UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

         For the fiscal year ended January 31, 2001

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

         Commission File No.:  0-23434

                           HIRSCH INTERNATIONAL CORP.
             (Exact name of registrant as specified in its charter)
             ------------------------------------------------------

           Delaware                                   11-2230715
(State or other jurisdiction of                    (I.R.S. Employer
 incorporation or organization)                   Identification No.)
-----------------------------------------------------------------------------

                200 Wireless Boulevard, Hauppauge, New York 11788
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:  (631) 436-7100

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

Securities registered pursuant to Section 12(g) of the Act:

                 Class A Common Stock, par value $.01 per share
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]

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

     The  aggregate  market  value of the 6.3  million  shares of Class A Common
Stock held by non-affiliates of the Company as of April 2, 2001 is $7.5 million.

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes   of   common   equity,    as   of   the   latest    practicable   date:

                        Class of                             Number of
                      Common Equity                            Shares
                      -------------                            ------

                  Class A Common Stock                      6,815,180
                     par value $.01

                  Class B Common Stock                      2,668,139
                     par value $.01


     The  information  required by Part III of this Form 10-K is incorporated by
reference from the Registrant's  definitive proxy statement to be filed with the
Commission on or before May 30, 2001.

                                     PART I

Item 1.  Business

General

     Hirsch  International  Corp.  ("Hirsch"  or  the  "Company"),   a  Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic  computer-controlled  embroidery machinery and related value-added
products and services.  The Company  offers a complete  line of  technologically
advanced single- and multi-head  embroidery  machines,  proprietary  application
software,  a  diverse  line  of  embroidery  parts,  supplies,  accessories  and
proprietary  embroidery products, and a range of equipment financing options. In
addition,  Hirsch provides a comprehensive  service  program,  user training and
software support. More recently,  through its Hometown Threads, LLC venture, the
Company has moved from test marketing its retail embroidery  services concept to
implementation  of a  national  franchise  program.  The  Company  believes  its
wide-range of product offerings together with its related  value-added  products
and  services  place it in a  competitively  advantageous  position  within  its
marketplace.

     The application of new technologies has transformed the embroidery industry
from one which was labor-intensive,  utilizing machinery with limited production
capabilities to an industry where investment in electronic,  computer-controlled
machinery and related application  software has increased labor efficiencies and
production   capacities  while  expanding  the  flexibility  and  complexity  of
embroidery  designs.  These developments have not only resulted in the expansion
of  existing  markets  but have  also led to the  creation  of new  markets  for
embroidery.  The industry has benefited  from the growth in consumer  demand for
licensed  products  carrying the names,  logos and designs of  professional  and
collegiate sports teams,  entertainment companies and their characters,  as well
as branded  merchandise  and related  goods.  Until  recently,  these trends and
others have  contributed to the increase in demand for  machinery,  software and
services  provided by Hirsch.  However,  beginning in fiscal 1999 and continuing
through  fiscal  2001,  the  Company  and  the  embroidery  industry  as a whole
experienced a decrease in overall  demand driven by the  relocation  offshore of
large,  multi-head equipment customers that resulted in reduced demand for large
embroidery machines.  As a result, the Company initiated a restructuring program
designed to address the market  shifts in the  industry,  including  closing and
consolidating  certain  divisions,  reducing  total  employment and disposing of
facilities  no  longer  required  to  support  its  new  business  model.   (See
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations).

     The  Company's  customer  base  includes  large  operators who run numerous
machines as well as  individuals  who  customize  products on a single  machine.
Principal  customer  groups  include:  (i)  contract  embroiderers,   who  serve
manufacturers that outsource their embroidery requirements;  (ii) manufacturers,
who use embroidery to embellish their apparel,  accessories,  towels, linens and
other products with decorative appeal; and (iii) embroidery  entrepreneurs,  who
produce  customized  products for individuals,  sports leagues,  school systems,
fraternal organizations, promotional advertisers and other groups.

     Hirsch has certain  exclusive  United States rights to sell new  embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima").  Tajima,  located in
Nagoya,  Japan,  is one of  the  world's  leading  manufacturers  of  embroidery
machines,  and is regarded as a  technological  innovator  and  producer of high
quality,  reliable  and  durable  embroidery  equipment.  The  Company  has  the
exclusive  right to distribute  Tajima small (one through  six-head "FX" models)
machines in the continental United States and Hawaii and large (six-head through
thirty-head "DC" models) machines in 39 states. In the states of Arizona, Idaho,
Montana,  Nevada,  Oregon, Utah,  Washington,  Wyoming,  and Hawaii,  Hirsch has
semi-exclusive  rights to distribute Tajima large machines.  Beginning in fiscal
year 2000,  Tajima  granted  Hirsch the  non-exclusive  right to  distribute  to
US-based  customers  who  had  expanded  their  operating  facilities  into  the
Caribbean region.

     The Company enjoys a solid  relationship  with Tajima,  having spanned more
than  20  years.  Hirsch  is  Tajima's  largest  distributor  in the  world  and
collaborates  with Tajima in the  development  of new  embroidery  equipment and
enhancements to existing equipment. Until 1997, all Tajima equipment sold in the
US was assembled in Japan. At that time, Hirsch formed a new subsidiary,  Tajima
USA, Inc ("TUI"), which currently assembles two, four, six and eight-head Tajima
machines in the United States.  In December 1997, Hirsch sold a forty-five (45%)
percent  interest  in TUI to  Tokai  Industrial  Sewing  Machine  Company,  Ltd.
("Tokai").

     In  addition  to  offering  a  complete  line  of  technologically-advanced
embroidery machines and customer training,  support and service, Hirsch provides
an array of  value-added  products  to its  customers.  The  Company's  software
subsidiary, Pulse Microsystems Ltd. ("Pulse"), develops and supplies proprietary
application software programs which enhance and simplify the embroidery process,
as well as enable the  customization of designs and reduce production costs. The
majority of Pulse's  proprietary  application  software programs are designed to
operate in the  Microsoft(R)  Windows(R)  95,  Windows(R) 98,  Windows(R)  2000,
Windows(R)  Me and Windows  (R) NT  environments,  which  Hirsch  believes  will
further simplify usage and enhance user  flexibility.  The Company believes that
Pulse  Signature(TM)  software  is unique in the  industry in that it earned the
right to use the Microsoft Windows(R) compliance trademark.

     The Company's leasing subsidiary,  HAPL Leasing Co., Inc. ("HAPL Leasing"),
provides a wide range of financing options to customers wishing to finance their
purchases of embroidery equipment. Hirsch also sells a broad range of embroidery
supplies, accessories and proprietary embroidery products.

     The Company's  equipment and value-added  products are marketed directly by
an  employee  sales  force,   whose  efforts  are  augmented  by  trade  journal
advertising,  informational "open house" seminars, e-commerce presence and trade
shows. The Company's long-term goal is to leverage its reputation,  knowledge of
the   marketplace,   Tajima   distribution   rights,   industry   expertise  and
technological  innovation  to  enable it to  increase  the  overall  size of the
embroidery equipment market and its market share.

