47


================================================================================
                       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, 2000

                                       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: (631) 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 20, 2000 was $9,960,000  (2,700,651 shares at a closing
sale price of $3.688).

As of October 20, 2000, 8,054,315 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, 2000
                                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                 12
           Related  Stockholder  Matters
Item 6.   Selected  Financial  Data                                         13
Item 7.   Management's  Discussion  and  Analysis of  Financial             14
           Condition and Results of Operations
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk        19
Item 8.   Financial  Statements  and  Supplementary  Data                   19
Item 9.   Change In and Disagreements with Accountants on Accounting        19
           and Financial Disclosures


Part III

Item 10.  Directors and Executive Officers of the Registrant                20
Item 11.  Executive Compensation                                            22
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  45

















<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., Coastal
Office Products,  Inc., Texport  Technology Group, Inc. and Learning  Technology
Group,  LLC,  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

Our Company

         Manchester Equipment Co., Inc.  ("Manchester" "we," "us," "our," or the
"Company")  is an  integrator  and reseller of computer  hardware,  software and
networking products,  primarily for commercial customers. We offer our 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 27 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.

         Our 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.

         We offer our  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 our  revenues  are derived  from sales to  customers
located in the New York Metropolitan area, with approximately 60% of our revenue
generated  from our Long  Island  and New York City  offices.  As a result,  our
business,  financial  condition and results of  operations  are  susceptible  to
regional  economic  downturns and other  regional  factors.  In addition,  as we
expand in our existing  markets,  opportunities  for growth within these regions
may become more limited.  There can be no assurance  that we will grow enough in
other markets to lessen our regional geographic concentration.

         On February 16, 2000, we launched our enhanced  website and  electronic
commerce system.  This new site,  located at  www.e-manchester.com,  allows both
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, 7 days a week. In addition,  on
June 25, 1999, we announced the launch of a new consumer  products on-line super
store,  Marketplace4U.com.  This site  offers  products  in  categories  such as
consumer electronics,  automotive accessories, and outdoor and camping equipment
from its main and outlet  stores.  The main store  offers top brand  products at
competitive prices; the outlet store offers top name brand factory  refurbished,
warranteed products at even greater savings.

         Manchester  was  incorporated  in New York in 1973 and has seven 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
                                       3
<PAGE>
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;   Marketplace4U.com,   Inc.,  a  New  York
corporation,  which is an online  superstore  that  offers a wide range of brand
name  products  to  consumers,  Texport  Technology  Group,  Inc.,  a  New  York
corporation  which is an  integrator  and  reseller of computer  products in the
Rochester, New York area; and Learning Technology Group, LLC, a New York limited
liability  corporation  which is an integrator and reseller of computer products
mainly to educational institutions within New York State.

Industry

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

         Over the last several  years,  the increase in  performance of personal
computers,  the  development  of a variety of  effective  business  productivity
software  programs and the ability to  interconnect  personal  computers in high
speed  networks  have led to an  industry  shift  away from  mainframe  computer
systems to client/server systems based on personal computer technology.  In such
systems, the client computer,  in addition to its stand-alone  capabilities,  is
able to obtain resources from a central server or servers. Accordingly, personal
computers may share everything from data files to printers.  Recently, networked
applications  such as  electronic  mail and work  group  productivity  software,
coupled with widespread acceptance of Internet technologies,  have led companies
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. Our 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. We
believe we provide state-of-the-art, cost-effective information systems designed
to meet our customers' particular needs.

         As a result of our long-standing  relationships  with certain suppliers
and our large volume purchases, we are often able to obtain significant purchase
discounts which can result in cost-savings for our customers.  Our relationships
with our  suppliers,  our  inventory  management  system and industry  knowledge
generally  enable us to procure desired products on a timely basis and therefore
to offer our customers timely product delivery.

Our Strategy

         The key elements of our 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. We have increased our focus on providing
                                       4
<PAGE>
these services through a number of key strategies.  We have 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. We
have increased our marketing focus on those companies outside the Fortune 500 in
order to increase its value-added services revenue. Our 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.  We  believe  that we 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. We have implemented an electronic ordering
system.  This ordering system enables  participating  customers to access us via
the Internet,  review various  products,  systems and services offered by us 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.  We are  addressing a variety of
strategies  to  increase   sales  force   productivity.   We  have   implemented
enhancements  to  our  system  allowing  our  salesforce   immediate  access  to
information  regarding price and availability of products.  In addition,  we are
planning  enhancements that will allow sales representatives to obtain immediate
customized  information  regarding  products  and  services  that meet  specific
requirements  of  customers.  We believe  that this  system  will  increase  the
productivity  of our sales  representatives  by enabling them to offer rapid and
comprehensive solutions to their customers' needs.

         We provide training of our sales representatives in matters relating to
value-added services, such as consulting and integration services. To facilitate
such training,  we constructed  dedicated training facilities in one of our Long
Island offices and in our New York City office.

         Expanding New York Metropolitan Area Presence.  We believe that we have
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.  We believe
that these steps will enable us to capture a greater  percentage of the New York
Metropolitan  area market. In fiscal 1998, we relocated our New York City office
to space that is approximately double the size of the previous office location.

         Expanding into Additional Business Centers. We have regional offices in
Newton, Massachusetts,  Baltimore, Maryland, and Boca Raton, Florida, from which
we derived  approximately 14% of our revenues for the fiscal year ended July 31,
2000. In addition,  during fiscal 2000,  we expanded  into  Rochester,  New York
through the acquisition on March 22, 2000 of Texport  Technology Group, Inc. and
Learning  Technology  Group,  LLC, and into Washington,  D.C. through opening an
office in Lanham, Maryland (see "Acquisitions").

         Expanding Internet Presence. We have continuously upgraded and expanded
our    electronic    communication    system.    Our    website,    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.
We have made,  and  expect to  continue  to make,  significant  investments  and
improvements in our e-commerce capabilities.

         On June 25, 1999,  we 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.  During
the  fiscal  years  ended  July  31,  2000 and 1999  revenue  from  MP4U was not
material.

Our Services and Products

         We  offer   customized   single-source   solutions  to  our  customers'
information systems requirements,  including consulting, integration and support
services, together with a broad range of computer and networking products from a
                                       5
<PAGE>
variety of leading  vendors.  We provide our 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.   Our  services  include  consulting,   integration  and  support
services.

         Consulting.  Our staff of senior systems engineers provides  consulting
services  consisting of systems design,  performance and security analysis,  and
migration planning services.

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

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

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

         Migration planning involves the performance of a detailed assessment of
existing  mission  critical  systems,  followed by an analysis of the end-user's
future requirements.  Working closely with the customer, our 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.

         We maintain a  sophisticated  systems build and test area,  adjacent to
our  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.  Our  engineers
prepare reports setting forth coordinated  timetables with respect to installing
and integrating the customer's information systems.

     Support.  We offer support  services for  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,  our engineers provide network management services on site
at customers' facilities.

         "Help-desk"  services  consist of providing  customers  with  telephone
support.  In addition,  our service call management system,  which we are in the
process of  enhancing,  will  enable our  "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
                                       6
<PAGE>
of information with both the information  systems at the Company's  headquarters
and with technical databases available on the Internet. We maintain a laboratory
at our Long Island  facilities where we prototype  customer problems for quicker
solutions without jeopardizing customers' information systems.

     Products.  We offer 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

         We have long-standing  relationships with many manufacturers,  which we
believe  assist  us in  procuring  desired  products  on a timely  basis  and on
desirable  financial  terms.  We sell  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,  2000,  1999 and 1998,  sales of
products  manufactured  by  Compaq,  Hewlett-Packard  and  Toshiba  collectively
comprised  approximately  33%, 43% and 49%,  respectively,  of our revenues.  In
fiscal years ended July 31, 2000, 1999 and 1998, sales of products  manufactured
by Toshiba  accounted  for  approximately  19%,  9%, and 18%,  respectively,  of
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 13%,  25%, and 21%,  respectively,  of revenue.  The total
dollar volume of products purchased directly from  manufacturers,  as opposed to
distributors or resellers, was approximately $122 million, $118 million, and $92
million for the fiscal years ended July 31, 2000, 1999, and 1998,  respectively,
and as a percentage of total cost of products sold was  approximately  48%, 61%,
and 55%, respectively.

         We have entered  into  agreements  with our  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,  and Toshiba have regularly  renewed
their  respective  agreements  us,  although  there can be no assurance that the
regular renewal of our dealer  agreements  will continue.  The  termination,  or
non-renewal, of any or all of these dealer agreements would materially adversely
affect  our  business.  We,  however,  are  not  aware  of any  reason  for  the
termination,  or non-renewal, of any of those dealer agreements and believe that
our relationships with Compaq, Hewlett-Packard, and Toshiba are satisfactory.

         We are  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. We believe 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 2001, 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.

         We seek to obtain volume  discounts for large customer  orders directly
from manufacturers and through aggregators and distributors.

