1
Filed Pursuant to
Rule 424(b)(4)
File No. 333-13345
PROSPECTUS

2,500,000 SHARES

[LOGO]

MANCHESTER EQUIPMENT CO., INC.
COMMON STOCK
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Of the 2,500,000 shares of Common Stock offered hereby, 2,125,000 shares
are being sold by Manchester Equipment Co., Inc. ("Manchester" or the "Company")
and 375,000 shares are being sold by a selling shareholder of the Company (the
"Selling Shareholder"). See "Principal and Selling Shareholders." The Company
will not receive any proceeds from the sale of the shares by the Selling
Shareholder.

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a trading market will develop after
the sale of shares offered hereby. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The Common
Stock has been approved for quotation on The Nasdaq National Market subject to
official notice of issuance under the symbol "MANC."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECU-
RITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
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Per Share.......................... $10.00 $.725 $9.275 $9.275
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Total(3)........................... $25,000,000 $1,812,500 $19,709,375 $3,478,125
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(1) For information regarding indemnification of the Underwriters and certain
compensation payable to the Representatives of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
at $825,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 375,000 additional shares of
Common Stock solely to cover over-allotments, if any, on the same terms and
conditions as the shares offered hereby. If such option is exercised in
full, the total "Price to Public," "Underwriting Discounts and Commissions"
and "Proceeds to Company" will be $28,750,000, $2,084,375 and $23,187,500,
respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the several Underwriters, subject to their
right to reject any order in whole or in part and to certain other conditions.
It is expected that delivery of the certificates representing the shares of
Common Stock will be made on or about December 2, 1996 at the offices of
Ladenburg Thalmann & Co. Inc., New York, New York.

[Ladenburg Thalmann Logo] [Cruttenden Roth Logo]

The date of this Prospectus is November 25, 1996
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OFFERING CUSTOMERS SINGLE-SOURCE SOLUTIONS
TO THEIR INFORMATION SYSTEMS NEEDS

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------------

The Company intends to furnish its shareholders with annual reports
containing audited financial statements reported on by independent auditors and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus. Unless
otherwise indicated, all references to the Company's authorized, issued and
outstanding securities assume no exercise of the Underwriters' over-allotment
option. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of the factors
set forth under "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

Manchester Equipment Co., Inc. is a systems integrator and reseller of
computer hardware, software and networking products, primarily for commercial
customers. The Company offers its customers single-source solutions customized
to their information systems needs by combining value-added services with
hardware, software, networking products and peripherals from leading vendors.
Over the past 20 years, the Company has forged long-standing relationships with
both customers and suppliers and has capitalized on the rapid developments in
the computer industry, including the shift toward client/server-based platforms.

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

The Company offers its customers a variety of value-added services, such as
consulting, integration and support services, together with a broad range of
computer and networking products from leading vendors. Consulting services
include systems design, performance analysis, security analysis and migration
planning. Integration services include product procurement, configuration,
testing, systems installation and implementation. Support services include
network management, "help-desk" support, and enhancement, maintenance and repair
of computer systems. Significant customers of the Company currently include
Barnes & Noble Inc., Cabletron Systems Inc., Conde Nast Publications Inc., J&R
Music World, National Broadcasting Company Inc., Pfizer Inc., Reuters America
Inc., Time Warner Inc., The Toronto Dominion Bank, United Parcel Service of
America Inc. and the United States Merchant Marine Academy. The Company offers
services and products from its headquarters in Long Island, New York, and its
regional offices in New York City, Needham (Boston), Massachusetts and Boca
Raton and Tampa, Florida. Most of the Company's revenues are derived from sales
to customers located in the New York Metropolitan area, with approximately 90%
of the Company's revenues being generated from its Long Island and New York City
offices.

The Company believes that a number of factors enable it to compete in its
highly fragmented and rapidly changing market. Among other things, the Company
benefits from long-standing relationships with many of its customers, providing
opportunities for continued sales of products and services. The Company's
long-standing relationships with suppliers and its large volume purchases
contribute to the Company's ability to obtain significant purchase discounts and
inventory as needed. Manchester further believes that its name is widely
recognized for high quality, competitively priced products and value-added
services. Manchester also has developed efficient inventory and credit extension
controls which have historically resulted in rapid inventory turnover and
minimal bad debt expense. The Company's expansion to regional offices in the
Northeast and Florida has contributed to a continued increase in its revenues.

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Key elements of Manchester's strategy include (i) increasing its focus on
providing value-added services, such as consulting, integration and support,
(ii) expanding its marketing focus on companies outside the Fortune 500, (iii)
introducing an electronic sales ordering system (linked to automated inventory
and credit control systems) for its customers, (iv) increasing sales force
productivity through enhanced electronic access to product information,
increased training of sales representatives and use of telemarketing, (v)
expanding its presence in the New York Metropolitan area by enlarging both its
New York City and Long Island offices and (vi) expanding geographically into
growing business centers in the eastern half of the United States. In support of
its strategy, during the past fiscal year, the Company hired additional
technical and administrative staff and increased its investment in its
management information systems.

The Company's executive offices are located at 160 Oser Avenue, Hauppauge,
New York 11788; its telephone number is (516) 435-1199.

THE OFFERING

Common Stock offered by
The Company...................................... 2,125,000 shares
The Selling Shareholder.......................... 375,000 shares
Common Stock to be outstanding after the
offering(1)......................................... 8,325,000 shares
Use of proceeds....................................... To repay short-term debt, to expand
its New York Metropolitan area
operations, to upgrade its
telecommunications system and for
working capital
Nasdaq National Market symbol......................... MANC

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(1) Excluding 1,100,000 shares of Common Stock reserved for issuance under the
Company's stock option plan and 250,000 shares of Common Stock reserved for
issuance upon the exercise of warrants to be issued to the Representatives
of the Underwriters and their designees exercisable at 120% of the public
offering price (the "Representatives' Warrants"). See "Capitalization,"
"Management -- Stock Option Plan" and "Underwriting."

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The following table sets forth summary financial data of the Company and
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and other financial information included herein.

FISCAL YEAR ENDED JULY 31,
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1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------

INCOME STATEMENT DATA:
Revenues................. $ 111,835 $ 118,898 $ 137,361 $ 170,818 $ 189,659
Gross profit............. 18,551 17,852 19,984 24,495 26,531
Income from operations... 1,285 1,787 2,604 3,215 3,933
Net income............... $ 628 $ 1,132 $ 1,776(1) $ 1,663 $ 2,138(2)
======== ======== ======== ======== ========
Net income per share..... $ .10 $ .18 $ .28 $ .27 $ .34(2)
======== ======== ======== ======== ========
Weighted average shares
of Common Stock
outstanding........... 6,262,626 6,262,626 6,262,626 6,262,626 6,246,970
======== ======== ======== ======== ========

JULY 31, 1996
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Working capital................................................. $ 9,841 $ 26,455
Total assets.................................................... 37,761 50,145
Short-term debt, including current maturities of capital lease
obligation................................................... 6,952 452
Shareholders' equity............................................ 8,175 31,798

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(1) Includes a cumulative effect of a change in accounting for income taxes of
$386. See Notes 1 and 8 of Notes to Consolidated Financial Statements.

(2) Pro forma net income for the fiscal year ended July 31, 1996 would have been
$4,246 or $.68 per share, after giving effect to the assumed reduction of
(i) $3,209 in officers' compensation payable to the Company's Chief
Executive Officer, Executive Vice President and Chief Financial Officer to
an aggregate of $1,125, exclusive of fringe benefits, to reflect (A) the
annual compensation that the Company's Chief Executive Officer and Executive
Vice President have agreed to receive without any diminished duties or
responsibilities, and (B) the reduction from the amount of annual
compensation paid to the former Chief Financial Officer to the annual
compensation currently payable to the present Chief Financial Officer, net
of applicable income taxes, and (ii) $304 in rent paid to related parties to
amounts stipulated in current leases, net of applicable income taxes. See
"Management" and "Certain Transactions." Officers' compensation was $3,940,
$1,897, $1,988, $4,990 and $4,334 for the fiscal years ended July 31, 1992,
1993, 1994, 1995 and 1996, respectively.

(3) As adjusted to reflect the sale of 2,125,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom and the
termination of the put right and shareholders' agreements between the
Company and certain shareholders. See "Use of Proceeds," "Capitalization"
and Note 10 of Notes to the Consolidated Financial Statements.

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RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth in the following risk factors and elsewhere in this
Prospectus.

ADVERSE INDUSTRY CONDITIONS; DECREASING OPERATING MARGINS IN SALES OF 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 has resulted in reduced per unit revenue and declining gross
profit margins. As a result of the intense price competition within the
industry, the Company has experienced increasing pressure on its gross profit
and operating margins with respect to the sale of products. The Company's
inability to compete successfully on the pricing of products sold, or the
continuing decline in its gross margins of products sold due to adverse industry
conditions or competition, could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RISKS ASSOCIATED WITH THE COMPANY'S STRATEGY

An integral part of the Company's strategy is to increase its value-added
services revenue. These services generally provide higher operating margins than
those associated with the sale of products. This strategy requires the Company,
among other things, to attract and retain highly skilled technical employees in
a competitive labor market, provide additional training to its sales
representatives and enhance its existing service management system. There can be
no assurance that the Company will be successful in increasing its focus on
providing value-added services, and the failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Strategy -- Emphasizing Value-added
Services."

Manchester's strategy also includes expanding its presence in the New York
Metropolitan area by increasing its sales and service capabilities in its New
York City office and enlarging its sales, service and training capabilities at
its Long Island headquarters as well as expanding geographically into growing
business centers in the eastern half of the United States. There can be no
assurance that the Company's expansion of its 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 or other expenditures. The failure of this
component of the Company's strategy could materially adversely affect its
business, results of operations and financial condition. See
"Business -- Strategy -- Expanding New York Metropolitan Area Presence" and
"-- Strategy -- Expanding into Additional Business Centers."

To date, Manchester's success has been based primarily upon sales in the
New York Metropolitan area. The Company's strategy, encompassing the expansion
of service offerings, the expansion of existing offices and the establishment of
new regional offices, is expected to challenge the Company's senior management
and infrastructure. There can be no assurance as to the Company's ability to
respond to these challenges. The failure of the Company to effectively manage
its planned growth could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Strategy."

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In addition, the success of the Company's strategy will depend in large
part upon the Company's ability to attract and retain highly skilled technical
personnel and sales representatives, including independent sales
representatives, in a competitive labor market. There can be no assurance that
the Company will be able to attract and retain such skilled personnel and
representatives. The loss of a significant number of the Company's existing
technical personnel or sales representatives or difficulty in hiring or
retaining additional technical personnel or sales representatives or
reclassification of the Company's sales representatives as employees could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Services and Products" and "-- Employees."

COMPETITION

The computer industry is characterized by intense competition. The Company
directly competes with local, regional and national systems integrators,
value-added resellers ("VARs") and distributors as well as with certain computer
manufacturers that market through direct sales forces. While the Company's
competitors vary depending upon the particular market, some of the national and
regional competitors of the Company include AmeriData Technologies, Inc.,
CompuCom Systems, Inc., Dataflex Corporation, Entex Information Services, Inc.,
Vanstar Corporation and Electronic Data Systems Corporation. The computer
industry has recently experienced a significant amount of consolidation through
mergers and acquisitions, and manufacturers of personal computers may increase
competition by offering a range of services in addition to their current product
and service offerings. In the future, the Company may face further competition
from new market entrants and possible alliances between existing competitors.
Some of the Company's competitors have, or may have, greater financial,
marketing and other resources, and may offer a broader range of products and
services, than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies or changes in customer requirements,
benefit from greater purchasing economies, offer more aggressive hardware and
service pricing or devote greater resources to the promotion of their products
and services. There can be no assurance that the Company will be able to compete
successfully in the future with these or other competitors. See "Business --
Competition."

DEPENDENCE ON KEY EXECUTIVES

The success of the Company is dependent on the services of 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. Mr. Steinberg, who has served the Company for in excess of 23 years,
has long-standing relationships with many manufacturers, which the Company
believes assist it in procuring desired products on a timely basis and on
desirable financial terms. In addition, Mr. Steinberg has long-standing
relationships with many of the Company's customers, providing opportunities for
continued sales of products and services. Dr. Stemple has served the Company for
in excess of 14 years and his management responsibilities include marketing and
advertising programs, review of contracts, monitoring the sales force and
inventory control. The loss of the services of either of Mr. Steinberg or Dr.
Stemple could have a material adverse effect on the Company's business, results
of operations and financial condition. Mr. Steinberg and Dr. Stemple own life
insurance policies in the amount of $2.6 million and $1.3 million, respectively,
for which the Company pays the premiums. Mr. Steinberg's daughters, on the one
hand, and the Company, on the other hand, are each entitled to one-half or $1.3
million of the death benefits payable under the policy in Mr. Steinberg's name.
Dr. Stemple's spouse and the Company are entitled to $600,000 and $700,000,
respectively, of the death benefits payable under the policy in Dr. Stemple's
name. There can be no assurance that the proceeds of these insurance policies
payable to the Company will be adequate to compensate the Company for the loss
of services of either of these key executives. See "Management."