The Embroidery Industry

     The development of electronic  computer-controlled  embroidery machines has
led to new  embroidery  applications  and markets,  cost savings,  higher profit
margins  and  production  efficiencies  which  has  transformed  the  embroidery
industry from being extremely  labor-intensive to an industry characterized by a
high level of  automation.  Past  innovations  to  embroidery  machines  offered
superior design  flexibility  and increased speed and provided the  manufacturer
with the ability to  embroider  finished  products,  the ability to  efficiently
embroider up to fifteen colors at a time,  automatic thread trimming,  and other
labor-saving  improvements.  Current  innovations  include a narrow cylinder arm
sewing head that permits embroidery on small diameter apparel,  such as pockets,
sleeves, pant legs and socks. The embroidery industry on a world-wide basis also
benefits from the demand for licensed products  distributed by apparel and other
manufacturers.  Licensed  names,  logos and  designs  provided  by,  among other
sources, professional and collegiate sports teams and the entertainment industry
appear on caps,  shirts,  outerwear,  luggage  and other  softgoods  for sale at
affordable  prices.  In addition,  the intricacy of the designs capable of being
embroidered have attracted broad fashion and commercial appeal for special event
promotional  marketing.  Embroidery  equipment  may  contain  single or multiple
sewing heads,  each sewing head consisting of one to a group of needles that are
fed by spools of thread  attached to the  equipment.  The design and  production
capabilities  of the sewing  heads are  enhanced  through  the  application  and
integration of computers and specialized software.

Business Strategy

     The   Company's   objective   is  to  establish   and  maintain   long-term
relationships with its customers by providing them with a single source solution
for their  embroidery  equipment,  software and related  services and  financing
needs. To achieve this goal, the Company has developed a comprehensive  approach
under  which it (i)  assembles  and  sells a broad  range of  Tajima  embroidery
machines,  (ii) develops and supplies proprietary  application software programs
for embroidery machines,  (iii) provides leasing options to customers to finance
equipment   purchases,   (iv)  sells  a  broad  range  of  embroidery  supplies,
accessories and proprietary products, (v) reconditions, remanufactures and sells
used embroidery equipment,  and (vi) provides  comprehensive  customer training,
support and service for these  embroidery  machines.  The Company  believes that
this  comprehensive  approach  positions it to become its  customers'  preferred
vendor for their embroidery  equipment and related services and financing needs.
In  addition,  the  Company,  through its  Hometown  Threads,  LLC  venture,  is
currently  implementing  its concept to provide  retail  embroidery  services at
Wal*Mart(R)  stores,  shopping  center and mall  locations.  To  complement  its
comprehensive  approach  effectively  and  efficiently,  the Company's  business
strategy includes the following:

     Comprehensive  Embroidery  Machine  Selection.  The Company  believes  that
offering Tajima embroidery  equipment  provides it with a competitive  advantage
because Tajima produces technologically advanced embroidery machines that are of
high quality,  reliable and durable. The Company markets and distributes over 80
models of embroidery machines, ranging in size from 1 head per machine, suitable
for sampling and small  production  runs, to 30 heads per machine,  suitable for
high production runs for embroidered  patches and small piece goods which become
parts of garments and other soft goods.

     Pulse Microsystems Ltd.  Software.  The Company's Pulse subsidiary offers a
wide range of proprietary  application software products to enhance and simplify
the  embroidery  process.  A majority of the Company's  proprietary  application
software  products are designed to operate in the  Microsoft(R)  Windows(R)  95,
Windows(R) 98,  Windows(R)  2000,  Windows(R) Me and Windows(R) NT  environments
that  the  Company  believes  will  enhance  creativity,  ease of use  and  user
flexibility. It is the Company's established practice to aggressively market its
software with  embroidery  equipment and as an upgrade to its installed  base of
approximately  17,500  embroidery  machines.  The  Company  believes  that these
products  have  broad  appeal  to  purchasers  of  single-head   and  multi-head
embroidery machines and present  opportunities for the Company to increase sales
of  embroidery  equipment  and  software as the Company  continues  to emphasize
marketing  activities.  Pulse  continues  to  automate  the  process of creating
embroidery  applications in order to open new markets, reduce costs and increase
production  efficiencies.  Pulse has created  what the  Company  believes is the
first  Internet-compatible  design  software,  branded  "StitchPort(R)"  and  is
implementing a business plan to commercialize this product.  Pulse has bolstered
its software  development team and will continue to work closely with Hirsch and
Tajima to develop software that enhances new features in the embroidery machines
being introduced.

     Financing  Options.  The  Company's  HAPL  Leasing  subsidiary  offers  its
customers the option to lease  embroidery  equipment.  The Company believes that
HAPL Leasing's programs increase opportunities to sell equipment by reducing the
initial capital  commitment  required of a potential  purchaser.  HAPL Leasing's
programs are attractive to purchasers  who desire to begin or expand  embroidery
operations while limiting their initial capital investment.

     Embroidery Supplies,  Accessories and Proprietary  Products.  The Company's
parts,  supplies and  accessories  division  offers a broad range of  embroidery
supplies, accessories and proprietary products, which is an integral part of the
Company's single source strategy. The Company has expanded the product line with
the  introduction  of  proprietary  products.  Moreover,  the  expansion  of the
Company's marketing efforts is directed toward trade  publications,  advertising
and both industry and proprietary trade show  participation.  The Company offers
proprietary products together with a full line of consumable supplies, parts and
materials  utilized in the embroidery  process and continues to develop  special
purpose  embroidery  replacement  parts and  products  which act to simplify the
embroidery process.

     At the end of fiscal 1999 the Company  created  its new  "Building  Blocks"
division,  specializing in the creation and sale of stock embroidery designs and
associated  software  products into the retail market.  The Company has expanded
the brand to include marketing and development of its clamping systems.

     Retail  Embroidery  Services.  In fiscal 1999, the Company created a retail
embroidery  concept known as Hometown  Threads(TM)  for the purpose of providing
retail  embroidery   services  within   Wal*Mart(R)   establishments.   Hometown
Threads(TM)  has  concluded  the test market  phase and is  expanding  through a
franchise  program in  Wal*Mart(R)  stores and other  mall and  shopping  center
locations throughout the United States.

     Customer Support.  The Company provides  comprehensive  customer  training,
support and service for the embroidery  machines and software that it sells. The
Company's service department includes field service  technicians  throughout the
US who are directed from its headquarters and regional service center. After the
Company delivers an embroidery machine to a customer,  its trained personnel may
assist in the  installation,  setup and  operation of the  machine.  The Company
employs  a staff  of  service  representatives  who  provide  assistance  to its
customers by telephone. While many customer problems or inquiries can be handled
by  telephone,  where  necessary  the  Company  dispatches  one of  its  service
technicians to the customer.  Software  support is conducted by  telephone-based
software staff located at the Company's Pulse Microsystems Ltd.  subsidiary.  In
addition,  the Company provides  introductory and advanced  training programs to
assist  customers  in the  use,  operation  and  maintenance  of the  embroidery
machines and software it sells.