         Most of our major product  manufacturers provide price protection for a
limited  time  period as well as stock  balancing  rights,  by way of credits or
                                       7
<PAGE>
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 our
customers. During fiscal 2000 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

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

     We believe that we benefit from our long-standing  relationships  with many
of our customers,  providing  opportunities for continued sales and services. We
believe that our broad range of  capabilities  with respect to both products and
services is attractive to companies of all sizes.  Although we target  companies
outside  the  Fortune  500 as one  part  of our  strategy,  we  have  sold,  and
anticipate  that we will continue to sell,  to some of the largest  companies in
the United States.  For the fiscal years ended July 31, 2000,  1999 and 1998, no
one  customer  accounted  for more  than 10% of our total  revenue.  Some of our
significant  commercial  customers currently include Bysis Fund Services,  Inc.,
Cabletron Systems Inc., Sterling Doubleday  Enterprises (New York Mets), Reuters
America Inc., Vytra Choice Care, Inc., United Nations  International  Children's
Emergency Fund and the United Parcel Services, Inc.

         Our 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.  We are
generally able to return  defective  merchandise  returned from customers to the
vendor.

Sales and Marketing

         Our sales are  generated  primarily by our 77 person  sales force.  Our
sales  representatives   generally  are  responsible  for  meeting  all  of  our
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 our facilities,
at which our new and existing product and service offerings are discussed.

         Our 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.

         We  believe  that  our name is  widely  recognized  for  high  quality,
competitively  priced products and services.  In 1998 we adopted a new logo that
appears on all of our 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.
We promote name  recognition  and the sale of our 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.  We advertise 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.  We also  promote  interest  in our
products and services through our website on the Internet, and have expanded our
website  information  to  provide an  electronic  catalog  of our  products  and
services.  Several  manufacturers  offer market development  funds,  cooperative
advertising and other  promotional  programs,  on which the we rely to partially
fund many of our advertising and promotional campaigns.

         Sales  force  training  is an  integral  part  of the our  strategy  to
increase our 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, we have expanded our training capabilities at
one of our 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 our management  information systems.
We utilize  our  technical  personnel  to  conduct  such  seminars  and may hire
additional dedicated trainers as needed.

                                       8
<PAGE>
Management Information Systems

         We  currently  use  an IBM  AS/400  integrated  management  information
system, which is an on-line system enabling  instantaneous access. We maintain a
proprietary inventory management system on our computer system pursuant to which
product purchases and sales are continually  tracked and analyzed.  Our computer
system is also used for accounting, billing and invoicing.

         Our information system assists management in maintaining  controls over
the our inventory and receivables.  Manchester's  average inventory turnover was
34, 22, and 17 times for the fiscal  years ended July 31,  2000,  1999 and 1998,
respectively, and we experienced bad debt expense of less than .3% of revenue in
each of these years.

         During  the  fiscal  year  ended  July 31,  2000,  we  invested  in our
management information systems, including upgrading and expanding the IBM AS/400
system,  enhancing and modifying our  client/server-based  management  system to
track  services  rendered  for  customers,  and  upgrading  servers  and network
infrastructures for our headquarters.  We utilize experienced in-house technical
personnel, assisted by our senior engineers, to upgrade and integrate additional
functions into our management information systems.

Competition

         The  computer  industry is  characterized  by intense  competition.  We
directly  compete  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 and/or the Internet.  The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions,  and  manufacturers of personal  computers may
increase  competition  by  offering a range of  services  in  addition  to their
current  product  and service  offerings.  In the  future,  we may face  further
competition  from new  market  entrants,  possible  alliances  between  existing
competitors.  In addition,  certain  suppliers and  manufacturers  may choose to
market products directly through a direct sales force and/or the Internet rather
than,  or in  addition  to channel  distribution,  and may also choose to market
services, such as repair and configuration services, directly to end users. Some
of our competitors  have, or may have,  greater  financial,  marketing and other
resources, and may offer a broader range of products and services, than us. 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.  We may not be able to compete
successfully in the future with these or other current or potential competitors.

     Our 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.  We believe that gross margins will continue
to be reactive to industry-wide changes. Future profitability will depend on our
ability  to  increase  focus on  providing  technical  service  and  support  to
customers, competition,  manufacturer pricing strategies, as well as our 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  we will  be  able  to  attract  and  retain  such  skilled  personnel  and
representatives.  The loss of a  significant  number of our  existing  technical
personnel  or  sales  representatives  or  difficulty  in  hiring  or  retaining
additional  technical personnel or sales  representatives or reclassification of
our sales  representatives  as employees could have a material adverse effect on
our business, results of operations and financial condition.

Subsidiaries

         Electrograph Systems, Inc.

         Electrograph Systems, Inc.,  ("Electrograph") is a national value-added
wholesale distributor of display technology solutions, and the largest wholesale
distributor of plasma display monitors in the United States. Electrograph offers
a full range of display technology  solutions for dealers and system integrators
through the U.S.  and Europe.  Products  include LCD flat panel,  CRT and plasma
display  monitors,  portable  and fixed  installation  projectors,  touch screen
monitors,   and  customer  monitor   integration   solutions.   In  addition  to
Electrograph's   worldwide   distribution  of  display   technology   solutions,
Electrograph  also  manufactures  a  complete  line of LCD flat panel and plasma
display  monitors.  Electrograph is  headquartered  in Hauppauge,  New York with
branch offices throughout the U.S. and in Europe.

                                       9
<PAGE>
         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.

         While  Electrograph  distributes  products  of more than 15  suppliers,
approximately  30%, 27%, 14% and 8% of  Electrograph's  purchases in fiscal 2000
were derived from products manufactured by Pioneer, NEC, Fujitsu and Mitsubishi,
respectively, 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 Timonium, Maryland, Northville, New
York and Long Beach, California.

Acquisition

         Texport Technology Group, Inc. and Learning Technology Group, LLC

         On  March  22,  2000,  we  acquired  all of the  outstanding  ownership
interests of Texport Technology Group, Inc.  ("Texport") and Learning Technology
Group,  LLC ("LTG"),  affiliated  entities engaged in reselling and providing of
microcomputer  services and  peripherals to companies in the greater  Rochester,
New York area.  The  acquisition,  which has been  accounted  for as a purchase,
consisted of a cash payment of $0.4 million  plus  potential  future  contingent
payments. Contingent payments of up to $750,000 will be payable on each of March
22, 2001 and 2002 based upon achieving certain agreed-upon  increases in revenue
and pretax earnings for each of the next two,  one-year periods from the date of
closing.  The cash payment was made from our cash  balances.  The selling owners
received  employment  agreements  that also  provided for the issuance of 10,000
shares of  common  stock.  The fair  value of the  common  stock,  amounting  to
$61,250,  was recorded as deferred  compensation  and is being expensed over the
three-year  vesting  period.  In  connection  with the  acquisition,  we assumed
approximately $648,000 of bank debt, which was subsequently repaid.

         Operating  results of Texport and LTG are included in the  consolidated
statement of income from the date of  acquisition.  The estimated  fair value of
assets and liabilities acquired was $1.6 million and $2.2 million, respectively.
The excess of the aggregate  purchase price over the estimated fair value of the
net assets acquired was  approximately  $995,000,  which is being amortized on a
straight-line basis over 20 years.

Employees

         At August 31, 2000,  we had 363  full-time  employees  consisting of 55
sales representatives,  48 management personnel, 105 technical personnel and 155
distribution and clerical personnel.  In addition, at August 31, 2000, we had 22
independent  sales  representatives.  We  are  not a  party  to  any  collective
bargaining agreements and believe our relations with our employees are good.

         The Company is highly dependent upon the services of the members of its
senior management team, particularly Barry R. Steinberg,  the Company's founder,
Chairman  of the  Board,  President  and Chief  Executive  Officer,  and Joel G.
Stemple,  Ph.D.,  the Company's  Executive  Vice  President.  The loss of either
member of the  Company's  senior  management  team may have a  material  adverse
effect on its business.
                                       10

<PAGE>


Intellectual Property

         We own, or have pending,  several  federally  registered  service marks
with respect to our name and logo. Most of our various dealer  agreements permit
us to refer to  ourselves  as an  "authorized  dealer" of the  products of those
manufacturers  and to  use  their  trademarks  and  trade  names  for  marketing
purposes.  We  consider  the use of  these  trademarks  and  trade  names in our
marketing to be important to our business.

ITEM 2. Properties

Properties

         We currently have 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)(2)
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, FL        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

Baltimore, MD         3832 Falls Rd.
Sales office          Baltimore, MD                    8,000            2,000           January 2002

Washington, D.C.      5001 Forbes Blvd.                3,000                -           February 2003
Sales office          Lanham, MD

Rochester, NY         106 Despatch Dr.                 3,500            6,500           February 2004
Sales office          Rochester, NY

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

Electrograph,
Timonium, MD          57 W. Timonium Rd.
Sales Office          Timonium, MD                       650                -           December 2000

</TABLE>




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

(2)  The Company continues to occupy this space while negotiating the terms of a
     lease renewal.

                                       11
<PAGE>


ITEM 3. Legal Proceedings

         On January 12, 1998,  we announced  that we had reached an agreement in
principle  settling the Shareholder  Securities Class Action  ("Lawsuit")  filed
against the Company and certain of our 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 our initial public offering, and during the
period  fromNovember  26, 1996 to February 13, 1997. The entire  $1,350,000 cash
settlement was paid by our 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. We agreed to the settlement solely to avoid the expense,
burdens and  uncertainties  of further  litigation  and continue to deny that we
have any liability on account of the matters  asserted in the litigation or that
the Plaintiffs' claims have merit.

         We are  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, 2000.