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DEPENDENCE UPON MAJOR CUSTOMER

The Company's largest customer accounted for approximately 14%, 22% and 16%
of the Company's revenues for the fiscal years ended July 31, 1994, 1995 and
1996, respectively, substantially all of such revenues being derived from the
sale of hardware products. The presence of this customer contributes to the
Company's ability to obtain volume discounts on the purchase of computer
hardware from certain of its vendors. Although this customer has been a customer
of the Company for approximately ten years, the Company has no long-term supply
contract with it, but rather ships products against purchase orders to meet the
customer's needs. The loss of this customer could have a material adverse effect
on the Company's revenues as well as its ability to obtain volume discounts from
certain vendors, either of which could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Services and Products" and "-- Customers."

DEPENDENCE ON SALES TO COMPUTER RESELLERS AND VARS

The Company's profitability has been affected by its ability to obtain
volume discounts from certain manufacturers which has been dependent, in part,
upon the Company's ability to sell large quantities of products to computer
resellers, including VARs. Sales to resellers have been made at profit margins
generally less favorable than sales directly to commercial customers. For the
fiscal years ended July 31, 1994, 1995 and 1996, approximately 23%, 24% and 23%
of the Company's revenues, respectively, were derived from sales to computer
resellers, including VARs. The Company's inability to continue to sell products
to computer resellers and thereby obtain the desired volume discounts from
manufacturers or to expand its sales to commercial customers sufficiently to
offset the need to rely on sales to computer resellers could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion of Financial Condition and Results of
Operations."

DEPENDENCE ON MAJOR MANUFACTURERS

The Company's business is dependent upon its relationships with major
manufacturers in the computer industry. Combined sales of products manufactured
by Toshiba America Information Systems, Inc. ("Toshiba"), Hewlett-Packard
Company ("Hewlett-Packard"), NEC Technologies, Inc. ("NEC") and Compaq Computer
Corporation ("Compaq") during the fiscal years ended July 31, 1994, 1995 and
1996 comprised approximately 51%, 52% and 53%, respectively, of the Company's
revenues. Sales of products manufactured by Toshiba accounted for approximately
23%, 24% and 23%, respectively, of the Company's revenues, substantially all of
which sales were of notebook computers and related accessories. Many aspects of
the Company's business are affected by its 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 product shortages from time to
time, because manufacturers have been unable to produce sufficient quantities of
certain products to meet demand. There can be no assurance that manufacturers
will maintain an adequate supply of these products to satisfy all the orders of
the Company's customers or that, during periods of increased demand,
manufacturers will provide products to the Company, even if available, or at
discounts previously offered to the Company. In addition, there can be no
assurance that the pricing and related terms offered by major manufacturers will
not adversely change in the future. The failure to obtain an adequate supply of
products, the loss of a major manufacturer, the deterioration of the Company's
relationship with a major manufacturer or the Company's inability in the future
to develop new relationships with other manufacturers could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business -- Services and Products."

Certain manufacturers offer market development funds, cooperative
advertising and other promotional programs to systems integrators, distributors
and computer resellers. The Company

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relies on these funds for many of its advertising and promotional campaigns. The
dollar amounts of funds received by the Company for the fiscal years ended July
31, 1994, 1995 and 1996 were $1.4 million, $906,000 and $943,000, respectively,
representing 1.0%, .5% and .5% of revenues, respectively. In recent years,
manufacturers have generally reduced their level of support with respect to
these programs. The discontinuance or material reduction of these programs would
result in the Company having to spend its own funds to obtain the same level of
advertising and promotion, which could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General" and "Business -- Sales and Marketing."

INVENTORY MANAGEMENT

The computer industry is characterized by rapid product improvement and
technological change resulting in relatively short product life cycles and rapid
product obsolescence, which can place inventory at considerable valuation risk.
Certain of Manchester's suppliers provide price protection to the Company, which
is intended to reduce the risk of inventory devaluation due to price reductions
on current products. Certain of the Company's suppliers also provide stock
balancing to the Company pursuant to which the Company is 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 can be
returned at any one time. There can be no assurance that such price protection
or stock balancing will be available to the Company in the future, or that these
measures will provide complete protection against the risk of excess or obsolete
inventories. Although the Company maintains a sophisticated proprietary
inventory management system, there can be no assurance that the Company will
continue to successfully manage its existing and future inventory. Failure to
successfully manage its current or future inventory could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business -- Management Information Systems."

RAPID TECHNOLOGICAL CHANGE

The markets for the Company's products and services are characterized by
rapidly changing technology and frequent introduction of new hardware and
software products and services, which may render many existing products
noncompetitive, less profitable or obsolete. The Company's continued success
will depend on its ability to keep pace with the technological developments of
new products and services and to address increasingly sophisticated customer
requirements. The Company's success will also depend upon its abilities to
address the technical requirements of its 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 its employees as
well as its customers with respect to these new products or services and to
integrate effectively and efficiently these new products into both the Company's
internal systems and systems developed for the Company's customers. There can be
no assurance that the Company will be successful in identifying, developing and
marketing product and service developments or enhancements in response to these
technological changes. The failure of the Company to respond effectively to
these technological changes could have a material adverse effect on the
Company's business, results of operations and financial condition.

FLUCTUATIONS IN QUARTERLY RESULTS

The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to continue to do so in the future.
Quarterly revenues and operating results generally fluctuate as a result of the
demand for the Company's products and services, the introduction of new hardware
and software technologies with improved features, the introduction of new
services by the Company and its competitors, changes in the level of the
Company's operating expenses, competitive conditions and economic conditions. In
particular, the Company currently is

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increasing its fixed operating expenses, including a significant increase in
personnel, as part of its strategy to increase its focus on providing systems
integration and other higher margin and value-added services. Accordingly, the
Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance. In addition,
the results of any quarterly period are not indicative of results to be expected
for a full fiscal year.

CONCENTRATION OF OWNERSHIP AND CONTROL AND ANTI-TAKEOVER PROVISIONS

Based on the number of shares of Common Stock that will be outstanding upon
completion of this offering, Barry R. Steinberg, the Company's Chairman of the
Board, President and Chief Executive Officer, will beneficially own 55.7% of the
outstanding shares of Common Stock (approximately 53.3% if the Underwriters'
over-allotment option is exercised in full). As a result, Mr. Steinberg will
have sufficient voting power to elect all of the Company's directors. Mr.
Steinberg also will be able to veto any proposed sale of the Company, which
under New York law requires the affirmative vote of the holders of two-thirds of
the outstanding shares of Common Stock. See "Principal and Selling
Shareholders."

The Company's principal shareholders and their families and affiliated
entities own a substantial portion of the real estate leased by the Company. The
Company believes that each of these leases, as amended to be effective with the
closing of this offering, is on terms comparable to those that the Company could
have obtained from independent third parties. However, there can be no assurance
that conflicts of interest may not arise out of such relationships. See
"Principal and Selling Shareholders" and "Certain Transactions."

The Company's Certificate of Incorporation provides that up to 5,000,000
shares of Preferred Stock may be issued by the Company from time to time in one
or more series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to and imposed upon any wholly
unissued series of Preferred Stock and to fix the number of shares of any series
of Preferred Stock and the designation of any such series, without any vote or
action by the Company's shareholders. The Board of Directors may authorize and
issue Preferred Stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In
addition, the potential issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids of the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of the Common Stock. In
addition, the Company is subject to Section 912 of the New York Business
Corporation Law which imposes certain restrictions and requirements on a
company's ability to engage in a "business combination" with an "interested
shareholder." See "Description of Capital Stock."

DISCRETIONARY USE OF PROCEEDS

Approximately $10.1 million of the net proceeds of this offering will be
utilized for general corporate purposes, including working capital. Accordingly,
the Board of Directors will have broad discretion as to the allocation of a
substantial portion of the net proceeds from this offering. See "Use of
Proceeds."

SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will incur an immediate and
substantial dilution of approximately $6.27 per share in pro forma net tangible
book value from the $10.00 per share initial public offering price. See
"Dilution."

NO PRIOR MARKET; STOCK PRICE VOLATILITY

Prior to this offering, there has been no public market for the Company's
Common Stock. Consequently, the initial public offering price has been
determined by negotiations between the

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Company and the Representatives. There can be no assurance that an active public
market for the Common Stock will develop or be sustained after this offering or
that the market price of the Common Stock will not decline below the initial
public offering price. The trading price of the Common Stock could be subject to
wide fluctuations in response to quarter to quarter variations in operating
results, announcements of technological innovations or new products or services
by the Company or its competitors, general conditions in the industry, changes
in earnings estimates by securities analysts, or other events or factors, many
of which are beyond the Company's control. In addition, the stock market has
experienced extreme price and volume fluctuations, which have particularly
affected the market prices of many technology-related companies and which have
often been unrelated to the operating performance of such companies. The
Company's revenue or operating results in future quarters may be below the
expectations of securities analysts and investors. In such event, the price of
the Company's Common Stock would likely decline, perhaps substantially. These
Company-specific factors or broad market fluctuations may materially adversely
affect the market price of the Company's Common Stock. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after
this offering or the prospect of such sales could adversely affect the market
price of the Common Stock and the Company's ability to raise capital necessary
to fund its future operations. In addition to the 2,500,000 shares of Common
Stock offered hereby, as of the date of this Prospectus (the "Effective Date"),
there will be approximately 5,825,000 shares of Common Stock outstanding, all of
which are deemed "restricted securities" under Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), and may be eligible for sale in the
public market in accordance with certain volume and other restrictions under
Rule 144 under the Securities Act beginning 90 days after the effective date of
this offering. Notwithstanding the ability to resell their shares under Rule
144, the current shareholders have agreed with the Representatives not to offer,
sell or otherwise dispose of any shares of Common Stock without the prior
written consent of Ladenburg Thalmann & Co. Inc., on behalf of the
Representatives, for a period of 180 days after the date of this Prospectus.
Sales of a substantial number of shares of Common Stock in the public market
following this offering, pursuant to Rule 144 or otherwise, could materially
adversely affect the market price of the Common Stock. In addition, the Company
intends to register under the Securities Act, 90 days following the closing of
this offering, 1,100,000 shares of Common Stock reserved for issuance under the
Company's stock option plan. See "Shares Eligible for Future Sale."

Upon completion of this offering, the Company has agreed to issue to the
Representatives and their designees warrants covering an aggregate of 250,000
shares of Common Stock exercisable for a four-year period commencing one year
from the date of this offering, at an exercise price equal to 120% of the
initial public offering price. The Company has agreed to grant certain demand
and piggyback registration rights to the holders of these warrants. The
existence or exercise of these warrants could materially adversely affect the
Company's ability to raise additional financing at a time when it may be
advantageous to do so. See "Underwriting."

ABSENCE OF DIVIDENDS

To date, the Company has not paid any cash dividends and does not presently
intend to pay cash dividends in the foreseeable future. See "Dividend Policy."

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12

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $18,884,375
($22,362,500 if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses. The Company intends to repay the entire balance outstanding under its
line of credit with the net proceeds of this offering. At July 31, 1996,
approximately $6.5 million was outstanding under the line of credit, of which
$3.5 million bore interest at 7.69% per annum and the balance bore interest at
8.25% per annum. Of the remaining net proceeds, approximately $1.0 million will
be used to relocate or expand the Company's New York City office, approximately
$770,000 will be used to expand training and sales facilities in Long Island,
and approximately $500,000 will be used to upgrade the Company's internal
telecommunications system. The approximately $10.1 million balance (assuming
$6.5 million is outstanding under the line of credit as of the closing of this
offering) will be added to working capital for general corporate purposes. The
retiring of indebtedness under the bank line of credit will increase the
availability of bank credit for general corporate purposes.

Exact allocation of the proceeds for working capital purposes, the
increased funds available under the bank line of credit and the timing of such
expenditures will depend upon various factors, including the availability of
strategic expansion opportunities. Although it is possible that the Company
might acquire businesses complementary to the current or future business of the
Company, the Company's ability to effect such an acquisition will depend upon a
number of factors, including the availability of acquisition candidates or other
business opportunities. The Company has no current plans for any acquisitions,
and no such acquisitions are being negotiated as of the date of this Prospectus.
There can be no assurance that any acquisition will be consummated or that, if
consummated, any acquisition will be successful.

Pending the use of the net proceeds of this offering, the Company will
invest the funds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Board of Directors currently intends to retain all future earnings,
if any, to fund the growth and development of the Company's business and,
accordingly, does not anticipate paying any cash dividends in the foreseeable
future.

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13

DILUTION

The following discussion and tables give pro forma effect to the
termination of the shareholder put right and shareholders' agreements upon the
closing of this offering. See Note 10 of the Notes to the Consolidated Financial
Statements.

