothlein
& Roth, Esqs.,  which, with its predecessor  firms, has acted as outside general
counsel to the Company since the Company's  inception.  Kressel Rothlein & Roth,
Esqs. was paid  approximately  $217,000,  $655,000 and $383,000 from the Company
for  legal  fees in the  fiscal  years  ended  July 31,  1998,  1997  and  1996,
respectively.  Fiscal 1997 fees to Kressel Rothlein & Roth, Esqs.  included fees
paid to special  counsel of $286,000.  In addition,  during the years ended July
31, 1998 and 1997, the Company recorded  revenue of  approximately  $177,000 and
$130,000,  respectively,  in connection with the sale of computer equipment to a
company controlled by Mr. Sandler.

         The  Company's  Stock  Option  Plan is  administered  by the  Board  of
Directors.  Barry R. Steinberg is President and Chief Executive Officer and Joel
G.  Stemple is  Executive  Vice  President  of the Company and each of them is a
member of the  Board.  As members  of the  Board,  they could vote on  executive
compensation  issues  before  the  Board  pertaining  to the  granting  of stock
options.  Although the issue has not arisen to date,  each of Messrs.  Steinberg
and Stemple has agreed to abstain  from voting on the grant of stock  options to
himself or to the other of them.

ITEM     12. Security  Ownership of Certain Beneficial Owners and Management 

     The following  table sets forth certain  information  as of October 2, 1998
(except  as  otherwise  indicated)  with  respect to the number of shares of the
Company's  common  stock  beneficially  owned by each person who is known to the
Company  to  beneficially  own more than 5% of the common  stock,  the number of
shares of common stock  beneficially  owned by each  director of the Company and
each executive officer of the Company,  and the number of shares of common stock
beneficially  owned by all executive  officers and directors of the Company as a
group. Except as otherwise indicated,  each such shareholder has sole voting and
investment  power  with  respect  to  the  shares  beneficially  owned  by  such
shareholder.
 <TABLE>
 <CAPTION>
                                                    Shares Beneficially   Percent of Shares
      Name and Address                                      Owned           Outstanding
      ----------------                                      -----           -----------
     <S>                                                 <C>              <C>     
      Barry R. Steinberg(1)(3)                            4,674,101       57.7%
      Joel G. Stemple(1)                                    626,263        7.7
      Joseph Looney(1)                                        4,700        *
      Joel Rothlein(2)                                       31,500        *
      Bert Rudofsky(1)                                            -        -
      Michael E. Russell(1)                                       -        -
      Julian Sandler(1)(4)                                    3,500        *
      Heartland Advisors                                    595,600        7.4
      790 N. Milwaukee St., Milwaukee, WI 53202

      Franklin Advisors, Inc.                               417,100        5.2
      777 Mariners Island Blvd., San Mateo, CA 94404

      Capital Technology, Inc.                              415,900        5.1
      8314 Pineville-Mathews  Rd., Suite 295,
      Charlotte,  NC 28226

      All executive
      officers and directors as a group
        (5 persons)                                       5,340,064       65.9%
</TABLE>

(1)   Address is 160 Oser Avenue, Hauppauge, New York 11788.
(2)   Address is 684  Broadway,  Massapequa,  New York 11758;  consists of 3,300
      shares held by Kressel, Rothlein & Roth, Esqs., in which Mr. Rothlein is a
      partner,  and 13,200  shares held by the  Kressel,  Rothlein & Roth Profit
      Sharing Plan. Mr. Rothlein  disclaims  beneficial  ownership of the Common
      Stock owned by Kressel Rothlein & Roth, Esqs., except to the extent of his
      equitable  interest  in the firm,  and of the  Common  Stock  owned by the
      Kressel  Rothlein & Roth Profit Sharing Plan,  except to the extent of his
      beneficial interest in such plan.
(3)   Excludes 29,000 shares owned by Ilene Steinberg and 29,000 shares owned by
      Sheryl Steinberg,  daughters of Mr. Steinberg, which shares were purchased
      with the  proceeds of a loan from Mr.  Steinberg.  As reported on Schedule
      13D filed on March 24, 1997, as amended,  Mr. Steinberg,  Ilene Steinberg,
      and Sheryl  Steinberg  each  disclaim  beneficial  ownership of the common
      stock owned by the others.
(4)   Includes option to  purchase  2,500  shares  that  became  exercisable  on
      December  18,  1997. 
*     Represents  less than one tenth of one  percent of outstanding shares.


                                       21
<PAGE>



ITEM 13.  Certain  Relationships and Related Transactions

         Until  August  1994,  the  Company  was  affiliated  with  Electrograph
Systems, Inc. ("Electrograph").  Barry R. Steinberg, the Company's President and
Chief Executive Officer and its majority  shareholder,  served as Electrograph's
Chairman of the Board and Chief Financial  Officer and had beneficial  ownership
(directly and through shares held by his spouse and certain trusts, of which his
children are  beneficiaries) of 35.5% of the outstanding  shares of common stock
of  Electrograph.  During the fiscal  years  ended July 31,  1993 and 1994,  the
Company paid approximately $322,000 and $385,000,  respectively, to Electrograph
for the purchase of products. In August 1994, Bitwise Designs, Inc. ("Bitwise"),
a  publicly-traded  company  engaged  in the  manufacture  and  distribution  of
document  imaging  systems,   personal  and  industrial  computers  and  related
peripherals,   acquired  Electrograph  through  a  stock-for-stock  merger;  Mr.
Steinberg  acquired  beneficial  ownership  of less  than 1% of the  outstanding
capital stock of Bitwise for the common stock of  Electrograph in which he had a
direct or indirect beneficial  interest.  Mr. Steinberg served as a director of,
and provided  consulting services to, Bitwise from August 1994 through September
17, 1996.  On April 25, 1997,  the Company  purchased  substantially  all of the
assets of Electrograph Systems, Inc. See Item 1 - Business "Acquisitions".

         Three of the Company's four  Hauppauge,  New York facilities are leased
from  entities  affiliated  with certain of the  Company's  executive  officers,
directors  or  principal  shareholders.   The  property  located  at  40  Marcus
Boulevard,  Hauppauge, New York is leased from a limited liability company owned
70% by Mr.  Steinberg  and his  relatives,  20% by Joel G. Stemple,  Ph.D.,  the
Company's  Executive  Vice  President  and a principal  shareholder,  and 10% by
Michael  Bivona,  a shareholder of the Company.  For the fiscal years ended July
31, 1998,  1997 and 1996, the Company made lease payments of $179,000,  $174,000
and $216,000,  respectively,  to such entity.  The Company's offices at 160 Oser
Avenue,  Hauppauge,  New York are leased from a limited  liability company owned
65% by Mr.  Steinberg,  17.5% by Dr.  Stemple and 17.5% by Mr.  Bivona.  For the
fiscal  years  ended July 31,  1998,  1997,  and 1996,  the  Company  made lease
payments of $263,000, $259,000 and $360,000,  respectively,  to such entity. The
property located at 50 Marcus Boulevard,  Hauppauge, New York is leased from Mr.
Steinberg  doing  business in the name of Marcus  Realty.  For the fiscal  years
ended July 31, 1998, 1997 and 1996, the Company made lease payments of $340,000,
$329,000,    and    $435,000,     respectively,     to    such    entity.    See
"Business--Properties."

         Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein & Roth, Esqs.,  which, with its predecessor firms, has acted as outside
general counsel to the Company since the Company's inception. Kressel Rothlein &
Roth, Esqs. was paid approximately $89,000 (exclusive of disbursements) from the
Company for legal fees in the fiscal year ended July 31, 1996 and received  fees
of  approximately  $655,000  from the  Company in the fiscal year ended July 31,
1997, which sum includes fees paid to special counsel ($286,000).  During fiscal
1998, $217,000 was paid to such firm for legal fees.

         During the year  ended July 31,  1998 and 1997,  the  Company  recorded
revenue  of  $177,000  and  $130,000  in  connection  with the sale of  computer
equipment to a company controlled by Julian Sandler, a director of the Company.

                                       22

<PAGE>
                                     PART IV

ITEM 14.  Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

(a)      (1)      Financial Statements
                  The financial  statements  included herein are filed as a part
of this Report.

                         Manchester Equipment Co., Inc.
                          INDEX TO FINANCIAL STATEMENTS


                                                                           Page
Independent Auditors' Report                                                 24

Consolidated Financial Statements:
         Balance Sheets as of July 31, 1998 and 1997                         25
         Statements of Income for the years ended July 31, 1998,
          1997 and 1996                                                      26
         Statements of Shareholders' Equity for the years ended
          July 31, 1998, 1997 and 1996                                       27
         Statements of Cash Flows for the years ended July 31, 1998,
          1997 and 1996                                                      28
         Notes to Consolidated Financial Statements                          29

                                       23
<PAGE>







                          Independent Auditors' Report

The Board of Directors and Shareholders
Manchester Equipment Co., Inc.:

We have  audited the  accompanying  consolidated  balance  sheets of  Manchester
Equipment  Co.,  Inc.  and  subsidiaries  as of July  31,  1998 and 1997 and the
related consolidated  statements of income,  shareholders' equity and cash flows
for  each of the  years  in the  three-year  period  ended  July  31,  1998.  In
connection with our audits of the  consolidated  financial  statements,  we have
also  audited the  financial  statement  schedule as listed in the  accompanying
index. These consolidated  financial statements and financial statement schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these  consolidated  financial  statements  and  financial
statement schedule based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Manchester Equipment
Co., Inc. and  subsidiaries  at July 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  July  31,  1998,  in  conformity  with  generally   accepted   accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.



                              KPMG PEAT MARWICK LLP


Melville, New York
September 18, 1998

                                       24

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                             July 31, 1998 and 1997
<TABLE>
<CAPTION>

                                   Assets                                1998           1997
                                   ------                                ----           ----
                                                                            (in thousands)
<S>                                                                     <C>         <C>      

Current assets:
     Cash and cash equivalents                                          $7,816       $15,049
     Investments                                                         1,501         4,408
     Accounts receivable, net of allowance for doubtful
        accounts of $1,150 and $1,051, respectively                     26,296        21,473
     Inventory                                                           9,167        10,127
     Deferred income taxes                                                 482           440
     Prepaid expenses and other current assets                             290           248
                                                                           ---           ---

                             Total current assets                       45,552        51,745

Property and equipment, net                                              5,975         4,073
Goodwill, net                                                            4,325         1,524
Deferred income taxes                                                      475           379
Other assets                                                               567           487
                                                                           ---           ---

                                                                       $56,894       $58,208
                                                                       =======       =======

                          Liabilities and Shareholders' Equity
                          ------------------------------------

Current liabilities:
     Current maturities of long-term debt                             $     82       $    99
     Notes payable-bank                                                      -         1,274
     Notes payable - other                                                   -           264
     Accounts payable and accrued expenses                              18,358        19,283
     Deferred service contract revenue                                     775           247
     Income taxes payable                                                  225             -
                                                                           ---        ------     

                             Total  current liabilities                 19,440        21,167

Long-term debt, less current maturities                                      -            77
Deferred compensation payable                                              109            87

Commitments and contingencies (note 8)
Shareholders' equity:
     Preferred stock, $.01 par value, 5,000 shares
        authorized, none issued                                              -             -
     Common stock, $.01 par value; 25,000 shares
        authorized, 8,097 and 8,525 shares issued
        and outstanding                                                     81            85
     Additional paid-in capital                                         18,767        20,403
     Deferred compensation                                                 (64)            -
     Retained earnings                                                  18,561        16,389
                                                                        ------        ------

                             Total shareholders' equity                 37,345        36,877
                                                                        ------        ------

                                                                       $56,894       $58,208
                                                                       =======       =======
</TABLE>

See accompanying notes to consolidated financial statements.
                                       25

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                        Consolidated Statements of Income
                    Years ended July 31, 1998, 1997 and 1996

    <TABLE>
<CAPTION>
                                                                1998              1997          1996
                                                                ----              ----          ----
                                                                 (in thousands except  per share amounts)
         <S>                                                  <C>              <C>            <C>    


         Revenue
              Products                                         $197,194         $185,397      $189,659
              Services                                            5,336            2,404             -
                                                                  -----            -----        ------     
                                                                202,530          187,801       189,659
                                                                -------          -------       -------

         Cost of revenue
              Products                                          168,083          159,877       163,128
              Services                                            3,847            1,309             -
                                                                  -----            -----        ------     
                                                                171,930          161,186       163,128
                                                                -------          -------       -------

              Gross profit                                       30,600           26,615        26,531
         Selling, general and administrative expenses            27,414           21,023        22,598
                                                                 ------           ------        ------

              Income from operations                              3,186            5,592         3,933

         Other income (expense):
              Interest expense                                      (41)            (225)         (399)
              Investment income                                     587              560            25 
              Other                                                   -               60             9
                                                                   ----               --             -

              Income before provision for income taxes            3,732            5,987         3,568
         Provision for income taxes                               1,560            2,450         1,430
                                                                  -----            -----         -----
              Net income                                         $2,172           $3,537        $2,138
                                                                 ======           ======        ======
              Net income per share
                  Basic                                          $0.26             $0.45         $0.34  
                                                                 =====             =====         =====  
                  Diluted                                        $0.26             $0.45         $0.34
                                                                 =====             =====         =====

         Weighted average shares of common
            stock and equivalents outstanding
              Basic                                              8,494             7,779         6,247    
                                                                 =====             =====         =====    
              Diluted                                            8,499             7,779         6,247
                                                                 =====             =====         =====

</TABLE>







See accompanying notes to consolidated financial statements.