                                     PART II

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

         Our Common Stock  commenced  trading on November 26, 1996 and is traded
on the NASDAQ National Market(R) 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 1999                     High             Low
                ----------------                     ----             ---
                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

                Fiscal Year 2000
                ----------------
                First Quarter                         4-1/2           2-1/4
                Second Quarter                        8               3
                Third Quarter                         9-1/8           3-7/8
                Fourth Quarter                        6-15/16         3-1/8





     On October 20, 2000, the closing sale price for the Company's  Common Stock
was $3.688  per share.  As of October  20,  2000 there were 45  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 we intend to  continue  our  policy  of  retaining  earnings  for the
continued development and expansion of our 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 our audited consolidated  financial statements.  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,
                                        2000            1999         1998           1997         1996
                                        ----            ----         ----           ----         ----
<S>                                   <C>             <C>          <C>            <C>         <C>

Income Statement Data:
  Revenue                              $300,073       $228,641     $202,530       $187,801     $ 189,659
  Cost of revenue                       260,236        195,423      171,930        161,186       163,128
                                        -------        -------      -------        -------     ---------
  Gross profit                           39,837         33,218       30,600         26,615        26,531
  Selling, general and
    administrative expenses              33,539         29,849       27,414         21,023        22,598
                                         ------         ------       ------         ------     ---------
Income from operations                    6,298          3,369        3,186          5,592         3,933
Interest and other income
  (expenses), net                           602            404          546            395          (365)
Provision for income taxes                2,800          1,590        1,560          2,450         1,430(1)
                                          -----          -----        -----          -----         -----
Net income                               $4,100         $2,183       $2,172         $3,537     $   2,138(1)
                                          =====          =====        =====          =====     =========
Net income per share:
   Basic                                 $0.51           $0.27        $0.26          $0.45    $    0 .34(1)
                                          ====            ====         ====           ====    ==========
   Diluted                               $0.50           $0.27        $0.26          $0.45    $    0 .34(1)
                                          ====            ====         ====           ====    ==========
Weighted average shares of common stock outstanding:
    Basic                                 8,108          8,096        8,494          7,779         6,247
                                          =====          =====        =====          =====         =====
    Diluted                               8,228          8,096        8,499          7,779         6,247
                                          =====          =====        =====          =====         =====

                                                                   July 31,
                                                                   --------
                                           2000          1999     1998               1997         1996
                                           ----          ----     ----               ----         ----
Balance Sheet Data:
  Working capital                       $30,453        $27,461      $26,112        $30,578       $ 9,841
  Total assets                           74,573         61,778       56,894         58,208        37,761
  Short-term debt, including
    current maturities of
    capital lease obligation                 18             85           82          1,637         6,952
  Capital lease obligation, excluding
     current maturities                       -              -            -             77           175
  Redeemable common stock(2)                  -              -            -              -         4,739
  Shareholders' equity                   44,263         39,586       37,345         36,877         8,175
</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 us 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  Manchester  should be read in  conjunction  with our
consolidated  financial statements 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

         We are an integrator  and reseller of computer  hardware,  software and
networking products,  primarily for commercial customers. We offer our customers
single-source  solutions  customized  to  their  information  systems  needs  by
integrating  analysis,   design  and  implementation   services  with  hardware,
software,  networking  products and peripherals from leading  vendors.  To date,
most of our revenues have been derived from product  sales.  We generally do not
develop or sell software products.  However,  certain computer hardware products
sold by us are loaded with prepackaged software products.

         The  computer  industry  is  characterized  by a number of  potentially
adverse business conditions,  including pricing pressures, evolving distribution
channels,  market consolidation and a potential decline in the rate of growth in
sales of personal computers. Heightened price competition among various hardware
manufacturers  may result in reduced per unit revenue and declining gross profit
margins.  As a result of the intense price competition  within our industry,  we
have experienced  increasing  pressure on our gross profit and operating margins
with respect to our sale of products.  Our inability to compete  successfully on
the  pricing of  products  sold,  or a  continuing  decline in gross  margins on
products  sold due to adverse  industry  conditions or  competition,  may have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

         An  integral  part  of our  strategy  is to  increase  our  value-added
services revenue. These services generally provide higher operating margins than
those  associated  with the sale of products.  This strategy  requires us, among
other things,  to attract and retain  highly  skilled  technical  employees in a
competitive   labor   market,   provide   additional   training   to  our  sales
representatives  and enhance our existing service  management  system.  We can't
predict  whether we will be  successful  in  increasing  our focus on  providing
value-added  services,  and the  failure  to do so may have a  material  adverse
effect on our business, results of operations and financial condition.

         Our  strategy  also  includes  expanding  our  presence in the New York
metropolitan  area by increasing our sales and service  capabilities  in our New
York City office and enlarging our sales,  service and training  capabilities at
our Long Island  headquarters as well as expanding  geographically  into growing
business  centers in the eastern half of the United States.  We can't assure you
that the expansion of our New York  metropolitan  area  operations will increase
profits generated by such operations, that the opening of new offices will prove
profitable, or that these expansion plans will not substantially increase future
capital expenditures or other expenditures. The failure of this component of our
strategy may materially adversely affect our business, results of operations and
financial condition.

         To date,  our  success has been based  primarily  upon sales in the New
York  Metropolitan  area.  Our strategy,  encompassing  the expansion of service
offerings,  the  expansion  of  existing  offices and the  establishment  of new
regional  offices,  has  challenged  and will  continue to challenge  our senior
management and infrastructure.  We can't predict our ability to respond to these
challenges.  If we fail to effectively manage our planned growth, there may be a
material  adverse  effect on our business,  results of operations  and financial
condition.

         In addition, the success of our strategy depends in large part upon our
ability to attract  and retain  highly  skilled  technical  personnel  and sales
representatives,   including  independent  sales  representatives,   in  a  very
competitive  labor  market.  Our ability to grow our service  offerings has been
somewhat limited by a shortage of qualified  personnel,  and we can't assure you
that  we will  be  able  to  attract  and  retain  such  skilled  personnel  and
representatives.  The loss of a  significant  number of our  existing  technical
personnel or sales representatives, difficulty in hiring or retaining additional
technical personnel or sales  representatives,  or reclassification of our sales
representatives as employees may have a material adverse effect on our business,
results of operations and financial condition.

                                       14
<PAGE>
         The  computer  industry is  characterized  by intense  competition.  We
directly  compete  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 and/or the Internet.  The
computer industry has recently experienced a significant amount of consolidation
through mergers and acquisitions,  and  manufacturers of personal  computers may
increase  competition  by  offering a range of  services  in  addition  to their
current  product  and service  offerings.  In the  future,  we 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 and/or the
Internet rather than or in addition to channel distribution, and may also choose
to market services, such as repair and configuration  services,  directly to end
users. Some of our competitors have or may have,  greater  financial,  marketing
and other  resources,  and may offer a broader  range of products and  services,
than  us.  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. We may
not be able to compete successfully in the future with these or other current or
potential competitors.

         Our  business  is   dependent   upon  our   relationships   with  major
manufacturers  and  distributors in the computer  industry.  Many aspects of our
business are affected by our relationships with major  manufacturers,  including
product  availability,  pricing and related terms, and reseller  authorizations.
The  increasing  demand for  personal  computers  and  ancillary  equipment  has
resulted  in  significant   products   shortages  from  time  to  time,  because
manufacturers  have been  unable to  produce  sufficient  quantities  of certain
products to meet demand.  We can't predict that  manufacturers  will maintain an
adequate  supply of these products to satisfy all the orders of our customers or
that, during periods of increased demand, manufacturers will provide products to
us, even if available, or at discounts previously offered to us. In addition, we
can't  assure  you  that  the  pricing  and  related   terms  offered  by  major
manufacturers  will not adversely change in the future. Our failure to obtain an
adequate supply of products, the loss of a major manufacturer, the deterioration
of our relationship with a major  manufacturer or our inability in the future to
develop new relationships  with other  manufacturers may have a material adverse
effect on our business, financial condition and results of operations.

         Certain  manufacturers  offer  market  development  funds,  cooperative
advertising and other promotional programs to systems integrators,  distributors
and computer  resellers.  We rely on these funds for many of our advertising and
promotional  campaigns.  In recent years,  manufacturers  have generally reduced
their level of support with respect to these programs,  which has required us to
increasing spending of our own funds to obtain the same level of advertising and
promotion.  If manufacturers continue to reduce their level of support for these
programs, or discontinue them altogether,  we would have to further increase our
advertising and promotion spending,  which may have a material adverse effect on
our business, financial condition and results of operations.

         Our  profitability  has been  affected by our ability to obtain  volume
discounts from certain  manufacturers,  which has been dependent,  in part, upon
our  ability  to sell  large  quantities  of  products  to  computer  resellers,
including value added resellers. Our sales to resellers have been made at profit
margins   generally  less  favorable  than  our  sales  directly  to  commercial
customers.  Our  inability to sell  products to computer  resellers  and thereby
obtain the desired volume discounts from manufacturers or to expand our sales to
commercial  customers  sufficiently  to  offset  our  need to rely on  sales  to
computer resellers may have a material adverse effect on our business, financial
conditions and results of operations.

