48


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

                                    FORM 10-K


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


For the fiscal year ended July 31, 1999

                                       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. [ X]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of October 12, 1999 was $8,193,408  (2,731,136 shares at a closing
sale price of $3.00).

As of October 12, 1999, 8,084,800 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, 1999
                                TABLE OF CONTENTS


Part I
                                                                    Page
                                                                    ----
Item 1.   Business                                                    3
Item 2.   Properties                                                 11
Item 3.   Legal Proceedings                                          12
Item 4.   Submission of Matters to a Vote of Security Holders        12

Part II

Item 5.   Market  for the  Registrant's  Common  Stock
           and  Related Stockholder Matters                          12
Item 6.   Selected  Financial  Data                                  13
Item 7.   Management's  Discussion  and  Analysis of  Financial
           Condition and Results of Operations                       14

Item 8.   Financial Statements and Supplementary Data                20
Item 9.   Change  In and  Disagreements  with  Accountants
           on  Accounting  and  Financial Disclosures                20

Part III

Item 10.  Directors and Executive Officers of the Registrant         21
Item 11.  Executive Compensation                                     21
Item 12.  Security Ownership of Certain Beneficial Owners
           and Management                                            25
Item 13.  Certain Relationships and  Related Transactions            26

Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports
           on Form 8-K                                               27

Signatures   Chief Executive Officer, Chief Financial Officer,
                and Directors                                        46

                                       2



<PAGE>

                                     PART I

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

ITEM 1. Business

General

         Manchester  Equipment Co., Inc.  ("Manchester"  or the "Company") is an
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
integrating  its analysis,  design and  implementation  services with  hardware,
software,  networking  products and peripherals from leading  vendors.  Over the
past 26 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 80% of
the Company's revenue generated from its Long Island and New York City offices.

         The  Company  was  incorporated  in New York in 1973 and has six active
wholly-owned   subsidiaries:   Manchester   International,   Ltd.,  a  New  York
corporation,  which sells computer hardware, software and networking products to
resellers domestically and internationally;  ManTech Computer Services,  Inc., a
New York  corporation,  which  identifies  and  provides  temporary  information
technology  positions  and  solutions  for  commercial  customers;  Electrograph
Systems,  Inc.,  a  New  York  corporation,   which  distributes   microcomputer
peripherals  throughout the United  States;  Coastal  Office  Products,  Inc., a
Maryland  corporation,  which is an integrator and reseller of computer products
in the Baltimore,  Maryland area; Manchester Solutions Incorporated,  a New York
corporation,  which provides project management, design, construction and office
furniture solutions; and Marketplace4U.com,  Inc., a New York corporation, which
is an online  superstore  that  offers a wide  range of brand name  products  to
consumers.

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,
                                       3
<PAGE>
making  predecessor  technologies or products obsolete within a few years or, in
some cases, within months. The constant changes in hardware and software and the
competitive pressure to upgrade existing products create significant  challenges
to companies.

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

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

The Manchester Solution

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

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

Strategy

         The key elements of the Company's strategy include:

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

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

         Electronic  Ordering  System.  Manchester has implemented an electronic
ordering system. This ordering system enables participating  customers to access
                                       4
<PAGE>
the Company via the  Internet,  review  various  products,  systems and services
offered by the Company and place their orders  on-line.  Customers are also able
to obtain  immediate  customized  information  regarding  products,  systems and
services that meet their specific  requirements.  The ordering system produces a
matrix  of  alternative   fully   compatible   packages,   together  with  their
availability and related costs,  based on parameters  indicated by the customer.
Customers are not granted access to this system without prior credit clearance.
(See "Expanding Internet Presence").

         Increasing Sales Force Productivity. Manchester is addressing a variety
of strategies to increase sales force productivity.  The Company has implemented
enhancements  to  its  system  allowing  its  salesforce   immediate  access  to
information  regarding  price and  availability  of products.  In addition,  the
Company is planning enhancements that will allow sales representatives to obtain
immediate  customized  information  regarding  products and  services  that meet
specific  requirements of customers.  The Company believes that this system will
increase the productivity of its sales representatives by enabling them to offer
rapid and comprehensive solutions to their customers' needs.

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

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

         Expanding into Additional  Business  Centers.  The Company has regional
offices in Newton,  Massachusetts and Boca Raton, Florida, from which it derived
approximately  10% of its  revenues  for the fiscal  year  ended July 31,  1999.
During fiscal 1998, the Company  expanded into Baltimore,  Maryland  through the
acquisition  on  January  2,  1998  of  Coastal  Office   Products,   Inc.  (see
"Acquisitions").

         Expanding Internet Presence. On January 18, 1999 the Company officially
launched its new website and electronic  commerce system.  The new site, located
at  www.e-manchester.com,  allows  existing  customers,  corporate  shoppers and
others to find  product  specifications,  compare  products,  check  prices  and
availability and place and track orders quickly and easily 24 hours a day, seven
days a week. The Company has made, and expects to continue to make,  significant
investments and improvements in its e-commerce capabilities.

         On June 25, 1999,  the Company  announced  the launch of a new consumer
products on-line super store,  Marketplace4U.com ("MP4U"). MP4U offers consumers
great selection,  price and service as well as a choice for savings. MP4U offers
products in categories  such as consumer  electronics,  automotive  accessories,
outdoor and camping equipment from each of its three "on line" stores. The first
store  (Marketplace4U)  displays  current top brand  products at aggressive  and
competitive prices; the second store (FactoryNew4U) sells factory remanufactured
and  warranteed  top-brand  products at even  greater  savings;  the third store
(Closeouts4U)  features new products that are brand name  close-outs and special
purchases.  During the fiscal year ended July 31, 1999 revenue from MP4U was not
material.


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
                                       5
<PAGE>
customer's   overall   network   needs,   including   access  to  the  Internet;
communications  design services involve analysis and creation of enterprise-wide
networks,  including corporate  intranets;  applications design services include
creation  of  relational   databases   meeting   customers'   specific  business
requirements;  and custom  solutions  design services  include design of storage
systems,   remote  access  systems  and  document   retention  through  scanning
technology.

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

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

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

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

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

         Support.  The  Company  offers  support  services  for  its  customers'
existing   information  systems,   including  network  management,   "help-desk"
services, enhancements, 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.
                                       6

<PAGE>




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

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

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

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


         For the fiscal years ended July 31, 1999 and 1998, sales by the Company
of products  manufactured by Compaq,  Hewlett-Packard  and Toshiba  collectively
comprised  approximately 43% and 49%,  respectively,  of the Company's revenues.
For the fiscal  year  ended  July 31,  1997,  sales by the  Company of  products
manufactured by Compaq, Hewlett-Packard,  NEC and Toshiba collectively comprised
approximately 56% of the Company's revenue. In fiscal years ended July 31, 1999,
1998  and  1997,  sales  of  products  manufactured  by  Toshiba  accounted  for
approximately  9%,  18%,  and  26%,  respectively,  of  the  Company's  revenue,
substantially  all of  which  were  sales  of  notebook  computers  and  related
accessories.  Also in these  fiscal  years,  sales of products  manufactured  by
Compaq accounted for 25%, 21%, and 13%, respectively,  of the Company's revenue.
The total dollar volume of products  purchased directly from  manufacturers,  as
opposed to  distributors  or resellers,  was  approximately  $118  million,  $92
million,  and $103 million for the fiscal  years ended July 31,  1999,  1998 and
1997,  respectively,  and as a  percentage  of total cost of  products  sold was
approximately 61%, 55%, and 64%, respectively.

         The Company has entered into  agreements  with its principal  suppliers
that  include   provisions   providing  for  periodic  renewals  and  permitting
termination by the vendor  without  cause,  generally upon 30 to 90 days written
notice, depending upon the vendor. Compaq, Hewlett-Packard, NEC and Toshiba 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 Compaq, Hewlett-Packard, NEC and Toshiba are satisfactory.

         The Company is dependent upon the continued supply of products from its
suppliers,   particularly  Compaq,  Hewlett-Packard  and  Toshiba.  Historically
certain  suppliers  occasionally  experience  shortages of select  products that
render them unavailable or necessitate product allocations among resellers. Each
fiscal year, the Company has experienced product shortages, particularly related
to newer models. The Company believes that product  availability issues are as a
result of the present  dynamics of the  personal  computer  industry as a whole,
which include high customer  product demand,  shortened  product life cycles and
increased  frequency of new product  introductions  into the marketplace.  While
there can be no assurance that product unavailability or product allocation,  or
both,  will not increase in fiscal 2000, 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.
                                       7
<PAGE>
         The Company seeks to obtain volume  discounts for large customer orders
directly from manufacturers and through aggregators and distributors.

         Most  of  the  Company's  major  product  manufacturers  provide  price
protection for a limited time period as well as stock balancing  rights,  by way
of credits or refunds, against price reductions by the supplier between the time
of the initial sale to the Company and the subsequent sale by the Company to its
customers. During fiscal 1999 certain manufacturers reduced the period for which
they  provide  price  protection  and stock  balancing  rights.  There can be no
assurance  that   manufacturers  will  not  further  limit  or  eliminate  price
protection and stock balancing rights in the future.