Business Strategies to Generate New Revenue Streams

     The Company has developed a number of complementary  strategies to generate
new revenue streams, including the following:

     Grow with  Embroidery  Equipment  Customers.  The continuing  growth of the
small machine  segment of the embroidery  industry and the increasing  number of
embroidery  entrepreneurs  who sell customized  products into specialized  niche
markets  presents the Company with the  opportunity  to grow its business  along
with that of its  customers.  The Company  believes  that  purchasers of smaller
embroidery  machines can be a significant source of repeat business in that they
may require larger multi-head  machines as their business and operations expand.
The Company's  customer support  personnel work with customers to assist them in
expanding their operations. By establishing a relationship through the sale of a
smaller  embroidery  machine,  the Company  strives to  establish  itself as the
customers'  preferred  vendor  for  larger  multi-head  machines.  New  uses for
embroidery  machines in the sewing of apparel  also  present the Company with an
opportunity to grow with its customers and sell to new customers.

     Hometown  Threads,   LLC.  The  Company  initiated  a  pilot  program  with
Wal*Mart(R)  in late fiscal 1999 and developed and refined it throughout  fiscal
2000 and 2001.  The  objective  was to  establish  a retail  embroidery  service
business  within the  Wal*Mart(R)  environment  and  determine  if such a "store
within a store" concept could be financially  feasible for both  Wal*Mart(R) and
an  independent  retail  embroidery  operator  in  that  environment.   Hometown
ThreadsTM has obtained approval from Wal*Mart(R) to expand to the implementation
phase of up to 25 store locations in fiscal 2002. The insights learned from this
program have had a direct benefit to the general  operations of Hirsch,  in that
there is improved  direct  knowledge of the needs and operating  issues faced by
the independent  embroidery operator.  Significant changes are being implemented
within the Hirsch  organization  to better respond to those needs.  This in turn
positions Hirsch as a knowledgeable resource to meet the broad business needs of
this embroidery entrepreneur customer.

     Increase  Penetration  in  Recently  Acquired  New  Equipment  Distribution
Markets.  The Company believes that it has significant  opportunities for growth
in new  distribution  markets.  The  Company  anticipates  that its  approach to
marketing, customer training, support and service will allow further penetration
of the potential customer base in these markets.  In fiscal 1998 the Company was
granted the exclusive right to distribute Tajima one through six-head "FX" model
embroidery  machines in nine  continental  western  states and  Hawaii.  Also in
fiscal 1998 Hirsch was granted  semi-exclusive rights to distribute large Tajima
embroidery  machines,  six-head "DC" models through  thirty-head  models, to the
states of Arizona, Idaho, Montana, Nevada, Oregon, Utah, Washington, Wyoming and
Hawaii. This expansion included establishing additional sales offices, hiring of
technical  service and support staff as well as investment in demo equipment and
inventory.  In fiscal  2000 the  Company  was  granted  by Tajima  the rights to
distribute new machines to US-based customers who have expanded their operations
into the Caribbean region.

     Expand Sales of Value-Added Product and Services.  Once a relationship with
a customer is established  through the sale of a new or used embroidery machine,
the Company  seeks to increase its sales  through an expanded  software  product
line  developed  by Pulse and a broad range of  embroidery  parts,  supplies and
accessories.  Higher margins are typically  available in these expanded  product
offerings.  The leasing  options  offered  through HAPL Leasing also present the
Company  with  opportunities  for  increased  revenues  through  the sale of new
embroidery  equipment.  New product  development  investments  have been made in
internet-based distribution channels and internet deliverable software products.
Additional programs include a machine rental program for customers with specific
project  requirements for which their existing  capacity or capabilities  cannot
meet the  volume or other  requirements.  Further  development  of  productivity
enhancing  accessories  such as  clamping  systems  are  adding  breadth  to the
Company's product offerings through existing and new distribution  channels.  In
addition, the Company's embroidery supplies and accessories product line also is
offered to all users of embroidery  equipment in the United States through trade
publications, print advertising and trade show participation.

     Ability to Accept Used Equipment on a Trade-In  Basis. As part of its sales
and marketing efforts,  the Company may accept used embroidery  equipment from a
customer to whom it is providing new machinery.  Improved management of the used
machine trade-in, acquisition, and sales process has delivered value to the used
machine customer and improved margins to the Company.

     Assembly  Operations.  The Company's  Tajima USA, Inc.  ("TUI")  subsidiary
maintains  a  facility  located  in  Ronkonkoma,  New York,  near the  Company's
headquarters.  Assembly of Tajima machines of up to eight heads are completed at
this location, using both Tajima supplied sub-assembly kits and locally supplied
components.   Shorter  lead  times  and  production   flexibility   enhance  the
responsiveness  to  changing  needs of the  market.  TUI's net sales  during the
fiscal year ended January 31, 2001 were approximately $11.6 million.


Embroidery Equipment

     Embroidery  equipment  may contain  single or multiple  sewing  heads.  The
selling prices of these machines range from  approximately  $12,000 to $150,000.
Each sewing head consists of a group of needles that are fed by spools of thread
attached to the equipment. The needles operate in conjunction with each other to
embroider the thread into the cloth or other surface in such configuration as to
produce the intended design. Thread flowing to each needle can be of the same or
varying colors.  Each head creates a design and heads operating at the same time
create the same size and shape  designs,  although  designs  created at the same
time can  differ in color.  Thus,  a 30-head  machine  with all heads  operating
simultaneously  creates an identical design on thirty  surfaces.  The design and
production  capabilities  are enhanced  through the integration of computers and
specialized software applications.

Recent Product Developments

     The Company often collaborates with Tajima in the development of embroidery
products.  Over  the  past  few  years,  Tajima  has  introduced  the  following
embroidery  products:  (i)  machines  with faster  operating  speeds and a wider
variety of color selections;  (ii) wide cap embroidery system, which expands the
small sewing field on finished caps to a 270 degree  continuous  arc;  (iii) the
multi-color  chenille embroidery machine,  which enables  embroiderers to create
more elaborate and colorful designs with chenille  stitches;  (iv) a single head
chenille  embroidery  machine  which  enables the  embroidery  entrepreneur  the
opportunity to enhance their products at an affordable  price, and; (v) a narrow
cylinder arm sewing head which permits embroidery on small diameter apparel such
as sleeves and pockets.  The Company believes that these  innovations will allow
new  applications  for the use of  embroidery  machines  that  will  impact  the
sportswear  market.  Additionally,  Tajima develops  customized  applications to
address specific customers needs.

Value Added Products

Software

     Pulse,  a strategic  acquisition  in 1994, is a developer and supplier of a
wide range of  application  software  programs  that  enhance and  simplify  the
embroidery  process.  All  Tajima  machines,  as  well as  other  manufacturers'
embroidery machines can be networked through Pulse software. The computerization
of the  embroidery  industry has led to a demand for more  advanced  application
software.  Pulse's  computer-aided design software packages target the different
functions performed by embroiderers,  and are contained in an integrated product
line.  These  products  range from a basic  lettering  package  that permits the
embroiderer to design names and letters for use on the product to be embroidered
to  sophisticated  packages  that permit the  creation  and editing of intricate
designs, logos and insignias through the use of scanners and computers.

     Pulse  software  provides  users  with  the most  technologically  advanced
software  solutions  delivering  improved  productivity  and  quality  for their
operations.  Pulse continues to develop and release  innovations that strengthen
its position as the technological leader in the industry.