         The markets for our products and services are  characterized by rapidly
changing  technology  and  frequent  introduction  of new  hardware and software
products  and  services.  This may render many  existing  products  and services
noncompetitive,  less profitable or obsolete.  Our continued success will depend
on our ability to keep pace with the technological  developments of new products
and services and to address increasingly  sophisticated  customer  requirements.
Our  success  will also  depend  upon our  abilities  to address  the  technical
requirements  of  our  customers   arising  from  new  generations  of  computer
technologies,  to obtain these new products from present or future suppliers and
vendors at reasonable  costs,  to educate and train our employees as well as our
customers  with  respect to these new  products  or  services  and to  integrate
effectively  and efficiently  these new products into both our internal  systems
and  systems  developed  for  our  customers.   We  may  not  be  successful  in
identifying,  developing  and  marketing  product  and service  developments  or
enhancements in response to these technological  changes. Our failure to respond
effectively to these technological changes may have a material adverse effect on
our business, financial condition and results of operations.

         Rapid product  improvement and  technological  change  characterize the
computer  industry.  This results in  relatively  short  product life cycles and
rapid product obsolescence,  which can place inventory at considerable valuation
risk. Certain of our suppliers provide price protection to us, which is intended
to reduce the risk of inventory  devaluation due to price  reductions on current
                                       15
<PAGE>
products.  Certain of our suppliers also provide stock  balancing to us pursuant
to which we are able to  return  unsold  inventory  to a  supplier  as a partial
credit against  payment for new products.  There are often  restrictions  on the
dollar amount of inventory that we can return at any one time.  Price protection
and stock  balancing  may not be  available  to us in the future,  and,  even if
available,  these measures may not provide complete  protection against the risk
of excess or obsolete  inventories.  During fiscal 2000,  certain  manufacturers
reduced the period for which they provide price  protection and stock  balancing
rights.  Although we maintain a sophisticated  proprietary  inventory management
system,  we can't assure you that we will  continue to  successfully  manage our
existing and future inventory. Our failure to successfully manage our current or
future inventory may have a material  adverse effect on our business,  financial
conditions and results of operations.

         Our strategy  envisions  that part of our future  growth will come from
making acquisitions consistent with our strategy. There can be no assurance that
we  will  be  able  to  identify  suitable  acquisition   candidates  and,  once
identified,  to negotiate  successfully their acquisition at a price or on terms
and conditions  favorable to us, or to integrate the operations of such acquired
businesses  with  our  operations.  Certain  of  these  acquisitions  may  be of
significant  size  and may  include  assets  that  are  outside  our  geographic
territories or are ancillary to our core business strategy.

         Our 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
our  products  and  services,  the  introduction  of new  hardware  and software
technologies with improved features,  the introduction of new services by us and
our  competitors,  changes in the level of our operating  expenses,  competitive
conditions and economic conditions.  In particular, we have increased certain of
our fixed operating expenses,  including a significant increase in personnel, as
part of our strategy to increase our focus on providing systems  integration and
other  higher  margin and value added  services.  As a result,  we believe  that
period-to-period  comparisons of our 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, our 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 has experienced  rapid declines
in average selling prices of personal computers. In some instances, we have been
able to offset these price declines with  increases in units shipped.  There can
be no assurance that average  selling prices will not decline or that we will be
able to offset  declines  in average  selling  prices  with  increases  in units
shipped.

         Most of the  personal  computers  we  sell  utilize  operating  systems
developed by Microsoft Corporation.  The United States Department of Justice has
brought a successful  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 our
business, results of operations and financial condition.

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

Impact of Year 2000

         In prior years,  we  discussed  the nature and progress of our plans to
become Year 2000 ready.  In late 1999, we completed our  remediation and testing
of  systems.  As a result  of those  planning  and  implementation  efforts,  we
experienced  no  significant   disruptions  in  mission   critical   information
technology and  non-information  technology systems and we believe those systems
successfully responded to the Year 2000 date change. Expenses in connection with
remediating our systems were not  significant.  We are not aware of any material
problems  resulting from Year 2000 issues,  either with our internal  systems or
the  products  and services of third  parties.  We will  continue to monitor our
mission  critical  computer  applications and those of our suppliers and vendors
throughout  the year 2000 to ensure that any latent Year 2000  matters  that may
arise are addressed promptly.

E-Commerce

         On February 16, 2000, we launched our enhanced  website and  electronic
commerce  system.  The new site,  located at  www.e-manchester.com  allows  both
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. We have made,
and expect to continue to make, significant  investments and improvements in our
e-commerce capabilities. There can be no assurance that we will be successful in
enhancing and increasing our business through our expanded Internet presence.
                                       16
<PAGE>
         On June 25, 1999,  we announced  the launch of a new consumer  products
on-line  super  store,  Marketplace4U.com  ("MP4U").  MP4U  offers  products  in
categories such as consumer electronics,  automotive accessories and outdoor and
camping  equipment  from its main and outlet  stores.  The main store offers top
brand  products at  competitive  prices;  the outlet store offers top name brand
factory  refurbished,  warranteed  products  at even  greater  savings.  To date
revenue  from  MP4U is  immaterial.  There  can be no  assurance  that MP4U will
generate  significant  revenue or that any of the on-line  stores  will  operate
profitably.

Recent Acquisition

         On  March  22,  2000,  we  acquired  all of the  outstanding  ownership
interests of Texport Technology Group, Inc.  ("Texport") and Learning Technology
Group,  LLC ("LTG"),  affiliated  entities engaged in reselling and providing of
microcomputer  services and  peripherals to companies in the greater  Rochester,
New York area.  The  acquisition,  which has been  accounted  for as a purchase,
consisted of a cash payment of $0.4 million  plus  potential  future  contingent
payments. Contingent payments of up to $750,000 will be payable on each of March
22, 2001 and 2002 based upon achieving certain agreed-upon  increases in revenue
and pretax earnings for each of the next two,  one-year periods from the date of
closing.  The cash payment was made from our cash  balances.  The selling owners
received  employment  agreements  that also  provided for the issuance of 10,000
shares of  common  stock.  The fair  value of the  common  stock,  amounting  to
$61,250,  was recorded as deferred  compensation  and is being expensed over the
three-year  vesting  period.  In  connection  with the  acquisition,  we assumed
approximately $648,000 of bank debt, which was subsequently repaid.

         Operating  results of Texport and LTG are included in the  consolidated
statement of income from the date of  acquisition.  The estimated  fair value of
assets and liabilities acquired was $1.6 million and $2.2 million, respectively.
The excess of the aggregate  purchase price over the estimated fair value of the
net assets acquired was  approximately  $995,000,  which is being amortized on a
straight-line basis over 20 years.
Results of Operations

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

                                                     Percentage of Revenue
                                                     the Year Ended July 31,
                                                  2000         1999        1998
                                                  ----         ----        ----
Revenue
         Products                                  97.6%        97.0%      97.4%
         Services                                   2.4          3.0        2.6
                                                    ---          ---        ---
                                                  100.0        100.0      100.0
                                                  -----        -----      -----
Cost of revenue
         Products                                  87.2         86.1       85.2
         Services                                  66.0         65.3       72.1
                                                   ----         ----       ----
                                                   86.7         85.5       84.9
                                                   ----         ----       ----

Product gross profit                               12.8         13.9       14.8
Services gross profit                              34.0         34.7       27.9
                                                   ----         ----       ----
         Gross profit                              13.3         14.5       15.1

Selling, general and administrative expenses       11.2         13.0       13.5
                                                   ----         ----       ----
Income from operations                              2.1          1.5        1.6
Interest and other income, net                      0.2          0.2        0.3
                                                    ---          ---        ---
Income before income taxes                          2.3          1.7        1.9
Provision for income taxes                          0.9          0.7        0.8
                                                    ---          ---        ---
Net income                                          1.4%         1.0%       1.1%
                                                    ===          ===        ===



                                       17



<PAGE>




Year Ended July 31, 2000 Compared to Year Ended July 31, 1999

         Revenue.  Our  revenue  increased  $71.4  million or 31.2% from  $228.6
million in fiscal 1999 to $300.1  million for fiscal 2000.  Revenue from product
sales  increased  by $71.3  million  (32.1%)  primarily  due to  higher  revenue
generated from the Company's  wholly-owned  subsidiaries,  Electrograph Systems,
Inc.  ("Electrograph")  and Texport Technology Group, Inc. (Texport),  which was
acquired  on March 22,  2000,  as well as  increases  in the number of  personal
computers  shipped and higher  average  selling  prices for personal  computers.
Services  revenue  increased  by $180,000,  or 2.6%,  reflecting  our  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 $6.6 million or 19.9% from
$33.2  million for fiscal 1999 to $39.8  million for fiscal  2000.  Gross profit
from the sale of products  increased by $6.6  million or 21.4% due  primarily to
increases in revenue  partially  offset by generally  lower  margins on products
resulting from the highly competitive  environment for computer products.  Gross
profit generated through service offerings increased by $15,000.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased  $3.7 million or 12.4% from $29.8 million in
fiscal 1999 to $33.5 million in fiscal 2000. This increase  primarily relates to
higher  operating and  personnel  costs at  Electrograph  and Coastal as well as
operating  costs from Texport which was acquired on March 22, 2000. In addition,
we incurred higher advertising, depreciation and commission costs in fiscal 2000
partially offset by a recovery of bad debt expenses.

     Other  Income.  Interest  income  increased  due to  higher  cash  balances
available for investment and higher interest rates.