Customers

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

         The  Company   believes  that  it  benefits   from  its   long-standing
relationships with many of its customers,  providing opportunities for continued
sales and services.  Manchester  believes  that its broad range of  capabilities
with respect to both  products and  services is  attractive  to companies of all
sizes. Although Manchester targets 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,  1999,  1998 and 1997,  approximately  7%, 7% and 15% of the  Company's
total revenue, respectively, were derived from United Parcel Service of America,
Inc. Some of the Company's  other  significant  commercial  customers  currently
include Bysis Fund Services, Inc., Cabletron Systems Inc., National Broadcasting
Company Inc.,  Sterling Doubleday  Enterprises (New York Mets),  Reuters America
Inc., Vytra Choice Care, Inc., United Nations International Children's Emergency
Fund and the United States Merchant Marine Academy.

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

Sales and Marketing

         The  Company's  sales are  generated  primarily  by its 60 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. In 1998 Manchester adopted
a new logo that appears on all of the  Company's  marketing  materials and other
corporate literature.  The logo includes the phrase "Manchester,  the Answer" to
emphasize our position as a  knowledgeable  resource for networking and computer
solutions for our customers.  The Company promotes name recognition and the sale
of its  products and  services  through  regional  business  directories,  trade
magazine advertisements, radio advertisements,  direct mailings to customers and
participation in computer trade shows and special events. The Company advertises
at numerous sporting events in the New York metropolitan region,  including full
page  four-color  advertisements  in yearbooks  and/or program guides for sports
teams such as the New York Mets,  the New York Knicks and the New York  Rangers.
The Company also  promotes  interest in its  products  and services  through its
website on the Internet,  and has expanded its website information to provide an
electronic  catalog of its products and services.  Several  manufacturers  offer
market  development  funds,   cooperative   advertising  and  other  promotional
programs,  on which the Company relies to partially fund many of its advertising
and promotional campaigns.
                                       8
<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 22, 17 and 17 times for the fiscal years ended July 31,
1999, 1998 and 1997,  respectively,  and Manchester experienced bad debt expense
of less than .3% of revenue in each of these years.

         During the fiscal year ended July 31, 1999, the Company invested in its
management information systems, including upgrading and expanding the IBM AS/400
system,  enhancing and modifying its  client/server-based  management  system to
track  services  rendered  for  customers,  and  upgrading  servers  and network
infrastructures for its headquarters.  The Company utilizes experienced in-house
technical personnel,  assisted by the Company's senior engineers, to upgrade and
integrate  additional  functions  into  the  Company's  management   information
systems.

Competition

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

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

                                       9
<PAGE>

Acquisitions

         Electrograph Systems, Inc.

         On April 25,  1997,  the Company,  through a newly formed  wholly-owned
subsidiary,  acquired  substantially  all  of the  assets  and  assumed  certain
liabilities of Electrograph  Systems, Inc.  ("Electrograph").  Electrograph is a
specialized  distributor  of  microcomputer  peripherals,  throughout the United
States.  The purchase price and transaction costs aggregated  approximately $2.6
million. The major categories of products presently  distributed by Electrograph
include printers and monitors.

         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.

         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 for a
limited time period, by way of credits, against price reductions by the supplier
between the time of the initial sale to Electrograph  and the subsequent sale by
Electrograph to its customer.  Additionally,  most of  Electrograph's  suppliers
accept defective  merchandise  returned within 12 to 15 months after shipment to
Electrograph.  Some  suppliers  permit  Electrograph  to rotate its inventory by
returning slow moving inventory for other inventory.  Credits,  refunds or other
payments  to which  Electrograph  was  entitled  by reason of price  protection,
advertising  allowances,  stock rotations and refunds for defective  merchandise
totaled approximately 1% of revenue for fiscal 1999.

         While  Electrograph  distributes  products  of more than 15  suppliers,
approximately 35%, 18%, 18% and 14% of Electrograph's revenue in fiscal 1999 was
derived from products  manufactured  by Fujitsu,  Pioneer,  Mitsubishi  and NEC,
Electrograph's largest suppliers.

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

         Coastal Office Products, Inc.

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal  Office  Products,  Inc.  ("Coastal"),  a reseller  and  provider  of
microcomputer  servers and peripherals in the greater Baltimore,  Maryland area.
The acquisition,  which has been accounted for as a purchase,  consisted of cash
payments of  approximately  $4.0  million  (including  a  contingent  payment of
$871,000 made on March 15, 1999) plus future contingent payments.

Employees

         At  September  30,  1999,  the  Company  had  312  full-time  employees
consisting of 33 sales  representatives,  41 management personnel,  84 technical
personnel and 154 distribution and clerical personnel. In addition, at September
30, 1999, the Company had 27 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, or has pending,  several 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.
                                       10
<PAGE>
ITEM 2. Properties

Properties

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

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

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

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


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


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

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

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

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

Coastal               3832 Falls Rd.
Corporate HQ          Baltimore, MD                    8,000            2,000           January 2002


</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.








                                       11


<PAGE>




ITEM 3. Legal Proceedings

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

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

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

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

No matters were  submitted to a vote of the security  holders  during the fourth
quarter of the fiscal year ended July 31, 1999.

                                     PART II

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

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

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

                Fiscal Year 1999
                First Quarter            3-1/2           2-11/16
                Second Quarter           9-1/4           2-1/2
                Third Quarter            5-3/8           2-3/16
                Fourth Quarter           3-3/4           2-7/16




         On October 12, 1999,  the closing sale price for the  Company's  Common
Stock was $3.00 per share.  As of October 12, 1999 there were 46 shareholders of
record of the  Company's  Common Stock.  The Company  believes that there are in
excess of 500 beneficial holders of its common stock.

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

                                       12


<PAGE>




ITEM 6.  Selected Financial Data

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

         The selected  consolidated  financial data presented  below are derived
from  the  audited  consolidated   financial  statements  of  the  Company.  The
Consolidated  Financial  Statements as of July 31, 1999 and 1998 and for each of
the years in the three-year period ended July 31, 1999 and the report thereon of
KPMG 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,
                                        1999            1998         1997           1996         1995
                                        ----            ----         ----           ----         ----     -
<S>                                     <C>           <C>           <C>         <C>            <C>

Income Statement Data:
  Revenue                              $228,641       $202,530     $187,801      $ 189,659     $ 170,818
  Cost of revenue                       195,423        171,930      161,186        163,128       146,323
                                        -------        -------      -------      ---------     ---------
  Gross profit                           33,218         30,600       26,615         26,531        24,495
  Selling, general and
    administrative expenses              29,849         27,414       21,023         22,598        21,280
                                         ------         ------       ------      ---------     ---------
Income from operations                    3,369          3,186        5,592          3,933         3,215
Interest and other income
  (expenses), net                           404            546          395           (365)         (392)
Provision for income taxes                1,590          1,560        2,450          1,430(1)      1,160
                                          -----          -----        -----          -----         -----
Net income                               $2,183         $2,172       $3,537      $   2,138(1)   $  1,663
                                          =====          =====        =====         =======      =======
Net income per share:
   Basic                                 $0.27           $0.26        $0.45        $  0 .34(1) $   0.27
                                          ====            ====         ====         =======    ========
   Diluted                               $0.27           $0.26        $0.45        $  0 .34(1) $   0.27
                                          ====            ====         ====        ========    ========
Weighted average shares of
 common stock outstanding:
    Basic                                 8,096          8,494        7,779          6,247         6,263
                                          =====          =====        =====          =====         =====
    Diluted                               8,096          8,499        7,779          6,247         6,263
                                          =====          =====        =====          =====         =====

                                                                July 31,
                                           1999          1998         1997           1996         1995
                                           ----          ----         ----           ----         ----
Balance Sheet Data:
  Working capital                       $27,461        $26,112      $30,578        $ 9,841       $ 9,189
  Total assets                           61,778         56,894       58,208         37,761        31,635
  Short-term debt, including
    current maturities of
    capital lease obligation                 85             82        1,637          6,952         5,600
  Capital lease obligation, excluding
     current maturities                       -              -           77            175             -
  Redeemable common stock(2)                  -              -            -          4,739         5,210
  Shareholders' equity                   39,586         37,345       36,877          8,175         6,037
</TABLE>
---------------

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

(2) Represents the aggregate  amounts payable by the Company to redeem shares of
common  stock  under the  shareholder  put right  and  shareholders'  agreements
between  the  Company  and  certain  shareholders.  See  Note 11 of notes to the
consolidated financial statements.
                                       13

<PAGE>



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

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

General

         Manchester is an 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  integrating  its  analysis,  design and  implementation  services with
hardware, software, networking products and peripherals from leading vendors. To
date, most of the Company's  revenues have been derived from product sales.  The
Company generally does not develop or sell software products.  However,  certain
computer  hardware  products  sold by the Company  are loaded with  pre-packaged
software products.

         As a result of intense price  competition  within the computer industry
as well as other industry  conditions,  the Company has  experienced  increasing
pressure on per unit prices as well as on its gross profit and operating margins
with respect to the sale of products.  Manchester's strategy includes increasing
its focus on providing  value-added  services  with  operating  margins that are
higher than those obtained with respect to the sale of products. The Company has
experienced  a  significant  increase  in selling,  general  and  administrative
expenses, primarily in the form of increased personnel costs, in connection with
the  implementation  of this strategy.  The Company's  future  performance  will
depend in part on its ability to manage  successfully a continuing  shift in its
operations towards 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  and  distributors  in  the  computer  industry.  There  can be no
assurance that the pricing and related terms offered by major  manufacturers and
distributors  will not adversely change in the future.  The failure to obtain an
adequate  supply of products,  the loss of a major  manufacturer or distributor,
the  deterioration of the Company's  relationship  with a major  manufacturer or
distributor,   or  the  Company's   inability  in  the  future  to  develop  new
relationships  with other  manufacturers and distributors  could have a material
adverse  effect on the Company's  business,  results of operations and financial
condition.