                                       26
<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
                    Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>


                                                            Additional
                                        Common     Par      Paid-in       Deferred         Retained
                                        Shares     Value    Capital       Compensation     Earnings      Total
                                        ------     -----    -------       ------------     --------      -----
                                                                 (in thousands)
     <S>                                   <C>       <C>    <C>               <C>          <C>           <C>

     Balance  July 31, 1995                6,263     $63     $      -           $  -       $5,974        $6,037
     Purchase and retirement of
           stock                             (63)     (1)           -              -            1             -

     Net income                                -       -            -              -        2,138         2,138
                                              --      --           --             --        -----         -----

     Balance July 31, 1996                 6,200      62            -              -        8,113         8,175

     Issuance of common stock              2,325      23       20,391              -            -        20,414
     Stock option commission
       expense                                 -       -           12              -            -            12
     Transfer  of redeemable
        common stock                           -       -            -              -        4,739         4,739
     Net income                                -       -            -              -        3,537         3,537
                                              --      --           --             --        -----         -----
     Balance July 31, 1997                 8,525      85       20,403              -       16,389        36,877

     Deferred compensation                    20       -           80            (80)           -             -
     Purchase and retirement of stock       (448)     (4)      (1,781)             -            -        (1,785)
     Stock option commission expense           -       -           65              -            -            65
     Stock award compensation
       expense                                 -       -            -             16            -            16
     Net income                                -       -            -              -        2,172         2,172
                                              --      --           --             --        -----         -----
     Balance July 31, 1998                 8,097     $81      $18,767           $(64)     $18,561       $37,345
                                           =====     ===      =======           ====      =======       =======

</TABLE>




     See accompanying notes to consolidated financial statements.

                                       27

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                    Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                     1998         1997           1996
                                                                     ----         ----           ----
                                                                              (in thousands)
<S>                                                                <C>           <C>             <C>   

 Cash flows from operating activities:
     Net income                                                      $2,172       $3,537          $2,138
     Adjustments to reconcile net income to net cash from
           operating activities:
           Depreciation and amortization                              1,340          720             473
           Allowance for doubtful accounts                               75          210             132
           Non-cash compensation and commission expense                  81           12               -
           Deferred income taxes                                       (138)         (90)            (86)
           Gain on disposition of assets                                  -          (37)             (9)
           Change in assets and liabilities; net of the effects
            of acquisitions:
              Increase in accounts receivable                        (4,430)        (545)         (1,700)
              Decrease in inventory                                   1,882          515             548
              (Increase) decrease in prepaid expenses and
                 other current assets                                   (12)         (44)             41
              (Increase) decrease in other assets                         -          342            (307)
              (Decrease) increase in accounts payable and
                 accrued expenses                                    (1,997)         221           2,715
              Increase in deferred service contract revenue             213          118              27
              Increase (decrease) in income taxes payable               225         (295)            205
              Increase (decrease) in deferred compensation payable       22          (96)            (15)
              (Purchase) sale of investments                          2,907       (4,408)              -
                                                                      -----       ------                

                Net cash provided by operating activities             2,340          160           4,162
                                                                      -----          ---           -----

     Cash flows from investing activities:
         Capital expenditures                                        (2,972)      (2,439)         (1,028)
         Proceeds from the sale of assets                                 -            -              55
         Payment for acquisitions, net of  cash acquired             (2,921)      (1,886)            __-
                                                                     ------       ------                

            Net cash used in investing activities                    (5,893)      (4,325)           (973)
                                                                     ------       ------            ---- 

     Cash flows from financing activities:
         Net repayments or borrowings from bank                      (1,274)      (6,490)            900
         Payments on note payable shareholder                             -         (353)           (118)
         Payments on capitalized lease obligations                     (140)         (98)            (31)
         Payments on notes payable - other                             (481)         (33)              -
         Net  proceeds from initial public offering                       -       20,414               -
         Purchase and retirement of common stock                     (1,785)           -               -
                                                                     ------         ----             ---                   

            Net cash provided by (used in)  financing activities     (3,680)      13,440             751
                                                                     ------       ------             ---

     Net increase (decrease)  in cash  and cash equivalents          (7,233)       9,275           3,940

         Cash and cash equivalents at beginning of year              15,049        5,774           1,834
                                                                     ------        -----           -----

     Cash and cash equivalents at end of year                        $7,816      $15,049          $5,774
                                                                     ======      =======          ======

     Cash paid during the year for:
          Interest                                                      $41         $225            $399
                                                                        ===         ====            ====
          Income taxes                                               $1,428       $2,868          $1,290
                                                                     ======       ======          ======

     Other noncash transactions:
         Capitalized lease obligation                                   $ -          $ -            $305 
                                                                        ===           ==            ==== 
         Purchase of stock for notes payable-shareholder                $ -          $ -            $471
                                                                        ===          ===            ====

</TABLE>

     See accompanying notes to consolidated financial statements.

                                       28


<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)


(1)  Operations and Summary of Significant Accounting Policies
     ---------------------------------------------------------

      (a)  The Company
           -----------

         Manchester  Equipment  Company,  Inc.  ("the  Company")  is  a  network
      integrator  and reseller of computer  hardware,  software  and  networking
      products,  primarily  for  commercial  customers.  The Company  offers its
      customers  single-source solutions customized to their information systems
      needs  by  combining   value-added   services  with  hardware,   software,
      networking products and peripherals from leading vendors.

         Sales of  hardware,  software  and  networking  products  comprise  the
      majority  of  the  Company's  revenues.   The  Company  has  entered  into
      agreements  with certain  suppliers  and  manufacturers  which provide the
      Company  favorable  pricing and price  protection  in the event the vendor
      reduces its prices.

      (b)  Principles of Consolidation
           ---------------------------

         The  consolidated  financial  statements  include  the  accounts of the
      Company  and its  wholly-owned  subsidiaries.  All  material  intercompany
      transactions and balances are eliminated in consolidation.

      (c)  Cash Equivalents
           ----------------

         The Company  considers  all highly  liquid  investments  with  original
      maturities  at the date of  purchase  of three  months  or less to be cash
      equivalents.

      (d)  Investments
           -----------

         The Company  classifies its marketable  debt securities in one of three
      categories:  trading,  available  for sale,  or held to  maturity  and its
      marketable  equity securities as trading,  or available for sale.  Trading
      securities are bought and held principally for the purpose of selling them
      in the near term. Held-to-maturity securities are those debt securities in
      which the Company has the  ability and intent to hold the  security  until
      maturity. All other securities not included in trading or held-to-maturity
      are classified as available-for-sale.

         Trading and  available-for-sale  securities are recorded at fair value.
      Held-to-maturity  securities are recorded at amortized cost,  adjusted for
      the amortization or accretion of premiums or discounts. Unrealized holding
      gains  and  losses  on  trading   securities  are  included  in  earnings.
      Unrealized  holding  gains and losses,  net of the related tax effect,  on
      available-for-sale  securities are excluded from earnings and are reported
      as a separate component of shareholders' equity until realized.  Transfers
      of securities between categories are recorded at fair value at the date of
      transfer.  Unrealized  holding gains and losses are recognized in earnings
      for transfers into trading securities.

         Dividend  and  interest  income are  recognized  when  earned.  Cost is
      maintained on a specific  identification basis for purposes of determining
      realized gains and losses on sales of investments.

