<PAGE> 1
==============================================================================
                       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, 1997

                                      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 21, 1997 was $15,194,231 (3,241,436 shares at a closing
sale price of $4.6875).

As of October 21, 1997, 8,525,000 shares of Common Stock ($.01 par value) of the
Registrant were issued and outstanding.

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

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None
================================================================================
<PAGE>
                         MANCHESTER EQUIPMENT CO., INC.

                                    FORM 10-K
                            YEAR ENDED JULY 31, 1997
                                TABLE OF CONTENTS


                                                                          Page
                                                                          ----
  Part I    

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  Stockholder
           Matters                                                           11
Item 6.    Selected  Financial  Data                                         12
Item 7.    Management's  Discussion  and  Analysis of  Financial
           Condition and Results of Operations                               13
Item 8.    Financial Statements and Supplementary Data                       16
Item 9.    Disagreements on Accounting and Financial Disclosures             16 

  Part III

Item 10.   Directors and Executive Officers of the Registrant                17
Item 11.   Executive Compensation                                            18
Item 12.   Security Ownership of Certain Beneficial Owners and Management    20
Item 13.   Certain Relationships and Transactions                            20
         
  Part IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K   22
                                                                        
Signatures Chief Executive Officer, Chief Financial Officer, and Directors   40
         








   
















                                                       

                                                                                
<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 acquisition of Electrograph Systems, Inc. will
continue to add to the Company's  profitability,  the Company will be successful
in its efforts to focus on value-added services,  the Company will be successful
in  attracting  and  retaining  highly  skilled  technical  personnel  and sales
representatives  necessary to implement the  Company's  growth  strategies,  the
Company  will be  adversely  affected by continued  intense  competition  in the
computer  industry,   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
systems  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 20 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 90% 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 three 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;  and Electrograph
Systems, Inc. a New York corporation which distributes microcomputer peripherals
throughout the United States.

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,
                                       3
<PAGE> 
coupled with widespread acceptance of Internet technologies,  have led companies
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 revenues 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 and
continues to recruit 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
bridges,  routers and switches),  database  design and  management.  The Company
actively  promotes  the  benefits  of  corporate  intranets  and has  introduced
additional services,  including remote network management services and fee-based
"help desk" services. The remote network management system consists of dedicated
servers and software  located at the Company's  Long Island  headquarters.  This
system  allows  the  Company's   specially  trained  engineers  to  solve  their
customers' network systems problems from the Company's facilities. The fee-based
"help desk"  services are  available for  end-users,  regardless of whether they
purchase products or other services from the Company.

         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  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.

         Introducing an 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 will also be 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 be 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  utilizing  similar  technology to the
electronic  ordering system described  above.  The electronic sales  information
system  will  allow the  Company's  sales  representatives  to obtain  immediate
                                       4

<PAGE>
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 while reducing the possibility
of returns based on incompatible products.

         Manchester  also has upgraded its internal  telecommunications  system.
Through this enhanced system,  installed in August, 1997, the Company intends to
institute a system  whereby  telephone  calls can be  automatically  placed to a
targeted list of existing or potential  customers and, upon  connection,  routed
automatically  to available  sales  representatives  with on-screen  information
containing product and service data for current customers and market demographic
data for  potential  customers.  The  system  also has the  capability  to route
automatically  in-coming calls to available sales representatives in response to
a caller's answers to automated queries.

         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  a dedicated  training
facility located in one of its existing offices in Long Island.

         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
by  enlarging  its New York City  office and  increasing  the sales and  service
capabilities  of such  office,  and  expanding  its sales,  service and training
capabilities at its Long Island  headquarters.  The Company  believes that these
steps  will  enable  it  to  capture  a  greater  percentage  of  the  New  York
Metropolitan  area market.  In fiscal 1997, the Company entered into a lease for
new office space in New York City which is approximately  double the size of the
existing space.
Occupancy of the new space is anticipated in November 1997.

         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,
1997.  The Company  intends to continue to expand  geographically  into  growing
business  centers in the eastern half of the United  States.  It is  anticipated
that each office would have the  capability to perform a broad array of services
as well as engage in product sales.

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.
                                       5
<PAGE>
     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.
Vendor management  includes  interfacing with the suppliers of computer products
in installing a project;  facility  management  involves management of the labor
aspects of a project, including supervision of electricians and other tradesmen.

         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
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:

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

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

      AST Research, Inc.                   Motorola, Inc..
      Bay Networks, Inc.                   NEC Technologies, Inc.
      Cisco Systems, Inc.                  Novell, Inc.
      Compaq Computer Corporation          Philips Electronics N.V.
      Epson America, Inc.                  Seagate Technology, Inc.
      Hayes Microcomputer Products, Inc.   Standard Microsystems Corporation
      Hewlett-Packard Company              Texas Instruments Inc.
      Intel Corporation                    3Com Corp.
      Microsoft Corporation                Toshiba America Information Systems,
                                           Inc.


     For the fiscal  years  ended  July 31,  1997,  1996 and 1995,  sales by the
Company of products  manufactured  by Toshiba,  Hewlett-Packard,  NEC and Compaq
collectively  comprised  approximately  56%, 53% and 52%,  respectively,  of the
Company's  revenues.  In these fiscal years,  sales of products  manufactured by
Toshiba  accounted  for  approximately  26%, 23% and 24%,  respectively,  of the
Company's revenues,  substantially all of which were sales of notebook computers
and related accessories.  The total dollar volume of products purchased directly
from manufacturers,  as opposed to distributors or resellers,  was approximately
$103 million,  $117 million and $118 million for the fiscal years ended July 31,
1997, 1996 and 1995, respectively, and as a percentage of total cost of products
sold was approximately 64%, 72% and 82%, respectively.
                                        6
<PAGE>
     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  product that
render  components   unavailable  or  necessitate   product   allocations  among
resellers.  While certain shortages existed  throughout fiscal 1997, 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 1998, 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.

Customers

         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, 1997, 1996 and 1995,  approximately 15%, 16% and 22%
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 Barnes & Noble Inc.,  Cabletron  Systems Inc., J&R
Music World,  National Broadcasting Company Inc., Sterling Doubleday Enterprises
(New York Mets),  Pfizer Inc., Reuters America Inc., SONY Theaters,  Time Warner
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 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.