The pro forma net tangible book value of the Company at July 31, 1996, was
approximately $12,185,000, or $1.97 per share. Net tangible book value per share
is equal to the Company's total tangible assets less its total liabilities,
divided by the number of shares of Common Stock outstanding. After giving effect
to the sale of the 2,125,000 shares of Common Stock offered by the Company
hereby and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value of the Company at July 31, 1996, would have been
$31,069,375, or $3.73 per share. This represents an immediate increase in pro
forma net tangible book value of $1.76 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $6.27 per share to
purchasers of Common Stock in this offering, as illustrated in the following
table:

Initial public offering price per share........................... $10.00
Pro forma net tangible book value per share as of July 31, $1.97
1996.........................................................
Increase per share attributable to new investors in this 1.76
offering.....................................................
-----
Pro forma net tangible book value per share after this offering... 3.73
------
Dilution per share to new investors in this offering.............. $ 6.27
======

The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and the new investors (before deducting the underwriting discounts
and commissions and estimated offering expenses):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------

Existing shareholders..... 6,200,000(1) 74.47% $ 4,600 .02% $ .00
New investors............. 2,125,000 25.53% $21,250,000 99.98% $ 10.00
--------- ------ ----------- ------
Total........... 8,325,000 100.00% $21,254,600 100.00%
========= ====== =========== ======

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

(1) Does not give effect to the sale by the Selling Shareholder of 375,000
shares of Common Stock pursuant to this offering. See "Principal and Selling
Shareholders."

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CAPITALIZATION

The following table sets forth, as of July 31, 1996, the capitalization of
the Company and the as adjusted capitalization of the Company after giving
effect to the sale of the 2,125,000 shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom after
deducting underwriting discounts and commissions and estimated offering
expenses. The information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.

JULY 31, 1996
---------------------------
ACTUAL AS ADJUSTED
----------- -----------

Short-term debt, including current maturities of capital lease
obligation................................................... $ 6,952,000 $ 452,000
=========== ===========
Capital lease obligation, excluding current maturities......... $ 175,000 $ 175,000
Redeemable Common Stock(1)..................................... 4,739,000 --
Shareholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized,
none issued and outstanding actual and as adjusted........... -- --
Common Stock, $.01 par value; 25,000,000 shares authorized,
6,200,000 shares issued and outstanding, and 8,325,000 shares
issued and outstanding as adjusted(2)........................ 62,000 83,000
Additional paid-in capital..................................... -- 18,863,000
Retained earnings.............................................. 8,113,000 12,852,000
----------- -----------
Total shareholders' equity..................................... 8,175,000 31,798,000
----------- -----------
Total capitalization........................................... $13,089,000 $31,973,000
=========== ===========

- ---------------
(1) Represents the aggregate amounts payable by the Company to redeem shares of
Common Stock under the shareholder put right and shareholders' agreements
between the Company and certain shareholders and as adjusted gives effect
to the termination of these agreements upon the effectiveness of this
offering. See Note 10 of Notes to the Consolidated Financial Statements.

(2) Excludes 1,100,000 shares of Common Stock reserved for issuance under the
Company's stock option plan and 250,000 shares of Common Stock reserved for
issuance upon exercise of the Representatives' Warrants. See
"Management -- Stock Option Plan" and "Underwriting."

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15

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The selected consolidated financial data presented below are derived from
the audited consolidated financial statements of the Company. The Consolidated
Financial Statements as of July 31, 1995 and 1996 and for each of the years in
the three-year period ended July 31, 1996 and the report thereon of KPMG Peat
Marwick LLP, independent auditors, are included elsewhere in this Prospectus.
The consolidated financial data presented below as of July 31, 1992, 1993 and
1994 and for the years ended July 31, 1992 and 1993 are derived from
consolidated financial statements of the Company not appearing herein which were
audited by another independent auditor. 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 Prospectus.

FISCAL YEAR ENDED JULY 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------

INCOME STATEMENT DATA:
Revenues............................ $111,835 $118,898 $137,361 $170,818 $ 189,659
Cost of revenues.................... 93,284 101,046 117,377 146,323 163,128
-------- -------- -------- -------- --------
Gross profit........................ 18,551 17,852 19,984 24,495 26,531
Selling, general and administrative
expenses(1)...................... 17,266 16,065 17,380 21,280 22,598
-------- -------- -------- -------- --------
Income from operations.............. 1,285 1,787 2,604 3,215 3,933
Interest and other expenses, net.... (47) 34 (172) (392) (365)
Provision for income taxes.......... 610 689 1,042 1,160 1,430(2)
Cumulative effect of change in
accounting for income taxes...... -- -- 386 -- --
-------- -------- -------- -------- --------
Net income.......................... $ 628 $ 1,132 $ 1,776 $ 1,663 $ 2,138(2)
======== ======== ======== ======== ========
Net income per share................ $ .10 $ .18 $ .28 $ .27 $ .34(2)
======== ======== ======== ======== ========
Weighted average shares of
Common Stock outstanding......... 6,262,626 6,262,626 6,262,626 6,262,626 6,246,970
======== ======== ======== ======== ========

JULY 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------

BALANCE SHEET DATA:
Working capital........................... $ 4,695 $ 6,274 $ 7,701 $ 9,189 $ 9,841
Total assets.............................. 21,662 22,002 25,879 31,635 37,761

Short-term debt, including current
maturities of capital lease
obligation............................. 3,500 2,200 5,400 5,600 6,952
Capital lease obligation, excluding
current maturities..................... -- -- -- -- 175
Redeemable Common Stock(3)................ 1,000 5,210 5,210 5,210 4,739
Shareholders' equity...................... 5,676 2,598 4,374 6,037 8,175

- ---------------
(1) Officers' compensation was $3,940, $1,897, $1,988, $4,990 and $4,334 for the
fiscal years ended July 31, 1992, 1993, 1994, 1995 and 1996, respectively.

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

(3) Represents the aggregate amounts payable by the Company to redeem shares of
Common Stock under the shareholder put right and shareholders' agreements
between the Company and certain shareholders. See Note 10 of Notes to the
Consolidated Financial Statements.

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16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto appearing elsewhere in
this Prospectus. The following discussion contains certain forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from the results anticipated in those forward-looking
statements as a result of certain of the factors set forth in the section of
this Prospectus entitled "Risk Factors" as well as elsewhere herein.

GENERAL

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

As a result of intense price competition within the computer industry as
well as other industry conditions, the Company has experienced increasing
pressure on its gross profit and operating margins with respect to the sale of
products. Manchester's strategy includes increasing its focus on providing
value-added services with operating margins that are higher than those obtained
with respect to the sale of products. The Company's future performance will
depend in part on its ability to manage successfully a continuing shift in its
operations towards value-added services.

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

The markets for the Company's products and services are characterized by
rapidly changing technology and frequent introductions of new hardware and
software products and services, which render many existing products
noncompetitive, less profitable or obsolete. The Company believes that its
inventory controls have contributed to its ability to respond effectively to
these technological changes. As of July 31, 1994, 1995 and 1996, inventories
represented 28%, 30% and 24% of total assets, respectively. During these same
fiscal years, the Company's average inventory turnover was 17, 16 and 18 times,
respectively. The failure of the Company to anticipate technology trends or to
continue to effectively manage its inventory could have a material adverse
effect on the Company's business, results of operations and financial condition.

The Company believes its controls on accounts receivable have contributed
to its profitability. The Company's bad debt expense represented .3%, .1% and
.1% of total revenues for the fiscal years ended July 31, 1994, 1995 and 1996,
respectively.

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17

increasing its fixed operating expenses, including a significant increase in
personnel, as part of its strategy to increase its focus on providing higher
margin, value-added services. Accordingly, the Company believes that
period-to-period comparisons of its operating results should not be relied upon
as an indication of future performance. In addition, the results of any
quarterly period are not indicative of results to be expected for a full fiscal
year.

As a result of the rapid changes which are taking place in computer and
networking technologies, product life cycles are short. Accordingly, the
Company's product offerings change constantly. Prices of products change with
generally higher prices early in the life cycle of the product and lower prices
near the end of the product's life cycle. The Company believes that the impact
of price or volume changes of any particular product or products is not material
to the Company's Consolidated Financial Statements.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, information
derived from the Company's Consolidated Statements of Income expressed as a
percentage of revenues.

PERCENTAGE OF REVENUES
FOR
THE YEAR ENDED JULY 31,
-------------------------
1994 1995 1996
----- ----- -----

Revenues................................................. 100.0% 100.0% 100.0%
Cost of revenues......................................... 85.5 85.7 86.0
----- ----- -----
Gross profit............................................. 14.5 14.3 14.0
Selling, general and administrative expenses............. 12.6 12.4 11.9
----- ----- -----
Income from operations................................... 1.9 1.9 2.1
Interest and other expenses, net......................... 0.1 0.2 0.2
----- ----- -----
Income before income taxes and cumulative effect of
change in accounting................................... 1.8 1.7 1.9
Provision for income taxes............................... 0.8 0.7 0.8
Cumulative effect of change in accounting for income
taxes.................................................. 0.3 -- --
----- ----- -----
Net income............................................... 1.3% 1.0% 1.1%
===== ===== =====

YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1996

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

Gross Profit. Cost of revenues includes the direct costs of products sold,
freight and the personnel costs associated with providing technical services,
offset in part by manufacturers' market development funds. All other operating
costs are included in selling, general and administrative expenses. Gross profit
increased $2.0 million or 8.3% from $24.5 million in fiscal 1995 to $26.5
million in fiscal 1996 primarily as a result of the increase in revenues. Gross
profit as a percentage of revenues decreased from 14.3% to 14.0%. The decrease
in the gross profit percentage was due to changes in product mix as well as
increased pricing pressures prevalent within the industry. Competitive
pressures, changes in the types of products or services sold and product
availability result in fluctuations in gross profit from period to period.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million or 6.2% from $21.3 million in
fiscal 1995 to $22.6 million in fiscal 1996. Approximately $261,000 of this
increase related to higher payroll and related costs due primarily to a $917,000
increase associated with the hiring of additional technical and administrative
staff in support of the Company's strategy to increase its value-added services
revenue partially offset by a $656,000 reduction in officers' compensation from
approximately $5.0 million in fiscal 1995 to approximately $4.3 million in
fiscal 1996. Rent and occupancy costs increased by approximately $408,000 due
primarily to higher rent principally paid to related parties as well as the
leasing of an additional facility to meet the Company's current and future
needs. In addition, commissions paid to

17
18

the Company's sales force increased approximately $328,000 due to the increase
in revenues in fiscal 1996.

The Company's Chief Executive Officer has entered into an employment
agreement with the Company under which he will receive $550,000 in compensation,
exclusive of fringe benefits, for each of the fiscal years ending July 31, 1997
and 1998. In addition, the Company's Executive Vice President has agreed to
receive base compensation, exclusive of fringe benefits, of $450,000 for the
fiscal years ending July 31, 1997 and 1998. These officers have agreed that they
will not be entitled to any bonuses for fiscal 1997 and that any bonus payable
to either of these officers in fiscal 1998 will require the approval of a
majority of the independent directors of the Company. The compensation to be
paid to the Company's President and Executive Vice President in fiscal 1999 and
thereafter will be based upon agreements to be negotiated at the expiration of
their current respective employment agreements, which compensation the Company
believes will reflect the then fair value of the services to be rendered to the
Company by such individuals. If the revised compensation terms had been in
effect for the entire fiscal 1996 period, and had the Company's former Chief
Financial Officer been compensated at the annual compensation payable to the
current Chief Financial Officer, officers' compensation would have been reduced
by approximately $3.2 million. See "Management." Each of the leases with related
parties has been amended effective with the closing of this offering, to reduce
the rent payable under that lease to current market rates. See "Certain
Transactions." If the revised leases had been in effect for the entire fiscal
1996 period, rent expense would have been reduced by $304,000 from the reported
amount. Giving pro forma effect to the foregoing reductions in officers'
compensation and rents to related parties, the pro forma selling, general and
administrative expenses would have been approximately $19.1 million or 10.1% of
revenues in fiscal 1996.

Interest Expense, Net. Interest expense, net increased from $346,000 in
fiscal 1995 to $374,000 in fiscal 1996 primarily due to increased borrowings.

Provision for Income Taxes. The effective income tax rate decreased
slightly from approximately 41% in fiscal 1995 to approximately 40% in fiscal
1996.

YEAR ENDED JULY 31, 1994 COMPARED TO YEAR ENDED JULY 31, 1995

Revenues. Revenues increased $33.5 million or 24.4% from $137.4 million in
fiscal 1994 to $170.8 million in fiscal 1995. This increase was due primarily to
the increased demand for pentium-based personal computers and notebook computers
and increased sales to the Company's largest customer.