     While continuing to invest in research in its core embroidery technologies,
Pulse has also created specialized and targeted applications that are addressing
the particular needs of growing segments of the embroidery market such as retail
operations,  small  entrepreneurs  and  uniform  manufacturers.  Pulse  has also
designed, as part of their new PowertoolsTM suite of applications, products that
assist  customers  in  creating  an  internet   presence  for  their  embroidery
creations. In addition, Pulse has created and is implementing StitchPort(R) that
the Company  believes is the first  internet-compatible  design  software in the
market.

     Pulse has expanded its  distribution  network by  establishing  distributor
relationships  in 43 countries  worldwide.  While  beginning from a small dollar
value base, Pulse  international  sales have grown dramatically and are expected
to continue to grow as these new  relationships  strengthen  Pulse's position as
the global leader in embroidery software.

Leasing

     In order to become a single source provider to the embroidery industry, the
Company  formed HAPL Leasing in 1990.  The Company  believes that it is the only
embroidery equipment distributor with a captive leasing subsidiary providing the
Company with a unique competitive advantage.

     Approximately  28.9% of the  Company's  new  machine  sales  were  financed
through HAPL Leasing for the year ended January 31, 2001,  compared to 42.5% for
the year ended  January 31, 2000.  Historically,  HAPL Leasing has minimized its
financing needs by selling  substantially  all of its sales-type leases to third
party financial institutions. This trend continued in fiscal 2001. Additionally,
during the third quarter of fiscal 1998,  HAPL Leasing  entered into an Ultimate
Net  Loss  ("UNL")  Limited  Liability  Recourse  Agreement  with a  third-party
financial  institution.  The  maximum  exposure is limited to 10% of the minimum
lease payments receivable,  for which the Company records a reserve. The selling
price of the leases to financial institutions generally will be a lump sum equal
to the sales price of the  embroidery  equipment  leased,  plus a portion of the
finance  charges  paid by the lessee.  At the end of the lease  term,  for those
leases that HAPL  Leasing has  retained  the  residual  value of the  embroidery
equipment,  it may revert to HAPL Leasing or HAPL Leasing may sell the equipment
to the lessee at terms agreed upon in the original lease  agreement.  Each lease
generally has a term of 5 years.  As of January 31, 2001,  HAPL Leasing had sold
approximately 90.7% of its leases.

     In some cases,  third-party  funding  sources  condition  their purchase of
leases on the  establishment  of a payment  history.  HAPL  Leasing also retains
selected  leases for which it has not  obtained a purchase  commitment  from its
funding  sources.  In each case where a lease is retained,  HAPL Leasing applies
its policies and procedures  and knowledge of the industry to determine  whether
to enter into the lease,  including an  evaluation of the  purchaser's  business
prospects and the  creditworthiness of the principals.  HAPL Leasing sells these
leases if financing becomes available at a later date.

     HAPL Leasing continues to work both internally and with its funding sources
to develop new lease programs attractive to the embroidery industry.

Used Embroidery Machinery

     The Company accepts used  embroidery  machines from customers on a trade-in
basis as a condition  to the sale of a new machine on a case by case basis.  The
Company's  ability  to accept  used  machines  is an  important  sales  tool and
necessary element in the Company's sales strategy. On occasion, the Company will
also purchase used machines from customers and  third-party  leasing  companies.
The  Company  believes  that the market  for  reconditioned  and  remanufactured
embroidery  machines  represents an established  share of the machine market and
operates  its Hirsch  Used  Machine  Division  to  capitalize  on this source of
revenue.

Embroidery Supplies and Accessories

     The Company offers a broad range of embroidery  supplies including threads,
needles,  thread cone winders,  embroidery  hoops, and embroidery  backings.  In
addition,  the Company develops embroidery products based on the recommendations
of  embroiderers.  The Company also  distributes the Universal  Hooper, a manual
hooping  device,  a machine  thread  rack  upgrade  called  "Quick  Thread"  and
specially sized embroidering hoops for unusual applications.

     The Company  markets  "Hoopless  Air  Clamps," a  proprietary  product that
allows  manufacturers  to apply embroidery to unfinished flat pieces without the
need for a hoop. The Company anticipates that this product will benefit clothing
manufacturers by reducing labor costs and production time.

     In  addition,   the  Company's  distribution  of  embroidery  supplies  and
accessories  includes the following  products:  "Power Hoops;" Tajima Hoops; 3-D
Embroidery   Foam,   which   allows   embroiderers   to  add  new   multi-media,
multi-dimensional  embroidery to a design using  existing  equipment;  steamers,
which remove  wrinkles and hoop marks,  cleaning  guns which remove  stains that
occur during the embroidery  process;  and Peggy's  Stitch  Eraser,  an electric
stitch remover that allows embroiderers to quickly and efficiently remove bobbin
thread from sewn garments.

     Following the Company's  acquisition of its West Coast distribution rights,
the Company  expanded  the hours of its east coast  supply and  accessory  sales
operations,  making it easier for customers across the United States to place an
order.

Marketing and Customer Support

     The Company has been selling  embroidery  equipment since 1976 and believes
it is the leading  distributor  of Tajima  equipment  in the world.  The Company
reinforces  recognition  of its name  through  trade  magazine  advertising  and
participation in seminars and over 25 trade shows annually.  The Company's sales
staff is headed by Paul Levine, President of the Company, and currently consists
of  salespeople  who  maintain  frequent  contact  with  customers  in  order to
understand  and satisfy  each  customer's  needs.  The  Company's  products  are
considered the highest quality embroidery equipment available, and therefore the
Company attempts not to compete  exclusively on a price basis but rather a value
added basis, through its reputation, knowledge of the marketplace, investment in
infrastructure  and  experience in the  industry.  In a climate of intense price
competition by lower quality  manufacturers,  the Company attempts to maintain a
balance between market share and margins to the best degree  possible.  While in
the short-term this may result in reduced share,  the Company believes that this
is the only way to sustain itself over the long-term.

     The Company  believes  that a key  element in its  business is its focus on
service,  and  investment  in sales  support and  training,  infrastructure  and
technology to support operations. The Company provides comprehensive one to five
day training  programs  developed by the Company to assist customers in the use,
operation  and  servicing  of the  embroidery  machines  and  software it sells.
Customers  are trained in the  operation  of  embroidery  machines as well as in
embroidery  techniques  and the  embroidery  industry  in  general.  The Company
provides proprietary videotapes and manuals as training tools. Company personnel
also provide  technical  and software  support by telephone,  field  maintenance
services and quality control testing,  as well as advice with respect to matters
generally affecting embroidery operations.

     The Company maintains a training center for its employees at its Hauppauge,
New York  headquarters for the training of service  technicians.  Senior service
technicians  also receive  formal  training from Tajima in addition to technical
updates  throughout the year. The Company will continue to dedicate resources to
education  and training as the  foundation  for  providing  the highest level of
service.

     In addition,  the Company  collaborates  with its  customers  and Tajima in
connection  with  the  development  of new  embroidery  equipment  and  software
applications to meet the specialized needs of the Company's  customers.  Current
projects  include  the  development  of  embroidery  applications  for  a  major
automobile   manufacturer,   collaborations  with  high  end  designer  clothing
manufacturers  to reduce  production  costs and increase  efficiency and further
development of Pulse integrated software.