Sales and Marketing

         The  Company's  sales are  generated  primarily  by its 65 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.  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 for many
of its advertising and promotional campaigns.
                                       7
<PAGE>
        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, 18 and 16 times for the fiscal years ended July 31,
1997, 1996 and 1995,  respectively,  and Manchester experienced bad debt expense
of less than .3% of revenues in each of these years.

         During the fiscal year ended July 31, 1997, 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., Dataflex Corporation,  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 and possible alliances between existing competitors. 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.

Recent Acquisition

         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.

        
                                       8
<PAGE>
     Electrograph   provides  technical  assistance  to  customers  through  its
Hauppauge, New York office. Electrograph will ship returns of defective products
to the manufacturer or to an authorized repair center. Returns have historically
been  approximately  3% of  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
suppliersthrough  credits and replacements,  and also through restocking charges
and resale.  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.

         Most of Electrograph's major suppliers provide price protection, 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 1997.

         While  Electrograph  distributes  products  of more than 15  suppliers,
approximately  48% of  Electrograph's  revenue in fiscal 1997 was  derived  from
products manufactured by Mitsubishi, Electrograph's largest supplier.

         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.

Employees

         At August 31, 1997, the Company had 263 full-time employees  consisting
of 23 sales representatives, 26 management personnel, 50 technical personnel and
123 distribution and clerical  personnel.  In addition,  at August 31, 1997, the
Company had 36 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  and  Electrograph  currently  have  nine  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 1998 - 50


Warehouse         125 Marcus Blvd.                  -      5,000         June 1998
                  Hauppauge, NY

Office            684 Broadway(1)
                  Massapequa, NY                  500         -           Month to month

New York City     469 Seventh Avenue(2)
Sales office      New York, NY                 13,000                     January 1999

                  352 Seventh Avenue Fl 12A     7,000          -          July 1999
                  New York, NY

Boca Raton        902 Clint Moore Road
Sales Office      Boca Raton, FL               2,500          -           July 1998

Boston            25-27 Christina Street(2)    3,000          -           October 2002
Sales office      Newton, MA

Tampa             6304 Benjamin Road
Sales office      Tampa, FL                    1,200          -           December 1997

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
</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.

(2) Lease signed during fiscal 1997,  occupancy expected in the first quarter of
fiscal 1998.

10
<PAGE>

ITEM 3. Legal Proceedings

On March 28, 1997 a complaint  was filed by  plaintiff  Vincent  Manngard in the
United States  District  Court for the Eastern  District of New York against the
Company, its President and Chief Executive Officer, its Executive Vice President
and Secretary,  and its Chief Financial  Officer.  The plaintiff  claims to have
purchased shares in the Company's Offering and purports to sue on his own behalf
and on behalf of a class of persons who  purchased  the  Company's  common stock
either  pursuant to the Offering or in the period from November 26, 1996 through
February 13, 1997.  The  Complaint  asserts that the Company and the  individual
defendants made false or misleading  statements and omissions in connection with
the  Offering  in  violation  of  Section  11,  12(a)(2)  and 15 of the  federal
Securities  Act of 1933, and seeks damages on behalf of the putative class in an
unspecified  amount  and/or  rescission,  together  with costs and  expenses  of
litigation.  The Company  believes  that the  allegations  in the  complaint are
entirely without merit and intends vigorously to defend this matter.

         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, 1997.

                                                     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.
<TABLE>
<CAPTION>                                               
          Fiscal Year 1997                                 High        Low
                                                           ----        ---
          <S>                                              <C>       <C>          
          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
</TABLE>
On October 21, 1997 the closing  sale price for the  Company's  Common Stock was
$4.6875 per share.  As of October 21, 1997 there were 28  shareholders of record
of the Company's 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.

Report on Sale of Securities and Uses of Proceeds Therefrom

         Subsequent to the Company's initial public offering, effective November
25, 1996 (Registration No.  333-13345),  and pursuant to the requirements of the
Securities  Act of 1993,  as amended and then in effect,  the  Company  filed an
initial report on Form SR with the  Securities and Exchange  Commission on March
6, 1997.

         The  following  table  sets  forth the  amount  of  direct or  indirect
payments to others from such  effective  date  through  July 31, 1997 which have
changed since the most recently filed report on Form SR.
<TABLE>
<CAPTION>
USE OF PROCEEDS                         DIRECT OR INDIRECT  PAYMENTS TO OTHERS 
<S>                                     <C>
Construction  of plant, building 
 and  facilities                         $ 250,000 
Purchase and installation 
 of machinery and equipment              $ 500,000
Acquisition of other business(es)       $2,600,000
Working capital                         $9,361,493
</TABLE>
                                       11


<PAGE>
ITEM 6.  Selected Financial Data

                      SELECTED CONSOLIDATED FINANCIAL DATA
               (in thousands, except share and 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, 1997 and 1996 and for each of
the years in the three-year period ended July 31, 1997 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,
                                                --------------------------
                                  1997          1996           1995           1994        1993
                                  ----          ----           ----           ----        ----
<S>                            <C>            <C>           <C>           <C>          <C>   
Income Statement Data:        
  Revenue                      $187,801      $ 189,659    $ 170,818      $ 137,361     $ 118,898
  Cost of revenue               161,186        163,128      146,323        117,377       101,046
                                -------      ---------    ---------      ---------     ---------
  Gross profit                   26,615         26,531       24,495         19,984        17,852
  Selling, general and
    administrative expenses      21,023         22,598       21,280         17,380        16,065
                                 ------      ---------    ---------      ---------     ---------
Income from operations            5,592          3,933        3,215          2,604         1,787
Interest and other income
  (expenses), net                   395           (365)        (392)          (172)           34
Provision for income taxes        2,450          1,430(1)     1,160          1,042           689
Cumulative effect of change in
  accounting for income taxes         -              -            -            386        _____-
                                -------       --------     --------      ---------             -
Net income                       $3,537      $   2,138(1) $   1,663      $   1,776     $   1,132
                                  =====      =========    =========      =========     =========
Net income per share              $0.45        $   .34(1)  $    .27      $     .28    $     .18
                                  ====       =========       =========    ========    =========
Weighted average shares of
  common stock outstanding    7,779,484      6,246,970    6,262,626      6,262,626     6,262,626
                              =========      =========    =========      =========     =========