Gross Profit. Gross profit increased $4.5 million or 22.6% from $20.0
million in fiscal 1994 to $24.5 million in fiscal 1995 principally as a result
of increased revenues. Gross profit as a percentage of revenues decreased from
14.5% in fiscal 1994 to 14.3% in fiscal 1995 as a result of changes in the mix
of products sold by the Company during the periods and increasing pricing
pressures prevalent in the industry. During the year ended July 31, 1994, the
Company was related, through common ownership and control, to Electrograph
Systems, Inc. ("Electrograph"), a value-added distributor of microcomputer
peripherals, components and accessories. Purchases from Electrograph during this
period were $385,000 substantially all of which was paid by July 31, 1994. In
August 1994, Electrograph was acquired by an unrelated company.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.9 million or 22.4% from $17.4 million in
fiscal 1994 to $21.3 million in fiscal 1995. These costs decreased as a
percentage of revenues from 12.6% to 12.4% as a result of the 24.4% increase in
revenues as compared to the 22.4% increase in selling, general and
administrative expenses. The dollar increase was principally due to higher
payroll and related costs, principally an increase of approximately $3.0 million
in officers' compensation from approximately $2.0 million to approximately $5.0
million, as well as lower market development funds and higher sales commissions
due to the increase in revenues in fiscal 1995. This increase was partially
offset by lower bad debt expense.

Interest Expense, Net. Interest expense, net increased from $236,000 in
fiscal 1994 to $346,000 in fiscal 1995, principally due to increased borrowings.

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19

Provision for Income Taxes. The effective income tax rate decreased from
approximately 43% in fiscal 1994 to approximately 41% in fiscal 1995. This
decrease was primarily due to lower state income taxes in fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

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

For the year ended July 31, 1996, cash provided by operations increased to
$4.2 million as compared to cash provided by operations of $1.6 million in
fiscal 1995 and cash used in operations of $4.1 million in fiscal 1994. The
increase in cash provided by operations in fiscal 1996 as compared to fiscal
1995 was primarily due to higher net income and reduced inventory levels. The
increase in cash provided by operations in fiscal 1995 as compared to fiscal
1994 was primarily due to increased balances in accounts payable and accrued
expenses. The Company's accounts receivable and accounts payable and accrued
expenses balances as well as its investment in inventory can fluctuate
significantly from one year end to the next due to the receipt of large customer
orders or payments or variations in product availability and vendor shipping
patterns at any particular date. Generally, the Company's experience is that
increases in accounts receivable, inventory and accounts payable and accrued
expenses will coincide with growth in revenue and increased operating levels.

Cash used in investing activities increased from approximately $448,000 in
fiscal 1994 and $440,000 in fiscal 1995 to $1.0 million in fiscal 1996. In
addition, during fiscal 1996, the Company acquired $305,000 of computer
equipment through a capital lease obligation resulting in total fixed asset
additions for fiscal 1996 of $1.3 million. This increased level of spending
reflects the initial expenditures related to the Company's plans to expand its
operations and facilities to accommodate current and anticipated increases in
revenues.

Cash provided by financing activities in fiscal 1996 was approximately
$751,000 compared to $200,000 in fiscal 1995 and $3.2 million in fiscal 1994.
The change in cash provided by financing activities is primarily reflective of
increases in borrowing by the Company under its line of credit with a financial
institution. Similar to the items discussed above, the Company's level of
borrowing will fluctuate significantly in order to provide cash for operations
and capital expenditures.

The Company's line of credit agreement with a financial institution, as
amended in October 1996, provides for a maximum of $11.5 million of borrowings
and is due on demand. Interest on borrowings is computed at the Company's option
based on the financial institution's prime rate (8.25% at July 31, 1996) or at
LIBOR plus 2% (7.69% at July 31, 1996). The line provides for a general security
interest first lien on all of the Company's assets, to the extent a first lien
is available. The line is guaranteed by Barry R. Steinberg, the Company's
President, Chief Executive Officer and majority shareholder. At July 31, 1996,
borrowings of $6.5 million were outstanding under the line of credit. A portion
of the net proceeds of this offering will be applied to repay the outstanding
indebtedness under the line. Following this offering, the Company expects to
maintain the line, may utilize it to fund operations and intends to eliminate
Mr. Steinberg's guarantee.

The Company believes that the net proceeds of this offering together with
current working capital, expected cash flows from operations and available
borrowings under the line of credit will be adequate to support current
operating levels for the foreseeable future, specifically through at least the
end of fiscal 1998. The Company currently has no major commitments for capital
expenditures. Future capital requirements of the Company include those for the
growth of working capital items such as accounts receivable and inventory and
the purchase of equipment and expansion of facilities as well as the possible
opening of new offices. The Company's ability to implement its expansion
strategy is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional funds through equity
or debt financings or from other sources, as may be required.

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20

INFLATION

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

NEW ACCOUNTING STANDARD

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 establishes financial accounting
and reporting standards for stock-based compensation plans. Statement 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. Statement 123 encourages a fair
value based method of accounting for employee stock options or other similar
equity instruments. Entities electing not to adopt a fair value method must make
pro forma disclosures of net income and earnings per share as if a fair value
based method had been applied. Statement 123 is effective for fiscal year 1997.
The Company has elected not to adopt a fair value based accounting method for
employee stock options and therefore does not expect that the adoption of
Statement 123 will have a material impact on its financial position or results
of operations. The Company will disclose, commencing in fiscal 1997, the pro
forma net income and earnings per share as if such method had been used to
account for stock-based compensation cost.

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21

BUSINESS

GENERAL

Manchester Equipment Co., Inc. is a systems integrator and reseller of
computer hardware, software and networking products, primarily for commercial
customers. The Company offers its customers single-source solutions customized
to their information systems needs by combining value-added services with
hardware, software, networking products and peripherals from leading vendors.
Over the past 20 years, the Company has forged long-standing relationships with
both customers and suppliers and capitalized on the rapid developments in the
computer industry, including the shift toward client/server-based platforms.

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

The Company offers its customers a variety of value-added services, such as
consulting, integration and support services, together with a broad range of
computer and networking products from leading vendors. Consulting services
include systems design, performance analysis, security 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. Significant customers of the Company currently include
Barnes & Noble Inc., Cabletron Systems Inc., Conde Nast Publications Inc., J&R
Music World, National Broadcasting Company Inc., Pfizer Inc., Reuters America
Inc., Time Warner Inc., The Toronto Dominion Bank, United Parcel Service of
America Inc. and the United States Merchant Marine Academy. The Company offers
these services and products from its headquarters in Long Island, New York, and
its regional offices in New York City, Needham, Massachusetts and Boca Raton and
Tampa, Florida. Most of the Company's revenues are derived from sales to
customers located in the New York Metropolitan area, with approximately 90% of
the Company's revenues being generated from its Long Island and New York City
offices.

The Company was incorporated in New York in 1973 and has one active
wholly-owned subsidiary, Manchester International, Ltd., a New York corporation
which sells computer hardware, software and networking products to resellers
domestically and internationally.

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 productiv-

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

THE MANCHESTER SOLUTION

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

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

STRATEGY

The key elements of the Company's strategy include:

EMPHASIZING VALUE-ADDED SERVICES. Value-added services, such as
consulting, integration and support services, generally provide higher profit
margins than computer hardware sales. The Company intends to increase its focus
on providing these services through a number of key strategies. The Company
plans to recruit additional technical personnel with broad-based knowledge in
systems design and specialized knowledge in different areas of systems
integration, including application software, inter-networking (including
bridges, routers and switches), database design and management and security. The
Company plans to actively promote the benefits of corporate intranets and
intends to introduce additional services, including remote network management
services and fee-based "help desk" services. The remote network management
system is expected to consist of dedicated servers and software located at the
Company's Long Island headquarters. This system is intended to allow the
Company's specially trained engineers to solve their customers' network systems
problems from the Company's facilities. The fee-based "help desk" services are
anticipated to be available for end-users, regardless of whether they purchase
products or other services from the Company.

INCREASING MARKETING FOCUS ON COMPANIES OUTSIDE THE FORTUNE
500. Manchester has decided to increase its marketing focus on those companies
outside the Fortune 500 in order to increase its value-added services revenue.
Manchester's experience is that these companies are

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increasingly looking to third parties to provide a complete solution to their
information systems needs from both a service and product standpoint. These
companies often do not have the necessary information technology personnel to
procure, design, install or maintain complex systems or to incorporate
continuously evolving technologies. Manchester believes that it can provide
these companies with solutions to their information systems requirements by
providing a variety of value-added services together with a broad range of
computer and networking products.

INTRODUCING AN ELECTRONIC ORDERING SYSTEM. Manchester is in the process of
implementing an electronic ordering system. This ordering system will enable
customers to access the Company via the Internet, review various products,
systems and services offered by the Company and place their orders on-line.
Customers will also be able to obtain immediate customized information regarding
products, systems and services that meet their specific requirements. The
ordering system will produce a matrix of alternative fully compatible packages,
together with their availability and related costs, based on parameters
indicated by the customer. Customers will not be granted access to this system
without prior credit clearance.

INCREASING SALES FORCE PRODUCTIVITY. Manchester is addressing a variety of
strategies to increase sales force productivity. The Company is in the process
of implementing an electronic sales information system utilizing similar
technology to the electronic ordering system described above. The electronic
sales information system will allow the Company's sales representatives to
obtain immediate customized information regarding products and services that
meet the specific system requirements of customers and the availability and
related costs of such products and services. The Company believes that this
system will increase the productivity of its sales representatives by enabling
them to offer rapid and comprehensive solutions to their customers' needs while
reducing the possibility of returns based on incompatible products.

Manchester also is upgrading its internal telecommunications system.
Through its enhanced system, anticipated to be implemented during the first
calendar quarter of 1997, telephone calls can be automatically placed to a
targeted list of existing or potential customers and, upon connection, will be
routed automatically to available sales representatives with on-screen
information containing product and service data for current customers and market
demographic data for potential customers. The system also will have the
capability to route automatically in-coming calls to available sales
representatives in response to a caller's answers to automated queries.

The Company also intends to provide increased training of its sales
representatives in matters relating to value-added services, such as consulting
and integration services. To facilitate such training, the Company plans to
construct a dedicated training facility to be located in one of its existing
offices in Long Island.

EXPANDING NEW YORK METROPOLITAN AREA PRESENCE. The Company believes that
it has a strong presence and wide name recognition in the New York Metropolitan
area, where there is a growing corporate demand for computer products and
services. Manchester is seeking to expand its presence in this area by enlarging
its New York City office and increasing the sales and service capabilities of
such office, and expanding its sales, service and training capabilities at its
Long Island headquarters. The Company believes that these steps will enable it
to capture a greater percentage of the New York Metropolitan area market.

EXPANDING INTO ADDITIONAL BUSINESS CENTERS. The Company has regional
offices in Needham, Massachusetts and Boca Raton and Tampa, Florida, from which
it derived approximately 10% of its revenues for the fiscal year ended July 31,
1996. The Company intends to continue to expand geographically into growing
business centers in the eastern half of the United States. It is anticipated
that each office would have the capability to perform a broad array of services
as well as engage in product sales.

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24

SERVICES AND PRODUCTS

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

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

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

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

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

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

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

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

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

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25

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

Network management consists of managing the compatibility of, and
communication between, the various components comprising a customer's
information system. The increased expense associated with the ownership of
information systems has encouraged customers to outsource the management of
computer networks, including local area networks ("LANs") and wide area networks
("WANs"). Currently, the Company's engineers provide network management services
on site at customers' facilities. The Company plans to expand these services by
enabling its specially trained engineers to solve many of their customers'
network systems problems on a remote basis from the Company's facilities.

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

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

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

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

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

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

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26

For the fiscal years ended July 31, 1994, 1995 and 1996, sales by the
Company of products manufactured by Toshiba, Hewlett-Packard, NEC and Compaq
collectively comprised approximately 51%, 52% and 53%, respectively, of the
Company's revenues. In these fiscal years, sales of products manufactured by
Toshiba accounted for approximately 23%, 24% and 23%, respectively, of the
Company's revenues, substantially all of which were sales of notebook computers
and related accessories. The total dollar volume of products purchased directly
from manufacturers, as opposed to distributors or resellers, was approximately
$89 million, $118 million and $117 million for the fiscal years ended July 31,
1994, 1995 and 1996, respectively, and as a percentage of total cost of products
sold was approximately 77%, 82% and 72%, respectively.

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

CUSTOMERS

The Company believes that it benefits from its long-standing relationships
with many of its customers, providing opportunities for continued sales and
services. Manchester believes that its broad range of capabilities with respect
to both products and services is attractive to companies of all sizes. Although
Manchester is planning to target companies outside the Fortune 500 as one part
of its strategy, it has sold, and anticipates that it will continue to sell, to
some of the largest companies in the United States. For the fiscal years ended
July 31, 1994, 1995 and 1996, approximately 14%, 22% and 16% of the Company's
total revenues, respectively, were derived from United Parcel Service of
America, Inc. Some of the Company's other significant commercial customers
currently include Barnes & Noble Inc., Cabletron Systems Inc., Cablevision
Systems Corp., Conde Nast Publications Inc., J&R Music World, National
Broadcasting Company Inc., Pfizer Inc., Reuters America Inc., SONY Theaters,
Time Warner Inc., The Toronto Dominion Bank, United Nations International
Children's Emergency Fund and the United States Merchant Marine Academy.