      (e)  Revenue Recognition
           -------------------

      Revenue from product  sales is  recognized  at the time of shipment to the
      customer. Revenue for services is recognized when the related services are
      performed.  When  product  sales and  services  are  bundled,  revenue  is
      recognized  upon  delivery of the product and  completion of the services.
      Service contract fees are recognized as revenue ratably over the period of
      the applicable contract. Deferred service contract revenue represents

                                       29

<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

      the unearned portion of service contract fees. The Company  generally does
      not develop or sell software products.  However, certain computer hardware
      products  sold  by  the  Company  are  loaded  with  prepackaged  software
      products.  The net impact on the Company's financial statements of product
      returns, primarily for defective products has been insignificant.

      (f) Market Development Funds
          ------------------------

         The  Company  receives  various  market   development  funds  including
      cooperative  advertising funds from certain vendors,  principally based on
      volume purchases of products.  The Company records such amounts related to
      volume  purchases as purchase  discounts  which reduce cost of revenue and
      other incentives that require specific  incremental  action on the part of
      the Company,  such as training,  advertising or other pre-approved  market
      development  activities  as an offset to the  related  costs  included  in
      selling,  general and  administrative  expenses.  Total market development
      funds  amounted to $623,  $521 and $943 for the years ended July 31, 1998,
      1997 and 1996, respectively.

      (g) Inventory
          ---------

         Inventory,  consisting  of  computer  hardware,  software  and  related
      supplies,  is valued at the lower of cost  (first-in  first-out) or market
      value.

      (h) Property and Equipment
          ----------------------

         Property and  equipment  are stated at cost.  Depreciation  is provided
      using the straight-line and accelerated methods over the economic lives of
      the assets, generally from five to seven years. Leasehold improvements are
      amortized over the shorter of the underlying lease term or asset life.

      (i)  Goodwill
           --------

         Goodwill related to acquisitions represents the excess of cost over the
      fair  value  of  net  assets   acquired.   Goodwill  is   amortized  on  a
      straight-line basis over twenty years. The Company reviews the significant
      assumptions  that  underlie  the  twenty-year  amortization  period  on  a
      quarterly  basis and will shorten the  amortization  period if  considered
      necessary.  The Company  assesses the  recoverability  of this  intangible
      asset by determining whether the amortization of the goodwill balance over
      its remaining life can be recovered through projected  undiscounted future
      cash flows.  Accumulated  amortization was  approximately  $183 and $19 at
      July 31, 1998 and 1997, respectively. Amortization expense of $164 and $19
      for the years ended July 31, 1998 and 1997 is included in selling  general
      and administrative expenses in the consolidated statements of income.

      (j)  Income Taxes
           ------------

         Deferred  taxes  are   recognized  for  the  future  tax   consequences
      attributable  to temporary  differences  between the  carrying  amounts of
      assets and  liabilities  for financial  statement  purposes and income tax
      purposes  using enacted  rates  expected to be in effect when such amounts
      are realized or settled.  The effect on deferred  taxes of a change in tax
      rates is  recognized  in income in the period that  includes the enactment
      date.

      (k)  Net Income Per Share
           --------------------

      In fiscal 1998,  the Company  adopted  Statement  of Financial  Accounting
      Standards  No.  128,  "Earnings  Per  Share"  ("EPS").   It  replaces  the
      presentation  of  primary  EPS with  the  presentation  of  basic  EPS and
      replaces  fully  diluted EPS with  diluted  EPS.  It also  requires a dual
      presentation of basic and diluted EPS on the face of the income  statement
      for  all  entities  with  complex   capital   structures  and  requires  a
      reconciliation  of  the  numerators  and  denominators  of the  basic  EPS
      computation   to  the  numerator  and   denominator  of  the  diluted  EPS
      computation.  Prior  periods' EPS data have been  restated to conform with
      Statement No. 128.

                                       30
<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)


         Basic net income per share has been  computed by dividing net income by
      the weighted  average  number of common  shares  outstanding.  Diluted net
      income per share has been  computed by dividing net income by the weighted
      average number of common shares outstanding,  plus the assumed exercise of
      dilutive  stock options and warrants,  less the number of treasury  shares
      assumed to be  purchased  from the  proceeds of such  exercises  using the
      average market price of the Company's  common stock during each respective
      period.  Options and  warrants  representing  380 and 1,052 shares for the
      years ended July 31, 1998 and 1997, respectively, were not included in the
      computation of diluted EPS because to do so would have been  antidilutive.
      The following table  reconciles the  denominators of the basic and diluted
      per share computations.  For each year, the numerator is the net income as
      reported.
<TABLE>
<CAPTION>

                                       1998                       1997                      1996
                                       ----                       ----                      ----
                                            Per Share                  Per Share                 Per Share
                                    Shares  Amount            Shares   Amount           Shares   Amount
                                    ------  ------            ------   ------           ------   ------
          <S>                   <C>            <C>          <C>         <C>           <C>        <C>

           Basic EPS             8,494,000     $0.26        7,779,000    $0.45        6,247,000   $0.34
                                               =====                     =====                    =====

           Effect of dilutive
            options                  5,000                          -                         -
                                     -----                       ----                      ----     

           Diluted EPS           8,499,000     $0.26        7,779,000    $0.45        6,247,000   $0.34
                                 =========     =====        =========    =====        =========   =====
</TABLE>

      (l)  Impairment of Long-Lived Assets
           -------------------------------

         The Company evaluates its long-lived assets,  certain intangibles,  and
      goodwill  related  to those  assets  to be held and used,  and  long-lived
      assets  and  certain  identifiable  intangibles  to  be  disposed  of  and
      recognizes an  impairment if it is probable that the recorded  amounts are
      in excess of anticipated undiscounted future cash flows. If the sum of the
      expected cash flows,  undiscounted and without interest,  is less than the
      carrying  amount of the assets,  an  impairment  loss is recognized as the
      amount by which the carrying amount of the asset exceeds the fair value.

      (m)  Accounting for Stock-Based Compensation
           ---------------------------------------

         The Company records  compensation expense for employee stock options if
      the current  market  price of the  underlying  stock  exceeds the exercise
      price on the date of the grant.  On August 1, 1996,  the  Company  adopted
      SFAS No. 123,  "Accounting for Stock-Based  Compensation." The Company has
      elected  not to  implement  the fair  value  based  accounting  method for
      employee  stock  options,  but has elected to  disclose  the pro forma net
      income and net income per share for  employee  stock  option  grants  made
      beginning  in fiscal  1996 as if such  method had been used to account for
      stock-based compensation cost as described in SFAS No.
      123.

      (n)  Use of Estimates
           ----------------

         Management   of  the  Company  has  made  a  number  of  estimates  and
      assumptions  relating to the reporting of assets and  liabilities  and the
      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 to prepare  these  financial  statements  in
      conformity with generally accepted accounting  principles.  Actual results
      could differ from those estimates.

      (o)  Fair Value of Financial Instruments
           -----------------------------------

         The fair  values  of cash  equivalents,  accounts  receivable,  prepaid
      expenses,  accounts payable and accrued  expenses,  and long-term debt are
      estimated  to be the  carrying  values  at July 31,  1998 due to the short
      maturity of such instruments.

                                       31

<PAGE>
               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

(p)      Reclassifications
         -----------------

         Certain prior year  information  has been  reclassified to conform with
the 1998 presentation format.