                                                    July 31,
                                   1997      1996           1995            1994            1993
                                   ----      ----           ----            ----            ----

Balance Sheet Data:
  Working capital               $30,578      $ 9,841        $ 9,189        $ 7,701       $ 6,274
  Total assets                   58,208       37,761         31,635         25,879        22,002
  Short-term debt, including
    current maturities of
    capital lease obligation      1,637        6,952          5,600          5,400         2,200
  Capital lease obligation,
   excluding current maturities      77          175              -              -             -
  Redeemable common stock(2)          -        4,739          5,210          5,210         5,210
  Shareholders' equity           36,877        8,175          6,037          4,374         2,598
</TABLE>

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

(1)      Pro forma  provision  for  income  taxes,  pro forma net income and pro
         forma 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  (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  currently 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 current  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
prospectus dated November 25, 1996.

General

         Manchester is a systems  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'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 15%, 16% and
22% of the Company's revenues for the fiscal years ended July 31, 1997, 1996 and
1995,  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, 1997, 1996 and 1995,  inventories
represented  17%, 24% and 30% of total assets,  respectively.  During these same
fiscal years, the Company's average inventory  turnover was 17, 18 and 16 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%,  .1% and .1% of total  revenues  for the fiscal  years ended July 31, 1997,
1996 and 1995, respectively.
                                       13
<PAGE>
         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.
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.  The Company  believes that the impact
of price or volume changes of any particular product or products is not material
to the Company's Consolidated Financial Statements.

         The Company's  Chief  Executive  Officer has entered into an employment
agreement with the Company under which he will receive $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 has agreed to
receive base  compensation,  exclusive of fringe  benefits,  of $450,000 for the
fiscal years ending July 31, 1997 and 1998. These officers have agreed that they
will not be entitled  to any bonuses for fiscal 1997 and that any bonus  payable
to either of these  officers  in fiscal  1998 will  require  the  approval  of a
majority of the independent directors of the Company. 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 to
reduce the rent payable under that lease to then current market rates.

Recent Acquisition

         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., a wholly owned subsidiary of Bitwise
Designs,  Inc.  Electrograph  is  a  specialized  distributor  of  microcomputer
peripherals,  primarily in the eastern  United  States.  The purchase  price and
transaction costs aggregated approximately $2.6 million. Included in the assumed
liabilities  of  Electrograph  was debt with  balances  of  $1,274,000  in notes
payable - bank and $264,000 in notes payable - other as of July 31, 1997.

         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
approximately  $1,500,000  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 revenues.
<TABLE>
<CAPTION>

                                                         Percentage of
                                                         Revenue for
                                                     the Year Ended July 31,
                                                 1997         1996       1995
                                                 ----         ----       ----
<S>                                              <C>           <C>       <C> 

Revenue                                           100.0%       100.0%    100.0%
Cost of revenue                                    85.8         86.0      85.7
                                                   ----         ----     -----
Gross profit                                       14.2         14.0      14.3
Selling, general and administrative expenses       11.2         11.9      12.4
                                                   ----         ----     -----
Income from operations                              3.0          2.1       1.9
Interest and other income (expenses), net          .2          ( 0.2)    ( 0.2)
                                                   ----         -----     -----
Income before income taxes                          3.2          1.9       1.7
Provision for income taxes                          1.3          0.8       0.7
                                                    ---          ---       ---
Net income                                          1.9%         1.1%      1.0%
                                                    ===          ====      ====
</TABLE>

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.  Cost of revenues includes direct costs of products sold,
freight and the personnel costs  associated with providing  technical  services,
                                       14
<PAGE>
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 $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 the most recent  fiscal year.  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,  described  below and under  General,  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.


Year Ended July 31, 1996 Compared to Year Ended July 31, 1995

         Revenue.  The Company's  revenue  increased $18.8 million or 11.0% from
$170.8  million in fiscal 1995 to $189.7 million in fiscal 1996 due to increased
revenues from both new and existing customers.  Many factors contributed to this
increase,  including new product  introductions,  special product  purchases and
volume and price  changes  with no one factor  having a material  effect on this
increase.

         Gross Profit.  Gross profit  increased  $2.0 million or 8.3% from $24.5
million in fiscal 1995 to $26.5 million in fiscal 1996  primarily as a result of
the increase in revenue.  Gross profit as a percentage of revenue decreased from
14.3% to 14.0%.  The decrease in the gross profit  percentage was due to changes
in product  mix as well as  increased  pricing  pressures  prevalent  within the
industry.  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  increased  $1.3 million or 6.2% from $21.3  million in
fiscal  1995 to $22.6  million in fiscal  1996.  Approximately  $261,000 of this
increase related to higher payroll and related costs due primarily to a $917,000
increase  associated with the hiring of additional  technical and administrative
staff in support of the Company's strategy to increase its value-added  services
revenue partially offset by a $656,000 reduction in officers'  compensation from
approximately  $5.0  million in fiscal  1995 to  approximately  $4.3  million in
fiscal 1996. Rent and occupancy costs  increased by  approximately  $408,000 due
primarily  to higher  rent  principally  paid to related  parties as well as the
leasing of an  additional  facility  to meet the  Company's  current  and future
needs.  In addition,  commissions  paid to the Company's  sales force  increased
approximately $328,000 due to the increase in revenues in fiscal 1996.