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

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

SALES AND MARKETING

The Company's sales are generated primarily by its 59 person sales force.
These sales representatives generally are responsible for meeting all of their
customers' product and service needs and are supervised by sales managers with
significant industry experience. The sales managers are responsible for
overseeing sales representative training, establishing sales objectives and
monitoring account management principles and procedures. Sales representatives
attend seminars conducted by manufacturers' representatives at the Company's
facilities, at which the Company's new and existing product and service
offerings are discussed.

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

Manchester believes that its name is widely recognized for high quality,
competitively priced products and services. The Company promotes name
recognition and the sale of its products and

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27

services through regional business directories, trade magazine advertisements,
radio advertisements, direct mailings to customers and participation in computer
trade shows and special events. The Company advertises at numerous sporting
events in the New York metropolitan region, including full page four-color
advertisements in yearbooks and/or program guides for sports teams such as the
New York Mets, the New York Knicks and the New York Rangers, and has advertised
on New York Mets and New York Yankees tickets. The Company also promotes
interest in its products and services through its website on the Internet, and
intends to expand its website information to provide an electronic catalog of
its products and services. Several manufacturers offer market development funds,
cooperative advertising and other promotional programs, on which the Company
relies for many of its advertising and promotional campaigns. See "Risk
Factors -- Dependence on Major Manufacturers."

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

MANAGEMENT INFORMATION SYSTEMS

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

The Company's information system assists management in maintaining controls
over the Company's inventory and receivables. Manchester's average inventory
turnover was 17, 16 and 18 times for the fiscal years ended July 31, 1994, 1995
and 1996, respectively, and Manchester experienced bad debt expense of less than
.3% of revenues in each of these years.

During the fiscal year ended July 31, 1996, the Company invested in its
management information systems, including upgrading and expanding the IBM AS/400
system, implementing a client/server-based management system to track services
rendered for customers, and upgrading servers and network infrastructures for
its headquarters. The Company utilizes experienced in-house technical personnel,
assisted by the Company's senior engineers, to upgrade and integrate additional
functions into the Company's management information systems.

COMPETITION

The computer industry is characterized by intense competition. The Company
directly competes with local, regional and national systems integrators,
value-added resellers and distributors as well as with certain computer
manufacturers that market through direct sales forces. While the Company's
competitors vary depending upon the particular market, some of the national and
regional competitors of the Company include AmeriData Technologies, Inc.,
CompuCom Systems, Inc., Dataflex Corporation, Entex Information Services, Inc.,
Vanstar Corporation and Electronic Data Systems Corporation. The computer
industry has recently experienced a significant amount of consolidation through
mergers and acquisitions, and manufacturers of personal computers may increase
competition by offering a range of services in addition to their current product
and service offerings. In the future, the Company may face further competition
from new market entrants and possible alliances between existing competitors.
Some of the Company's competitors have, or may

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have, greater financial, marketing and other resources, and may offer a broader
range of products and services, than the Company. As a result, they may be able
to respond more quickly to new or emerging technologies or changes in customer
requirements, benefit from greater purchasing economies, offer more aggressive
hardware and service pricing or devote greater resources to the promotion of
their products and services.

The Company's ability to compete successfully depends on a number of
factors such as breadth of product and service offerings, sales and marketing
efforts, product and service pricing, and quality and reliability of services.

EMPLOYEES

At August 31, 1996, the Company had 222 full-time employees consisting of
23 sales representatives, 26 management personnel, 50 technical personnel and
123 distribution and clerical personnel. In addition, at August 31, 1996, the
Company had 36 independent sales representatives. The Company is not a party to
any collective bargaining agreements and believes its relations with its
employees are good.

INTELLECTUAL PROPERTY

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

PROPERTIES

The Company's main offices and warehouses are located in four buildings in
Hauppauge, New York, consisting of approximately 40,000 and 60,000 square feet
of office and warehouse space, respectively, under leases expiring between
January 1998 and October 2005, for aggregate annual lease payments of
approximately $1,040,000 in fiscal 1996. Three of these buildings are leased
from entities controlled by, or affiliated with, certain of the Company's
executive officers and principal shareholders. Effective with the closing of
this offering, the leases with related parties have been amended to provide
terms comparable to those that could be obtained from independent third parties.
Giving effect to these amended leases, the aggregate annual lease payments for
all four buildings in Hauppauge, New York will be approximately $778,000 in
fiscal 1997. The Company leases an additional office in Massapequa, Long Island
for $10,572 per annum on a month-to-month basis from an entity of which Messrs.
Rothlein and Bivona own 25% and 50%, respectively. See "Certain Transactions."
The Company leases additional offices in New York City, Needham, Massachusetts
and Boca Raton and Tampa, Florida, under leases expiring in January 1999, April
1997, July 1998 and December 1996, respectively, for aggregate rental payments
of approximately $164,000 and $148,000 in fiscal 1996 and fiscal 1997,
respectively, with options to renew in Needham and Tampa. The Company believes
that its Hauppauge and regional offices and warehouse space are well maintained
and are adequate for present requirements. The Company intends to relocate or
expand its New York City office as part of its strategy. See
"Strategy -- Expanding New York Metropolitan Area Presence."

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

NAME AGE POSITION
------------------------------- --- ----------------------------------------------------

Barry R. Steinberg............. 54 Chairman of the Board, President, Chief Executive
Officer and Director
Joel G. Stemple, Ph.D.......... 54 Executive Vice President, Secretary and Director
Joseph Looney.................. 39 Chief Financial Officer
William F. Scheibel, Jr........ 41 Chief Technology Officer
Joel Rothlein, Esq............. 67 Director
George Bagetakos............... 50 Director(1)
Julian Sandler................. 52 Director(1)

- ---------------
(1) Appointment will become effective as of the closing of this offering.

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

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

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

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

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

George Bagetakos has been appointed as a director to be effective as of the
closing of this offering. Mr. Bagetakos has been the Director of Sales, Major
Accounts for Northern Telecom, Inc., a supplier of telecommunications equipment
products, since July 1995, and served as Manager, National Accounts for Northern
Telecom, Inc. from 1984 to June 1995. Prior to joining Northern Telecom, Mr.
Bagetakos was Corporate Vice President, Telecommunications for American Express
Company from 1979 to 1983.

Julian Sandler has been appointed as a director to be effective as of the
closing of this offering. 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.

As a result of his managerial position, stock ownership and activities
relating to the organization of the Company, Barry R. Steinberg may be deemed a
"promoter" as that term is defined in the Securities Act.

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Officers are elected annually and serve at the pleasure of the Board of
Directors, subject to rights, if any, under contracts of employment.

BOARD OF DIRECTORS

Independent Directors. As of the closing of this offering, Messrs. George
Bagetakos and Julian Sandler will be appointed to the Board as independent
directors within the meaning of the rules of the Nasdaq National Market.

Committees of the Board of Directors. As of the closing of this offering,
the Board of Directors will establish an Audit Committee, comprised of the two
independent directors and Dr. Stemple. It is anticipated that the Audit
Committee will be responsible for reviewing the Company's internal accounting
practices as well as the scope of the work performed by the Company's
independent auditors.

Director Compensation. Non-employee directors receive a fee of $500 for
attending Board of Directors' and committee meetings, and are reimbursed for
expenses incurred in connection with the performance of their respective duties
as directors of the Company. Additionally, as of the closing of this offering,
each of the two independent directors will be granted options under the
Company's stock option plan to purchase 2,500 shares of Common Stock at the
initial public offering price of the shares of Common Stock offered hereby.
These options will become first exercisable one year after the date of grant.
See "Stock Option Plan" below.

EXECUTIVE COMPENSATION

Summary Compensation. The following table sets forth a summary of the
compensation paid or accrued by the Company during the fiscal year ended July
31, 1996 to the Company's Chief Executive Officer and the other executive
officers whose compensation exceeded $100,000:

SUMMARY COMPENSATION TABLE

FISCAL 1996 ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ----------------------------------------------------- -------- ---------- ------------

Barry R. Steinberg, Chief Executive Officer.......... $271,800 $1,816,439 $ 54,210(1)
Joel G. Stemple, Executive Vice President............ $251,800 $1,669,193 $ 29,000(2)
Michael Bivona, Chief Financial Officer(3)........... $ 77,312 $ 216,463 $ 28,417(2)

- ---------------
(1) Includes $50,000 of premiums paid by the Company for a whole life insurance
policy in the name of Mr. Steinberg having a face value of $2,600,000 and
under which his daughters, on the one hand, and the Company, on the other
hand, are beneficiaries and share equally in the death benefits payable
under the policy.

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

(3) Resigned as Chief Financial Officer effective June 30, 1996 upon his
retirement.

The executive officers named in the Summary Compensation Table have not
been granted, and do not hold, options to purchase shares of Common Stock, nor
have they received any other long-term incentive compensation during the 1996
fiscal year.

Barry R. Steinberg has agreed with the Company that his annual base salary
for services rendered to the Company in his current positions as President and
Chief Executive Officer shall be $550,000 in each of the fiscal years ending
July 31, 1997 and 1998. Mr. Steinberg has agreed that he will not be eligible to
receive any bonus in fiscal 1997 and that any bonus payable for fiscal 1998 will
require the approval of a majority of the independent directors of the Company.
The Company will continue to make available to him the car allowance and
deferred compensation benefits that he is currently receiving. See Note 5 of
Notes to Consolidated Financial Statements. Mr. Steinberg will also be able to
participate in other benefits that the Company makes generally available to its
employees, such as medical and other insurance, and Mr. Steinberg will be able
to participate under

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the Company's stock option plan. In the event Mr. Steinberg's employment with
the Company were terminated, he would not be precluded from competing with the
Company.

The Company has an employment agreement with Joel G. Stemple, Ph.D., under
which Dr. Stemple receives a base salary of $450,000 in each of the fiscal years
ending July 31, 1997 and 1998. Under the employment agreement, Dr. Stemple is
not eligible to receive any bonus in fiscal 1997 and any bonus payable to Dr.
Stemple for fiscal 1998 must be approved by a majority of the independent
directors of the Company. Under the employment agreement, the Company provides
Dr. Stemple with an automobile and certain deferred compensation benefits and
provides Dr. Stemple with medical and other benefits generally offered by the
Company to its employees. Dr. Stemple also is able to participate in the
Company's stock option plan. The employment agreement is terminable by either
party on 90 days' prior notice. In the event the Company so terminates Dr.
Stemple's employment, or the Company elects not to renew his employment
agreement, he is entitled to severance equal to 12 months of his then current
base salary. This severance will be payable in accordance with the Company's
customary payroll practices. Under the employment agreement, if Dr. Stemple
terminates his employment, or the Company terminates his employment for cause,
Dr. Stemple is prohibited, for a two-year period from such termination, from
competing with the Company in the eastern half of the United States.

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. The Plan will be administered
by the Board of Directors. 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. The
Board of Directors will also determine (i) the exercise price of each option
which must be 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, (ii) the number of shares
of Common Stock subject to each option, (iii) the term of each stock option up
to a maximum of 10 years (or, in the case of incentive options, five years for
certain employees) and (iv) the time or times when the stock option becomes
exercisable. 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, in which event the option may be exercised during the
12-month period following the date of termination of employment to the extent
such option was exercisable on the date of termination of employment but in no
event beyond the term of such option. The maximum number of shares of Common
Stock underlying options which may be granted to any person in any calendar year
is 200,000. Options may be exercised in cash, Common Stock, or any combination
thereof. No options have been granted to date under the Plan. Upon the closing
of this offering, the Company expects to grant options to purchase 2,500 shares
of Common Stock at an exercise price equal to the initial public offering price
of the Common Stock offered hereby to each of the independent directors.

In the event of a Change in Control (as defined below), all outstanding
options under the Plan shall accelerate and become immediately fully
exercisable. Under the Plan, a Change in Control means (i) the sale or other
disposition to a person, entity or group of 50% or more of the Company's
consolidated assets, (ii) the acquisition of 50% or more of the outstanding
shares by a person or group or (iii) if the majority of the Company's Board of
Directors consists of persons other than the Continuing Directors (as defined
below). The term "Continuing Director" shall mean any member of the Company's
Board of Directors on the effective date of the Plan and any other member of the
Board of Directors who shall be recommended or elected to succeed or become a
Continuing Director by a majority of the Continuing Directors who are then
members of the Board of Directors.

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of the date of this Prospectus, and as adjusted
to reflect the sale of the Common Stock offered hereby, by (i) each person known
by the Company to own beneficially five percent or more of such Common Stock,
(ii) each director of the Company, (iii) each person named in the Summary
Compensation Table, (iv) the Selling Shareholder and (v) all executive officers
and directors as a group, together with the number of shares of Common Stock
being sold by the Selling Shareholder hereby.

PERCENTAGE OF
OUTSTANDING
SHARES OWNED
---------------------
SHARES BENEFICIALLY SHARES BEING BEFORE AFTER
NAME AND ADDRESS OWNED SOLD OFFERING OFFERING
----------------------------------- ------------------- ------------ -------- --------

Barry R. Steinberg(1).............. 5,010,101 375,000 80.8% 55.7%
Joel G. Stemple(1)................. 626,263 -- 10.1 7.5
Michael Bivona(2)(3)............... 563,636 -- 9.1 6.8
Joel Rothlein...................... -- -- -- --
George Bagetakos(4)................ -- -- -- --
Julian Sandler(4).................. -- -- -- --
All executive officers and
directors as a group (2
persons)......................... 5,636,364 375,000 90.9 63.2

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

(2) Resigned as Chief Financial Officer and a director effective June 30, 1996
upon his retirement. See "Certain Transactions."