         Provision for Income Taxes.  Our  effective  income tax rate  decreased
from 42.1% in fiscal  1999 to 40.6% in fiscal  2000  primarily  due to the lower
percentage of non-taxable interest income and the non-deductible amortization of
goodwill to the  current  year  taxable  income as compared to that of the prior
year.

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

         Revenue.  Our  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  our  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. 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. We also experienced higher operating costs at Electrograph and
Coastal as well as higher advertising,  depreciation and rent expenses in fiscal
1999.

     Other  Income.  Interest  income  decreased  due  to  lower  cash  balances
available for investment.

         Provision for Income Taxes.  Our  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.

                                       18
<PAGE>


Liquidity and Capital Resources

       Our primary  sources of  financing  in fiscal  2000 have been  internally
generated working capital from profitable operations and a line of credit from a
financial institution.

     For the year ended July 31, 2000, cash provided by operating activities was
$13.2  million  consisting   primarily  of  net  income  and  non  cash  charges
(principally  depreciation and amortization),  increases in accounts payable and
accrued  expenses,  a decrease in inventory,  partially offset by an increase in
accounts  receivable.  Our accounts  receivable and accounts payable and accrued
expenses  balances,  as well  as our  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,  our experience is that increases in
accounts  receivable,  and accounts  payable and accrued  expenses will coincide
with growth in revenue and  increased  operating  levels.  During the year ended
July 31, 2000,  we used  approximately  $1.7  million for capital  expenditures,
$179,000  (net  of cash  acquired  of  $221,000)  for the  purchase  of  Texport
Technology  Group,  Inc. and $742,000  for the  repayment of debt.  In addition,
$671,000  was used to  purchase  and retire  common  stock  partially  offset by
$414,000 received in connection with the exercise of employee stock options.

       We have an available  line of credit with financial  institutions  in the
aggregate amount of $15.0 million. At July 31, 2000, no amounts were outstanding
under this line.

       We  believe  that our  current  balances  in cash  and cash  equivalents,
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 2001. We currently have
no material  commitments for capital  expenditures.  Future capital requirements
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 $1,500,000, as well as the possible
opening of new offices and potential acquisitions.


Inflation

       We do not  believe  that  inflation  has  had a  material  effect  on our
operations.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company is not exposed to significant market risk.


ITEM 8.  Financial Statements and Supplementary Data

See Item 14.

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

None.

                                       19
<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                  58            Chairman of the Board, President, Chief
                                                    Executive Officer and Director

Joel G. Stemple, Ph.D               58            Executive Vice President, Secretary and Director

Joseph Looney                       43            Vice President, Finance, Chief Financial Officer
                                                    and Assistant Secretary

Laura Fontana                       45            Vice President - Technical Services

Mark Glerum                         42            Vice President - Sales

Joel Rothlein, Esq.                 71            Director

Bert Rudofsky                       66            Director

Michael E. Russell                  53            Director

Julian Sandler                      56            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 Vice President, Finance since
January 2000 and 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 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.

         Laura Fontana has served as Vice  President - Technical  Services since
January  2000 and as  Director of  Technical  Services  since  January  1999.  A
twenty-year  Manchester  veteran,  Ms. Fontana had previously  managed the sales
organization  and been  largely  responsible  for the  design of sales,  product
information,  and automated order-processing systems. She received her B.A. from
Dowling College.

     Mark Glerum has served as Vice  President - Sales since January  2000.  Mr.
Glerum  joined  Manchester in January 1999 as Manager of the New York City Sales
office.  He became  National Sales Manager in September  1999.  Prior to joining
Manchester,  Mr.  Glerum  spent  twelve  years at Toshiba  America,  Inc.,  most
recently as Regional Sales Manager. Mr. Glerum received his Bachelor's Degree in
Business Administration from Alfred University.

     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.
                                       20
<PAGE>
     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.

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 our 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, 2000, we believe that the Reporting  Persons  timely  complied with all
applicable Section 16 filing requirements.

                                       21

<PAGE>



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, 2000,  1999,  and
1998 to the Company's Chief Executive  Officer and the other executive  officers
whose  compensation  exceeded  $100,000  (collectively,   the  "Named  Executive
Officers"):
<TABLE>
<CAPTION>

                           Summary Compensation Table
                                                                                   Long Term
                                                                                   Compensation
                                                                                   ------------
                                                                                    Common Stock
                                    Annual Compensation            Other Annual    Underlying            All Other
Principal Position              Year       Salary       Bonus      Compensation(1) Options              Compensation
------------------              ----       ------       -----      -----------------------              ------------
<S>                           <C>         <C>          <C>           <C>               <C>                <C>

Barry R. Steinberg,             2000       $650,000     $485,248     $58,707(2)             -                  -
 President  and Chief           1999       $650,000            -     $23,806(2)             -                  -
 Executive Officer              1998       $550,000            -     $37,031(2)             -                  -

Joel G. Stemple, Executive      2000       $450,000     $242,624     $31,375 (3)            -                  -
 Vice President and             1999       $450,000            -     $13,881 (3)            -                  -
  Secretary                     1998       $450,000            -     $22,194 (3)             -                  -

Joseph Looney, Chief            2000       $220,000      $80,875     $11,025(4)             -                  -
 Financial Officer, Vice        1999       $200,000      $15,000     $15,061(4)
President, Finance and          1998       $140,394      $40,000     $13,677(4)        70,000(5)               -
Assistant Secretary

Laura Fontana, Vice             2000       $169,254      $38,683     $17,848(6)             -                  -
President - Technical Services

Mark Glerum, Vice               2000       $128,830      $35,866     $ 6,675            9,000(7)               -
President - Sales
</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, 2000.
------------------

(1)  Includes in fiscal 2000 employer  matching  contributions  to the Company's
     defined  contribution plan of $5,100,  $5,100,  $5,100, and $5,048, for Mr.
     Steinberg, Mr. Stemple, Mr. Looney, and Ms. Fontana,  respectively,  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.

 (2)  Includes $50,000 in 2000, $15,399 in 1999, and $32,081 in 1998 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 $25,000 in 2000,  $7,606 in 1999, and $17,394 in 1998 of premiums
      paid by the Company for a whole life  insurance  policy in the name of Mr.
      Stemple  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 2000,  1999 and 1998 of  premiums  paid by the
      Company for a whole life insurance policy in the name of Mr. Looney 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.
(6)   Includes  $5,000 in 2000 of premiums paid by us for a whole life insurance
      policy in the name of Ms.  Fontana  having a face  value of  $589,000  and
      under  which her minor child and the  Company  are  beneficiaries  and are
      entitled to $200,000 and $389,000, respectively, of death benefits payable
      under the policy.
(7)   See option grant table below.
                                       22
<PAGE>
         No bonus was paid for fiscal 1998 or 1999 to Mr. Steinberg. We continue
to make  available  to Mr.  Steinberg  the  auto use and  deferred  compensation
benefits that he has historically  received.  Mr. Steinberg also participates in
other  benefits  that we make  generally  available  to our  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 us
were terminated, he would not be precluded from competing with us.

         We have an  employment  agreement  with Joel G. Stemple,  Ph.D.,  under
which Dr.  Stemple  received a base  salary of  $450,000.  No bonus was paid for
fiscal 1998 or 1999. Under the employment agreement, we provide Dr. Stemple with
an automobile and certain deferred compensation benefits and provide Dr. Stemple
with medical and other benefits  generally  offered by us to our employees.  Dr.
Stemple also is able to  participate  in our stock option plan.  The  employment
agreement is terminable  by either party on 90 days' prior notice.  In the event
we so  terminate  Dr.  Stemple's  employment,  or we  elect  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 our
customary  payroll  practices.  Under the employment  agreement,  if Dr. Stemple
terminates his employment, or we terminate his employment for cause, Dr. Stemple
is prohibited, for a two-year period from such termination,  from competing with
us in the eastern half of the United States.

     The   Compensation   Committee  of  our  Board  of   Directors   determines
compensation  for our executive  officers.  Effective August 1, 2000, based upon
the  recommendation of the Compensation  Committee,  the annual base salaries of
Mr. Steinberg,  Mr. Stemple and Mr. Looney,  Ms. Fontana and Mr. Glerum were set
at $650,000, $450,000 $245,000, $196,000, and $175,000, respectively.

Option/SAR Grants in the Last Fiscal Year

     The  following  table sets forth  certain  information  concerning  options
granted to the Named  Executive  Officers  during the fiscal year ended July 31,
2000. No stock appreciation rights have been granted by the Company.
<TABLE>
<CAPTION>

                        Option Grants During the Fiscal Year Ended July 31, 2000
                        --------------------------------------------------------

                    Number of        % of Total                                        Potential Realizable Value
                    Securities       Options                                           at Assumed Annual Rates
                    Underlying       Granted to        Exercise                        of  Stock Price Appreciation
                    Options          Employees in      Price           Expiration      for Option Term(2)
Name                Granted(1)       Fiscal Year       Per Share       Date            5%                10%
----                ----------       -----------       ---------       ----            --                ---
<S>                 <C>                 <C>            <C>            <C>             <C>                <C>

Mark Glerum         9,000               4%             $3.75           10/27/09        21,240            53,820
</TABLE>

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

(1)      Grant  consists  of ten  year  ISOs  granted  under  the  Option  Plan,
         exercisable  cumulatively at the annual rate of one third of the number
         of underlying shares,  generally  commencing two years from the date of
         grant.