         The Company's  largest customer  accounted for approximately 7%, 7% and
15% of the Company's  revenue for the fiscal years ended July 31, 1999, 1998 and
1997, respectively, substantially all of which revenue was derived from the sale
of hardware  products.  There can be no assurance that the Company will continue
to derive substantial revenue from this customer.

         The Company's  profitability has been enhanced by its ability to obtain
volume discounts from certain  manufacturers  and  distributors,  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  and  distributors 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
                                       14
<PAGE>
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, 1999, 1998 and 1997,  inventories
represented  13%, 16% and 17% of total assets,  respectively.  During these same
fiscal years, the Company's average inventory  turnover was 22, 17 and 17 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
 .1%, .2% and .2% of total revenue for the fiscal years ended July 31, 1999, 1998
and 1997, respectively.

         The  Company's  quarterly  revenue and  operating  results  have varied
significantly  in the past and are  expected to continue to do so in the future.
Quarterly revenue 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 has increased 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 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 necessarily 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 computer  industry  continues to
experience  rapid declines in average selling prices of personal  computers.  In
some  instances,  the Company has been able to offset these price  declines with
increases  in units  shipped.  There can be no assurance  that  average  selling
prices will not  continue to decline or that the Company  will be able to offset
declines in average selling prices with increases in units shipped.

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

         The Company  leases  certain  warehouses and offices from entities that
are owned or  controlled  by the  Company's  majority  shareholder.  Each of the
leases with related  parties has been amended  effective with the closing of the
Company's  initial  public  offering in December 1996 to reduce the rent payable
under that lease to then current market rates.

Year 2000 Issue

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

         The Company has undertaken a complete and thorough review of all of its
operations to determine  those  aspects  which  involve or are dependent  upon a
computer  application.  The Company is  reviewing  the  software  and  operating
systems for each such application to determine if it is Year-2000-Compliant. Any
such system or application which has been identified as not  Year-2000-Compliant
has been modified or upgraded to assure our continued ability to operate without
interruption.  Manchester's  year 2000 project has been underway for over a year
and is aimed at ensuring that, when the year 2000 arrives, all applications used
on Manchester's  AS/400 computer system are  Year-2000-Compliant.  As of October
12, 1999 the following tasks have been completed:

o    All programs  containing  date  manipulations,  calculations  or comparison
     routines have been  identified.

o    All of these programs have been modified to be Year-2000-Compliant.

o    Physical  database files and  supporting  logical views of these files that
     contain date data and  sequencing  by date have been  identified  and these
     files have been modified as required to be Year-2000-Compliant.
                                       15
<PAGE>
Manchester's  communications,  local, and wide area networks have been tested or
represented (by the manufacturers) to be  Year-2000-Compliant,  with a few minor
exceptions that should be resolved shortly. Our status as of October 12, 1999 is
as follows:

o    The local area  network  operations  systems  have been  represented  to be
     Year-2000-Compliant by their manufacturers/publishers.

o    The network  servers have been  represented to be Year-  2000-Compliant  by
     their  manufacturers.

o    An  audit of all wide  area  network  devices  has been  completed  and the
     recommended changes have been made. o An audit has been completed assessing
     the compliance  level of all computers and  recommended  upgrades have been
     made.

o    We  continue  to audit  software  applications  on our local area  network.
     Products that are identified as non-compliant  are either being upgraded or
     removed.

o    The  telephone  system  has  been  represented  by its  manufacturer  to be
     Year-2000-Compliant.

o    We have received  assurances  of compliance  from vendors of other types of
     equipment (e.g. alarm, HVAC), either via correspondence or from information
     on their websites.

Testing and  monitoring  will be on going  throughout  the rest of the year. The
Company is in the process of obtaining assurances regarding Year 2000 compliance
from other companies upon which it may rely for products or services.

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

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

     The  Company  believes  the most  reasonably  likely  worst  case Year 2000
scenario would include a combination of some or all of the following:

o    Internal  information  technology modules or systems may fail to operate or
     may give  erroneous  information.  Such  failure  could  result in shipping
     delays,  inability to generate or delays in generation of financial reports
     and statements,  inability of the Company to communicate  among its various
     offices,  and computer network  downtime  resulting in  inefficiencies  and
     higher payroll expenses.

o    Components in HVAC, lighting, telephone, security and similar systems might
     fail, causing such systems to fail.

o    Communications with customers and vendors that the Company depends upon may
     fail or give erroneous information. These types of problems could result in
     such  difficulties as the inability to receive or process  customer orders,
     shipping  delays,  or sale of products at  erroneous  prices.  Furthermore,
     customers may be unable to, or may suffer delays, in remitting  payments to
     the Company on a timely basis.

o    The   unavailability  of  products  as  a  result  of  Year  2000  problems
     experienced  by one or more key vendors of the  Company,  or as a result of
     changes in inventory levels at aggregators,  VARs and similar  providers in
     response to an  anticipated  Year 2000 problem  and/or the inability of the
     Company to  develop  alternative  sources  for  products  may result in the
     inability of the Company to obtain an adequate supply of products.

o    Products sold to some of the Company's customers could fail to perform some
     or all of their  intended  functions.  In such a situation,  the  Company's
     maximum  obligation would be to repair or replace the defective products to
     the extent the Company is required to do so under  manufacturer  reimbursed
     warranty programs.

         The Company  believes its plans for  addressing  the Year 2000 Issue as
outlined  above are  adequate to handle the most  reasonably  likely  worst case
                                       16
<PAGE>
scenario. The Company does not believe it will incur a material financial impact
for the risk of failure,  or from the costs  associated with assessing the risks
of failure, arising from the Year 2000 Issue. Consequently, the Company does not
intend to create a contingency  plan other than as set forth above. In addition,
if the  Company's  assessment of its vendors,  when  completed,  indicates  that
certain product  shortages can be anticipated,  the Company may adjust its plans
accordingly,  although  the Company  does  believe  that it has the  capacity to
maintain significant levels of inventory.

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


E-Commerce

         On January 18, 1999,  the Company  officially  launched its new website
and electronic  commerce system. The new site, located at  www.e-manchester.com,
allows  existing  customers,  corporate  shoppers  and  others  to find  product
specifications,  compare  products,  check price and  availability and place and
track  orders  quickly and easily 24 hours a day seven days a week.  The Company
has  made  and  expects  to  continue  to  make,  significant   investments  and
improvements in its e-commerce capabilities.  There can be no assurance that the
Company will be successful in enhancing and increasing its business  through its
expanded Internet presence.

         On June 25, 1999,  the Company  announced  the launch of a new consumer
products on-line super store,  Marketplace4U.com ("MP4U"). MP4U offers consumers
great selection,  price and service as well as a choice for savings. MP4U offers
products in categories  such as consumer  electronics,  automotive  accessories,
outdoor and camping equipment from each of its three "on line" stores. The first
store  (Marketplace4U)  displays  current top brand  products at aggressive  and
competitive   prices;   the   second   store    (FactoryNew4U)   sells   factory
remanufactured, warranteed top-brand products at even greater savings; the third
store  (Closeouts4U)  features new products that are brand name  close-outs  and
special purchases. During the fiscal year ended July 31, 1999 revenues from MP4U
were immaterial.  There can be no assurance that MP4U will generate  significant
revenue or that any of the Company's on-line stores will operate profitably.

Recent Acquisition

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal Office  Products,  Inc.  ("Coastal"),  a Maryland  corporation  and a
reseller and provider of microcomputer  services and peripherals to companies in
the greater Baltimore, Maryland area. The acquisition,  which has been accounted
for as a purchase,  consisted of a cash payment of approximately $3.1 million at
closing,  an  additional  payment of  $871,000 in cash on March 15,  1999,  plus
potential  future  contingent  payments.  The cash  payments  were made from the
Company's  cash  balances.  Contingent  payments of up to $1,050,000 in calendar
1999 will be determined  based upon  achieving  certain agreed upon increases in
revenue  and  pretax  income  for  calendar  1999 over  calendar  1997  amounts.
Contingent  payments,  if  any,  would  be  paid  in  cash  (or,  under  certain
conditions,  in Company  common stock) on March 15, 2000.  Operating  results of
Coastal are included in the  Consolidated  Statements of Income from the date of
acquisition.  The acquisition  resulted in goodwill of $3,976,000 which is being
amortized on the straight-line basis over 20 years.
                                       17

<PAGE>




Results of Operations

         The following table sets forth, for the periods indicated,  information
derived from the  Company's  consolidated  statements  of income  expressed as a
percentage of related revenue or total revenue.