(3) Address is 684 Broadway, Massapequa, New York 11758.

(4) Appointment as a director will become effective as of the closing of this
offering.

CERTAIN TRANSACTIONS

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

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Three of the Company's four Hauppauge, New York facilities are leased from
entities affiliated with certain of the Company's executive officers, directors
or principal shareholders. The property located at 40 Marcus Boulevard,
Hauppauge, New York is leased from a limited liability company owned 70% by Mr.
Steinberg and his relatives, 20% by Joel G. Stemple, Ph.D., the Company's
Executive Vice President and a principal shareholder, and 10% by Michael Bivona,
a principal shareholder of the Company. For the fiscal year ended July 31, 1996,
the Company made lease payments of $216,000 to such entity. The Company's
offices at 160 Oser Avenue, Hauppauge, New York are leased from a limited
liability company owned 65% by Mr. Steinberg, 17.5% by Dr. Stemple and 17.5% by
Mr. Bivona. For the fiscal years ended July 31, 1994, 1995 and 1996, the Company
made lease payments of $244,000, $255,000 and $360,000, respectively, to such
entity. The property located at 50 Marcus Boulevard, Hauppauge, New York is
leased from Mr. Steinberg doing business in the name of Marcus Realty. For the
fiscal years ended July 31, 1994, 1995 and 1996, the Company made lease payments
of $399,000, $417,000 and $435,000, respectively, to such entity. Effective with
the closing of this offering, the leases with the affiliated parties with
respect to the leases of the Hauppauge, New York facilities have been amended to
provide terms comparable to those that could be obtained from independent third
parties. Giving effect to these amended leases, the rent for the properties
located at 40 Marcus Boulevard, 160 Oser Boulevard and 50 Marcus Boulevard will
be $170,375, $255,000 and $324,225, respectively, for fiscal 1997. The Company
leases an additional office in Massapequa, New York at $10,572 per annum on a
month-to-month basis from an entity of which Messrs. Rothlein and Bivona own 25%
and 50%, respectively. See "Business -- Properties."

Mr. Steinberg personally guarantees the Company's obligations under its
bank line of credit for which he receives no compensation. Following this
offering, the Company intends to eliminate Mr. Steinberg's guarantee. See Note 7
of Notes to Consolidated Financial Statements.

On May 7, 1996, following his retirement as the Company's Chief Financial
Officer which became effective June 30, 1996, Mr. Bivona elected, under an
agreement with the Company, to require the Company to purchase 62,626 shares of
Common Stock held by him for $471,000 payable in four equal quarterly
installments, without interest, commencing May 7, 1996. In September 1996, Mr.
Bivona agreed with the Company to terminate transfer restrictions previously
applicable to the balance of the shares of Common Stock owned by Mr. Bivona. In
connection therewith, Mr. Bivona terminated certain put rights he had with
respect to such shares, agreed to the 180-day lock-up required by the
Representatives and agreed that upon expiration of the 180-day period, he may
sell his shares of Common Stock, solely in brokerage transactions, in an amount,
in any three month period, not to exceed the greater of (i) 1% of the then
outstanding shares of Common Stock, and (ii) the average weekly trading volume
in the Common Stock, in the over-the-counter market, during the preceding four
calendar weeks. Pursuant to the agreement, Mr. Bivona has certain piggyback
registration rights in the event of a registration of Common Stock in which Mr.
Steinberg is a selling shareholder. Mr. Bivona has waived these rights with
respect to this offering. See "Shares Eligible For Future Sale."

Joel Rothlein, Esq., a director of the Company, is a partner of Kressel
Rothlein & Roth, Esqs., which, with its predecessor firms, has acted as outside
general counsel to the Company since the Company's inception. Kressel Rothlein &
Roth, Esqs. was paid approximately $89,000 from the Company for legal fees and
disbursements in the fiscal year ended July 31, 1996 and anticipates receiving
fees of approximately $350,000 from the Company (exclusive of disbursements) for
services to be rendered to the Company in the fiscal year ending July 31, 1997.

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34

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 8,325,000 shares of
Common Stock outstanding. Of these shares, the 2,500,000 shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below.

Prior to this offering, there has been no public market for the Common
Stock of the Company, and no assurance can be given that a significant public
market for the Common Stock can be developed or sustained after this offering.
Future sales of substantial amounts of Common Stock in the public market could
have a material adverse effect on the market price of the Common Stock from time
to time.

SALE OF RESTRICTED SHARES

The 5,825,000 shares of Common Stock not being sold in this offering are
deemed "restricted securities" under Rule 144 and may be eligible for sale in
the public market in accordance with certain volume and other restrictions under
Rule 144 beginning 90 days after the date of this Prospectus. Notwithstanding
the ability to resell their shares under Rule 144, the current shareholders have
executed lock-up agreements ("Lock-up Agreements") with the Representatives
providing that such shareholders will not offer, sell or otherwise dispose of
any of their shares of Common Stock without the prior written consent of
Ladenburg Thalmann & Co. Inc., on behalf of the Representatives, for a period of
180 days after the date of this Prospectus.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
restricted securities for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately 83,250
shares immediately after this offering) and (ii) the average weekly trading
volume in the Common Stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed,
provided certain requirements concerning the availability of public information,
manner of sale and notice of sale are satisfied. In addition, Affiliates must
comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
which are not restricted securities. Also, under Rule 144(k), a person who is
not an Affiliate and has not been an Affiliate for at least three months prior
to the sale and who has beneficially owned restricted securities for at least
three years may resell such shares without compliance with the foregoing
requirements. In meeting the two and three year holding periods described above,
a holder of restricted securities can include the holding periods of a prior
owner who was not an Affiliate. The Securities and Exchange Commission has
proposed an amendment to Rule 144 which would reduce the holding period required
for shares subject to Rule 144 to become eligible for sale in the public market
from two years to one year, and from three years to two years in the case of
Rule 144(k).

SHARES RESERVED FOR ISSUANCE

Options. The Company has reserved 1,100,000 shares of Common Stock for
issuance upon exercise of stock options granted under its stock option plan. No
options have been granted to date under the Plan. Upon the closing of this
offering, the Company expects to grant options to purchase 2,500 shares of
Common Stock at an exercise price equal to the initial public offering price of
the Common Stock offered hereby to each of the independent directors. See
"Management -- Stock Option Plan."

The Company intends to file a Registration Statement on Form S-8 under the
Securities Act to register all shares of Common Stock issuable pursuant to the
Company's stock option plan. The

34
35

Company expects to file such Registration Statement 90 days following the
closing of this offering, and such Registration Statement is expected to become
effective upon filing. Shares covered by such Registration Statement will
thereupon be eligible for sale in the public markets, subject to Rule 144
limitations with respect to Affiliates.

Warrants. The Company has reserved 250,000 shares of Common Stock for
issuance upon exercise of the Representatives' Warrants. The holders of the
Representatives' Warrants have certain demand and piggyback registration rights.
See "Underwriting."

LOCK-UP AGREEMENTS

The Company and all of its officers, directors and current shareholders
have agreed, pursuant to the Lock-up Agreements, not to directly or indirectly,
without the prior written consent of Ladenburg Thalmann & Co. Inc., on behalf of
the Representatives, offer, sell, or otherwise dispose of any shares of Common
Stock beneficially owned by them for a period of 180 days after the date of this
Prospectus.

No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could materially
adversely affect the prevailing market prices for the Common Stock and could
impair the Company's future ability to obtain capital through an offering of
equity securities.

35
36

DESCRIPTION OF CAPITAL STOCK

The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$.01 par value, none of which is outstanding, and 25,000,000 shares of Common
Stock, $.01 par value, 6,200,000 of which are issued and outstanding and held by
three shareholders.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series and classes and with such dividend rights,
conversion rights, voting rights, redemption provisions, liquidation preferences
and other rights and restrictions as the Board of Directors may determine. The
issuance of the Preferred Stock permits the Board of Directors, without
shareholder approval, to utilize the Preferred Stock as an anti-takeover device
which could have an adverse effect on the market price of the Common Stock. The
Company has no present intention to issue any shares of Preferred Stock.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held of
record. Subject to the rights of any holders of Preferred Stock which may be
issued in the future, the holders of outstanding shares of Common Stock are
entitled to share ratably on a share-for-share basis with respect to any
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in the assets
remaining after payment of all liabilities and liquidation preferences, if any.
Shares of Common Stock are not redeemable and have no preemptive or similar
rights to subscribe for additional shares. All outstanding shares of Common
Stock are, and the shares of Common Stock offered hereby will upon issuance and
payment be, fully paid and nonassessable.

LIMITED LIABILITY AND INDEMNIFICATION

As permitted by the New York Business Corporation Law ("BCL"), the
Company's Restated Certificate of Incorporation provides that, to the fullest
extent permitted by the BCL, no director of the Company shall be liable to the
Company or its shareholders for monetary damages for the breach of fiduciary
duty in such capacity. Such provision does not eliminate or limit the liability
of any director (i) if a judgment or other final adjudication adverse to such
director establishes that his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that he personally
gained in fact a material profit or other advantage to which he was not legally
entitled or that his acts violated Section 719 of the BCL, or (ii) for any act
or omission prior to the adoption of this provision. As a result of this
provision, the Company and its shareholders may be unable to obtain monetary
damages from a director for breach of his duty of care. Although shareholders
may continue to seek injunctive or other equitable relief for an alleged breach
of fiduciary duty by a director, shareholders may not have any effective remedy
against the challenged conduct if equitable remedies are unavailable. In
addition, under the Restated Certificate of Incorporation, the Company has
agreed to indemnify its officers, directors, employees and agents to the fullest
extent permitted by the BCL against actions that may arise against them in such
capacities, and to advance expenses in connection with any such actions.

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37

NEW YORK BUSINESS COMBINATION STATUTE

Section 912 of the BCL prohibits a company from entering into a business
combination (e.g., a merger, consolidation, sale of 10% or more of a company's
assets, or issuance of securities with an aggregate market value of 5% or more
of the aggregate market value of all of the company's outstanding capital stock)
with a beneficial owner of 20% or more of a company's securities (a "20%
shareholder") for a period of five years following the date such beneficial
owner became a 20% shareholder (the "stock acquisition date"), unless, among
other things, such business combination or the purchase of stock resulting in
the 20% shareholder's beneficial ownership was approved by the company's board
of directors prior to the stock acquisition date or the business combination is
approved by the affirmative vote of the holders of a majority of the outstanding
voting stock exclusive of the stock beneficially owned by the 20% shareholder.
The applicability of this provision to the Company may discourage unsolicited
takeover bids by third parties.

TRANSFER AGENT

American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005 is the transfer agent and registrar for the Common Stock.

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38

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriters named below have, severally and not
jointly, agreed, through Ladenburg Thalmann & Co. Inc. and Cruttenden Roth
Incorporated (the "Representatives"), the representatives of the Underwriters,
to purchase from the Company and the Selling Shareholder, and the Company and
the Selling Shareholder have agreed to sell to the Underwriters, the aggregate
number of shares set forth opposite their respective names:

NAME OF UNDERWRITERS NUMBER OF SHARES
-------------------------------------------------------------------- ----------------

Ladenburg Thalmann & Co. Inc. ...................................... 699,000
Cruttenden Roth Incorporated........................................ 466,000
BT Securities Corporation........................................... 70,000
Dillon, Read & Co. Inc.............................................. 70,000
A.G. Edwards & Sons, Inc............................................ 70,000
Montgomery Securities............................................... 70,000
PaineWebber Incorporated............................................ 70,000
Robertson, Stephens & Company LLC................................... 70,000
UBS Securities LLC.................................................. 70,000
Advest, Inc......................................................... 35,000
Arnhold and S. Bleichroeder, Inc.................................... 35,000
J.C. Bradford & Co.................................................. 35,000
Cowen & Company..................................................... 35,000
First Albany Corporation............................................ 35,000
First of Michigan Corporation....................................... 35,000
Gerard Klauer Mattison & Co., L.L.C................................. 35,000
Jefferies & Company, Inc............................................ 35,000
Josephthal Lyon & Ross Incorporated................................. 35,000
McDonald & Company Securities, Inc.................................. 35,000
The Ohio Company.................................................... 35,000
Punk, Ziegel & Knoell............................................... 35,000
Rauscher Pierce Refsnes, Inc........................................ 35,000
Raymond James & Associates, Inc..................................... 35,000
The Robinson-Humphrey Company, Inc.................................. 35,000
Roney & Co. L.L.C................................................... 35,000
Soundview Financial Group, Inc...................................... 35,000
Tucker Anthony Incorporated......................................... 35,000
Unterberg Harris, L.P............................................... 35,000
Aegis Capital Corp.................................................. 20,000
Black & Company, inc................................................ 20,000
JW Charles Securities, Inc.......................................... 20,000
Ferris, Baker Watts Incorporated.................................... 20,000
Kaufman Bros., L.P.................................................. 20,000
Kirkpatrick, Pettis, Smith, Polian Inc.............................. 20,000
Laidlaw Equities, Inc............................................... 20,000
Prime Charter Ltd................................................... 20,000
Sands Brothers & Co., Ltd........................................... 20,000
---------
Total..................................................... 2,500,000
=========

The Underwriters are committed to take and to pay for all of the shares of
Common Stock offered hereby, if any are purchased.