(2)      Amounts reported in this column represent  hypothetical values that may
         be  realized  upon  exercise of the  options  immediately  prior to the
         expiration of their term,  assuming the specified  compounded  rates of
         appreciation  of the common stock over the term of the  options.  These
         numbers are calculated based on rules promulgated by the Securities and
         Exchange  Commission.  Actual  gains,  if any, in option  exercises are
         dependent on the time of such  exercise and the future  performance  of
         the common stock.

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, 2000. No options were  exercised by the Named
Executive  Officers  during  the  fiscal  year  ended  July 31,  2000.  No stock
appreciation rights have been granted by the Company.

                                       23
<PAGE>



<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, 2000                    July 31, 2000(1)
         Name           Exercised      Realized        Exercisable/Unexercisable        Exercisable/Unexercisable
         ----           ---------      --------        -------------------------        -------------------------
<S>                      <C>             <C>                    <C>                                 <C>

Joseph Looney                  -           -                     30,000/40,000                      $24,375/$32,500
Laura Fontana             20,000         $65,003                 10,000/40,000                       $8,125/$32,500
Mark Glerum                    -           -                           -/9,000                             -/$7,875
</TABLE>

--------

(1)  Based on the closing sale price of common stock as of July 31, 2000 ($4.625
     per share) minus the applicable exercise price.

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.

     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 be  exercisable  immediately  upon  such
          grant.

         Effective  July 12,  2000,  the Board  voted to change  the  directors'
compensation  plan.  Starting  August 1, 2000, all  non-employee  directors will
receive a $10,000 annual  stipend  payable in four  quarterly  installments.  In
addition,  each  non-employee  director will be granted annually on August 1, an
option to purchase  10,000 shares at an exercise  price equal to the fair market
value of the common  stock on August 1 of each year.  Such options will be for a
term of five years and will be 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).  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). In addition,  on August 1, 2000 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 10,000 shares at an exercise price of $4.625 per share (the
fair market value of the common stock on August 1, 2000.)

         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.

                                       24
<PAGE>

Compensation Committee Interlocks and Insider Participation

     The members of our 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 our outside general
counsel  since  our  inception.   We  paid  Kressel   Rothlein  &  Roth,   Esqs.
approximately  $177,000,  $213,000,  and  $217,000  for legal fees in the fiscal
years ended July 31, 2000, 1999 and 1998, respectively.  In addition, during the
years ended July 31, 2000, 1999 and 1998, we recorded  revenue of  approximately
$273,000,  $597,000 and $177,000  respectively,  in connection  with the sale of
computer equipment to a company controlled by Mr. Sandler.

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

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

     The following  table sets forth certain  information as of October 20, 2000
(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.
<TABLE>
<CAPTION>

                                                        Shares Beneficially       Percent of Shares
      Name and Address                                         Owned(1)             Outstanding
       ----------------------------------------------------------------------------------------
     <S>                                                   <C>                      <C>

      Barry R. Steinberg(2) (3)                              4,690,201                57.6%
      Joel G. Stemple(2)                                       626,263                 7.7
      Joseph Looney(4)                                          34,700                 0.4
      Laura Fontana                                             10,000                 0.1
      Joel Rothlein(4) (5)                                      51,500                 0.6
      Bert Rudofsky (4)                                         15,000                 0.2
      Michael E. Russell (4)                                    15,000                 0.2
      Julian Sandler(4)                                         23,500                 0.3
      Dimensional Fund Advisors, Inc.                          583,000                 7.2
      1299 Ocean Ave. 11th Fl., Santa Monica, CA 90401
      All executive officers and directors as a group
        (8 persons) (6)                                      5,466,164                67.1%
</TABLE>

(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  8,144,315 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  30,000  shares (Mr.
     Looney); 22,500 shares (Mr. Sandler); 15,000 shares (Mr. Rudofsky);  20,000
     shares (Mr. Rothlein); and 15,000 shares (Mr. Russell).
(5)  Includes 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.

                                       25

<PAGE>



ITEM 13.  Certain  Relationships and Related Transactions

         Until August 1994, we were affiliated with Electrograph  Systems,  Inc.
("Electrograph").  Barry R. Steinberg, our President and Chief Executive Officer
and 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,  we 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,  we purchased  substantially  all of the assets of  Electrograph
Systems, Inc.

         Three of our  four  Hauppauge,  New York  facilities  are  leased  from
entities  affiliated  with  certain  of our  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, 2000,
1999,  and 1998,  we made lease  payments of $190,000,  $186,000,  and $179,000,
respectively,  to such entity.  Our 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, 2000,  1999,  and 1998, we made lease  payments of $279,000,  $271,000,  and
$263,000,  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, 2000,  1999, and
1998, we made lease payments of $360,000, $344,000, and $340,000,  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 our inception. During fiscal 2000, 1999 and
1998,  $177,000,  $213,000 and $217,000  respectively  was paid to such firm for
legal fees.

         During  the year ended  July 31,  2000,  1999,  and 1998,  we  recorded
revenue of $273,000, $597,000, and $177,000, 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, 2000 and 1999                     29
         Statements of Income for the years ended July 31, 2000,
          1999, and 1998                                                 30
         Statements of Shareholders' Equity for the years
          ended July 31, 2000, 1999, and 1998                            31
         Statements of Cash Flows for the years ended
          July 31, 2000, 1999, and 1998                                  32
         Notes to Consolidated Financial Statements                      33

Schedule II - Valuation and Qualifying Accounts                          46


                                       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,  2000 and 1999 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,  2000.  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 auditing standards generally accepted
in the  United  States of  America.  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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended July 31, 2000, in conformity with accounting principles generally accepted
in the United  States of America.  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 15, 2000

                                       28
<PAGE>


                 Manchester Equipment Co., Inc. and Subsidiaries
                           Consolidated Balance Sheets
                             July 31, 2000 and 1999
<TABLE>
<CAPTION>
                                   Assets                                2000              1999
                                   ------                                ----              ----                  -
                                                                   (in thousands except per share amounts)
<S>                                                                    <C>                <C>

Current assets:
     Cash and cash equivalents                                           $16,156           $5,749
     Accounts receivable, net of allowance for doubtful accounts
        of $899 and $1,204, respectively                                  36,024           34,747
     Inventory                                                             6,797            8,245
     Deferred income taxes                                                   579              538
     Prepaid income taxes                                                    635                -
     Prepaid expenses and other current assets                               538              340
                                                                             ---              ---

                             Total current assets                         60,729           49,619

Property and equipment, net                                                6,329            6,248
Goodwill, net                                                              6,534            5,070
Deferred income taxes                                                        673              560
Other assets                                                                 308              281
                                                                             ---              ---

                                                                         $74,573          $61,778
                                                                          ======           ======

                          Liabilities and Shareholders' Equity

Current liabilities:
     Accounts payable and accrued expenses                               $29,312          $20,824
     Current maturities of long-term debt                                      -               85
     Notes payable                                                            18                -
     Deferred service contract revenue                                       946              581
     Income taxes payable                                                      -              668
                                                                            ----              ---

                          Total  current liabilities                      30,276           22,158


Deferred compensation payable                                                 34               34

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, 8,159 and 8,085 shares issued
        and outstanding                                                       82               81
     Additional paid-in capital                                           19,402           18,799
     Deferred compensation                                                   (65)             (38)
     Retained earnings                                                    24,844           20,744
                                                                          ------           ------

                             Total shareholders' equity                   44,263           39,586
                                                                          ------           ------

                                                                         $74,573          $61,778
                                                                          ======           ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       29
<PAGE>




                 Manchester Equipment Co., Inc. and Subsidiaries
                        Consolidated Statements of Income
                    Years ended July 31, 2000, 1999 and 1998


<TABLE>
<CAPTION>

                                                                2000              1999                1998
                                                                ----              ----                ----         -
                                                                 (in thousands except per share amounts)
        <S>                                                   <C>             <C>                  <C>
         Revenue
              Products                                         $292,971         $221,719            $197,194
              Services                                            7,102            6,922               5,336
                                                                  -----            -----               -----
                                                                300,073          228,641             202,530
                                                                -------          -------             -------

         Cost of revenue
              Products                                          255,549          190,901             168,083
              Services                                            4,687            4,522               3,847
                                                                  -----            -----               -----
                                                                260,236          195,423             171,930
                                                                -------          -------             -------

              Gross profit                                       39,837           33,218              30,600
         Selling, general and administrative expenses            33,539           29,849              27,414
                                                                 ------           ------              ------

              Income from operations                              6,298            3,369               3,186

         Other income (expense):
              Interest expense                                       (4)              (8)                (41)
              Interest and investment income                        606              412                 587
                                                                    ---              ---                 ---

              Income before provision for income taxes            6,900            3,773               3,732
         Provision for income taxes                               2,800            1,590               1,560
                                                                  -----            -----               -----
              Net income                                         $4,100           $2,183              $2,172
                                                                  =====            =====               =====
              Net income per share
                  Basic                                          $0.51             $0.27               $0.26
                                                                  ====              ====                ====
                  Diluted                                        $0.50             $0.27               $0.26
                                                                  ====              ====                ====
         Weighted average shares of common
            stock and equivalents outstanding
              Basic                                               8,108            8,096               8,494
                                                                  =====            =====               =====
              Diluted                                             8,228            8,096               8,499
                                                                  =====            =====               =====



</TABLE>


See accompanying notes to consolidated financial statements.