<TABLE>
<CAPTION>

                                                        Percentage of Revenue
                                                        the Year Ended July 31,
                                                    1999         1998            1997
                                                    ----         ----            ----
<S>                                                 <C>           <C>           <C>
Revenue
         Products                                     97.0%        97.4%         98.7%
         Services                                      3.0          2.6           1.3
                                                       ---          ---           ---
                                                     100.0        100.0         100.0
                                                     -----        -----         -----
Cost of revenue
         Products                                     86.1         85.2          86.2
         Services                                     65.3         72.1          54.4
                                                      ----         ----          ----

                                                      85.5         84.9          85.8
                                                      ----         ----          ----

Product gross profit                                  13.9         14.8          13.8
Services gross profit                                 34.7         27.9          45.6
                                                      ----         ----          ----
         Gross profit                                 14.5         15.1          14.2

Selling, general and administrative expenses          13.0         13.5          11.2
                                                      ----         ----          ----
Income from operations                                 1.5          1.6           3.0
Interest and other income (expenses), net             .2            0.3           0.2
                                                     ---            ---          ----
Income before income taxes                             1.7          1.9           3.2
Provision for income taxes                             0.7          0.8           1.3
                                                       ---          ---           ---
Net income                                             1.0%         1.1%          1.9%
                                                       ===          ===          ====
</TABLE>

Year Ended July 31, 1999 Compared to Year Ended July 31, 1998

         Revenue.  The Company's  revenue  increased $26.1 million or 12.9% from
$202.5  million in fiscal 1998 to $228.6  million for fiscal 1999.  Revenue from
product sales increased by $24.5 million (12.4%) primarily due to higher revenue
generated from the Company's  wholly-owned  subsidiaries,  Electrograph Systems,
Inc.  ("Electrograph")  which was acquired on April 25, 1997 and Coastal  Office
Products,  Inc.,  which was acquired on January 2, 1998, as well as increases in
the number of personal computers shipped.  These increases were partially offset
by lower  average  selling  prices  for  personal  computers.  Services  revenue
increased by $1.6 million, or 29.7%, reflecting the Company's continued emphasis
on providing services.

         Gross  Profit.  Cost of revenue  includes  the direct costs of products
sold,  freight and the  personnel  costs  associated  with  providing  technical
services,  offset  in part by  certain  market  development  funds  provided  by
manufacturers.  All other operating  costs are included in selling,  general and
administrative  expenses.  Gross  profit  increased by $2.6 million or 8.6% from
$30.6  million for fiscal 1998 to $33.2  million for fiscal  1999.  Gross profit
from the sale of products  increased  by $1.7  million or 5.9% due  primarily to
increases in revenue  partially  offset by less  favorable mix of products sold.
Gross profit generated through service offerings  increased by $911,000 or 61.2%
reflecting  improved  service  revenue,  as discussed above, as well as improved
productivity  and utilization of personnel  associated with providing  technical
services.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased  $2.4 million or 8.9% from $27.4  million in
fiscal 1998 to $29.8 million in fiscal 1999. This increase  primarily relates to
higher  personnel  costs  associated  with  enhancing the  Company's  e-commerce
capabilities and building the infrastructure to provide Internet based solutions
to our  customers.  The  Company  also  experienced  higher  operating  costs at
Electrograph  and Coastal as well as higher  advertising,  depreciation and rent
expenses in fiscal 1999.

     Other  Income  (Expense).  Interest  income  decreased  due to  lower  cash
balances available for investment.
                                       18
<PAGE>
         Provision for Income Taxes.  The  Company's  effective  income tax rate
increased  slightly from 41.8% in fiscal 1998 to 42.1% in fiscal 1999  primarily
due to  non-deductible  amortization  of  goodwill  associated  with the Coastal
acquisition.

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

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

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

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

     Other Income (Expense).  Interest expense decreased due to lower borrowings
by the Company.  Interest income is generated by the investment of the Company's
excess cash balances.

         Provision for Income Taxes.  The  Company's  effective  income tax rate
increased  from 40.9% in fiscal 1997 to 41.8% in fiscal 1998 due to higher state
and local  taxes in new and  existing  jurisdictions  as well as  non-deductible
amortization of goodwill associated with the Coastal acquisition.

Liquidity and Capital Resources

       The  Company's  primary  sources of  financing  in fiscal  1999 have been
internally  generated  working capital from profitable  operations and a line of
credit from a financial institution.

       For the year ended July 31, 1999,  cash provided by operating  activities
was  $676,000   consisting   primarily  of  net  income  and  non  cash  charges
(principally  depreciation and amortization),  increases in accounts payable and
accrued expenses, decreased inventory and sales of trading investments partially
offset by increases in accounts  receivable.  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. The Company  experienced  particularly strong demand
for its  products  during the month of July,  1999  resulting  in  significantly
higher accounts receivables  balances at July 31, 1999. In addition,  during the
year ended July 31,  1999,  the  Company  used  approximately  $1.7  million for
capital  expenditures and $900,000 as an additional  contingent  payment for the
purchase of Coastal.

       The Company has available lines of credit with financial  institutions in
the  aggregate  amount of $15.0  million.  At July 31,  1999,  no  amounts  were
outstanding under this line.

       The  Company  believes  that  its  current  balances  in  cash  and  cash
equivalents and  investments,  expected cash flows from operations and available
borrowings  under  the lines of  credit  will be  adequate  to  support  current
operating levels for the foreseeable future,  specifically  through at least the
end of fiscal  2000.  The  Company  currently  has no material  commitments  for
capital  expenditures.  Future capital requirements of the Company include those
for the  growth  of  working  capital  items  such as  accounts  receivable  and
inventory,  the purchase of equipment  and  expansion of  facilities,  potential
contingent  acquisition payments of $1,050,000,  as well as the possible opening
of new offices and potential acquisitions.

                                       19

<PAGE>





Inflation

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

ITEM 8.  Financial Statements and Supplementary Data

See Item 14.

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

None.

                                       20

<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:

<TABLE>
<CAPTION>

Name                                           Age                     Position
<S>                                           <C>           <C>
Barry R. Steinberg                             57            Chairman of the Board, President, Chief
                                                             Executive Officer and Director

Joel G. Stemple, Ph.D                          57            Executive Vice President, Secretary and Director

Joseph Looney                                  42            Chief Financial Officer and Assistant Secretary

Joel Rothlein, Esq.                            70            Director

Bert Rudofsky                                  65            Director

Michael E. Russell                             52            Director

Julian Sandler                                 55            Director
</TABLE>

     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 and as Assistant  Secretary  since April 1999.  From 1984 until joining
the Company,  Mr. Looney served in various positions with KPMG Peat Marwick LLP,
including Senior Audit Manager at the end of his tenure at such firm. Mr. Looney
is a  Certified  Public  Accountant,  a member of the AICPA,  the New York State
Society of Certified Public Accountants and the Institute of Internal Auditors.

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

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

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

         Julian  Sandler  became a director on December 2, 1996.  Mr. Sandler is
Chief  Executive  Officer  of  Rent-a-PC,   Inc.,  a  full-service  provider  of
short-term  computer rentals,  which Mr. Sandler founded in 1984. Mr. Sandler is
also  the  founder  and  was the  President  from  1974  to  1993  of  Brookvale
Associates, a national organization  specializing in the remarketing of hardware
manufactured by Digital Equipment  Corporation.  Mr. Sandler also co-founded and
from 1970 to 1973 was Vice President of Periphonics Corporation, a developer and
manufacturer of voice response systems.
                                       21
<PAGE>
Section 16(a) Beneficial Reporting Compliance

         Section 16 of the Securities Exchange Act of 1934, as amended, requires
that  officers,  directors  and  holders  of more than 10% of the  Common  Stock
(collectively,  "Reporting  Persons")  file  reports  of  their  trading  in the
Company's equity securities with the Securities and Exchange  Commission.  Based
on a review of Section 16 forms filed by the Reporting Persons during the fiscal
year ended July 31, 1999, the Company believes that the Reporting Persons timely
complied with all applicable Section 16 filing requirements.

ITEM 11.      Executive Compensation.

         The following  table sets forth a summary of the  compensation  paid or
accrued by the Company  during the fiscal  years ended July 31,  1999,  1998 and
1997 to the Company's Chief Executive  Officer and the other executive  officers
whose  compensation  exceeded  $100,000  (collectively,   the  "Named  Executive
Officers"):


                                                      Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                   Long Term
                                                                                   Compensation
                                       Annual Compensation                         Common Stock
Name and                                                      Other Annual         Underlying       All Other
Principal Position           Year     Salary     Bonus        Compensation(1)      Options        Compensation
-------------------          ---------------------------------------------------------------------------------
<S>                         <C>     <C>               <C>      <C>                   <C>              <C>

Barry R. Steinberg,          1999    $650,000             -      $23,806(2)                 -            -
 President  and Chief        1998    $550,000             -      $37,031(2)                 -            -
 Executive Officer           1997    $550,000             -      $59,252(2)                 -            -

Joel G. Stemple, Executive   1999    $450,000             -      $13,881(3)                 -            -
 Vice President and          1998    $450,000             -      $22,194(3)                 -            -
  Secretary                  1997    $450,000             -      $33,050(3)                 -            -

Joseph Looney, Chief         1999    $200,000       $15,000      $15,061(4)                 -            -
 Financial Officer and       1998    $140,394       $40,000      $13,677(4)            70,000(5)
 Assistant Secretary         1997    $125,489       $47,500       $7,610               70,000(5)
</TABLE>

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, 1999.
------------------
(1)   Includes in fiscal 1999 employer  matching  contributions to the Company's
      defined  contribution  plan of  $4,800,  $4,800  and  $4,960  for  Messrs.
      Steinberg,  Stemple,  and  Looney,  respectively,   fiscal  1998  employer
      matching contributions of $4,950, $4,800 and $3,477 for Messrs. Steinberg,
      Stemple  and  Looney,  respectively,  and fiscal  1997  employer  matching
      contributions to the Company's defined contribution plan of $6,252, $6,675
      and $2,510 for Messrs. Steinberg, Stemple and Looney, respectively.