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39

The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered hereby directly to the public initially at the
price set forth on the cover page of this Prospectus, that they may offer shares
to certain dealers at a price that represents a concession of not more than
$.435 per share, and that the Underwriters may allow, and such dealers may
reallow, a concession of not more than $.10 per share to certain other dealers.
After the commencement of this offering, the price to the public and the
concessions may be changed.

The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
375,000 shares of Common Stock at the same price per share as the initial
2,500,000 shares to be purchased by the Underwriters. The Underwriters may
exercise this option only to cover over-allotments, if any. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same percentage
thereof as the percentage of the initial 2,500,000 shares to be purchased by
that Underwriter.

The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities under
the Securities Act, and to contribute to payments the Underwriters may be
required to make in respect thereof.

The Company has agreed to issue to the Representatives, for their own
account, warrants (the "Representatives' Warrants") to purchase an aggregate of
250,000 shares of Common Stock, exercisable for a period of four years
commencing one year after the date hereof, at a price equal to 120% of the
public offering price, subject to adjustment in certain events. The
Representatives' Warrants contain certain registration rights relating to the
shares issuable thereunder. For the life of the Representatives' Warrants, the
Representatives will have the opportunity to profit from a rise in the market
price for the Common Stock.

The Company, its officers, directors and present shareholders (including
the Selling Shareholder) have agreed not to sell or otherwise dispose of any
equity securities of the Company or any securities convertible into or
exchangeable for, or any rights to purchase or acquire, equity securities of the
Company for a period of 180 days after the date of this Prospectus without the
prior written consent of Ladenburg Thalmann & Co. Inc., on behalf of the
Representatives.

The Company has agreed, for the two-year period following the date of this
Prospectus, not to appoint anyone as syndicate manager, broker or agent in
connection with any public or private debt or equity financing, or registered
public offering, unless the Company has first offered the same to Ladenburg
Thalmann & Co. Inc., upon specified terms and conditions, and if Ladenburg
Thalmann & Co. Inc. fails to accept such terms and conditions within 30 days,
then the Company will be free to appoint any other firm or organization as its
syndicate manager, broker or agent upon terms and conditions that are not more
favorable to such firm or organization than those offered to Ladenburg Thalmann
& Co. Inc.

The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the Underwriters do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.

The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have expressed an interest in
purchasing such shares of Common Stock in this offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.

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40

Prior to this offering, there has been no public market for the Common
Stock. The proposed initial offering price has been determined by negotiations
between the Representatives, the Company and the Selling Shareholder. Among the
factors considered in such negotiations were the Company's results of operations
and financial condition, the prospects for the Company and for the industry in
which the Company operates, the Company's capital structure, and the general
condition of the securities market.

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company and the Selling
Shareholder by Epstein Becker & Green, P.C., New York, New York. Certain legal
matters will be passed upon for the Underwriters by Fulbright & Jaworski L.L.P.,
New York, New York.

EXPERTS

The consolidated financial statements of Manchester Equipment Co., Inc., as
of July 31, 1995 and 1996 and for each of the years in the three-year period
ended July 31, 1996, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of such
firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (the "Commission"), Washington, D.C., in
accordance with the provisions of the Securities Act with respect to the Common
Stock offered hereby, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits filed as a part thereof. Statements
made in this Prospectus concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement and the exhibits may be inspected, without charge at, or copies
thereof obtained at prescribed rates from, the Public Reference Section of the
Commission at Room 1024 at its principal office, located at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and also will be available for
inspection and copying at the regional offices of the Commission located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World
Trade Center, Suite 1300, New York, New York 10048. The Registration Statement
and the exhibits and schedules thereto can also be accessed through EDGAR
terminals located in the Commission's public reference rooms in Washington,
D.C., Chicago and New York or through the World Wide Web at http://www.sec.gov.

The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of this offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information filed by the Company with
the Commission can be inspected, without charge, and copies may be obtained at
prescribed rates, at the offices of the Commission referenced above.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Independent Auditors' Report......................................................... F-2
Consolidated Financial Statements:
Balance Sheets as of July 31, 1995 and 1996........................................ F-3
Statements of Income for the years ended July 31, 1994, 1995 and 1996.............. F-4
Statements of Shareholders' Equity for the years ended July 31, 1994, 1995 and F-5
1996............................................................................
Statements of Cash Flows for the years ended July 31, 1994, 1995 and 1996.......... F-6
Notes to Consolidated Financial Statements......................................... F-7

F-1
42

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, 1996 and 1995 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, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manchester Equipment
Co., Inc. and subsidiaries at July 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 1996, in conformity with generally accepted accounting
principles.

As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in fiscal 1994.

KPMG PEAT MARWICK LLP

Jericho, New York
September 13, 1996, except as
to note 10, which is as of
October 30, 1996

F-2
43

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JULY 31, 1995 AND 1996

HISTORICAL
------------------- PRO FORMA
-------------
JULY 31,
------------------- (UNAUDITED)
1995 1996 JULY 31, 1996
------- ------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,834 $ 5,774 $ 5,774
Accounts receivable, net of allowance for doubtful
accounts of $718 and $800, respectively............. 17,500 19,068 19,068
Inventory.............................................. 9,505 8,957 8,957
Deferred income taxes.................................. 302 334 334
Prepaid expenses and other current assets.............. 238 197 197
------ ------ ------
Total current assets........................... 29,379 34,330 34,330
Property and equipment, net.............................. 1,430 2,244 2,244
Deferred income taxes.................................... 341 395 395
Other assets............................................. 485 792 792
------ ------ ------
$31,635 $37,761 $37,761
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities under capital lease obligation...... $ -- $ 99 $ 99
Notes payable -- bank.................................. 5,600 6,500 6,500
Notes payable -- shareholder........................... -- 353 353
Accounts payable and accrued expenses.................. 14,398 17,113 17,113
Deferred service contract revenue...................... 102 129 129
Income taxes payable................................... 90 295 295
------ ------ ------
Total current liabilities...................... 20,190 24,489 24,489
Capital lease obligation, less current maturities........ -- 175 175
Deferred compensation payable............................ 198 183 183
Commitments and contingencies (Note 6)
Redeemable Common Stock.................................. 5,210 4,739 --
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued............................. -- -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 6,262,626 and 6,200,000 shares issued
and outstanding in 1995 and 1996.................... 63 62 62
Retained earnings...................................... 5,974 8,113 12,852
------ ------ ------
Total shareholders' equity..................... 6,037 8,175 12,914
------ ------ ------
$31,635 $37,761 $37,761
====== ====== ======

See accompanying notes to consolidated financial statements.

F-3
44

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 31, 1994, 1995 AND 1996

YEARS ENDED JULY 31,
--------------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS EXCEPT SHARE AND
PER SHARE AMOUNTS)

Revenues.......................................... $137,361 $170,818 $189,659
Cost of revenues.................................. 117,377 146,323 163,128
-------- -------- --------
Gross profit................................. 19,984 24,495 26,531
Selling, general and administrative expenses...... 17,380 21,280 22,598
-------- -------- --------
Income from operations.......................... 2,604 3,215 3,933
Other income (expense):
Interest, net................................... (236) (346) (374)
Other........................................... 64 (46) 9
-------- -------- --------
Income before provision for income taxes and
cumulative effect of change in accounting for
income taxes................................. 2,432 2,823 3,568
Provision for income taxes........................ 1,042 1,160 1,430
-------- -------- --------
Income before cumulative effect of change in
accounting for income taxes..................... 1,390 1,663 2,138
Cumulative effect of change in accounting for
income taxes (Notes 1 and 8).................... 386 -- --
-------- -------- --------
Net income.............................. $ 1,776 $ 1,663 $ 2,138
========= ========= =========
Net income per share.............................. $ .28 $ .27 $ .34
========= ========= =========
Weighted average shares of Common Stock
outstanding..................................... 6,262,626 6,262,626 6,246,970
========= ========= =========

See accompanying notes to consolidated financial statements.

F-4
45

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS)

PREFERRED COMMON RETAINED
STOCK STOCK EARNINGS TOTAL
--------- ------ -------- ------

Balance July 31, 1993.............................. $ -- $ 63 $2,535 $2,598
Net income......................................... -- -- 1,776 1,776
--------- ------ -------- ------
Balance July 31, 1994.............................. -- 63 4,311 4,374
Net income......................................... -- -- 1,663 1,663
--------- ------ -------- ------
Balance July 31, 1995.............................. -- 63 5,974 6,037
Net income......................................... -- -- 2,138 2,138
Purchase and retirement of stock................... -- (1) 1 --
--------- ------ -------- ------
Balance July 31, 1996.............................. $ -- $ 62 $8,113 $8,175
======= ======= ======= ======

See accompanying notes to consolidated financial statements.

F-5
46

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS)

YEARS ENDED JULY 31,
-------------------------------
1994 1995 1996
------- ------- -------

Cash flows from operating activities:
Net income.................................................. $ 1,776 $ 1,663 $ 2,138
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 360 395 473
Bad debt expense....................................... 398 161 132
Cumulative effect of change in accounting.............. (386) -- --
Deferred income taxes.................................. (118) (71) (86)
Loss (gain) on disposition of assets................... -- 71 (9)
Change in assets and liabilities:
Increase in accounts receivable...................... (3,817) (1,954) (1,700)
(Increase) decrease in inventory..................... (1,362) (2,382) 548
(Increase) decrease in prepaid expenses and
other current assets.............................. 182 (24) 41
Increase in other assets............................. (9) (113) (307)
Increase (decrease) in accounts payable and accrued
expenses.......................................... (1,486) 4,371 2,715
(Decrease) increase in deferred service contract
revenue........................................... (52) (79) 27
Increase (decrease) in income taxes payable.......... 440 (468) 205
Decrease in deferred compensation payable............ -- -- (15)
------- ------- -------
Net cash (used in) provided by operating
activities...................................... (4,074) 1,570 4,162
------- ------- -------
Cash flows from investing activities:
Capital expenditures...................................... (448) (545) (1,028)
Proceeds from the sale of assets.......................... -- 105 55
------- ------- -------
Net cash used in investing activities............. (448) (440) (973)
------- ------- -------
Cash flows from financing activities:
Net proceeds from borrowings.............................. 3,200 200 900
Payments on note payable -- shareholder................... -- -- (118)
Payments on capital lease obligation...................... -- -- (31)
------- ------- -------
Net cash provided by financing activities......... 3,200 200 751
------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (1,322) 1,330 3,940
Cash and cash equivalents at beginning of year............ 1,826 504 1,834
------- ------- -------
Cash and cash equivalents at end of year.................... $ 504 $ 1,834 $ 5,774
======= ======= =======
Cash paid during the year for:
Interest.................................................. $ 189 $ 378 $ 399
======= ======= =======
Income taxes.............................................. $ 494 $ 1,729 $ 1,290
======= ======= =======
Other noncash transactions:
Capital lease obligation for purchase of equipment........ $ -- $ -- $ 305
======= ======= =======
Purchase of stock with note payable -- shareholder........ $ -- $ -- $ 471
======= ======= =======

See accompanying notes to consolidated financial statements.

F-6
47

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Business

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

Sales of hardware, software and networking products comprise most of the
Company's revenues. Service revenues have not comprised a significant part of
revenues to date. The Company has entered into agreements with certain suppliers
and manufacturers which provide the Company favorable pricing and price
protection in the event the vendor reduces its prices.

In July 1996, the Company executed a letter of intent with an investment
banking firm for a proposed initial public offering ("IPO"). The terms of the
proposed IPO include the sale of 2,125,000 shares of Common Stock by the
Company, plus an option in favor of the underwriters for an additional 375,000
shares to provide for potential over-allotments and warrants in favor of the
representatives of the underwriters to purchase 250,000 shares of Common Stock.
The net proceeds of the IPO will be used to retire indebtedness under the bank
line of credit, to relocate or expand the Company's New York City office, for
training and expanded sales facilities in Long Island, to upgrade the Company's
internal telecommunications system and for working capital.

(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 have been eliminated in consolidation.

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

(d) Revenue Recognition

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

F-7
48

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

records such amounts related to volume purchases as purchase discounts which
reduce cost of revenues 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 $1,400, $906 and $943 for the years ended July 31,
1994, 1995 and 1996, respectively.