         The Company's  Chief  Executive  Officer has entered into an employment
agreement with the Company under which he will receive $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 has agreed to
receive base  compensation,  exclusive of fringe  benefits,  of $450,000 for the
fiscal years ending July 31, 1997 and 1998. These officers have agreed that they
will not be entitled  to any bonuses for fiscal 1997 and that any bonus  payable
to either of these  officers  in fiscal  1998 will  require  the  approval  of a
majority of the  independent  directors of the Company.  The  compensation to be
paid to the Company's  President and Executive Vice President in fiscal 1999 and
thereafter  will be based upon  agreements to be negotiated at the expiration of
their current respective employment  agreements,  which compensation the Company
believes  will reflect the then fair value of the services to be rendered to the
Company  by such  individuals.  If the  revised  compensation  terms had been in
effect for the entire  fiscal 1996 period,  and had the  Company's  former Chief
Financial  Officer been  compensated at the annual  compensation  payable to the
current Chief Financial Officer,  officers' compensation would have been reduced
by approximately $3.2 million. See "Management." Each of the leases with related
parties has been amended effective with the closing of this offering,  to reduce
the rent payable under that lease to current market rates. If the revised leases
had been in effect for the entire  fiscal 1996 period,  rent expense  would have
been reduced by $304,000  from the reported  amount.  Giving pro forma effect to
the foregoing reductions 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 in fiscal 1996.

         Interest  Expense,  Net.  Interest  expense,  net  increased  from
 $346,000 in fiscal 1995 to $374,000 in fiscal 1996 primarily due to increased
 borrowings.
                                       15
<PAGE>
      Provision  for Income  Taxes.  The  effective  income tax rate  decreased
slightly from  approximately  41% in fiscal 1995 to approximately  40% in fiscal
1996.

Liquidity and Capital Resources

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

       For the year ended July 31, 1997,  cash provided by operating  activities
was $4.6 million consisting primarily of net income and a decrease in inventory,
offset by  increases  in  accounts  receivable  net of an  increase  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,  1997 the  Company  used
approximately $2.4 million for capital  expenditures,  $1.9 million (net of cash
acquired) for the purchase of  Electrograph  Systems,  Inc. and $4.4 million for
the purchase of marketable  securities and generated  $13.4 million in cash from
financing  activities  primarily from the net proceeds of the Company's  initial
public offering (IPO) ($20.4 million)  partially offset by the net repayments of
$7.0 million of debt.

       The  Company  and a  subsidiary  have  available  lines of credit  with a
financial  institution  in the aggregate  amount of $10.0  million.  All amounts
outstanding  under  this line at the  completion  of the IPO were  repaid by the
Company  with the proceeds  from the IPO  described  below.  At July 31, 1997, a
subsidiary of the Company had $1.3 million outstanding under its line of credit.
This outstanding balance was repaid in full in August 1997.

       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.
In addition, the Company utilized $2.4 million for capital improvements and $1.9
million (net of cash acquired) for the purchase of  Electrograph  Systems,  Inc.
The remaining net proceeds have been invested in short-term,  interest  bearing,
investment grade securities.

       The  Company  believes  that  its  current  balances  in  cash  and  cash
equivalents and marketable  securities,  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 1998. 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 next fiscal year.  The
aggregate commitment for these projects is approximately $1.0 million 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 and the purchase of equipment
and expansion of  facilities as well as the possible  opening of new offices and
potential acquisitions.

Inflation

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

New Accounting Standard

       Net income per share is based on the weighted average number of shares of
Common Stock and dilutive common stock equivalents  (stock options and warrants)
outstanding during the period.

       Statement  of  Financial  Accounting  Standards  No. 128,  "Earnings  Per
Share",  is required to be adopted for interim and annual  periods  ending after
December  15,  1997.  At that time,  the Company  will be required to change the
method  currently  used to  compute  earnings  per share and  restate  all prior
periods.  Basic and diluted  earnings per share will  replace  primary and fully
diluted  earnings  per share.  The  dilutive  effect of stock  options and other
common stock equivalents will be excluded from the calculation of basic earnings
per  share,   but  will  be  reflected  in  diluted   earnings  per  share.  The
implementation  of SFAS No. 128 would not have had an impact on fiscal  1997 net
income per share.

ITEM 8.  Financial Statements and Supplementary Data

See Item 14.

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

None.

                                       16

<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                  55      Chairman of the Board, President, 
Executive                                   Chief Officer and Director

Joel G. Stemple, Ph.D               55      Executive Vice President, Secretary
                                            and Director

Joseph Looney                       40      Chief Financial Officer

William F. Scheibel, Jr.            42      Chief Technology Officer

Joel Rothlein, Esq.                 68      Director

George Bagetakos                    51      Director

Julian Sandler                      53      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.  Prior to joining the Company,  from 1984 to 1996,  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.

         William F. Scheibel,  Jr. has served as the Company's Chief  Technology
Officer  since  September  1996 and served as Manager of Technical  Services and
Support from  September  1995 through  August 1996.  Before joining the Company,
from 1990 to 1995, Mr. Scheibel  served in various  positions with Bay Networks,
Inc., a manufacturer of computer  networking  equipment,  including  Director of
Field Support for North and South America at the end of his tenure at such firm.

     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.

         George  Bagetakos  became a director on December 2, 1996. Mr. Bagetakos
has been the Director of Sales,  Major  Accounts for Northern  Telecom,  Inc., a
supplier of telecommunications  equipment products,  since July 1995, and served
as Manager, National Accounts for Northern Telecom, Inc. from 1984 to June 1995.
Prior to joining Northern  Telecom,  Mr. Bagetakos was Corporate Vice President,
Telecommunications for American Express Company from 1979 to 1983.
                                       17
<PAGE>

         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.

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 last
fiscal year,  (a) the Reporting  Persons filed Form 3 two days late; b) Barry R.
Steinberg,  a Reporting  Person,  filed his Form 4 reporting the  acquisition of
additional  shares of the Common Stock  approximately  two and  one-half  months
late;  and (c) Julian  Sandler,  a  Director  of the  Company,  filed his Form 4
reporting the acquisition of shares of the Common Stock approximately ten 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, 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
                                                            -------------------
                                                                                   Other Annual
Name and Principal Position                      Year        Salary     Bonus     Compensation(5)
---------------------------                      ----        ------     -----     ---------------
<S>                                               <C>    <C>        <C>        <C>  


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

Joel G. Stemple, Executive Vice President         1997    50,000      -         $33,050(2)
                                                  1996   $251,800   $1,669,193  $29,000(2)

Joseph Looney, Chief Financial Officer(3)         1997   $125,489    $  47,500  $ 7,610
                                                  1996   $ 31,250    $  10,000                                         $1,275

William F. Scheibel, Jr., Chief Technology
 Officer(4)                                       1997   $128,956    $  22,500  $ 8,266
                                                  1996   $ 96,157    $  17,500 $  4,250
---------------------
</TABLE>


(1)   Includes  $50,000  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  $25,000  of  premiums  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) Began employment with the Company on September 7, 1995.