 (2)  Includes $15,399 in 1999,  $32,081 in 1998 and $50,000 in 1997 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.

 (3)  Includes  $7,606 in 1999,  $17,394 of premiums in 1998 and $25,000 in 1997
      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.

(4)   Includes  $5,000 in each of 1999 and 1998 of premiums  paid by the Company
      for a whole life  insurance  policy in the name of the  executive  officer
      having a face value of $345,000 and under which his spouse and the Company
      are beneficiaries and are entitled to $100,000 and $245,000, respectively,
      of the death benefits payable under the policy.

(5)  The grant of 70,000  options  during fiscal 1998  represents a repricing of
     the 70,000  options  granted to Mr.  Looney  during  fiscal 1997.
                                       22
<PAGE>
     Barry R. Steinberg  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 would be $550,000 in each of the fiscal years ending July 31,
1997 and 1998.  Mr.  Steinberg  further  agreed that he would not be eligible to
receive  any bonus in fiscal  1997 and that any bonus  payable  for fiscal  1998
would  require the  approval of a majority of the  independent  directors of the
Company.  No bonus was paid for fiscal 1997, 1998 or 1999. The Company continues
to make available to Mr.  Steinberg the car allowance and deferred  compensation
benefits that he has historically  received.  Mr. Steinberg also participates in
other benefits that the Company makes generally available to its employees, such
as medical and other  insurance,  and Mr.  Steinberg is eligible 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 received a base salary of $450,000 in each of the fiscal
years ending July 31, 1997 and 1998. Under the employment agreement, Dr. Stemple
was not  eligible to receive  any bonus in fiscal 1997 and any bonus  payable to
Dr. Stemple for fiscal 1998 required  approval by a majority of the  independent
directors of the Company. No bonus was paid for fiscal 1997, 1998 or 1999. Under
the employment  agreement,  the Company  provides Dr. Stemple with an automobile
and certain deferred compensation benefits and provides Dr. Stemple with medical
and other  benefits  generally  offered  by the  Company to its  employees.  Dr.
Stemple also is able to  participate  in the  Company's  stock option plan.  The
employment  agreement is terminable by either party on 90 days' prior notice. In
the event the Company so terminates  Dr.  Stemple's  employment,  or the Company
elects not to renew his employment agreement,  he is entitled to severance equal
to 12 months of his then current base salary.  This severance will be payable in
accordance with the Company's customary payroll practices.  Under the employment
agreement,  if Dr. Stemple terminates his employment,  or the Company terminates
his employment for cause, Dr. Stemple is prohibited,  for a two-year period from
such  termination,  from  competing  with the Company in the eastern half of the
United States.

     The Compensation  Committee of the Company's Board of Directors  determines
compensation  for the Company's  executive  officers.  Effective August 1, 1998,
based upon the  recommendation  of the Compensation  Committee,  the annual base
salaries of Mr.  Steinberg,  Mr.  Stemple and Mr.  Looney were set at  $650,000,
$450,000 and $200,000, respectively.

Option/SAR Grants in the Last Fiscal Year

         No stock options were granted to the Named  Executive  Officers  during
fiscal 1999. No stock appreciation rights have been granted by the Company.

Aggregated Options/SAR Exercises and Fiscal Year-end Options/SAR Value Table

         The following table sets forth  information  with respect to the number
and  value  of  exercisable  and  unexercisable  options  granted  to the  Named
Executive  Officers as of July 31, 1999. No options were  exercised by the Named
Executive  Officers  during  the  fiscal  year  ended  July 31,  1999.  No stock
appreciation rights have been granted by the Company.

<TABLE>
<CAPTION>

                                                       Number of Securities             Value of
                        Shares                         Underlying Unsecured             Unexercised In-the-Money
                        Acquired                       Options/SAR's at                 Options/SAR's at
                        or             Value           July 31, 1999                    July 31, 1999
         Name           Exercised      Realized        Exercisable/Unexercisable        Exercisable/Unexercisable
<S>                       <C>             <C>             <C>                                   <C>

Joseph Looney              -                -                 15,000/55,000                      $0
</TABLE>

Compensation of Directors

         Prior to July 15, 1998,  directors who were not full-time  employees of
the Company were  reimbursed  for their  expenses and received a fee of $500 per
Board and committee  meeting  attended.  On July 15, 1998, the Board adopted the
following program with respect to non-employee director compensation:

a)   Commencing  August 1, 1998 each such  director  will be paid a fixed annual
     stipend of $5,000 payable in four quarterly installments.

b)   Commencing  with the  meeting of July 15,  1998,  each such  director  will
     receive a fee of $1,500 per Board  meeting  attended.
                                       23
 <PAGE>
c)   Commencing  August 1, 1998,  each such  director will receive a fee of $500
     for each  committee  meeting  attended,  and the Chairman of each committee
     will be paid a fixed annual  stipend of $1,000,  payable in four  quarterly
     installments.

d)   Commencing  August 1,  1998,  and on each  August 1  thereafter,  each such
     director who has served on the Board since the  preceding  August 1 will be
     granted non-incentive options under the Plan to purchase 5,000 shares at an
     exercise  price equal to the fair market  value of the Common  Stock on the
     date of such grant.  Such options will be for a term of five years and will
     exercisable immediately upon such grant.

         On August 1, 1998,  pursuant to and in  accordance  with the  directors
compensation  program described above, the Board of Directors granted to each of
Joel Rothlein and Julian Sandler, who are non-employee directors,  non-incentive
options  under the Plan to purchase  5,000 shares at an exercise  price of $3.25
per share (the fair  market  value of the Common  Stock on August 1,  1998).  In
addition on August 1, 1999  pursuant  to and in  accordance  with the  directors
compensation  program described above, the Board of Directors granted to each of
Joel Rothlein,  Bert Rudofsky,  Michael E. Russell and Julian  Sandler,  who are
non-employee  directors,  non-incentive options under the Plan to purchase 5,000
shares at on  exercise  price of $2.75 per share (the fair  market  value of the
Common Stock on August 2, 1999).

         On  October  19,  1998,  the  Board of  Directors  appointed  a Special
Committee ("Special Committee") consisting of Bert Rudofsky, Michael Russell and
Julian  Sandler  to  explore  possible   strategies  and  methods  of  enhancing
shareholder  value.  As  compensation  for their work on the  Special  Committee
through  December 31,  1999,  each member of the  Committee  was paid $10,000 on
February 1, 1999 and $10,000 on August 1, 1999.


         Compensation Committee Interlocks and Insider Participation

         The members of the Company's  Compensation Committee are Joel Rothlein,
Esq.,  Julian Sandler,  and Bert Rudofsky.  Mr. Rothlein is a partner of Kressel
Rothlein & Roth, Esqs.,  which, with its predecessor firms, has acted as outside
general counsel to the Company since the Company's inception. Kressel Rothlein &
Roth,  Esqs.  was paid  approximately  $213,000,  $217,000 and $655,000 from the
Company for legal fees in the fiscal years ended July 31,  1999,  1998 and 1997,
respectively.  Fiscal 1997 fees to Kressel Rothlein & Roth, Esqs.  included fees
paid to special  counsel of $286,000.  In addition,  during the years ended July
31, 1999, 1998 and 1997, the Company recorded revenue of approximately $597,000,
$177,000 and $130,000,  respectively,  in  connection  with the sale of computer
equipment to a company controlled by Mr. Sandler.

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

                                       24
<PAGE>




ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

         The following  table sets forth certain  information  as of October 12,
1999 (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,  together  with
their respective  addresses,  the number of shares of common stock  beneficially
owned by each  director of the Company and each Named  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 Beneficially   Percent of Shares
      Name and Address                          Owned(1)         Outstanding
       ---------------------------------------------------------------------
      Barry R. Steinberg(2) (3)               4,690,201            57.7%
      Joel G. Stemple(2)                        626,263             7.7
      Joseph Looney(4)                           19,700             *
      Joel Rothlein(5)                           41,500             *
      Bert Rudofsky (4)                           5,000             *
      Michael E. Russell (4)                      5,000             *
      Julian Sandler(4)                          13,500             *
      All executive officers and
        directors as a group
        (7 persons) (6)                       5,401,164            66.4%

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

(1)   For purposes of determining the aggregate  amount and percentage of shares
      deemed beneficially owned by directors and Named Executive Officers of the
      Company  individually  and by all directors,  nominees and Named Executive
      Officers as a group,  exercise of all currently exercisable options listed
      in the footnotes hereto is assumed.  For such purposes 8,132,300 shares of
      Common Stock are deemed to be outstanding.

(2)  Address is 160 Oser Avenue,  Hauppauge, New York 11788.

(3)  Excludes  59,500 shares owned by Ilene Steinberg and 59,000 shares owned by
     Sheryl Steinberg,  daughters of Mr. Steinberg,  which shares were purchased
     with the proceeds of a loan from Mr. Steinberg. As reported on Schedule 13D
     filed on March 24, 1997, as amended,  Mr. Steinberg,  Ilene Steinberg,  and
     Sheryl  Steinberg  each disclaim  beneficial  ownership of the common stock
     owned by the others.