     The Company provides its customers with a limited two-year warranty against
malfunctions  from defects in material or workmanship on the Tajima  machines it
distributes. The warranty covers specific classes of parts and labor for various
periods up to two years.  Tajima provides the Company with a six month warranty.
As a  consequence,  the  Company  absorbs  a  portion  of the cost of  providing
warranty service on Tajima products.

Supplier Relationships with Tajima

     The Company has four separate distributorship agreements with Tajima which,
collectively,  provide the Company the exclusive  right to  distribute  Tajima's
complete line of standard embroidery,  chenille embroidery and certain specialty
embroidery  machines in 39 States.  The main agreement (the "East  Coast/Midwest
Agreement")  which covers 33 States,  became  effective on February 21, 1991 and
has a term of 20 years. The East Coast/Midwest Agreement is terminable by Tajima
and/or  the  Company  on not less  than two  years'  prior  notice.  The  second
agreement (the "Southwest  Agreement")  covers six states,  became  effective on
February 21, 1997 and has a term of five years. Under the third  distributorship
agreement,  which  covers nine  western  states and  Hawaii,  the Company is the
exclusive  distributor  of Tajima's  single,  two,  four and six-head "FX" model
machines as well as chenille or chenille/standard  embroidery machines with less
than four heads or two stations,  respectively (the "West Coast Agreement"). The
West Coast  Agreement,  which has an initial term of five years,  terminates  on
February 20, 2002,  and contains a renewal  provision  which permits  successive
five year renewals upon mutual  agreement of the parties.  The fourth  agreement
("the  Caribbean  Agreement")  which was  effective  July 27,  1999  permits the
Company to distribute  Tajima  machines to US-based  customers who are operating
expansion  facilities in the Caribbean  region.  It has continued without change
from the initial trial period.

     Each of the first three  agreements  may be terminated  upon the failure by
the Company to achieve  certain  minimum  sales  quotas.  Furthermore,  the East
Coast/Midwest  Agreement  may be terminated if Henry Arnberg and Paul Levine (or
in certain  circumstances,  their spouses and children) fail to own a sufficient
number of shares of voting stock to elect a majority of the  Company's  Board of
Directors.  The  Southwest  Agreement  may be terminated if the Company fails to
remain the sole shareholder of its subsidiary that is the party to the Southwest
Agreement. The West Coast Agreement may be terminated should any material change
occur in the current Class B shareholders, directors or officers of the Company.

     Although there can be no assurance,  management of the Company  believes it
is unlikely  that the Company  would lose Tajima as a source of supply  because:
(i) the Company has maintained a relationship  with Tajima for over 20 years and
is Tajima's largest distributor;  (ii) Tajima's success in the United States is,
in large part,  attributable  to the Company's  knowledge of the  marketplace as
well as the Company's  reputation  for customer  support;  (iii) the Company and
Pulse support Tajima's  development  activities and the Pulse software  enhances
the Tajima product line;  and (iv) the ownership by Tokai of a forty-five  (45%)
percent interest in the TUI venture.

Other Supplier Relationships

     The Company  purchases  personal  computers  that are  integrated  with the
embroidery  machines it  distributes.  The Company obtains its inventory for its
embroidery  supplies and accessories  business from many different sources.  The
Company believes that alternate sources of supply are readily available.

Customers

     The  Company's  customers  range from large  operators  utilizing  numerous
machines to individuals who customize  products on a single  machine.  Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers,  who use embroidery
to embellish their apparel, accessories,  towels, linens and other products with
decorative  appeal; and (iii) embroidery  entrepreneurs,  who produce customized
products  for   individuals,   sports   leagues,   school   systems,   fraternal
organizations, promotional advertisers and other groups.

Competition

     The  Company  competes  with  original  equipment  manufacturers,  such  as
Barudan,  Brother  International and Melco Industries,  who distribute  products
directly into the  Company's  markets.  The Company also competes  against local
Tajima  distributors  in certain  western US markets.  The  Company  believes it
competes against these competitors on the basis of knowledge,  experience,  name
recognition,  customer  service and the quality of the  embroidery  equipment it
distributes. A new competitor,  SunStar, trading under the "SWF" brand name, has
entered  the  worldwide  market for  embroidery  machines  and has  aggressively
competed on a price basis in various Pacific rim countries, Europe and the US.

     Further,  the Company's customers are subject to competition from importers
of embroidered products,  which could materially affect the Company's customers,
and  consequently  have a material  adverse  effect on the  Company's  business,
financial conditions and results of operations.

     The Company's  success is  dependent,  in part, on the ability of Tajima to
continue  producing  products  that  are  technologically   superior  and  price
competitive with those of other manufacturers.

     Pulse's software  products  compete against  products  developed by several
companies  from around the world.  The primary  competitors  are Wilcom Pty., an
Australian corporation, Melco Industries, Inc., a United States-based subsidiary
of Saurer Textile  Machinery  Group, a Swiss  corporation  and Compucon S.A., of
Greece.  The Company believes that Pulse competes favorably on the basis of ease
of use, functionality and the range of software applications it markets.

     HAPL  Leasing   competes   principally   with  equipment   leasing  brokers
specializing in the embroidery  industry.  The Company believes that it competes
on the basis of HAPL  Leasing's  favorable  pricing and because the Company is a
single source provider of embroidery equipment, customer service and support and
value added products.

     The Company's  embroidery  supplies and accessories  business competes with
ARC, a division of Melco Industries,  MIM, a division of Brother Industries, and
other vendors of embroidery  supplies.  The Company believes that the market for
embroidery  supplies is  fragmented  and that the Company  will benefit from the
breadth of its product line,  development of  proprietary  products and the fact
that the Company is a single source provider.

Patents and Copyrights

     The Pulse  software has  copyright  protection  under  Canadian law and the
Berne  Convention that also affords it protection in the United States.  Certain
of  the  Pulse   software  has  also  been  granted   United  States   copyright
registrations.  The  following  patents have been granted in the United  States:
5,270,939:  "Method  For  Modifying  Embroidery  Design  Programs";   5,343,401:
"Embroidery  Design Systems";  5,430,658:  "Method For Creating  Self-Generating
Embroidery  Pattern";  5,510,994:  "Method for  Automatically  Generating  Chain
Stitches";  5,668,730:  "Method for  Automatically  Generating  Chain Stitches";
5,506,784:  "Method for Automatically  Generating A  Chenille-Filled  Embroidery
Stitch   Pattern";   5,541,847:   "Method   for   Automatically   Generating   A
Chenille-Filled   Embroidery   Stitch   Pattern.";    5,771,173:   "Method   for
Automatically   Generating  A   Chenille-Filled   Embroidery  Stitch  Pattern.";
5,809,921:  "Method for Generating a Continuously  Stitched Regional Carved Fill
Composite  Embroidery  Stitch Pattern";  6,196,146:  "Web Embroidery  System and
Method"; and 6,216,618: "Embroidery System Utilizing Windows CE based GUI".