(5)   Includes in fiscal 1997 employer  matching  contributions to the Company's
      defined  contribution  plan of  $6,252,  $6,675,  $2,510,  and  $3,166 for
      Messrs. Steinberg, Stemple, Looney and Scheibel, respectively.

                                       18
<PAGE>
         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, 1997.

         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.  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.  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.

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, 1997 and all options
outstanding to the named Executive Officers as of July 31, 1997.
<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
                        -------        -----------     -----         ----         ---------------

         Name                (#)                        ($/sh)                          5%          10%
         ----               ----                       -------                        ----        -----
<S>                       <C>            <C>           <C>           <C>            <C>          <C>

Joseph Looney              50,000(1)     6.3%          $10.00        2/03/2007       $29,000     $343,000
                           20,000(2)     2.5%          $ 5.00        3/26/2007             -      $20,000

William F. Scheibel, Jr.   50,000(1)     6.3%          $10.00        2/03/2007       $29,000     $343,000
                           20,000(2)     2.5%          $  5.00       3/26/2007             -      $20,000
</TABLE>

         No options  outstanding were exercised or exercisable during the fiscal
year  ended July 31,  1997 or as of July 31,  1997.  There were no  in-the-money
exercisable or unexercisable options at July 31, 1997.
--------------

(1) Exercisable cumulatively at the rate of 20% per annum commencing February 3,
    1999.
(2) Exercisable cumulatively at the rate of 25% per annum commencing May 5,
    1999.


                                       19

<PAGE>



ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

         The following  table sets forth certain  information  as of October 21,
1997 (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.



                                                 Shares          Percent
                                                 Beneficially    of Shares
      Name and Address                           Owned           Outstanding
      ----------------                           -----           -----------

      Barry R. Steinberg(1)(3)                  4,630,101          54.3%
      Joel G. Stemple(1)                          626,263           7.3
      Joseph Looney(1)                              4,700           *
      William F. Scheibel, Jr.(1)                       -
      Joel Rothlein(2)                             16,500           *
      George Bagetakos(1)(4)                        2,500           *
      Julian Sandler(1)(5)                          3,500           *
      All executive officers and
        directors as a group
        (6 persons)                             5,283,564

(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, Esq.,  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)   Consists of option exercisable on December 18, 1997.
(5)   Includes option to purchase 2,500 shares exercisable on December 18, 1997.
*     Represents less than one tenth of one percent of outstanding shares.

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 "Recent Acquisition".
                                       20
<PAGE>
         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 principal  shareholder of the Company.  For the fiscal years
ended July 31, 1997 and 1996,  the Company  made lease  payments of $174,000 and
$216,000,  respectfully,  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, 1997, 1996 and 1995, the Company made lease payments
of $259,000, $360,000 and $255,000,  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,
1997,  1996 and 1995, the Company made lease payments of $329,000,  $435,000 and
$417,000,  respectively, to such entity. The Company leases an additional office
in Massapequa, New York at $300 per month ($881 per month through May 1997) on a
month-to-month basis from an entity of which Messrs. Rothlein and Bivona own 25%
and 50%, respectively. 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 the year ended July 31, 1997,  the Company  recorded  revenue of
$130,000  in  connection  with  the  sale of  computer  equipment  to a  company
controlled by Julian Sandler.

                                       21

<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                                             23
Consolidated Financial Statements:
         Balance Sheets as of July 31, 1997 and 1996                     24
         Statements of Income for the years ended July 31, 1997,
          1996 and 1995                                                  25
         Statements of Shareholders' Equity for the years
         ended July 31, 1997, 1996 and 1995                              26
         Statements of Cash Flows for the years ended
          July 31, 1997, 1996 and 1995                                   27
         Notes to Consolidated Financial Statements                      28

                                       22
<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,  1997 and 1996 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,  1997.  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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  July  31,  1997,  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


Jericho, New York
September 24, 1997

                                       23

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                             July 31, 1997 and 1996
<TABLE>
<CAPTION>
                                         Assets               1997         1996
                                         ------               ----         ----
                                                           (in thousands, except 
                                                              share amounts)
<S>                                                           <C>       <C>   

Current assets:
     Cash and cash equivalents                                $15,049   $ 5,774
     Investments                                                4,408         -
     Accounts receivable, net of allowance 
        for doubtful accounts
        of $1,051 and $800, respectively                       21,473    19,068
     Inventory                                                 10,127     8,957
     Deferred income taxes                                        440       334
     Prepaid expenses and other current assets                    248       197
                                                                  ---       ---

                             Total current assets              51,745    34,330

Property and equipment, net  4,073                              2,244
Goodwill, net                                                   1,524         -
Deferred income taxes                                             379       395
Other assets                                                      487       792
                                                                  ---   -------
                                                              $58,208   $37,761
                                                              =======    ======

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

Current liabilities:
     Current maturities of long-term debt                    $     99   $    99
     Notes payable-bank                                         1,274     6,500
     Notes payable-shareholder                                      -       353
     Notes payable - other                                        264         -
     Accounts payable and accrued expenses                     19,283    17,113
     Deferred service contract revenue                            247       129
     Income taxes payable                                           -       295
                                                                -----       ---
                                                                          
                             Total  current liabilities        21,167    24,489
                                                               
Long-term debt, less current maturities                            77       175
Deferred compensation payable                                      87       183

Commitments and contingencies (note 8)
Redeemable common stock                                             -     4,739
Shareholders' equity:
     Preferred stock, $.01 par value, 5,000,000 shares
        authorized, none issued                                     -         -
     Common stock, $.01 par value; 25,000,000 shares
        authorized, 8,525,000 and 6,200,000 shares issued
        and outstanding                                            85        62
     Additional paid-in capital                                20,403         -
     Retained earnings                                         16,389     8,113
                                                               ------     -----