(4)  Includes  currently  exercisable  options to  purchase  15,000  shares (Mr.
     Looney;  12,500 shares (Mr. Sandler);  5,000 shares (Mr.  Rudofsky);  5,000
     shares (Mr. Rothlein); and 5,000 shares (Mr. Russell).

(5)  Consists  of  currently  exercisable  options to acquire  10,000  shares of
     common stock and 31,500 shares held by the Kressel,  Rothlein & Roth Profit
     Sharing Plan. Mr.  Rothlein  disclaims  beneficial  ownership of the Common
     Stock owned by the Kressel  Rothlein & Roth Profit Sharing Plan,  except to
     the extent of his beneficial interest in such plan.

(6)  See Notes 1 through 5 above.

*     Represents less than one tenth of one percent of outstanding shares.

                                       25
<PAGE>



ITEM 13.  Certain  Relationships and Related Transactions

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

         Three of the Company's four  Hauppauge,  New York facilities are leased
from  entities  affiliated  with certain of the  Company's  executive  officers,
directors  or  principal  shareholders.   The  property  located  at  40  Marcus
Boulevard,  Hauppauge, New York is leased from a limited liability company owned
70% by Mr.  Steinberg  and his  relatives,  20% by Joel G. Stemple,  Ph.D.,  the
Company's  Executive  Vice  President  and a principal  shareholder,  and 10% by
Michael Bivona, a shareholder and former officer of the Company.  For the fiscal
years ended July 31, 1999,  1998 and 1997,  the Company  made lease  payments of
$186,000,  $179,000 and $174,000,  respectively,  to such entity.  The Company's
offices  at 160 Oser  Avenue,  Hauppauge,  New York are  leased  from a  limited
liability company owned 65% by Mr. Steinberg,  17.5% by Dr. Stemple and 17.5% by
Mr.  Bivona.  For the fiscal  years ended July 31,  1999,  1998,  and 1997,  the
Company made lease payments of $271,000, $263,000 and $259,000, 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, 1999, 1998 and 1997, the Company made lease payments
of  $344,000,  $340,000,  and  $329,000,   respectively,  to  such  entity.  See
"Business--Properties."

         Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein & Roth, Esqs.,  which, with its predecessor firms, has acted as outside
general counsel to the Company since the Company's inception. Kressel Rothlein &
Roth,  Esqs.  received  fees of  approximately  $655,000 from the Company in the
fiscal year ended July 31, 1997, which sum includes fees paid to special counsel
($286,000).  During fiscal 1999 and 1998, $213,000 and $217,000 respectively was
paid to such firm for legal fees.

         During  the year  ended  July 31,  1999,  1998 and  1997,  the  Company
recorded revenue of $597,000,  $177,000 and $130,000  respectively in connection
with the sale of computer equipment to a company controlled by Julian Sandler, a
director of the Company.

                                       26
<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                                               28

Consolidated Financial Statements:
    Balance Sheets as of July 31, 1999 and 1998                            29
    Statements of Income for the years ended
     July 31, 1999, 1998, and 1997                                         30
    Statements of Shareholders' Equity for the years
     ended July 31, 1999, 1998 and 1997                                    31
    Statements of Cash Flows for the years ended
     July 31, 1999, 1998 and 1997                                          32
    Notes to Consolidated Financial Statements                             33

Schedule II - Valuation and Qualifying Accounts                            47

                                       27
<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,  1999 and 1998 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,  1999.  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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  July  31,  1999,  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 LLP


Melville, New York
September 20, 1999


                                       28
<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                             July 31, 1999 and 1998

<TABLE>
<CAPTION>
                                   Assets                                1999                     1998
                                   ------                                ----                     ----
                                                                                 (in thousands)
<S>                                                                      <C>                      <C>
Current assets:
     Cash and cash equivalents                                            $5,749                  $7,816
     Investments                                                               -                   1,501
     Accounts receivable, net of allowance for doubtful accounts
        of $1,204 and $1,151, respectively                                34,747                  26,296
     Inventory                                                             8,245                   9,167
     Deferred income taxes                                                   538                     482
     Prepaid expenses and other current assets                               340                     290
                                                                             ---                   -----

                             Total current assets                         49,619                  45,552

Property and equipment, net                                                6,248                   5,975
Goodwill, net                                                              5,070                   4,325
Deferred income taxes                                                        560                     475
Other assets                                                                 281                     567
                                                                             ---                  ------

                                                                         $61,778                 $56,894
                                                                          ======                 =======

                          Liabilities and Shareholders' Equity

Current liabilities:
     Current maturities of long-term debt                               $     85                $     82
     Accounts payable and accrued expenses                                20,824                  18,358
     Deferred service contract revenue                                       581                     775
     Income taxes payable                                                    668                     225
                                                                             ---                 -------

                             Total  current liabilities                   22,158                  19,440


Deferred compensation payable                                                 34                     109

Commitments and contingencies (note 7)

Shareholders' equity:
     Preferred stock, $.01 par value, 5,000 shares
        authorized, none issued                                                -                       -
     Common stock, $.01 par value; 25,000 shares
        authorized, 8,085 and 8,097 shares issued
        and outstanding                                                       81                      81
     Additional paid-in capital                                           18,799                  18,767
     Deferred compensation                                                   (38)                    (64)
     Retained earnings                                                    20,744                  18,561
                                                                          ------                  ------

                             Total shareholders' equity                   39,586                  37,345
                                                                          ------                  ------

                                                                         $61,778                 $56,894
                                                                          ======                  ======
</TABLE>

See accompanying notes to consolidated financial statements.
                                       29

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                        Consolidated Statements of Income
                    Years ended July 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                1999              1998                1997
                                                                ----              ----                ----
                                                                 (in thousands except  per share amounts)
        <S>                                                  <C>               <C>                <C>

         Revenue
              Products                                         $221,719         $197,194            $185,397
              Services                                            6,922            5,336               2,404
                                                                  -----            -----               -----
                                                                228,641          202,530             187,801
                                                                -------          -------             -------

         Cost of revenue
              Products                                          190,901          168,083             159,877
              Services                                            4,522            3,847               1,309
                                                                  -----            -----               -----
                                                                195,423          171,930             161,186
                                                                -------          -------             -------

              Gross profit                                       33,218           30,600              26,615

         Selling, general and administrative expenses            29,849           27,414              21,023
                                                                 ------           ------              ------

              Income from operations                              3,369            3,186               5,592

         Other income (expense):
              Interest expense                                       (8)             (41)               (225)
              Interest and investment income                        412              587                 560
              Other                                                   -                -                  60
                                                                   ----             ----               -----
              Income before provision for income taxes            3,773            3,732               5,987

         Provision for income taxes                               1,590            1,560               2,450
                                                                  -----            -----               -----
              Net income                                         $2,183           $2,172              $3,537
                                                                  =====            =====              ======
              Net income per share
                  Basic                                          $0.27             $0.26               $0.45
                                                                  ====              ====               =====
                  Diluted                                        $0.27             $0.26              $0.45
                                                                  ====              ====               =====

         Weighted average shares of common
            stock and equivalents outstanding
              Basic                                               8,096            8,494               7,779
                                                                  =====            =====               =====
              Diluted                                             8,096            8,499               7,779
                                                                  =====            =====               =====

</TABLE>





See accompanying notes to consolidated financial statements.

                                       30
<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
                    Years ended July 31, 1999, 1998 and 1997

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


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

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

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

     Purchase and retirement of stock        (12)      -           (33)            -            -           (33)
     Stock option commission expense           -                    65             -            -            65
     Stock award compensation expense          -                     -            26            -            26
     Net income                                -                     -             -        2,183         2,183
                                            ----     ---      --------           ---        -----         -----
     Balance July 31, 1999                 8,085     $81       $18,799          $(38)     $20,744       $39,586
                                           =====     ===        ======           ====      ======        ======

</TABLE>

     See accompanying notes to consolidated financial statements.

                                       31

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                    Years ended July 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
                                                                     1999         1998           1997
                                                                     ----         ----           ----
                                                                                        (in thousands)
    <S>                                                              <C>         <C>             <C>

     Cash flows from operating activities:
     Net income                                                      $2,183       $2,172          $3,537
     Adjustments to reconcile net income to net cash from
           operating activities:
           Depreciation and amortization                              1,835        1,340             720
           Allowance for doubtful accounts                              154           75             210
           Non-cash compensation and commission expense                  91           81              12
           Deferred income taxes                                       (141)        (138)            (90)
           Gain on disposition of assets                                  -            -             (37)
           Change in assets and liabilities; net of the effects of
            acquisitions:
            Increase in accounts receivable                          (8,605)      (4,430)           (545)
            Decrease in inventory                                       922        1,882             515
            Increase in prepaid expenses and
             other current assets                                       (50)         (12)            (44)
            Decrease in other assets                                    287            -             342
            (Decrease) increase in accounts payable and
                 accrued expenses                                     2,325       (1,997)            221
            Increase (decrease) in deferred service contract revenue   (194)         213             118
            Increase (decrease) in income taxes payable                 443          225            (295)
            Increase (decrease) in deferred compensation payable        (75)          22             (96)
            (Purchase) sale of investments                            1,501        2,907          (4,408)
                                                                      -----        -----           ------

                Net cash provided by operating activities               676        2,340             160
                                                                        ---        -----             ---
     Cash flows from investing activities:
         Capital expenditures                                        (1,735)      (2,972)         (2,439)

         Payment for acquisitions, net of  cash acquired               (871)      (2,921)         (1,886)
                                                                       -----      ------          -------

            Net cash used in investing activities                    (2,606)      (5,893)         (4,325)
                                                                     -------       -----           ------
     Cash flows from financing activities:
         Net repayments or borrowings from bank                           -       (1,274)         (6,490)
         Payments on note payable shareholder                             -            -            (353)
         Payments on capitalized lease obligations                     (104)        (140)            (98)
         Payments on notes payable - other                                -         (481)            (33)
         Net  proceeds from initial public offering                       -            -          20,414
         Purchase and retirement of common stock                        (33)      (1,785)              -
                                                                        ----      ------          ------

            Net cash provided by (used in)  financing activities       (137)      (3,680)         13,440
                                                                       -----      -------         ------

     Net increase (decrease)  in cash  and cash equivalents          (2,067)      (7,233)          9,275

         Cash and cash equivalents at beginning of year               7,816       15,049           5,774
                                                                      -----       ------           -----

     Cash and cash equivalents at end of year                        $5,749       $7,816         $15,049
                                                                      =====       ======          ======

     Cash paid during the year for:
          Interest                                                       $5          $41            $225
                                                                         ==          ===            ====
          Income taxes                                                 $992       $1,428          $2,868
                                                                        ===       ======           =====

     Other noncash transactions:
         Capitalized lease obligation                                  $107          $ -             $ -
                                                                       ====          ===             ===

</TABLE>


     See accompanying notes to consolidated financial statements.