(2)      Investments
         -----------

     The Company  classified  all its  investments  at July 31, 1998 and 1997 as
trading  securities.  Fair  value  of  U.S.  government  obligations  and  other
securities are based on quoted market prices. The gross unrealized holding gains
and fair values of  investments  by major type at July 31, 1998 and 1997 were as
follows:

                                                 Gross Unrealized  Fair Value
                                                 Holding Gain      of Investment
                                                 ------------      -------------

At July 31, 1998
         U.S. government obligation                     $ 1             $ 501
         Corporate commercial instruments                 -             1,000
                                                         --             -----
                                                        $ 1            $1,501
                                                        ===            ======
At July 31, 1997
         U.S. government obligation                     $ 2            $1,007
         Corporate  commercial instruments                -             3,401
                                                         --             -----
                                                        $ 2            $4,408
                                                        ===            ======

     At July 31, 1998 and 1997 all  investments  had maturities of less than one
year.

(3)  Property and Equipment
     ----------------------

         Property and equipment at July 31, consist of the following:
                                                            1998         1997
                                                            ----         ----

      Furniture and fixtures                                $2,327       $2,096
      Machinery and equipment                                4,289        3,401
      Transportation equipment                                 426          281
      Leasehold improvements                                 2,284        2,168
                                                             -----        -----
                                                             9,326        7,946

      Less accumulated depreciation and amortization         3,351        3,873
                                                             -----        -----

                                                            $5,975       $4,073
                                                            ======       ======

         Depreciation  and amortization  expense  amounted to $1,176,  $701, and
$473 for the years ended July 31, 1998, 1997 and 1996, respectively.

(4)      Acquisitions
         ------------

Electrograph Systems. Inc.
--------------------------

         On April 25,  1997,  the Company,  through a newly formed  wholly-owned
subsidiary,  acquired  substantially  all  of the  assets  and  assumed  certain
liabilities of Electrograph  Systems, Inc.  ("Electrograph").  Electrograph is a
specialized distributor of microcomputer  peripherals,  primarily in the eastern
United States. The purchase price and transaction costs aggregated approximately
$2,600, plus liabilities assumed. Included in the liabilities assumed were notes
payable-bank  and  notes   payable-other  with  balances  of  $1,274  and  $264,
respectively, at July 31, 1997 which were repaid in fiscal 1998.
                                       32
<PAGE>
               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

         The  acquisition has been accounted for as a purchase and the operating
results of Electrograph  are included in the  consolidated  statements of income
from the date of acquisition.  The  acquisition  resulted in goodwill of $1,543,
which is being amortized on the straight-line basis over 20 years.

Coastal Office Products, Inc.
-----------------------------

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal  Office  Products,  Inc.  ("Coastal"),  a value  added  reseller  and
provider of  microcomputer  services and peripherals to companies in the greater
Baltimore,  Maryland  area. The  acquisition,  which has been accounted for as a
purchase,  consisted of a cash payment of  approximately  $3,100 plus  potential
future  contingent  payments.  Contingent  payments  of up to  $1,050 in each of
calendar 1998 and 1999 will be determined  based upon  achieving  certain agreed
upon  increases  in revenues and pretax  income for calendar  1998 and 1999 over
calendar  1997  amounts.  The cash  payment  was made  from the  Company's  cash
balances.  Contingent payments, if any, would be paid in cash (or, under certain
conditions,  in Company  common stock) on March 15, 1999 and March 15, 2000. The
selling shareholders  received employment  agreements that also provided for the
issuance of 20,000 shares of common  stock.  The fair value of the common stock,
amounting to $80 was  recorded as deferred  compensation  and is being  expensed
over the three year vesting period.

         Operating   results  of  Coastal  are  included  in  the   consolidated
statements of income from the date of acquisition.  The acquisition  resulted in
goodwill of $2,965,  which is being amortized on the straight-line basis over 20
years.

         The following  unaudited pro forma  consolidated  results of operations
for the  years  ended  July 31,  1998  and 1997  assume  that  the  Coastal  and
Electrograph  acquisitions occurred on August 1, 1996 and reflect the historical
operations of the purchased  businesses  adjusted for lower interest on invested
funds,  contractually  revised officer  compensation  and rent (for Coastal) and
increased  amortization,  net of  applicable  income taxes,  resulting  from the
acquisitions:

                                                        Year ended July 31,
                                                        1998            1997
                                                        ----            ----

           Revenue                                    $206,105         $216,118
           Net income                                   $2,186           $3,749
           Diluted net income per share                 $0.26             $0.48

       The pro forma results of operations are not necessarily indicative of the
actual  results that would have occurred had the  acquisitions  been made at the
beginning of the period, or of results which may occur in the future.

(5)  Accounts Payable and Accrued Expenses
     -------------------------------------

     Accounts payable and accrued expenses consist of the following:

                                                           July 31,
                                                           --------
                                                      1998           1997
                                                      ----           ----

             Accounts payable, trade                  $14,659        $15,783
             Accrued salaries and wages                 2,462          1,630
             Customer deposits                            494            740
             Other accrued expenses                       743          1,130
                                                          ---          -----
                                                      $18,358        $19,283
                                                      =======        =======

                                       33
<PAGE>





               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

              The Company has entered into financing agreements for the purchase
     of inventory.  These agreements are secured by the related inventory and/or
     accounts  receivables.  In each of the years in the three-year period ended
     July 31, 1998, the Company has repaid all balances  outstanding under these
     agreements   within  the  30  day  non-interest   bearing  payment  period.
     Accordingly, amounts outstanding under such agreements of $2,372 and $5,184
     at July 31, 1998 and 1997,  respectively,  are included in accounts payable
     and  accrued  expenses.   Prior  to  December  1996,  pursuant  to  certain
     intercreditor  agreements,  these financing agreements were subordinated to
     the  Company's  line of credit  agreement  except as to specific  inventory
     purchased  under these  financing  agreements.  In August 1997, the Company
     entered into a new financing  agreement for the purchase of inventory.  The
     agreement  provides  a maximum  of  $10,000  in  credit  for  purchases  of
     inventory  from  certain  specified  manufacturers.  The new  agreement  is
     unsecured,  allows for a 30 day  non-interest  bearing  payment  period and
     requires the Company to maintain,  among other  things,  a certain  minimum
     tangible net worth. As of July 31, 1998,  retained  earnings  available for
     dividends amounts to approximately $8,400.

(6)  Long-Term Debt
     --------------

         In  January  1996,  the  Company  entered  into  a  capitalized   lease
     obligation for certain computer equipment. Future minimum payments required
     under such lease are $85 (including interest of $3) in fiscal 1999.

(7)  Employee Benefit Plans
     ----------------------

         The  Company  maintains a qualified  defined  contribution  plan with a
     salary  deferral  provision,  commonly  referred to as a 401(k)  plan.  The
     Company  matches 50% of employee  contributions  up to three percent of the
     employees' compensation.  The Company's contribution amounted to $205, $161
     and $124 for the years ended July 31, 1998, 1997 and 1996, respectively.