                             Total shareholders' equity        36,877     8,175
                                                               ------     -----

                                                              $58,208   $37,761
                                                               ======    ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       24

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                        Consolidated Statements of Income
                    Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                1997          1996          1995
                                                  (in thousands except share and per share amounts)
<S>                                                            <C>          <C>           <C>            

         Revenue                                               $187,801     $189,659     $170,818
         Cost of revenue                                        161,186      163,128      146,323
                                                                -------      -------      -------

              Gross profit                                       26,615       26,531       24,495
         Selling, general and administrative expenses            21,023       22,598       21,280
                                                                 ------       ------       ------

              Income from operations                              5,592        3,933        3,215

         Other income (expense):
              Interest expense                                     (225)        (399)       (360)
              Interest income                                       560           25          14
              Other                                                  60            9         (46)
                                                                  -----      -------          ---

              Income before provision for income taxes            5,987        3,568        2,823
         Provision for income taxes                               2,450        1,430        1,160
                                                                  -----        -----        -----

              Net income                                         $3,537       $2,138       $1,663
                                                                 ======        =====        =====

              Net income per share                                $0.45        $0.34        $0.27
                                                                  =====        =====        =====

         Weighted average shares of common
            stock outstanding                                 7,779,484    6,246,970    6,262,626
                                                              =========    =========    =========

</TABLE>

See accompanying notes to consolidated financial statements.
                                       25

<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
                    Years ended July 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                      Additional
                                          Common          Par         Paid-in     Retained
                                          Shares          Value       Capital     earnings     Total                           
                                                    (in thousands except share amounts)

     <S>                                 <C>                 <C>        <C>       <C>          <C>  

     Balance July 31, 1994                6,262,626          $63        $  -       $4,311       $4,374

     Net income                                   -            -           -        1,663        1,663
                                           --------          ---           -        -----        -----

     Balance July 31, 1995                6,262,626           63           -        5,974        6,037

     Net income                                   -            -           -        2,138        2,138
     Purchase and retirement of
           stock                            (62,626)          (1)          -            1            -
                                            -------       -------        ---       ------         ----

     Balance July 31, 1996                6,200,000           62           -        8,113        8,175

     Issuance of common stock             2,325,000           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                8,525,000          $85     $20,403      $16,389      $36,877
                                          =========           ==      ======       ======       ======

</TABLE>




     See accompanying notes to consolidated financial statements.



<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                    Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>                                                                  <C>           <C>         <C>
                                                                     1997          1996       1995
                                                                     ----          ----       ----
                                                                              (in thousands)
     Cash flows from operating activities:
     Net income                                                      $3,537       $2,138      $1,663
     Adjustments to reconcile net income to net cash from
           operating activities:
           Depreciation and amortization                                720          473         395
           Allowance for doubtful accounts                              210          132         161
           Stock options commission expense                              12            -           -
           Deferred income taxes                                        (90)         (86)        (71)
           (Gain) Loss on disposition of assets                         (37)          (9)         71
           Change in assets and liabilities;  net of the 
            effects of the purchase of Electrograph:
              Increase in accounts receivable                          (545)      (1,700)     (1,954)
              (Increase) decrease  in inventory                         515          548      (2,382)
              (Increase) decrease in prepaid expenses and
                 other current assets                                   (44)          41         (24)
              (Increase) decrease in other assets                       342         (307)       (113)
              Increase in accounts payable and
                 accrued expenses                                       221        2,715       4,371
              (Decrease) increase in deferred service
                 contract revenue                                       118           27         (79)
              Increase (decrease) in income taxes payable              (295)         205        (468)
              Decrease in deferred compensation payable                 (96)         (15)          -
                                                                        ---          ----     ------

                Net cash provided by operating activities             4,568        4,162       1,570
                                                                      -----        -----       -----

     Cash flows from investing activities:
         Capital expenditures                                        (2,439)      (1,028)       (545)
         Proceeds from the sale of assets                                 -           55         105
         Purchase of marketable securities                           (4,408)           -           -
         Payment for purchase of Electrograph, net of
           cash acquired                                             (1,886)           -           -
                                                                     -------         ---         ---
            Net cash used in investing activities                    (8,733)        (973)       (440)
                                                                      ------        ----        ----

     Cash flows from financing activities:
         Net repayments of borrowings                                (6,490)         900         200
         Payments on note payable shareholder                          (353)        (118)          -
         Payments on capitalized lease obligation                       (98)         (31)          -
         Payments on note payable - other                               (33)           -           -
         Net  proceeds from initial public offering                  20,414            -           -
                                                                     ------        -----       -----

                      Net cash provided by financing activities      13,440          751         200
                                                                     ------         ----         ---

     Net increase in cash                                             9,275        3,940       1,330

         Cash at beginning of year                                    5,774        1,834         504
                                                                      -----        -----         ---

     Cash at end of year                                            $15,049       $5,774      $1,834
                                                                     ======        =====       =====

     Cash paid during the year for:
          Interest                                                     $225         $399        $378
                                                                       ====          ===        ====
          Income taxes                                               $2,868       $1,290      $1,729
                                                                      =====        =====       =====

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

</TABLE>

     See accompanying notes to consolidated financial statements.
                                       27



<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (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  systems
      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 most of
      the Company's revenues.  Service revenues have not comprised a significant
      part of revenues to date.  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 and equity securities in one
      of three  categories:  trading,  available  for sale, or held to maturity.
      Trading  securities  are bought and held  principally  for the  purpose of
      selling  them in the near  term.  Held-to-maturity  securities  are  those
      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 completion of the installation.  Service contract fees are
      recognized as revenue  ratably over the period of the applicable  contract
      or as the services are provided. Deferred service contract
                                       28
<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)

      revenue  represents  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 $521,  $943 and $906 for the years ended July 31, 1997,
      1996 and 1995, 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 the  acquisition  of  Electrograph  Systems,  Inc.
      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  $19 at July 31, 1997.  Amortization  expense of $19 for the
      year ended July 31, 1997 is included in selling general and administrative
      expenses in the consolidated statement 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

         Net income per share is based on the weighted  average number of shares
      of Common Stock and dilutive common stock  equivalents  (stock options and
      warrants) outstanding during the period. Statement of Financial Accounting
      Standards  No. 128,  "Earnings  Per Share",  is required to be adopted for
      interim and annual  periods  ending after December 15, 1997. At that time,
      the Company will be required to change the

                                       29

<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)

      method  currently used to compute earnings per share and restate all prior
      periods.  Basic and diluted  earnings per share will  replace  primary and
      fully diluted earnings per share. The dilutive effect of stock options and
      other common stock  equivalents  will be excluded from the  calculation of
      basic  earnings per share,  but will be reflected in diluted  earnings per
      share. The  implementation of SFAS No. 128 would not have had an impact on
      fiscal 1997 net income per share.