                                       32

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)


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

      (a)  The Company

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

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

      (b)  Principles of Consolidation

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

      (c)  Cash Equivalents

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

      (d)  Investments

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

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

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

      (e)  Revenue Recognition

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

                                       33

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

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

      (f) Market Development  Funds

         The  Company  receives  various  market   development  funds  including
      cooperative  advertising funds from certain vendors,  principally based on
      volume purchases of products.  The Company records such amounts related to
      volume  purchases as purchase  discounts  which reduce cost of revenue and
      other incentives that require specific  incremental  action on the part of
      the Company,  such as training,  advertising or other pre-approved  market
      development  activities  as an offset to the  related  costs  included  in
      selling,  general and  administrative  expenses.  Total market development
      funds  amounted to $380,  $623 and $521 for the years ended July 31, 1999,
      1998 and 1997, respectively.

      (g) Inventory

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

      (h) Property and Equipment

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


      (i)  Goodwill

         Goodwill related to acquisitions represents the excess of cost over the
      fair  value  of  net  assets   acquired.   Goodwill  is   amortized  on  a
      straight-line basis over twenty years. The Company reviews the significant
      assumptions  that  underlie  the  twenty-year  amortization  period  on  a
      quarterly  basis and will shorten the  amortization  period if  considered
      necessary.  The Company  assesses the  recoverability  of this  intangible
      asset by determining whether the amortization of the goodwill balance over
      its remaining life can be recovered through projected  undiscounted future
      cash flows.  Accumulated  amortization was approximately  $449 and $183 at
      July 31, 1999 and 1998,  respectively.  Amortization expense of $266, $164
      and $19 for the years  ended July 31,  1999,  1998 and 1997 is included in
      selling general and administrative expenses in the consolidated statements
      of income.

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

      (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.

                                       34
<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)


      (k)  Net Income Per Share

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

         Basic net income per share has been  computed by dividing net income by
      the weighted  average  number of common  shares  outstanding.  Diluted net
      income per share has been  computed by dividing net income by the weighted
      average number of common shares outstanding,  plus the assumed exercise of
      dilutive  stock options and warrants,  less the number of treasury  shares
      assumed to be  purchased  from the  proceeds of such  exercises  using the
      average market price of the Company's  common stock during each respective
      period. Options and warrants representing 1,065,000, 380,000 and 1,052,000
      shares for the years  ended July 31,  1999,  1998 and 1997,  respectively,
      were not included in the computation of diluted EPS because to do so would
      have been antidilutive. The following table reconciles the denominators of
      the basic and diluted per share computations. For each year, the numerator
      is the net income as reported.
<TABLE>
<CAPTION>
                                       1999                       1998                      1997
                                       ----                       ----                      ----
                                            Per Share                  Per Share                 Per Share
                                    Shares  Amount            Shares   Amount           Shares   Amount
                                    ------  ------            ------   ------           ------   ------
          <S>                   <C>            <C>          <C>         <C>          <C>         <C>

           Basic EPS             8,096,000     $0.27        8,494,000    $0.26        7,779,000   $0.45
                                                ====                     =====                    =====

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

           Diluted EPS           8,096,000     $0.27        8,499,000    $0.26        7,779,000   $0.45
                                 =========      ====        =========    =====        =========   =====
</TABLE>


      (l)  Accounting for Stock-Based Compensation

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

      (m)  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.

      (n)  Fair Value of Financial Instruments

         The fair values of accounts receivable,  prepaid expenses, and accounts
      payable and accrued  expenses are  estimated to be the carrying  values at
      July 31, 1999 due to the short maturity of such instruments.
                                       35
<PAGE>
               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)


(2)  Property and Equipment
     ----------------------

         Property and equipment at July 31, consist of the following:
                                                       1999             1998
                                                       ----             ----

      Furniture and fixtures                           $2,464           $2,327
      Machinery and equipment                           5,500            4,289
      Transportation equipment                            454              426
      Leasehold improvements                            2,667            2,284
                                                        -----            -----
                                                       11,085            9,326

      Less accumulated depreciation
        and amortization                                4,837            3,351
                                                        -----            -----

                                                       $6,248           $5,975
                                                        =====            =====

     Depreciation and amortization expense amounted to $1,569,  $1,176, and $701
for the years ended July 31, 1999, 1998 and 1997, respectively.

(3)      Acquisitions
         ------------

Electrograph Systems. Inc.

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

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

Coastal Office Products, Inc.

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal  Office  Products,  Inc.  ("Coastal"),  a value  added  reseller  and
provider of  microcomputer  services and peripherals to companies in the greater
Baltimore,  Maryland  area. The  acquisition,  which has been accounted for as a
purchase,  consisted  of cash  payments of  approximately  $3,971  (including  a
contingent  payment  of $871  made on March  15,  1999)  plus  potential  future
contingent  payments.  Contingent payments of up to $1,050 in calendar 1999 will
be determined based upon achieving certain agreed upon increases in revenues and
pretax income for calendar  1999 over  calendar 1997 amounts.  The cash payments
were made from the Company's cash balances.  The final contingent  payments,  if
any,  would be paid in cash (or,  under certain  conditions,  in Company  common
stock)  on  March  15,  2000.  The  selling  shareholders   received  employment
agreements that also provided for the issuance of 20,000 shares of common stock.
The fair value of the common  stock,  amounting  to $80 was recorded as deferred
compensation and is being expensed over the three year vesting period.

         Operating   results  of  Coastal  are  included  in  the   consolidated
statements of income from the date of acquisition.  The acquisition  resulted in
goodwill of $3,976,  which is being amortized on the straight-line basis over 20
years.

                                       36


<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

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

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

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

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

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

     Accounts payable and accrued expenses consist of the following:

                                                             July 31,
                                                        1999           1998
                                                        ----           ----


                  Accounts payable, trade               $17,193      $14,659
                  Accrued salaries and wages              2,182        2,462
                  Customer deposits                         715          494
                  Other accrued expenses                    734          743
                                                            ---          ---
                                                        $20,824      $18,358
                                                        =======      =======

          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, 1999, the Company has repaid all balances  outstanding under these
     agreements  within the  non-interest  bearing payment period.  Accordingly,
     amounts  outstanding under such agreements of $2,944 and $2,372 and at July
     31, 1999 and 1998,  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,  generally 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, 1999,  retained  earnings  available for  dividends  amounts to
     approximately $10,600.

(5)  Long-Term Debt
     --------------

         The Company has entered into capitalized  lease obligations for certain
     computer  equipment.  Future minimum payments required under such lease are
     $85 (including interest of $3) in fiscal 1999.

                                       37

<PAGE>





               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)


(6)  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 $273, $205
     and $161 for the years ended July 31, 1999, 1998 and 1997, 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, 1999 and 1998
     the Company has recorded an asset  (included  with other assets) of $34 and
     $109, respectively, representing the cash surrender value of policies owned
     by the Company and a liability of the same amount  relating to the unvested
     portion of benefits due under this plan. For the years ended July 31, 1999,
     1998 and 1997,  the Company  recorded  an expense of $51,  $105 and $110 in
     connection with this plan.

(7)  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 $1,539,  $1,255 and $1,073 for the years  ended July 31,  1999,
     1998 and 1997.

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

                                2000                    $1,495
                                2001                    $1,221
                                2002                    $1,262
                                2003                      $975
                                2004                      $937

                                       38
<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

     Litigation

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

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

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

(8)   Line of Credit
      --------------

         In July 1998, the Company entered into a revolving credit facility with
     its banks which was revised in June,  1999 to change  participating  banks.
     Under the terms of the facility,  the Company may borrow up to a maximum of
     $15,000.  Borrowings under the facility bear interest at variable  interest
     rates based upon several  options  available  to the Company.  The facility
     requires the Company to maintain certain financial ratios and covenants. As
     of July 31, 1999,  there was no balance  outstanding  under this agreement,
     which expires on March 31, 2002.