     Pulse also has several  other  patents  pending in the United States Patent
and  Trademark  Office.  Pulse  has been  granted  the  following  patent in the
European Patent Office: "Method for Modifying Embroidery Design Programs." Pulse
also has the following  patents pending in the Japanese  Patent Office:  "Method
for Modifying Embroidery Design Programs," "Method for Automatically  Generating
Chain  Stitches"  and "Method For  Automatically  Generating  A  Chenille-Filled
Embroidery  Stitch Pattern." Pulse believes these  protections are sufficient to
prevent unauthorized third party uses of such property rights. Neither Pulse nor
the Company is aware of any  patents or other  intellectual  property  rights of
third parties which would prevent the use of Pulse's intellectual  property. The
Company continues to seek intellectual property protection for Pulse products.

Employees

     As of January 31,  2001,  the Company  employed  approximately  290 persons
engaged  in  sales,  service  and  supplies,   product   development,   finance,
administration and management for the Company, Pulse, TUI and HAPL Leasing. None
of the Company's  employees are represented by unions.  The Company believes its
relationship with its employees is good.

Risk Factors

Dependence on Tajima

     For the fiscal year ending  January 31,  2001,  approximately  90.6% of the
Company's  revenues  resulted  from the sale or  lease of  embroidery  equipment
supplied by Tajima. Four separate distributorship agreements (collectively,  the
"Tajima Agreements") govern the Company's rights to distribute Tajima embroidery
equipment in the United  States and the  Caribbean.  Two of the  distributorship
agreements  with Tajima  collectively  provide the  Company  with the  exclusive
rights to distribute  Tajima's  complete line of standard  embroidery,  chenille
embroidery  and certain  specialty  embroidery  machines in 39 states.  The main
agreement  (the  "East  Coast/Midwest  Agreement"),  which now covers 33 states,
first became effective on February 21, 1991, has a term of 20 years and contains
a renewal  provision  which  permits  successive  five year renewals upon mutual
agreement of the parties. The East Coast/Midwest  Agreement may be terminated by
Tajima and/or the Company on not less than two years' prior  notice.  The second
agreement (the "Southwest  Agreement") which covers six states, became effective
on  February  21,  1997,  and  has  a  term  of  five  years.  Under  the  third
distributorship  agreement,  (the "West  Coast  Agreement")  which  covers  nine
western continental states and Hawaii, the Company is the exclusive  distributor
of Tajima's  small  machines,  as well as chenille and tandem  chenille/standard
embroidery machines with less than four heads or two stations, respectively. The
West Coast Agreement,  which has an initial term of five years, became effective
on February 21, 1997, and contains a renewal  provision that permits  successive
five year renewals upon mutual  agreement of the parties.  The fourth  Agreement
(the "Caribbean Agreement") was for a one-year trial period,  effective July 27,
1999, that permitted the Company to distribute  Tajima equipment to its existing
US-based customers who establish  expansion  facilities in the Caribbean region.
Activity under the fourth agreement has continued without change from inception.
Each of the  first  three  Tajima  Agreements  contains  language  that  permits
termination  if the Company  fails to achieve  certain  minimum  sales quotas or
annual targets. In recognition of difficult general industry conditions,  Tajima
agreed to waive meeting these specific targets in fiscal year 2001. Furthermore,
the East  Coast/Midwest  Agreement  may be  terminated if Henry Arnberg and Paul
Levine  (or in  certain  circumstances,  their  spouses  and  children)  fail to
maintain  ownership of a sufficient  number of shares of voting stock to elect a
majority  of the  Company's  Board of  Directors  or in the event of the  death,
physical  or  mental  disability  of a  duration  of six  months or  longer,  or
incapacity of both Henry Arnberg and Paul Levine. The Southwest Agreement may be
terminated if the Company fails to remain the sole shareholder of its subsidiary
that is the party to the Southwest  Agreement.  The West Coast  Agreement may be
terminated should any material change occur in the current Class B shareholders,
directors or officers of the Company or should there occur any change in control
of the Company.  The termination of the Tajima  Agreements would have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

     Importing  Tajima's  equipment  from Japan subjects the Company to risks of
engaging in business overseas,  including  international  political and economic
conditions,  changes in the exchange rates between currencies,  tariffs, foreign
regulation of trade with the United States, and work stoppages. The interruption
of supply or a  significant  increase  in the cost of Tajima  equipment  for any
reason could have a material adverse effect on the Company's business, financial
condition  and  results of  operation.  In  addition,  Tajima  manufactures  its
embroidery  machines in one location in Japan.  The Company  could be materially
and adversely  affected should this facility be seriously damaged as a result of
a fire, natural disaster or otherwise.  Further, the Company could be materially
and adversely  affected should Tajima be subject to adverse market,  business or
financial conditions.

     Embroidery  machines  produced  by  Tajima  are  subject  to  technological
advances  and new  product  introductions.  Current  competitors  or new  market
entrants could introduce products with features that render products sold by the
Company and products developed by Tajima less marketable.  The Company relies on
Tajima's  embroidery  equipment  to be high  quality  and state of the art.  The
Company's  future success will depend,  to a certain  extent,  on the ability of
Tajima to adapt to technological  change and address market needs.  There can be
no assurance that Tajima will be able to keep pace with technological  change in
the embroidery  industry or the current demands of the marketplace.  The failure
of  Tajima  to do so could  have a  material  adverse  effect  on the  Company's
business, financial conditions and results of operations.

Embroidery Industry

     The  Company's  growth in past years has resulted in part from the increase
in demand for embroidered  products and the growth of the embroidery industry as
a whole. The embroidery industry is cyclical and has recently experienced; (i) a
decline in demand for large  embroidery  machines,  and; (ii) a trend toward the
relocation  of  manufacturing  facilities  to Mexico,  the  Caribbean  and South
America,  all of which  have had an  adverse  effect  on the  operations  of the
Company and its business.  A decrease in consumer  preferences  for  embroidered
products,  a general economic  downturn or other events having an adverse effect
on the embroidery industry would also have an adverse effect on the Company.

Foreign Currency Risks

     The Company pays for its Tajima  embroidery  machinery in Japanese Yen. Any
change in the valuation of the U.S.  Dollar  compared to the Japanese Yen either
increases the cost to the Company of its embroidery machine inventory or results
in competitive pressures for reduced US dollar pricing among Yen-based equipment
distributors and  manufacturers.  The Company has generally been able to recover
increased  costs  through  price  increases  to its  customers  or,  in  limited
circumstances, price reductions from Tajima, however, dollar price reductions do
reduce  dollar  contribution  margins and as a result create  overhead  coverage
pressure.  There can be no  assurance  that the Company  will be able to recover
such increased costs in the future or reduce  overheads to the necessary  degree
to maintain  profitability.  The Company's Pulse  Microsystems  Ltd.  subsidiary
conducts  business through 43 distributors  throughout the world, and while most
transactions are conducted in US dollars,  there are some that are transacted in
major European currencies,  including Deutschmarks,  French Francs and Euros, as
well as Japanese Yen. While an increasing part of Pulse's business,  the foreign
exchange exposure created by these transactions is not presently material to the
consolidated  results of the parent Company, and they are not hedged through any
derivative  currency  product.  Should  they  become  material,  there can be no
assurance  that  the  Company  will be able to  effectively  hedge  against  all
currency fluctuations.