      (l)  Impairment of Long-Lived Assets

         In March 1995, the Financial Accounting Standards Board issued SFAS No.
      121  (Statement  121)  that  established   accounting  standards  for  the
      impairment of long-lived assets, certain intangibles, and goodwill related
      to those assets to be held and used, and for long-lived assets and certain
      identifiable  intangibles to be disposed of. In conformity  with Statement
      121, it is the Company's policy to evaluate and recognize 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 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 and cash  equivalents,  accounts  receivable,
      prepaid expenses,  accounts payable and accrued  expenses,  long-term debt
      and notes payable - other are estimated to be the carrying  values at July
      31, 1997 due to the short maturity of such instruments.  The book value of
      notes payable - bank approximated fair value since those instruments carry
      prime or LIBOR  based  interest  rates that are  adjusted  for market rate
      fluctuations.

       (p)  Reclassifications

         Certain  reclassifications  were made to prior year  amounts to conform
      with the fiscal 1997 presentation format.

(2)  Investments

         The Company  classified all its investments at July 31, 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, 1997 were as follows:

                                       30
<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)

                                             Gross Unrealized      Fair Value
                                             Holding Gain          of Investment
         U.S. government obligation                $  2                  $1,007
         Corporate  commercial instruments            -                   3,401
                                                      -                   -----
                                                   $  2                  $4,408
                                                   ====                   =====

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

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

         Property and equipment at July 31, consist of the following:
                                                          1997         1996
                                                          ----         ----

      Furniture and fixtures                              $2,096       $1,824
      Machinery and equipment                              3,401        1,668
      Transportation equipment                               281          361
      Leasehold improvements                               2,168        1,656
                                                           -----        -----
                                                           7,946        5,509

      Less accumulated depreciation and amortization       3,873        3,265
                                                           -----        -----

                                                          $4,073       $2,244
                                                           =====        =====

      Depreciation and amortization expense amounted to $701, $473, and $395 for
      the years ended July 31, 1997, 1996 and 1995, respectively.

(4)  Acquisition of 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., a wholly owned subsidiary of Bitwise
Designs,  Inc.  Electrograph  is  a  specialized  distributor  of  microcomputer
peripherals,  primarily in the eastern  United  States.  The purchase  price and
transaction costs aggregated  approximately $2,600.  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.

         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.

         The following  unaudited pro forma  consolidated  results of operations
for the  years  ended  July  31,  1997  and 1996  assume  that the  Electrograph
acquisition occurred on August 1, 1995 and reflect the historical  operations of
the purchased  business adjusted for lower interest on investments and increased
amortization, net of applicable income taxes resulting from the acquisition:

                                                  1997                1996
                                                  ----                ----
                  Revenues                    $203,368            $205,786
                  Net income                 $   3,557           $   2,231
                  Net  income per share          $0.46               $0.36

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

                                       31
<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)

(5)  Accounts Payable and Accrued Expenses

     Accounts payable and accrued expenses consist of the following:

                                                           July 31,
                                                     1997           1996
                                                     -------------------

                  Accounts payable, trade            $15,783        $12,973
                  Accrued salaries and wages           1,630          2,552
                  Customer deposits                      740            629
                  Other accrued expenses               1,130            959
                                                       -----            ---
                                                     $19,283        $17,113
                                                     -------        -------

                  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, 1997, 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
     $5,184 and $1,450 at July 31, 1997 and 1996, 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,  1997,  retained  earnings
     available for dividends amounts to approximately $14,500.

(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 as follows:

                                      Year ending July 31,
                                                      1998    $109
                                                      1999      74
                                                             -----
     Total minimum lease payments                              183
     Less: amounts representing interest                         7
                                                             -----
     Present value of minimum lease payments                   176
     Less: Current portion                                      99
                                                               ---
                                                               $77
                                                               ---

(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 $161, $124
     and $125 for the years ended July 31, 1997, 1996 and 1995, 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, 1997 and 1996,
     the Company has recorded an asset  (included  with other assets) of $87 and
     $183, respectively, representing the cash surrender value of policies owned
     by the Company and a liability of the same amount  relating to the unvested
                                       32
<PAGE>
               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)

     portion of benefits due under this plan. For the years ended July 31, 1997,
     1996 and 1995, the Company recorded an expense of $110, $72 and $97 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 $1,073, $1,212 and $849 for the years ended July 31, 1997, 1996
     and 1995.

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

                                1998                    $1,209
                                1999                     1,184
                                2000                     1,169
                                2001                       900
                                2002                       917

     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 March 28, 1997 a complaint was filed in the United  States  District
     Court  for the  Eastern  District  of New York  against  the  Company,  its
     President and Chief  Executive  Officer,  its Executive  Vice President and
     Secretary,  and its Chief Financial  Officer.  The plaintiff claims to have
     purchased  common  shares in the  Company's  initial  public  offering  and
     purports  to sue on his own behalf and on behalf of a class of persons  who
     purchased the Company's  common stock either pursuant to the initial public
     offering or in the period from November 26, 1996 through February 13, 1997.
     The complaint  asserts that the Company and the individual  defendants made
     false or misleading statements and omissions in connection with the initial
     public  offering in violation of Section 11, 12(a)(2) and 15 of the federal
     Securities  Act of 1933,  and seeks damages on behalf of the putative class
     in an  unspecified  amount  and/or  rescission,  together  with  costs  and
     expenses of litigation.  The Company  believes that the  allegations in the
     complaint are entirely without merit and intends  vigorously to defend this
     matter.