         The Company also has a deferred compensation plan which is available to
     certain  eligible  key  employees.  The  plan  consists  of life  insurance
     policies purchased by the Company for the participants. Upon vesting, which
     occurs at various times from three to ten years,  the  participant  becomes
     entitled  to have  ownership  of the  policy  transferred  to him or her at
     termination  of employment  with the Company.  As of July 31, 1998 and 1997
     the Company has recorded an asset  (included with other assets) of $109 and
     $87, respectively,  representing the cash surrender value of policies owned
     by the Company and a liability of the same amount  relating to the unvested
     portion of benefits due under this plan. For the years ended July 31, 1998,
     1997 and 1996,  the Company  recorded  an expense of $105,  $110 and $72 in
     connection with this plan.

(8)  Commitments and Contingencies
     -----------------------------

     Leases
     ------

         The  Company  leases  most  of  its  executive  offices  and  warehouse
     facilities  primarily  from related  parties  (Note 11). In  addition,  the
     Company  is  obligated  under  lease   agreements  for  sales  offices  and
     additional  warehouse space.  Aggregate rent expense under all these leases
     amounted to $1,255,  $1,073 and $1,212 for the years  ended July 31,  1998,
     1997 and 1996.

         The following  represents  the  Company's  commitment  under  operating
leases for the next five years ended July 31:

                                1999                    $1,460
                                2000                    $1,489
                                2001                    $1,221
                                2002                    $1,272
                                2003                      $975


                                       34
<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

     Litigation
     ----------

         The Company is involved in various claims and legal actions  arising in
     the ordinary  course of business.  In the opinion of  management,  based on
     advice from its legal  counsel,  the ultimate  disposition of these matters
     will not have a material adverse effect.

         On January  12,  1998,  the  Company  announced  that it had reached an
     agreement in principle  settling the  Shareholder  Securities  Class Action
     ("Lawsuit")  filed against the Company and certain of its officers in March
     1997. The settlement  resulted in the distribution of $1,350 minus approved
     attorney's fees and related expenses, to purchasers of the Company's common
     stock in the Company's  initial public  offering,  and during the period of
     November 26, 1996 to February 13, 1997.  The entire $1,350 cash  settlement
     was paid by the Company's insurance carrier.

         The  settlement  included a release of all claims that were asserted or
     that could have been  asserted in the  Lawsuit  against the Company and its
     officers and  directors.  The Company  agreed to the  settlement  solely to
     avoid the expense,  burdens and  uncertainties  of further  litigation  and
     continues  to deny that it has any  liability  on  account  of the  matters
     asserted in the litigation or that the Plaintiffs' claims had merit.

(9)  Line of Credit
     --------------

         In July 1998, the Company entered into a revolving credit facility with
     its banks. Under the terms of the facility,  the Company may borrow up to a
     maximum of $15,000.  The maximum borrowings are reduced to $12,500 at April
     1, 2000 and $10,000 on April 1, 2001.  Borrowings  under the facility  bear
     interest at variable interest rates based upon several options available to
     the  Company.  The  facility  requires  the  Company  to  maintain  certain
     financial  ratios and covenants.  As of July 31, 1998, there was no balance
     outstanding under this agreement, which expires on March 31, 2002.


                                       35


<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

 (10)  Income Taxes
       ------------

      The provision for income taxes for the years ended July 31, 1998, 1997 and
1996 consists of the following:

                                                        1998      1997     1996
                                                        ----      ----     ----
              Current
                  Federal                             $1,300    $1,938   $1,166
                  State                                  398       602      350
                                                         ---       ---      ---
                                                       1,698     2,540    1,516
                                                       -----     -----    -----
              Deferred
                  Federal                               (105)      (68)     (73)
                  State                                  (33)      (22)     (13)
                                                         ---       ---      --- 
                                                        (138)      (90)     (86)
                                                        ----       ---      --- 
                                                      $1,560    $2,450   $1,430
                                                      ======    ======   ======

      The  difference  between the Company's  effective  income tax rate and the
      statutory rate is as follows,  for the years ended July 31, 1998, 1997 and
      1996:

                                                        1998      1997     1996 
                                                        ----      ----     ---- 

              Income taxes at statutory rate          $1,269    $2,036   $1,213
              State taxes, net of
                  federal benefit                        241       383      222
              Other                                       50        31       (5)
                                                          --        --       -- 

                                                      $1,560    $2,450   $1,430
                                                      ======    ======   ======

      The tax effects of  temporary  differences  that give rise to  significant
      portions of the net  deferred  tax asset at July 31, 1998 and 1997 were as
      follows:

                                                        1998      1997
                                                        ----      ----

              Deferred tax assets:
                 Allowance for doubtful accounts        $450      $410
                 Deferred compensation                   315       270
                 Other                                   192       139
                                                         ---       ---

                  Deferred tax asset                    $957      $819
                                                        ====      ====


              A valuation allowance has not been provided in connection with the
      deferred tax assets since the Company believes that it is more likely than
      not that such deferred tax assets will be realized.


                                       36
<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)


 (11)  Related Party Transactions
       --------------------------

         The Company leases its warehouse and distribution center as well as its
      corporate  offices and certain sales  facilities  from  entities  owned or
      controlled by  shareholders,  officers,  or directors of the Company.  The
      leases  generally  cover a period of ten years and expire at various times
      from 1998 through 2005. Lease terms generally  include annual increases of
      five percent. Rent expense for these facilities aggregated $782, $771, and
      $1,022 for the years ended July 31, 1998, 1997 and 1996, respectively.

         The  Company  paid legal fees to a law firm in which a director  of the
      Company  is a  partner.  Such  fees  amounted  to $217,  $655,  and  $383,
      including  disbursements,  in the fiscal years ended July 31, 1998,  1997,
      and 1996 respectively.

         During  fiscal year ended July 31,  1998 and 1997 the Company  received
      approximately  $177 and  $130,  respectively,  in  revenue  from a company
      controlled by a director of the Company.

 (12)  Shareholders' Equity
       --------------------

      Initial Public Offering
      -----------------------

         On December 2, 1996, the Company  completed an initial public  offering
      (IPO)  of  2,325,000  shares  of its  common  stock at an  initial  public
      offering price of $10 per share.  Net proceeds to the Company were $20,414
      after deducting the underwriting discounts and commissions and other costs
      associated with the IPO. In connection with the IPO, the Company issued to
      the  underwriter  warrants to purchase an aggregate  of 250,000  shares of
      common stock. The warrants are exercisable at a price of $12 per share and
      expire in December, 2001.

      Redeemable Common Stock
      -----------------------

         Prior to the IPO,  the  Company was a party to an  agreement  among its
      shareholders  whereby each of the Company's two minority  shareholders had
      the  right to demand  that upon  termination,  retirement,  or death,  the
      Company  redeem his interest at differing  values stated in the agreement.
      The Company  maintains  term life insurance with a face value of $1,500 to
      be used  towards  the  purchase of the shares in the event of the death of
      each shareholder.  One of the minority shareholders retired in fiscal 1996
      and  based  upon the terms of the  agreement  and a  subsequent  agreement
      entered   into  in  May  1996,   payment  was  fixed  at  $4,710  for  the
      shareholder's  interest in the Company  (626,263 shares at the time of the
      agreement).  The shareholder  had an annual option to redeem  one-tenth of
      his shares  commencing  in fiscal  1996,  at an annual price of $471 to be
      paid  in  equal  quarterly   installments  over  the  following  year.  In
      connection with such agreements,  in May 1996 the Company purchased 62,626
      shares of common stock from the retired minority shareholder. The purchase
      price  was  $471,  which  was  paid in  four  non-interest  bearing  equal
      quarterly  installments  beginning  on  May  1,  1996.  Such  shares  were
      subsequently retired.