                                       30
<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
                    Years ended July 31, 2000, 1999 and 1998

<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, 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

     Purchase and retirement of stock       (151)     (1)         (670)            -            -          (671)
     Stock award compensation expense          -                     -            34            -            34
     Deferred compensation                    10       -            61           (61)           -             -
     Stock issued in connection with
         exercise of stock options           109       1           413             -            -           414
     Stock issued in connection with
         purchase acquisition                106       1           799             -            -           800
     Net income                                -                     -             -        4,100         4,100
                                            ----     ---      --------           ---        -----         -----
     Balance July 31, 2000                 8,159     $82       $19,402          $(65)     $24,844       $44,263
                                           =====     ===        ======          =====      ======        ======
</TABLE>


     See accompanying notes to consolidated financial statements.

                                       31

<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                    Years ended July 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
                                                                     2000         1999           1998
                                                                     ----         ----           ----
                                                                             (in thousands)
     <S>                                                            <C>          <C>              <C>

     Cash flows from operating activities:
     Net income                                                      $4,100       $2,183          $2,172
     Adjustments to reconcile net income to net cash from
      operating activities:
         Depreciation and amortization                                2,081        1,835           1,340
         Provision for (recovery of) doubtful accounts                 (366)         154              75
         Non-cash compensation and commission expense                    34           91              81
         Deferred income taxes                                         (154)        (141)           (138)
         Change in assets and liabilities; net of the effects of
          acquisitions:
            Increase in accounts receivable                            (264)      (8,605)         (4,430)
            (Increase) decrease in inventory                          1,951          922           1,882
            Increase in prepaid  income taxes                          (620)           -               -
            Increase in prepaid expenses and
              other current assets                                     (177)         (50)            (12)
            (Increase) decrease in other assets                         (27)         287               -
            (Decrease) increase in accounts payable and
              accrued expenses                                        6,991        2,325          (1,997)
            Increase (decrease) in deferred service contract revenue    365         (194)            213
            Increase (decrease) in income taxes payable                (668)         443             225
            Increase (decrease) in deferred compensation payable          -          (75)             22
            Sale of investments                                           -        1,501           2,907
                                                                     ------        -----           -----
                Net cash provided by operating activities            13,246          676           2,340
                                                                     ------          ---           -----
     Cash flows from investing activities:
         Capital expenditures                                        (1,661)      (1,735)         (2,972)
         Payment for acquisitions, net of  cash acquired               (179)        (871)         (2,921)
                                                                       -----        -----         ------
            Net cash used in investing activities                    (1,840)      (2,606)         (5,893)
                                                                      -----       -------          -----
     Cash flows from financing activities:
         Net repayments of borrowings from bank                        (648)           -          (1,274)
         Payments on capitalized lease obligations                      (85)        (104)           (140)
         Payments on notes payable - other                               (9)           -            (481)
         Issuance of common stock upon exercise of options              414            -               -
         Purchase and retirement of common stock                       (671)         (33)         (1,785)
                                                                       -----         ----         ------

            Net cash used in financing activities                      (999)        (137)         (3,680)
                                                                       ----         -----         -------
     Net increase (decrease) in cash  and cash equivalents           10,407       (2,067)         (7,233)

         Cash and cash equivalents at beginning of year               5,749        7,816          15,049
                                                                      -----        -----          ------

     Cash and cash equivalents at end of year                       $16,156       $5,749          $7,816
                                                                     ======        =====          ======

     Cash paid during the year for:
          Interest                                                       $4           $5             $41
                                                                         ==           ==             ===
          Income taxes                                               $4,205         $992          $1,428
                                                                     ======          ===          ======

     Other noncash transactions:
         Capitalized lease obligation                                 $   -         $107            $  -
                                                                      =====         ====            ====
         Common stock issued in connection with acquisitions           $861       $    -            $  -
                                                                       ====       ======            ====
</TABLE>



     See accompanying notes to consolidated financial statements.


                                       32

<PAGE>




                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)

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

      (a)  The Company

          Manchester  Equipment Co., Inc.  ("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.  The Company
     operates in a single segment.

         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 may 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.  Cash  equivalents of $12,178 and $3,486 at July 31, 2000 and
      1999, respectively, consisted of money market mutual funds.

      (d)  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 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.

      (e) 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 $414,  $380, and $623 for the years ended July 31, 2000,
      1999, and 1998, respectively.

      (f) Inventory

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

                                       33
<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)

      (g) 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.

       (h)  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  $780 and $449 at
      July 31, 2000 and 1999, respectively.  Amortization expense of $331, $266,
      and $164 for the years ended July 31, 2000,  1999, and 1998 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.

      (i)  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.

      (j)  Net Income Per Share

         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 153,000,  1,065,000, and 380,000
      shares for the years ended July 31, 2000,  1999,  and 1998,  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>
                                   2000                       1999                      1998
                                   ----                       ----                      ----
                                        Per Share                  Per Share                 Per Share
                                Shares  Amount            Shares   Amount           Shares   Amount
                                ------  ------            ------   ------           ------   ------
      <S>                    <C>          <C>           <C>          <C>         <C>          <C>

       Basic EPS             8,108,000     $0.51        8,096,000    $0.27        8,494,000   $0.26
                                            ====                     =====                    =====
       Effect of dilutive
        options                120,000                          -                     5,000
                               -------                  ---------                  --------

       Diluted EPS           8,228,000     $0.50        8,096,000    $0.27        8,499,000   $0.26
                             =========      ====        =========     ====        =========   =====
</TABLE>


                                       34
<PAGE>


                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)


      (k)  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.

      (l)  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.

      (m)  Fair Value of Financial Instruments

         The  fair  values  of  accounts  receivable,  prepaid  expenses,  notes
      payable,  accounts  payable and accrued  expenses are  estimated to be the
      carrying  values  at July  31,  2000  due to the  short  maturity  of such
      instruments.


(2)  Property and Equipment

         Property and equipment at July 31, consist of the following:
                                                            2000         1999
                                                            ----         ----

      Furniture and fixtures                                $2,619       $2,464
      Machinery and equipment                                6,971        5,500
      Transportation equipment                                 483          454
      Leasehold improvements                                 2,834        2,667
                                                             -----        -----
                                                            12,907       11,085

      Less accumulated depreciation and amortization         6,578        4,837
                                                             -----        -----

                                                            $6,329       $6,248
                                                             =====        =====
         Depreciation and amortization  expense amounted to $1,750,  $1,569, and
$1,176, for the years ended July 31, 2000, 1999 and 1998, 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.


                                       35
<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)


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

Coastal Office Products, Inc.

         On January 2, 1998, the Company acquired all of the outstanding  shares
of Coastal  Office  Products,  Inc.  ("Coastal"),  a value  added  reseller  and
provider of  microcomputer  services and peripherals to companies in the greater
Baltimore,  Maryland  area. The  acquisition,  which has been accounted for as a
purchase,  consisted  of cash  payments of  approximately  $3,971  (including  a
contingent payment of $871 made on March 15, 1999). A contingent payment of $800
was made on March  15,  2000  through  the  issuance  of  105,786  shares of the
Company's  common stock.  The cash  payments  were made from the Company's  cash
balances.  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 $4,776,  which is being amortized on the straight-line basis over 20
years.

Texport Technology Group, Inc. and Learning Technology Group, LLC

         On  March  22,  2000,  the  Company  acquired  all of  the  outstanding
ownership  interests of Texport Technology Group, Inc.  ("Texport") and Learning
Technology  Group,  LLC ("LTG"),  affiliated  entities  engaged in reselling and
providing of microcomputer  services and peripherals to companies in the greater
Rochester,  New York area.  The  acquisition,  which has been accounted for as a
purchase,  consisted of a cash payment of $400 plus potential future  contingent
payments. Contingent payments of up to $750,will be payable on each of March 22,
2001 and 2002 based upon achieving  certain agreed-upon increases in revenue and
pretax  earnings  for each of the next two,  one-year  periods  from the date of
closing. The cash payment was made from the Company's cash balances. The selling
owners  received  employment  agreements  that also provided for the issuance of
10,000 shares of common stock. The fair value of the common stock,  amounting to
$61,  was  recorded  as deferred  compensation  and is being  expensed  over the
three-year  vesting  period.  In connection  with the  acquisition,  the Company
assumed  approximately  $648 of bank debt,  which was subsequently  repaid,  and
assumed  notes payable to the former  shareholders  amounting to $27 which has a
remaining balance of $18 at July 31, 2000.

         Operating  results of Texport and LTG are included in the  consolidated
statement of income from the date of  acquisition.  The estimated  fair value of
assets and liabilities acquired was $1,600 and $2,200, respectively.  The excess
of the aggregate  purchase price over the estimated fair value of the net assets
acquired was  approximately  $995,  which is being  amortized on a straight-line
basis over 20 years.