(9)  Line of Credit

         The Company has unsecured  lines of credit  agreements with a bank that
     provide  for a maximum  of  $10,000  of  borrowings  and is due on  demand.
     Interest on  borrowings  is computed at the  Company's  option based on the
     bank's prime rate (8.50% at July 31, 1997) or LIBOR plus 2%. (7.63% at July
     31,  1997).  At July 31,  1997  and  1996  amounts  outstanding  under  the
     agreements   totaled  $1,274,   and  $6,500,   respectively.   The  balance
     outstanding at July 31, 1997 was repaid in August 1997.

                                       33

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)

 (10)  Income Taxes

      The provision for income taxes for the years ended July 31, 1997, 1996 and
1995 consists of the following:

                                                1997        1996      1995
                                                ----        ----      ----
              Current
                  Federal                     $1,938      $1,166     $   997
                  State                          602         350         302
                                                 ---         ---         ---
                                               2,540       1,516      $1,299
                                               -----       -----       -----

              Deferred
                  Federal                        (68)        (73)       (113)
                  State                          (22)        (13)        (26)
                                                ----        ----        ----
                                                 (90)        (86)       (139)
                                                 ---         ----       -----

                                              $2,450       $1,430      $1,160
                                              ======        =====       =====

      The  difference  between the Company's  effective  income tax rate and the
      statutory rate is as follows,  for the years ended July 31, 1997, 1996 and
      1995:

                                                1997         1996          1995
                                                ----         ----          ----

              Income taxes at statutory rate   $2,036       $1,213      $   960
              State taxes, net of
                  federal benefit                 383          222          182
              Other                                31           (5)          18
                                                   --           ---          --

                                               $2,450       $1,430       $1,160
                                                =====        =====        =====

      The tax effects of  temporary  differences  that give rise to  significant
      portions of the net  deferred  tax asset at July 31, 1997 and 1996 were as
      follows:

                                                        1997       1996
                                                        ----       ----

              Deferred tax assets:
                 Allowance for doubtful accounts        $410       $321
                 Deferred compensation                   270        317
                 Other                                   139         91
                                                         ---         --

                  Deferred tax asset                    $819       $729
                                                        ====        ===


              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 recovered as an offset to taxes
      due on future taxable income.

                                       34

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (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 $771, $1,022,
      and $683 for the years ended July 31, 1997, 1996 and 1995, respectively.

         The  Company  paid legal fees to a law firm in which a director  of the
      Company is a partner. Such fees amounted to $655, $383, and $66, including
      disbursements,  in the fiscal  years ended July 31, 1997,  1996,  and 1995
      respectively.

         During fiscal 1997, the Company received  approximately $130 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 expire five years from the date of issuance and
      are  exercisable  commencing one year after issuance at a price of $12 per
      share.

      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.  At July 31, 1996 notes
      payable- shareholder of $353 related to this acquisition. Such shares were
      subsequently retired.

      The aggregate amounts payable by the Company to redeem  outstanding shares
      of common  stock  under these  agreements,  $4,739 at July 31,  1996,  was
      classified as redeemable common stock.

      In September  1996,  among other  provisions,  the  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 have been  reclassified from redeemable
      common stock to retained earnings.

                                       35

<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (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 Co.  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 have been 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.  At
     July 31, 1997, no options were  exercisable  and all options granted expire
     ten years from the date of grant.

     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 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 $12 in fiscal 1997. 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 year ended July 31, 1997 would approximate the pro
     forma amounts below:

                      Net Income:
                        As reported                     $3,537
                        Pro forma                        3,464

                      Net income per share:
                        As reported                      $0.45
                        Pro forma                        $0.45

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

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

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

     The per share weighted  average fair value of stock options  granted during
fiscal 1997 was $1.05.

                                       36

<PAGE>

               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)


(13)  Major Customer and Vendor 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 15%,
      16% and 22% of total revenues for the years ended July 31, 1997,  1996 and
      1995, respectively.

         The Company's top two vendors accounted for approximately  17%, and 15%
      of total  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.  The Company's top two vendors
      accounted  for 22% and 16% of total  product  purchases for the year ended
      July 31, 1995.

         One customer accounted for 10% of the Company's accounts  receivable at
July 31, 1997.











                                       37

<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     Lease dated June 23, 1997 between Registrant and First Willow, LLC

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

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.
                                       38
<PAGE>
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.a(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 among Electrograph Systems, Inc., Bitwise
           Designs, Inc., Electrograph Acquisition, Inc. and Manchester
           Equipment Co., Inc., April 15, 1997.

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.



                                       39

<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 23, 1997                   By:  ss: Barry R. 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 Steinberg                               Date:      October 23, 1997
--------------------
Barry R. Steinberg
President, Chief Executive Officer,
 Chairman of the Board and Director
(Principal Executive Officer)


ss: Joel G. Stemple                               Date:      October 23, 1997
-------------------
Joel G. Stemple
Executive Vice President and Director


ss: Joseph Looney                                 Date:       October 23, 1997
------------------
Joseph Looney
Chief Financial Officer (Principal Accounting Officer)


ss: Joel Rothlein                                  Date:      October 23, 1997
-----------------                                          
Joel Rothlein
Director


ss: Julian Sandler                                 Date:      October 23, 1997
-------------------
Julian Sandler
Director


ss: George Bagetakos                                Date:     October 25, 1997
---------------------
George Bagetakos
Director

                                       40
<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)    -----------    -------------
                         ------         --------      ------------
                         
                         
Allowance for doubtful
accounts

Year ended:
     <S>                     <C>            <C>          <C>              <C>            <C>   

     July 31, 1995           $598           $161                          $ 41             $718

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

    July 31, 1997            $800           $339           $40            $128           $1,051
</TABLE>

(a) Write-of amounts against allowance provided.
(b) Recorded in connection with the acquisition of Electrograph Systems, Inc.

                                       41