         In  September  1996,  among  other  provisions,  the  retired  minority
      shareholder  agreed to  terminate  his put  options to sell his  remaining
      shares to the Company upon the  effective  date of the  Company's  IPO. In
      addition,  the shareholders'  agreement terminated upon the effective date
      of the Company's IPO. As a result of the successful completion of the IPO,
      the  amounts  which  would  have  been  due  under  the  agreements   were
      reclassified from redeemable common stock to retained earnings.

                                       37

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

     Stock Option Plan
     -----------------

         Under  the   Company's   Amended  and  Restated   1996   Incentive  and
     Non-Incentive  Stock  Option Plan (the  "Plan"),  which was approved by the
     Company's shareholders in October 1996, an aggregate of 1,100,000 shares of
     common stock are reserved for issuance upon exercise of options thereunder.
     Under the Plan,  incentive stock options,  as defined in section 422 of the
     Internal Revenue Code of 1986, as amended,  may be granted to employees and
     non-incentive stock options may be granted to employees, directors and such
     other persons as the Board of Directors may determine,  at exercise  prices
     equal to at least 100% (with  respect to  incentive  stock  options) and at
     least 85% (with respect to non-incentive  stock options) of the fair market
     value of the Common  Stock on the date of grant.  In addition to  selecting
     the  optionees,  the Board of Directors will determine the number of shares
     of Common Stock subject to each option, the term of each stock option up to
     a maximum of ten years  (five  years for certain  employees  for  incentive
     stock   options),   the  time  or  times  when  the  stock  option  becomes
     exercisable,  and otherwise  administer the Plan.  Incentive  stock options
     expire three months from the date of the holder's termination of employment
     with the Company other than by reason of death or  disability.  Options may
     be exercised  with cash or common stock  previously  owned for in excess of
     six months.  During fiscal 1997, 742,350 and 60,000 options were granted at
     $10 and $5, respectively, per share. Such exercise prices were greater than
     or equal to the market value on the date of grant. Vesting commences one or
     two years from the date of grant and  ranges  from one to seven  years.  On
     December 22, 1997, the exercise price of all then  outstanding  options was
     reduced to $3.8125  per share,  which was the closing  market  price of the
     Company's  common stock on that date. The following table  summarizes stock
     option activity to date:
                                                                      Average
                                                                      Exercise
                                                Balance                Price
                                                -------                -----
         Balance August 1, 1996                        -                   -
           Granted                               802,350               $9.63
                                                 -------               -----

         Balance July 31, 1997                   802,350               $9.63
            Granted                              220,000               $4.24
            Cancelled                           (172,750)              $3.8125
                                                --------               -------

         Balance July 31, 1998                   849,600               $3.92
                                                 =======               =====

          At July 31, 1998, 2,500 options  exercisable at $3.8125 per share were
     exercisable  and all  options  granted  expire  ten years  from the date of
     grant.  The range of exercise  prices for options  outstanding  at July 31,
     1998 was $3,8125 - $5.00 with a remaining life of approximately nine years.

         The Company has adopted the pro forma disclosure  provision of SFAS No.
     123,  "Accounting for Stock Based Compensation".  Accordingly,  the Company
     does not record compensation cost in the financial statements for its stock
     options  which have an  exercise  price  equal to or greater  than the fair
     value of the  underlying  stock  on the  date of  grant.  The  Company  has
     recognized $108 in deferred  commission  expense  representing the value of
     stock options granted to non-employee sales  representatives.  Such cost is
     expensed over the vesting  period,  amounting to $65 and $12 in fiscal 1998
     and 1997,  respectively.  Had  compensation  cost for the  Company's  stock
     option  grants  been  determined  based on the fair value at the grant date
     under SFAS No. 123, the  Company's  net income and net income per share for
     the years  ended  July 31,  1998 and 1997 would  approximate  the pro forma
     amounts below:

                                                         1998          1997
                                                         ----          ----
                      Net Income:
                        As reported                     $2,172        $3,537
                        Pro forma                        1,992        $3,464

                      Diluted net income per share:
                        As reported                      $0.26         $0.45
                        Pro forma                        $0.23         $0.45

                                       38
<PAGE>
               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1998, 1997 and 1996
                 (in thousands, except share and per share data)

     The pro forma  effects on net income and  diluted  net income per share for
1998 and 1997 may not be  representative  of the pro  forma  effects  in  future
years.

     The fair value of options  granted was  estimated  using the  Black-Scholes
option pricing model with the following weighted average assumptions:

                                                         1998          1997
                                                         ----          ----
              Expected dividend yield                       0%           0%
              Expected stock volatility                    27%          29%
              Risk free interest rate                       5%           5%
              Expected option term until exercise (years) 4.70          4.27

The per share weighted average fair value of stock options granted during fiscal
1998 and 1997 was $1.09 and $1.05, respectively.

Repurchase of Common Stock
--------------------------

     During the year ended July 31, 1998, the Company repurchased 448,400 shares
of its common stock at an aggregate  purchase price of $1,785.  Such shares were
subsequently retired.

 (13)  Major Customer and Vendors and Concentration of Credit Risk
       -----------------------------------------------------------

         The Company sells and services  customers that are located primarily in
the eastern United States.  One customer accounted for approximately 7%, 15% and
16% of total  revenues  for the  years  ended  July  31,  1998,  1997 and  1996,
respectively.

The Company's top three vendors accounted for approximately  24%, 13% and 11% of
total product  purchases for the year ended July 31, 1998. The Company's top two
vendors  accounted for  approximately 17% and 15% of total product purchases for
the year ended July 31, 1997. The Company's top four vendors  accounted for 20%,
12%, 11% and 10% of total product purchases for the year ended July 31, 1996.

         One customer accounted for 5% of the Company's  accounts  receivable at
July 31, 1998.











                                       39

<PAGE>



ITEM 14.  Exhibits,  Financial  Statements,  Schedules,  and Reports on Form 8-K
          (Continued)

         (2)      Financial Statement Schedules
                  Schedule II - Valuation and Qualifying Accounts and Reserves

                  All  other   schedules  are  omitted   because  they  are  not
                  applicable  or  the  required  information  is  shown  in  the
                  financial statements or notes thereto.

         (3)      Exhibits:

 3.1.a(1) Certificate of Incorporation of Registrant filed August 21, 1973.

3.1.b(1)   Certificate  of  Amendment  of  Certificate  of  Incorporation  filed
           January 29, 1985.

 3.1.c(1) Restated Certificate of Incorporation filed October 1, 1996.

 3.2(1)    Bylaws of Registrant.

 4.2(1)    Form of Representative's Warrants.

10.1(1)    1996 Incentive and Non-Incentive Stock Option Plan of Registrant.