Assembly Facility

     The Company  assembles  Tajima  embroidery  machines  in the United  States
through its subsidiary TUI,  initially in  configurations of up to six heads per
machine and currently including eight head machines. Tajima provides the Company
with technical  assistance and support.  While TUI operations were profitable in
fiscal 2001,  the  throughput of the facility is largely  dependent on continued
demand for embroidery machines generated by the Hirsch sales organization.

Creation of Additional Revenue Streams

     In July  1999  the  Company  was  granted  the  rights  to  distribute  new
embroidery  machines  into its existing  US-based  customers  who have  expanded
facilities in the Caribbean  region.  There can be no assurance that the Company
will be able  integrate  activity  in the new  territories  with  the  Company's
operations  without  substantial  costs,  delays or problems or that the Company
will be able to profitably sell equipment or the Company's  value-added products
in the Caribbean region.

     The  Company's  Hometown  Threads  venture  was  created for the purpose of
establishing   retail  embroidery  service  centers  within  Wal-Mart(R)  retail
locations.  As of the end of fiscal 2001, Hometown Threads had concluded a pilot
test market at two  Wal-Mart(R)  centers  located in Texas and was authorized by
Wal-Mart(R)  to continue to an expansion  strategy of up to 25 units.  While the
relationship with Wal-Mart(R) is good, the Company is dependent on the continued
existence  of the  master  lease  with  Wal-Mart(R)  for  implementation  of its
franchise program of Hometown Threads within Wal-Mart(R) locations. There can be
no  assurance  that  locations  outside of  Wal-Mart(R)  will  provide  the same
opportunity for expansion of the franchise program as those within  Wal-Mart(R),
or that the  Wal-Mart(R)  locations will be available  concurrent with qualified
franchisees as those customers are developed.  As of the end of fiscal 2001, the
Company's net  investment in Hometown  Threads was  approximately  $1.1 million.
Although  the  Company  believes it will be able to access the market for retail
embroidery  services,  there is no guaranty  that it will be successful in doing
so, or that it will be able to do so on a profitable basis.

     Changes  in  the  embroidery  industry  and  recent  restructuring  of  the
Company's  business  have  resulted in new and  increased  responsibilities  for
management  and have placed  increased  demands  upon the  Company's  operating,
financial and technical  resources.  The Company's ability to successfully adapt
to  industry-wide  changes and the  restructuring of its business and operations
will require continued enhancement of its management and operational,  financial
and  technical  resources.  The  Company  will also need to  attract  and retain
qualified personnel to support its operations.  The Company's failure to attract
and retain  qualified  personnel  could have a  material  adverse  effect on the
Company's business, financial condition and results of operations.

Leasing Operations

     HAPL Leasing provides a range of equipment  financing  options to customers
wishing to finance equipment purchases. HAPL Leasing retains selected leases for
which it has not  obtained  a  purchase  commitment  from its  funding  sources.
Although HAPL Leasing has sold approximately  90.7% of the leases it has written
to date, the  marketability of these leases is subject to changes and volatility
in the equipment  financing  industry in general,  and there can be no assurance
that it will  continue  to be able to sell its  leases  to third  party  funding
sources. Unfunded leases create the risk of nonpayment by lessees, including the
risk  that   foreclosure   could  be  hampered  by  bankruptcy  or  other  legal
proceedings,  and the risk that foreclosed equipment cannot be re-leased or sold
due to  market  conditions  or the  physical  condition  of the  equipment.  The
operations of HAPL Leasing are interest rate sensitive.  If interest rates rise,
there  can  be no  assurances  that  profit  margins  can  be  maintained,  and,
consequently, the business financial condition and results of operations of HAPL
Leasing could be materially and adversely affected.

     HAPL Leasing's  strategy is to enter into leases that qualify as sales-type
leases for which  revenue is  recognized  immediately  in an amount equal to the
present value of minimum lease payments.  However, high interest rates, weakness
of the U.S. dollar,  poor general economic  conditions,  market  conditions,  or
other factors could result in HAPL Leasing having to enter into operating leases
resulting in deferral of revenue recognition.  Unlike sales-type leases, revenue
relating to operating leases is recognized over the term of the lease, resulting
in a deferral  in the  recognition  of  revenue.  In  addition,  the  embroidery
industry  as a whole has been  experiencing  a decline  of  overall  demand  for
embroidery machines, which if prolonged, could have a material adverse effect on
the business and results of  operations  of HAPL Leasing and that of the Company
taken as a whole.

Inventory

     The Company's  ordering cycle for new embroidery  machines is approximately
three to four  months  prior to  delivery  to the  Company.  Since  the  Company
generally  delivers new Tajima  embroidery  machines to its customers within one
week of receiving  orders,  it orders  inventory  based on past  experience  and
forecasted  demand.  Due to lower than  forecasted  demand,  in fiscal  1999 and
fiscal 2000 the Company  experienced an increase in inventory  levels beyond the
desired  supply which  caused the Company to  experience  higher than  projected
inventory costs. The Company has reduced new machine  inventories  substantially
over the past two years, moving to "just in time" inventory management policies.
Due to the relatively  long lead times of the ordering  cycle,  any  significant
unanticipated  downturn or upturn in equipment sales could result in an increase
in  inventory  levels or shortage of product,  respectively,  which could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

Competition

     The Company competes with  distributors of embroidery  machines produced by
manufacturers  other than Tajima and with  manufacturers  who  distribute  their
embroidery  machines  directly  as well as with other  providers  of  embroidery
products and services.  The Company  believes that competition in the embroidery
industry  is  based  on  technological  capability  and  quality  of  embroidery
machines, price and service. The Company has been able to compete effectively in
part because of the relatively advanced technological capabilities and excellent
quality of Tajima embroidery machines.  However, if other manufacturers  develop
more  technologically  advanced  embroidery  machines  or the  quality of Tajima
embroidery  machines  diminishes,  the  Company  would not be able to compete as
effectively  which  could  have a  material  adverse  effect  on  its  business,
financial   condition  and  results  of  operations.   The  Company  also  faces
competition  in  selling   software,   embroidery   supplies,   accessories  and
proprietary products as well as providing leasing and customer training, support
and  services.  Due to the recent  decline in  overall  demand in the  industry,
potential  customers may emphasize price  differences over value-added  services
and support in purchasing new embroidery machines.  Severe price competition may
impair  the  Company's  abilities  to provide  its  customers  with  value-added
services and support.  The  Company's  failure to compete  effectively  in these
areas could have a material adverse effect on its business,  financial condition
and results of operations.

Software

     The software  industry is  characterized  by the rapid  development  of new
programs with increased capabilities. Other producers of software for embroidery
machines  could  produce  new  software  programs  that would make the  software
developed by Pulse less marketable or obsolete. The failure by Pulse to continue
to develop and  upgrade  its  software  products  could have a material  adverse
effect on its business,  financial  condition and results of operations and that
of the Company taken as a whole.