(f) Inventory

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

(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) Income Taxes

Effective August 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("Statement
109"). Statement 109 requires the use of the asset and liability approach for
financial accounting and reporting of income taxes. Under this method, 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 tax 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. The Company previously accounted for income taxes
in conformity with APB No. 11. The adoption of Statement 109 resulted in a
cumulative effect adjustment in the Company's 1994 financial statements of $386
and prior years' financial statements were not restated.

(i) Net Income Per Share

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

(j) Impairment of Long Lived Assets

In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
("Statement 121") that establishes accounting standards for the impairment of
long lived assets, certain intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. In conformity with Statement 121, it is the Company's policy
to evaluate and recognize an impairment if it is probable that the recorded
amounts are in excess of anticipated undiscounted future cash flows.

(k) 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

F-8
49

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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.

(l) Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, prepaid
expenses, accounts payable and accrued expenses, capital lease obligation and
notes payable -- shareholder are estimated to be their carrying values at July
31, 1996 due to the short maturity of such instruments. The book value of notes
payable -- bank approximated fair value since those instruments carry prime or
LIBOR based interest rates that are adjusted for market rate fluctuations.

(m) Reclassifications

Certain reclassifications were made to prior year amounts to conform with
the fiscal 1996 presentation format.

(2) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

JULY 31,
-----------------
1995 1996
------ ------

Furniture and fixtures......................................... $1,539 $1,824
Machinery and equipment........................................ 1,358 1,668
Transportation equipment....................................... 382 361
Leasehold improvements......................................... 1,405 1,656
------ ------
4,684 5,509
Less accumulated depreciation and amortization................. 3,254 3,265
------ ------
$1,430 $2,244
====== ======

Depreciation and amortization expense amounted to $360, $395 and $473 for
the years ended July 31, 1994, 1995 and 1996, respectively.

(3) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

JULY 31,
-------------------
1995 1996
------- -------

Accounts payable, trade........................................ $10,791 $12,973
Accrued salaries and wages..................................... 2,140 2,552
Customer deposits.............................................. 502 629
Other accrued expenses......................................... 965 959
------- -------
$14,398 $17,113
======= =======

The Company has entered into financing agreements for the purchase of
inventory. These agreements are secured by the related inventory and/or accounts
receivables. In each of the years in the three year period ended July 31, 1996,
the Company has repaid all balances outstanding

F-9
50

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

under these agreements within a provided 30 day non-interest bearing payment
period. Accordingly, amounts outstanding under such agreements of $650 and
$1,450 at July 31, 1995 and 1996, respectively, are included within accounts
payable and accrued expenses. Pursuant to certain intercreditor agreements,
these financing agreements are subordinated to the Company's line of credit
agreement except as to specific inventory purchased under these financing
agreements.

(4) CAPITAL LEASE OBLIGATION

In January 1996, the Company entered into a capital lease obligation for
certain computer equipment. Future minimum payments required under such lease
are as follows:

Year ending July 31,
1997....................................................................... $109
1998....................................................................... 109
1999....................................................................... 74
----
Total minimum lease payments................................................. 292
Less: Amount representing interest........................................... 18
----
Present value of minimum lease payments...................................... 274
Less: Current portion........................................................ 99
----
$175
====

(5) 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 each employee's
compensation. The Company's contribution amounted to $130, $125 and $124 for the
years ended July 31, 1994, 1995 and 1996, respectively.

The Company also has a deferred compensation plan which is available to
certain eligible key employees. The plan consists of life insurance policies
purchased by the Company for the participants. Upon vesting, which occurs after
ten years in the plan (three years for certain key executives), 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, 1995 and 1996, the
Company has recorded an asset (included in other assets) of $198 and $183,
respectively, representing the cash surrender value of policies owned by the
Company and a liability of the same amount relating to the unvested portion of
benefits due under this plan. For the years ended July 31, 1994, 1995 and 1996,
the Company recorded an expense of $93, $97 and $72, respectively, in connection
with this plan.

(6) COMMITMENTS AND CONTINGENCIES

Leases

The Company leases most of its executive offices and warehouse facilities
from related parties (Note 9). In addition, the Company is obligated under lease
agreements for sales offices and additional warehouse space. Aggregate rent
expense under these leases amounted to $827, $849 and $1,212 for the years ended
July 31, 1994, 1995 and 1996, respectively.

F-10
51

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following represents the Company's commitment under all operating
leases for the years ending July 31:

1997........................................................................ $1,307
1998........................................................................ 1,100
1999........................................................................ 800
2000........................................................................ 783
2001........................................................................ 363
Thereafter.................................................................. 1,755
-------
$6,108
=======

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 business, results of operations or
financial condition.

(7) LINE OF CREDIT

The Company has a line of credit agreement with a bank that provides for a
maximum of $9,500 of borrowings and is due on demand. Interest on borrowings is
computed at the Company's option based on the bank's prime rate (8.25% at July
31, 1996) or at LIBOR plus 2% (7.69% at July 31, 1996). The credit facility
provides for a general security interest first lien on all of the Company's
assets, to the extent one can be obtained. The line is personally guaranteed by
the Company's president and majority shareholder. At July 31, 1995 and 1996
amounts outstanding under the agreement totaled $5,600 and $6,500, respectively.

(8) INCOME TAXES

The provision (benefit) for income taxes consisted of the following:

YEARS ENDED JULY 31,
----------------------------
1994 1995 1996
------ ------ ------

Current
Federal.............................................. $ 873 $ 997 $1,166
State................................................ 287 302 350
------ ------ ------
1,160 1,299 1,516
------ ------ ------
Deferred
Federal.............................................. (101) (113) (73)
State................................................ (17) (26) (13)
------ ------ ------
(118) (139) (86)
------ ------ ------
$1,042 $1,160 $1,430
====== ====== ======

F-11
52

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The difference between the provision for income taxes at the Company's
effective income tax rate and the Federal statutory rate of 34% is as follows:

YEARS ENDED JULY 31,
----------------------------
1994 1995 1996
------ ------ ------

Income taxes at statutory rate......................... $ 827 $ 960 $1,213
State taxes, net of Federal benefit.................... 178 182 222
Other.................................................. 37 18 (5)
------ ------ ------
Provision for income taxes............................. $1,042 $1,160 $1,430
====== ====== ======

The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at July 31, 1995 and 1996 were as follows:

JULY 31,
---------------
1995 1996
---- ----

Allowance for doubtful accounts receivable......................... $288 $321
Deferred compensation.............................................. 288 317
Other.............................................................. 67 91
---- ----
Deferred tax asset............................................ $643 $729
==== ====

A valuation allowance has not been provided in connection with the
Company's deferred tax assets since, based on historical pre-tax earnings and
expected taxable income in the future, the Company believes that it is more
likely than not that such deferred tax assets will be recovered.

As discussed in Note 1, the Company adopted Statement 109 as of August 1,
1993. The cumulative effect of the change in accounting for income taxes of $386
was determined as of August 1, 1993 and is reported separately in the
consolidated statement of income for the year ended July 31, 1994. The
cumulative effect adjustment related principally to the establishment under
Statement 109 of deferred tax assets arising due to the nondeductability of the
allowance for doubtful accounts and deferred compensation expenses.

(9) RELATED PARTY TRANSACTIONS

The Company leases executive offices and warehouse space as well as its
corporate offices and sales facilities from entities owned or controlled by
shareholders or officers of the Company. The leases generally cover a period of
ten years and expire at various times from 1998 through 2005. Lease terms
generally include annual increases of five percent. Rent expense for these
facilities aggregated $654, $683 and $1,022 for the years ended July 31, 1994,
1995 and 1996, respectively.

During the year ended July 31, 1994, the Company was related, through
common ownership and control, to Electrograph Systems, Inc. ("Electrograph"), a
value-added distributor of microcomputer peripherals, components and
accessories. Purchases from Electrograph during this period were $385,
substantially all of which was paid by July 31, 1994. In August 1994,
Electrograph was acquired by an unrelated company.

F-12
53

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(10) SHAREHOLDERS' EQUITY

Recapitalization

In connection with the planned IPO, on October 1, 1996, the Company
effected a recapitalization, which increased the authorized number of shares of
Common Stock from 5,000 to 25,000,000, authorized 5,000,000 shares of Preferred
Stock, effected a 6262.63 for one stock split for all outstanding shares of
Common Stock on that date and established a $.01 per share par value for Common
Stock. All references in the accompanying consolidated financial statements and
notes thereto relating to per share and share data have been retroactively
adjusted to reflect the recapitalization.

Redeemable Common Stock

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

The aggregate amounts payable by the Company to redeem outstanding shares
of Common Stock under these agreements, $5,210 and $4,739 at July 31, 1995 and
1996, respectively, have been classified as redeemable Common Stock.

In September 1996, among other provisions, the retired shareholder agreed
to terminate his option to sell his remaining shares to the Company, subject to
successful completion of the IPO. In addition, the Company's shareholders
entered into an agreement to terminate the shareholders' agreement upon
effectiveness of the IPO. As a result, a pro forma balance sheet has been
presented as of July 31, 1996 showing the impact of the termination of these
agreements.

New Accounting Standard

In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The Statement also applies to transactions in which
an entity issues its equity instruments to acquire goods or services from
nonemployees. Statement 123 encourages a fair value based method of accounting
for employee stock options or similar equity instruments. Entities electing not
to adopt a fair value method must make pro forma disclosures of net income and
earnings per share as if a fair value based method had been applied. The
Statement is effective for fiscal year 1997. The Company has elected not to
adopt a fair value based accounting method for employee stock options and
therefore does not expect that the adoption of Statement 123 will have a
material impact on its financial position or results of operations. The Company
will disclose, commencing in fiscal 1997, the pro forma net

F-13
54

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

income and income per share as if such method had been used to account for
stock-based compensation costs.

Stock Option Plan

(11) MAJOR CUSTOMER AND VENDORS AND CONCENTRATION OF CREDIT RISK

The Company sells products and services to customers that are located
primarily in the eastern United States. One customer accounted for approximately
14%, 22% and 16% of total revenues for the years ended July 31, 1994, 1995 and
1996, respectively.

The Company's top four vendors accounted for 20%, 12%, 11% and 10% of total
product purchases for the year ended July 31, 1996. The Company's top two
vendors accounted for 22% and 16% of total product purchases for the year ended
July 31, 1995. The Company's top two vendors accounted for 22% and 15% of total
product purchases for the year ended July 31, 1994.

No individual customer accounted for more than 5% of the Company's accounts
receivable at July 31, 1996.

F-14
55

MANCHESTER EQUIPMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(12) PRO FORMA INFORMATION (UNAUDITED)

Effective with the closing of the IPO, the leases with related parties
(Note 9) have been amended to provide for lower rental payments with terms
comparable to those that could be obtained from independent third parties. In
addition, in connection with the planned IPO, the Company's Chief Executive
Officer has entered into an agreement to receive a base salary of $550 for each
of the fiscal years ending July 31, 1997 and 1998 and to forego any bonus for
fiscal 1997 and the Company's Executive Vice President has also entered into an
agreement to receive a base salary of $450 in each of the fiscal years ending
July 31, 1997 and 1998 and to forego any bonus for fiscal 1997. These officers
have further agreed that any bonus payable to either of these officers in fiscal
1998 will require the approval of a majority of the independent directors of the
Company.

The following pro forma information assumes the consummation of the IPO and
includes adjustments to increase net income for the amounts by which aggregate
officers' compensation paid to the Company's Chief Executive Officer, Executive
Vice President and Chief Financial Officer, during the fiscal year ended July
31, 1996 exceeded the total of the annual amounts to be paid under the
agreements with the Company's Chief Executive Officer and Executive Vice
President plus the current annual salary of the Company's present Chief
Financial Officer as well as rents paid to related parties in fiscal 1996 in
excess of rents that will be payable under current leases, as amended, effective
with the closing of the IPO, net of applicable income taxes.

Income before income taxes, as reported.............................. 3,568
Reduction in officers' compensation.................................. 3,209
Reduction in rent to related parties................................. 304
-----
Pro forma income before income taxes................................. 7,081
Pro forma provision for income taxes................................. 2,835
-----
Pro forma net income................................................. 4,246
-----
Pro forma net income per share....................................... $ .68
=====

Also see Note 10 regarding pro forma balance sheet.

F-15
56

HELPING CUSTOMERS THROUGH THE USE OF TECHNOLOGY

Manchester provides its customers with client/server solutions such as this
corporate intranet.
The use of intranets allows employees and other authorized users to access
information using readily available Internet tools.
57

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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

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TABLE OF CONTENTS

PAGE
----

Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 12
Dividend Policy....................... 12
Dilution.............................. 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 21
Management............................ 29
Principal and Selling Shareholders.... 32
Certain Transactions.................. 32
Shares Eligible for Future Sale....... 34
Description of Capital Stock.......... 36
Underwriting.......................... 38
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Index to Consolidated Financial
Statements.......................... F-1

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Until December 20, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.

2,500,000 SHARES

LOGO

MANCHESTER EQUIPMENT CO., INC.

COMMON STOCK

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PROSPECTUS
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[LADENBURG THALMANN LOGO]

[CRUTTENDEN ROTH LOGO]

NOVEMBER 25, 1996

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