10.2(1)    Agreement dated September  24, 1996  between  Registrant  and Michael
           Bivona.

10.3(1) *  Compensation Agreement dated November 6, 1996 between  Registrant and
           Joel G. Stemple.

10.4(1) *  Agreement of Employment  dated  September 30, 1996 between Registrant
           and Barry Steinberg

10.4.a(1)* Amendment  dated  November 6, 1996 to Agreement of  Employment  dated
           September 30, 1996 between Registrant and Joel G. Stemple.

10.5.a(1)  Lease dated October 1995 between Registrant and 40 Marcus Realty, LLC
           - f/k/a 40 Marcus Realty Associates, as amended.

10.5.b(1)  Lease dated January 1988 between  Registrant  and Marcus  Realty,  as
           amended.

10.5.c(1) Lease dated June 1995 between Registrant and Facilities Management.

10.5.d(1) Lease dated July 31, 1995 between  Registrant and Boatman's  Equities,
          LLC - f/k/a 160 Oser Avenue Associates, as amended.

10.5.e(1) Lease dated January 15, 1992 between Registrant and 352 Seventh Avenue
          Associates.

10.5.f(1)  Lease dated  April 16, 1990  between  Registrant  and Regent  Holding
           Corporation,  as  successor  to  Crow-Childress-Donner,  Limited,  as
           amended.

10.5.g(1)  Business  Lease dated  December 4, 1992  between  Registrant  and TRA
           Limited, as amended.

10.5.h(5) Lease dated June 23, 1997 between Registrant and First Willow, LLC.

10.5.i(5)  Lease dated June 30, 1997  between  Registrant  and Angela C. Maffeo,
           Trustee Under the Will of John Capobianco.

10.5.j(6)  Lease dated  October 1, 1997  between  Registrant  and Spanish  River
           Executive Plaza, Ltd. A/k/a Century Financial Plaza.
                                       40
<PAGE>
10.5.k(4)  Lease dated January 2, 1998 between Coastal Office Products, Inc. and
           BC & HC Properties, LLC


10.6.2     Promissory Note dated October 15, 1996 between Registrant and The
           Bank of New York

10.7.a(1)  Letter Agreement Regarding Inventory Financing dated December 7, 1993
           between ITT Commercial Finance Corp. and Registrant.

10.7.b(1)  Agreement for Wholesale Financing dated November 11, 1993 between ITT
           Commercial Finance Corp. and Registrant.

10.7.c(1)  Intercreditor  Agreement  dated May 18, 1994  between ITT  Commercial
           Finance Corp. and The Bank of New York.

10.8.(1)   Letter Agreement  Regarding  Inventory Financing dated April 22, 1996
           between AT&T Capital Corporation and Registrant.

10.8.b(1)  Intercreditor  Agreement  dated May 18, 1994 between AT&T  Commercial
           Finance Corporation and The Bank of New York.

10.9(1)    Reseller Agreement dated May 1, 1990 between Toshiba America
           Information Systems, Inc. and Registrant.

10.10(1)   Agreement  for  Authorized  Resellers  dated  March 1,  1996  between
           Hewlett-Packard Company and Registrant.

10.11(3)   Asset Purchase  Agreement  dated  April 15,  1997 among  Electrograph
           Systems,  Inc.,  Bitwise  Designs,  Inc.,  Electrograph  Acquisition,
           Inc.  and Registrant.

10.12(4)  Definitive Purchase Agreement and Indemnity Agreement dated January 2,
          1998 between Registrant and Coastal Office Products, Inc.

10.13     $15,000,000 Revolving Credit  Facility Agreement  dated July 21,  1998
          between Registrant and Bank of New York, as Agent.

27         Financial Data Schedule.

(b)      Reports on Form 8-K
         The  Registrant  did not file any  reports  on Form 8-K during the last
         quarter of the period covered by this report, and none were required.



-----------------------
*  Denotes management  contract or compensatory plan or arrangement  required to
   be filed as an Exhibit to this Annual Report on Form 10-K.

1 Filed as the same numbered Exhibit to the Company's  Registration Statement on
  Form S-1 (File No. 333- 13345) and incorporated herein by reference thereto.
2 Filed as the same numbered  Exhibit to the Company's  Quarterly Report on Form
  10-Q for the quarter ended October 31, 1996  (Commission File No. 0-21695) and
  incorporated herein by reference thereto.
3 Filed as the same numbered  Exhibit to the Company's  Quarterly Report on Form
  10-Q for the quarter ended April 30, 1997  (Commission  File No.  0-21695) and
  incorporated herein by reference thereto.
4 Filed as the same numbered  Exhibit to the Company's  Quarterly Report on Form
  10-Q for the quarter ended January 31, 1998  (Commission File No. 0-21695) and
  incorporated herein by reference thereto.
5 Filed as the same numbered Exhibit to the Company's Annual Report on Form 10-K
  for the year ended July 31, 1997.
6 Filed as the same numbered  Exhibit to the Company's  Quarterly Report on Form
  10-Q for the quarter ended October 31, 1997  (Commission File No. 0-21695) and
  incorporated herein by reference thereto.
                                       41
<PAGE>

                                   SIGNATURES

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

                         Manchester Equipment Co., Inc.

Date:         October 27, 1998         By: ss:  Barry Steinberg 
                                                  ---------------   
                                              Barry R. Steinberg
                                              President, Chief Executive Officer

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


ss:   Barry R. Steinberg                      Date:      October 27, 1998
      ------------------
Barry R. Steinberg
President, Chief Executive Officer,
Chairman of the Board and Director
(Principal Executive Officer)


ss: Joel G. Stemple                          Date:      October 27, 1998
    --------------- 
Joel G. Stemple
Executive Vice President and Director


ss: Joseph Looney                            Date:       October 27, 1998
    -------------
Joseph Looney
Chief Financial Officer (Principal Accounting Officer)


ss: Joel Rothlein                            Date:      October 27, 1998
    -------------
Joel Rothlein
Director


ss: Julian Sandler                           Date:      October 27, 1998
    --------------
Julian Sandler
Director


ss: Michael Russell                          Date:     October 27, 1998
    ---------------
Michael Russell
Director

ss: Bert Rudofsky                            Date:      October 27, 1998
    -------------
Bert Rudofsky
Director


                                       42
<PAGE>




                         Manchester Equipment Co., Inc.
                 Schedule II - Valuation and Qualifying Accounts
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                        Column C-Additions
                         Column B-           (1)-         (2)-        Column D-       Column E-
Column A -               Balance at     Charged to    Charged to      Deductions-     Balance at
Description              beginning of   costs and     other            (a)            end of period
                         period         expenses      accounts (b)    ----------      ------------- 
                         ------         --------      ------------
<S>                       <C>            <C>             <C>            <C>              <C>  

Allowance for doubtful
accounts

Year ended:


    July 31, 1996            $718           $132                          $ 50             $800

    July 31, 1997            $800           $339           $40            $128           $1,051

    July 31, 1998          $1,051           $351           $25            $277           $1,150
</TABLE>

(a) Write-off amounts against allowance provided.
(b) Recorded in connection with the acquisitions.