                                       39



<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

 (9)  Income Taxes

      The provision for income taxes for the years ended July 31, 1999, 1998 and
1997 consists of the following:

                                   1999                1998             1997
                                   ----                ----             ----
              Current
                  Federal        $1,351              $1,300           $1,938
                  State             380                 398              602
                                    ---                 ---              ---
                                  1,731               1,698            2,540
                                   -----              -----            -----
              Deferred
                  Federal          (106)               (105)             (68)
                  State             (35)                (33)             (22)
                                    ---                 ---             ----
                                   (141)               (138)             (90)
                                   -----               ----              ---
                                 $1,590              $1,560           $2,450
                                  =====               =====           ======

      The  difference  between the Company's  effective  income tax rate and the
      statutory rate is as follows,  for the years ended July 31, 1999, 1998 and
      1997:

                                                   1999      1998      1997
                                                   ----      ----     -----

          Income taxes at statutory rate          $1,283    $1,269    $2,036
          State taxes, net of federal benefit        228       241       383
          Non deductible goodwill amortizations       64        29         -
          Other                                       15        21        31
                                                      --        --        --
                                                  $1,590    $1,560    $2,450
                                                   =====     =====     =====

      The tax effects of  temporary  differences  that give rise to  significant
      portions of the net  deferred  tax asset at July 31, 1999 and 1998 were as
      follows:

                                                    1999        1998
                                                    ----        ----

          Deferred tax assets:
             Allowance for doubtful accounts        $488        $450
             Deferred compensation                   330         315
             Other                                   280         192
                                                     ---         ---

              Deferred tax asset                  $1,098        $957
                                                   =====         ===


              A valuation allowance has not been provided in connection with the
      deferred  tax  assets  since the  Company  believes,  based  upon its long
      history of  profitable  operations,  that it is more  likely than not that
      such deferred tax assets will be realized.

                                       40

<PAGE>




               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

 (10)  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 2000 through 2005. Lease terms generally  include annual increases of
      five percent. Rent expense for these facilities aggregated $801, $782, and
      $771 for the years ended July 31, 1999, 1998 and 1997, respectively.

         The  Company  paid legal fees to a law firm in which a director  of the
      Company  is a  partner.  Such  fees  amounted  to $213,  $217,  and  $655,
      including  disbursements,  in the fiscal years ended July 31, 1999,  1998,
      and 1997 respectively.

          During  fiscal  years ended July 31,  1999,  1998 and 1997 the Company
     received approximately $597, $177 and $130, respectively, in revenue from a
     company controlled by a director of the Company.

 (11)  Shareholders' Equity
       --------------------

      Initial Public Offering

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

      Redeemable Common Stock

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

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

     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

                                       41

<PAGE>



               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

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

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

         Balance July 31, 1998                    849,600               $3.92

            Granted                                19,000               $3.52
            Cancelled                             (53,500)               3.8125
                                                  -------                ------
         Balance July 31, 1999                    815,100                3.93
                                                  =======                ====

          At July 31, 1999,  approximately 236,000 options exercisable at prices
     ranging  from $3.25 to $5.00 per share  were  exercisable  and all  options
     granted  expire  ten years  from the date of grant.  The range of  exercise
     prices for  options  outstanding  at July 31, 1999 was $3.25 - $5.00 with a
     remaining life of approximately eight years.

         The Company has adopted the pro forma disclosure  provision of SFAS No.
     123,  "Accounting for Stock Based Compensation".  Accordingly,  the Company
     does not record compensation cost in the financial statements for its stock
     options  which have an  exercise  price  equal to or greater  than the fair
     value of the  underlying  stock  on the  date of  grant.  The  Company  has
     recognized $142 in deferred  commission  expense  representing the value of
     stock options granted to non-employee sales  representatives.  Such cost is
     expensed over the vesting  period,  amounting to $65, $65 and $12 in fiscal
     1999, 1998 and 1997, respectively.  Had compensation cost for the Company's
     stock option  grants been  determined  based on the fair value at the grant
     date under SFAS No. 123, the  Company's net income and net income per share
     for the years ended July 31, 1999, 1998 and 1997 would  approximate the pro
     forma amounts below:

                                            1999            1998       1997
                                            ----            ----       ----
           Net Income:
             As reported                     $2,183        $2,172     $3,537
             Pro forma                        1,940         1,992      3,464

           Diluted net income per share:
             As reported                      $0.27         $0.26      $0.45
             Pro forma                        $0.24         $0.23      $0.45

                                       42
<PAGE>





               Manchester Equipment Company, Inc. and Subsidiaries
                          Notes to Financial Statements
                          July 31, 1999, 1998 and 1997
                 (in thousands, except share and per share data)

     The pro forma  effects on net income and  diluted  net income per share for
1999, 1998 and 1997 may not be representative of the pro forma effects in future
years.

     The fair value of options  granted was  estimated  using the  Black-Scholes
option pricing model with the following weighted average assumptions:
                                                    1999       1998       1997
                                                    ----       ----       ----
        Expected dividend yield                       0%        0%         0%
        Expected stock volatility                    43%       27%        29%
        Risk free interest rate                       5%        5%         5%
        Expected option term until exercise (years) 5.00       4.70       4.27

The per share weighted average fair value of stock options granted during fiscal
1999, 1998 and 1997 was $1.40, $1.09 and $1.05, respectively.

Repurchase of Common Stock

     During the years  ended July 31,  1999 and 1998,  the  Company  repurchased
11,800 and 448,400 shares of its common stock at an aggregate  purchase price of
$33 and $1,785, respectively. Such shares were subsequently retired.

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

     The Company sells and services  customers that are located primarily in the
eastern United States.  One customer  accounted for approximately 7%, 7% and 15%
of  total  revenues  for  the  years  ended  July  31,  1999,   1998  and  1997,
respectively.

The Company's top four vendors accounted for  approximately  21%, 10%, 6% and 6%
respectively  of total product  purchases for the year ended July 31, 1999.  The
Company's top three  vendors  accounted  for  approximately  24%, 13% and 11% of
total product  purchases for the year ended July 31, 1998. The Company's top two
vendors  accounted for  approximately 17% and 15% of total product purchases for
the year ended July 31, 1997.

One customer accounted for 9% of the Company's  accounts  receivable at July 31,
1999.

                                       43

<PAGE>




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

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

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

         (3)      Exhibits:

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

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

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

3.2(1)    Bylaws of Registrant.

 4.2(1)      Form of Representative's Warrants.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.5.j(6) Lease dated  October 1, 1997  between  Registrant  and  Spanish  River
          Executive Plaza, Ltd. A/k/a Century Financial Plaza.

10.5.k(4) Lease dated January 2, 1998 between Coastal Office Products,  Inc. and
          BC & HC Properties, LLC
                                       44
<PAGE>
10.6(2)  Promissory  Note dated October 15, 1996 between Registrant and The Bank
          of New York

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

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

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

10.8.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  dated  April 15,  1997  among  Electrograph
         Systems, Inc., Bitwise Designs, Inc.,  Electrograph Acquisition,  Inc.
         and Registrant.

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

10.13(7) $15,000,000  Revolving  Credit  Facility  Agreement dated July 21, 1998
         between Registrant and Bank of New York, as Agent.

10.14    $15,000,000  Revolving  Credit Facility  Agreement dated June 25, 1999
          between Registrant and EAB, as Agent.

27         Financial Data Schedule.

(b)        Reports on Form 8-K
           The  Registrant  did not file any reports on Form 8-K during the last
           quarter of the period covered by this report, and none were required.
-----------------------
*  Denotes management  contract or compensatory plan or arrangement  required to
   be filed as an Exhibit to this Annual Report on Form 10-K.

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

                                       45
<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 29, 1999              By:  ss:  Barry Steinberg
                                                 --------------------
                                                   Barry R. Steinberg
                                              President, Chief Executive Officer

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

 ss:    Barry R. Steinberg                    Date:   October 29, 1999
      --------------------
        Barry R. Steinberg
 President, Chief Executive Officer,
 Chairman of the Board and Director
(Principal Executive Officer)


ss:   Joel G. Stemple                         Date:  October 29, 1999
--------------------------
Joel G. Stemple
Executive Vice President and Director


ss:   Joseph Looney                           Date:   October 29, 1999
  -----------------
Joseph Looney
Chief Financial Officer (Principal Accounting Officer)


ss:   Joel Rothlein                           Date:  October 29, 1999
      -------------
Joel Rothlein
Director


ss:   Julian Sandler                          Date:  October 29, 1999
      --------------
Julian Sandler
Director


ss:   Michael Russell                         Date:  October 29, 1999
      ---------------
Michael Russell
Director

Ss:  Bert Rudofsky                            Date:   October 29, 1999
   -------------
Bert Rudofsky
Director


                                       46
<PAGE>




                         Manchester Equipment Co., Inc.

                 Schedule II - Valuation and Qualifying Accounts
                 -----------------------------------------------
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                        Column C-Additions
                         Column B-           (1)-         (2)-        Column D-       Column E-
Column A -               Balance at     Charged to    Charged to      Deductions-     Balance at
Description              beginning of   costs and     other             (a)         end of period
                         period         expenses      accounts (b)    ----------    -------------
                         ------         --------      ------------
<S>                       <C>             <C>            <C>           <C>             <C>
Allowance for doubtful
accounts

Year ended:


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

    July 31, 1998          $1,051           $351           $25            $277           $1,150

    July 31, 1999          $1,150           $154             -            $100           $1,204

</TABLE>

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

                                       47
<PAGE>