     The following  unaudited pro forma  consolidated  results of operations for
the years ended July 31, 2000 and 1999 assume that the acquisitions  occurred on
August 1, 1998 and reflect the historical operations of the purchased businesses
adjusted for lower interest on invested  funds,  contractually  revised  officer
compensation  and  increased  amortization,  net  of  applicable  income  taxes,
resulting from the acquisition:

                                                 Year ended July 31,
                                                  2000           1999
                                                  ----           ----

           Revenue                              $306,056       $242,166
           Net income                             $3,773         $2,094
           Diluted net income per share            $0.46          $0.26


                                       36

<PAGE>




                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)

       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,
                                                    2000           1999
                                                    ----           ----

         Accounts payable, trade                    $25,005        $17,193
         Accrued salaries and wages                   2,535          2,182
         Customer deposits                              628            715
         Other accrued expenses                       1,144            734
                                                    -------            ---
                                                    $29,312        $20,824
                                                     ======         ======

          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, 2000, the Company has repaid all balances  outstanding under these
     agreements  within the  non-interest  bearing payment period.  Accordingly,
     amounts outstanding under such agreements of $2,645,  $2,944 and $2,372 and
     at July 31,  2000,  1999 and 1998,  respectively,  are included in accounts
     payable and accrued  expenses.  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 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, 2000,  retained  earnings  available  for  dividends
     amounted to approximately $14,800.

(5)  Long-Term Debt

         The Company  entered into  capitalized  lease  obligations  for certain
     computer equipment. No amounts were outstanding at July 31, 2000.

(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 $250, $273,
     and $205 for the years ended July 31, 2000, 1999 and 1998, 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, 2000 and 1999,
     the  Company  has  recorded an asset  (included  with other  assets) of $34
     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, 2000,  1999 and 1998, the
     Company  recorded an expense of $92, $51, and $105 in connection  with this
     plan.

                                       37
<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)

(7)  Commitments and Contingencies

     Leases

         The  Company  leases  most  of  its  executive  offices  and  warehouse
     facilities  primarily  from related  parties  (note 10). 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 $1,594,  $1,539,  and $1,255 for the years ended July 31, 2000,
     1999 and 1998.

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

                     2001                    $1,289
                     2002                    $1,331
                     2003                    $1,044
                     2004                    $1,010
                     2005                    $1,034

     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 the Company's financial position
     or results of operations.

         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, 2000,  there was no balance  outstanding  under this agreement,
     which expires on April 2, 2002.



                                       38

<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999, and 1998
                 (in thousands, except share and per share data)

 (9)  Income Taxes

      The provision for income taxes for the years ended July 31, 2000, 1999 and
1998 consists of the following:

                                                 2000         1999        1998
                                                 ----         ----        ----
       Current
           Federal                             $2,242       $1,351      $1,300
           State                                  712          380         398
                                                  ---          ---         ---
                                                2,954        1,731       1,698
                                                -----        -----       -----

       Deferred
           Federal                               (115)        (106)       (105)
           State                                  (39)         (35)        (33)
                                                ------         ---        ----

                                                 (154)        (141)       (138)
                                                 ----         ----        ----
                                               $2,800       $1,590      $1,560
                                                =====        =====       =====

      The  difference  between the Company's  effective  income tax rate and the
      statutory rate is as follows, for the years ended July 31, 2000, 1999, and
      1998 :

                                                 2000         1999        1998
                                                 ----         ----        ----

       Income taxes at statutory rate          $2,346       $1,283      $1,269
       State taxes, net of federal benefit        444          228         241
       Non deductible goodwill amortization        85           64          29
       Other                                      (75)          15          21
                                                 ----           --          --
                                               $2,800       $1,590      $1,560
                                                =====        =====       =====

      The tax effects of  temporary  differences  that give rise to  significant
      portions of the net  deferred  tax asset at July 31, 2000 and 1999 were as
      follows:

                                                 2000          1999
                                                 ----          ----

         Deferred tax assets:
            Allowance for doubtful accounts      $359          $488
            Deferred compensation                 375           330
            Depreciation                          328           250
            Other                                 190            30
                                                  ---            --

        Deferred tax asset                     $1,252        $1,098
                                                =====         =====


              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.

                                       39

<PAGE>




                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (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 $828, $801, and
      $782, for the years ended July 31, 2000, 1999, and 1998, respectively.

         The  Company  paid legal fees to a law firm in which a director  of the
      Company  is a  partner.  Such  fees  amounted  to $177,  $213,  and  $217,
      including  disbursements,  in the fiscal years ended July 31, 2000,  1999,
      and 1998 respectively.

         During  fiscal  years ended July 31, 2000,  1999,  and 1998 the Company
      received approximately $273, $597, and $177, respectively, in revenue from
      a company controlled by a director of the Company.

 (11)  Shareholders' Equity

      Warrants

         In connection  with its Initial Public Offering (IPO) in December 1996,
      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.

      Stock Option Plan

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


                                       40

<PAGE>



                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                   Weighted
                                                                   Average
                                              Exercise             Exercise
                                              Balance              Price
                                              -------              -----

        <S>                                   <C>                    <C>

         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

             Granted                           253,250               $4.37
           Exercised                          (109,416)              $3.8125
             Cancelled                        (132,250)              $4.50
                                               --------
         Balance July 31, 2000                 826,684               $4.00
                                               =======               =====
</TABLE>

          At July 31, 2000,  approximately 306,067 options exercisable at prices
     ranging  from $2.75 to $4.875 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, 2000 was $2.75 - $5.69 with a
     weighted average remaining life of approximately seven 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
     market value of the underlying  stock on the date of grant. The Company has
     recognized a total of $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 and $65 in
     fiscal 1999 and 1998,  respectively.  No expense was  recognized  in fiscal
     2000.  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, 2000, 1999 and 1998 would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                            2000            1999        1998
                                            ----            ----        ----
          <S>                               <C>             <C>        <C>

          Net income:
            As reported                     $4,100        $2,183      $2,172
            Pro forma                       $3,813        $1,940      $1,992

          Basic net income per share:
             As reported                     $0.51         $0.27      $0.26
             Pro forma                       $0.47         $0.24      $0.23

          Diluted net income per share:
            As reported                      $0.50         $0.27      $0.26
            Pro forma                        $0.46         $0.24      $0.23
</TABLE>

The pro forma  effects on net income and  diluted net income per share for 2000,
1999 and 1998 may not be representative of the pro forma effects in future years

                                       41
<PAGE>





                 Manchester Equipment Co., Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                          July 31, 2000, 1999 and 1998
                 (in thousands, except share and per share data)



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

<TABLE>
<CAPTION>
                                                   2000      1999     1998
                                                   ----      ----     ----
       <S>                                        <C>       <C>     <C>

       Expected dividend yield                       0%       0%       0%
       Expected stock volatility                    49%      43%      27%
       Risk free interest rate                       5%       5%       5%
       Expected option term until exercise (years) 5.00     5.00     4.70
</TABLE>

     The per share weighted  average fair value of stock options  granted during
fiscal 2000, 1999 and 1998 was $2.15, $1.40, and $1.09, respectively.

Repurchase of Common Stock

     During  the  years  ended  July  31,  2000,  1999  and  1998,  the  Company
repurchased  150,600,  11,800  and  448,400  shares  of its  common  stock at an
aggregate purchase price of $671, $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.

The Company's top three vendors accounted for  approximately  16%, 14%, and 10%,
respectively  of total product  purchases for the year ended July 31, 2000.  The
Company's  top  two  vendors   accounted  for   approximately,   21%,  and  10%,
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.

     No customer accounted for more than 5% of the Company's accounts receivable
at July 31,  2000.  One  customer  accounted  for 9% of the  Company's  accounts
receivable at July 31, 1999.

                                       42
<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

10.5.l       Lease dated March 1, 2000 between ASP  Washington  LLC and Coastal
             Office Products.
                                       43
<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(8)     $15,000,000 Revolving Credit Facility Agreement dated June 25, 1999
             between Registrant and EAB, as Agent.

23.1         Independent auditors consent.

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 on Form
     10-K for the year ended July 31, 1998  (Commission  File No.  0-21695)  and
     incorporated herein by reference thereto.
8.   Filed as the same numbered  Exhibit to the Company's  Annual Report on Form
     10-K for the year ended July 31, 1999  (Commission  File No.  0-21695)  and
     incorporated herein by reference thereto.


                                       44

<PAGE>





                                   SIGNATURES

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

                                            Manchester Equipment Co., Inc.

Date:         October 27,2000               By: ss/ Barry  R. Steinberg_
                                                   --------------------
                                                    Barry R. Steinberg
                                            President, Chief Executive Officer

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

 ss/ Barry R. Steinberg                                  Date:  October 27,2000
 ----------------------
Barry R. Steinberg
President, Chief Executive Officer,
 Chairman of the Board and Director
(Principal Executive Officer)


ss/ Joel G. Stemple                                      Date:  October 27,2000
-------------------
Joel G. Stemple
Executive Vice President and Director


ss/ Joseph Looney                                        Date:  October 27,2000
   --------------
Joseph Looney
Vice President - Finance,
 Chief Financial Officer (Principal Accounting Officer)


ss/ Joel Rothlein                                        Date:  October 27,2000
   --------------
Joel Rothlein
Director

ss/ Julian Sandler                                       Date:  October 27,2000
    --------------
Julian Sandler
Director


ss/  Michael Russell                                     Date:  October 27,2000
     ---------------
Michael Russell
Director

ss/ Bert Rudofsky                                        Date:  October 27,2000
    -------------
Bert Rudofsky
Director



<PAGE>




                         Manchester Equipment Co., Inc.

                 Schedule II - Valuation and Qualifying Accounts
                             (dollars in thousands)

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

Allowance for doubtful
accounts

Year ended:


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

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

    July 31, 2000          $1,204          ($366)          $61               -             $899

</TABLE>

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