     Pulse's software products,  like software programs  generally,  may contain
undetected  errors when  introduced or when new versions are released.  To date,
Pulse has not experienced  significant adverse financial or operational problems
due to post release  software  errors,  although  there can be no assurance that
this will not  occur in the  future,  particularly  if these  software  programs
continue to become more  complex and  sophisticated.  Defective  software  could
result  in loss of or delay  in  market  acceptance  of the  Company's  software
products,  warranty  liability or product recalls and can diminish the Company's
reputation in the industry.

     The Company has been granted  patent and copyright  protection  for Pulse's
software  products.  Although the Company does not believe that the ownership of
such patents or copyrights is a significant  factor in Pulse's  business or that
its  success  is  materially   dependent   upon  the   ownership,   validity  or
enforceability  of such patents or copyrights,  existing  intellectual  property
laws afford  limited  protection  of patents  and  copyrights  and  unauthorized
parties may obtain and use information  that the Company regards as proprietary.
The  Company  intends to enforce  its  intellectual  property  rights in Pulse's
products, but there can be no assurance that it will be successful in doing so.

Dependence on Existing Management

     The Company's  continued  success will depend to a significant  extent upon
the abilities and continued efforts of Henry Arnberg,  Chairman of the Board and
Chief Executive Officer of the Company; Paul Levine,  President,  and a Director
of the Company;  Ronald  Krasnitz,  Chief  Operating  Officer,  Secretary  and a
Director of the Company;  and Richard  Richer,  its  Executive  Vice  President,
Finance and  Administration,  and Chief  Financial  Officer.  Pulse's  continued
success will depend to a  significant  extent upon the  abilities  and continued
efforts of Tas Tsonis,  Vice  President and a Director of the Company and CEO of
Pulse and Brian Goldberg,  Vice President of the Company and President of Pulse.
Effective as of February 24, 1999, Messrs.  Tsonis and Goldberg elected to renew
their  respective  employment  agreements for an additional three (3) year term.
Mr. Krasnitz is currently in the fifth year of a five-year employment agreement.
Messrs.  Arnberg,  Levine  and Richer  are not bound by any  written  employment
agreement with the Company. The loss of the services of Messrs. Arnberg, Levine,
Krasnitz,  Tsonis,  Goldberg or Richer or the  services of other key  management
personnel  could have a material  adverse  effect upon the  Company's  business,
financial condition and results of operations.

ITEM 2.  Properties

     The Company's corporate headquarters is in Hauppauge,  New York in a 50,000
square foot facility.  Subsequent to the close of the fiscal year, this facility
was sold to  Brandywine  Realty Trust and  approximately  24,500 square feet was
leased back in a concurrent  transaction.  This  property  houses the  Company's
executive  offices,  the  Northeast  sales  office,  technical  service and HAPL
Leasing.

     In March 1997,  the  Company  entered  into a five-year  lease for a 25,000
square foot factory  facility in  Ronkonkoma,  New York where  Tajima USA,  Inc.
("TUI"),  operates a machine  assembly  facility.  The lease  provides for lease
payments of approximately $132,000 per annum.

     In addition to the Company's  headquarters and assembly facilities occupied
by TUI, the Company leases 14 regional satellite offices,  as well as a location
in Mississauga, Ontario, Canada for Pulse headquarters. These offices consist of
regional  sales  offices,  training  centers,  repair  centers and warehouse and
showroom space. All leased space is considered adequate for the operation of our
business,  and  no  difficulties  are  foreseen  in  meeting  any  future  space
requirements.

ITEM 3.  Legal Proceedings

     There are no material legal proceedings pending against the Company.

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

     The Company did not submit any matters to a vote of Security holders during
the fourth quarter of its most recent fiscal year.


<PAGE>


                                     PART II

ITEM 5.  Market For Common Equity and Related Stockholder Matters

(a)  The Company's  outstanding  Common Stock  consists of two classes,  Class A
     Common Stock and Class B Common Stock.  The Class A Common Stock, par value
     $.01 per share,  trades on the NASDAQ  Stock  Market under the symbol HRSH.
     The following  table sets forth for each period  indicated the high and low
     closing  bid prices for the Class A Common  Stock as reported on the NASDAQ
     National Market.  Trading began in the Class A Common Stock on February 17,
     1994.
<TABLE>
<CAPTION>


Fiscal 2001                                               High              Low
-----------                                               ----              ---

<S>                                                       <C>              <C>
First Quarter ended April 30, 2000........................$ 1.750          $ 0.750
Second Quarter ended July 31, 2000........................$ 1.500          $ 0.750
Third Quarter ended October 31, 2000......................$ 1.438          $ 0.938
Fourth Quarter ended January 31, 2001.....................$ 1.313          $ 0.688

Fiscal 2000                                                High             Low
-----------                                                ----             ---

First Quarter ended April 30, 1999........................$3.875           $1.750
Second Quarter ended July 31, 1999........................$2.500           $2.031
Third Quarter ended October 31, 1999......................$2.188           $  .813
Fourth Quarter ended January 31, 2000.....................$2.125           $1.094

Fiscal 1999                                                High             Low
-----------                                                ----             ---

First Quarter ended April 30, 1998........................$22.750          $8.094
Second Quarter ended July 31, 1998........................$11.250          $4.500
Third Quarter ended October 31, 1998......................$  5.625         $2.000
Fourth Quarter ended January 31, 1999.....................$  5.500         $2.750
</TABLE>



     The foregoing  over-the-counter  market quotations  represent  inter-dealer
prices,  without retail  mark-up,  mark-down or commission and may not represent
actual transactions.

(b)  As of April 30, 2001,  the Company  believes that there were  approximately
     3,652 beneficial owners of its Class A Common Stock.

(c)  The Company  intends to retain earnings for use in operations and expansion
     of its business and therefore does not anticipate  paying cash dividends on
     the  Class A Common  Stock or the Class B Common  Stock in the  foreseeable
     future.  The future  payment of dividends is within the  discretion  of the
     Board  of  Directors  and  will be  dependent,  among  other  things,  upon
     earnings,   capital  requirements,   financing  agreement  covenants,   the
     financial  condition of the Company and applicable  law. The Class A Common
     Stock and Class B Common Stock share ratably in any  dividends  declared by
     the Company on its Common Stock.  Any stock dividends on the Class A Common
     Stock and the Class B Common Stock will be paid in shares of Class A Common
     Stock.




                                    PART III

ITEM 6.  Selected Financial Data

     The  following  selected  consolidated  financial  data  should  be read in
conjunction  with the  Consolidated  Financial  Statements and the Notes thereto
included  elsewhere  herein.  The  consolidated  financial  statement data as of
January 31, 2001 and 2000 and for the fiscal years ended January 31, 2001, 2000,
and  1999  are  derived  from,  and  qualified  by  reference  to,  the  audited
Consolidated  Financial  Statements included elsewhere herein and should be read
in  conjunction  with  those  Consolidated  Financial  Statements  and the Notes
thereto.  The consolidated  financial  statement data as of January 31, 1998 and
1997,  and for the fiscal years ended January 31, 1998 and 1997 are derived from
audited Consolidated Financial Statements not included herein.
<TABLE>
<CAPTION>

                                                                             Year Ended January 31,
                                                              (in thousands of dollars, except per share amounts)

Hirsch International Corp. and Subsidiaries                       2001        2000     1999      1998      1997
-------------------------------------------------------------------------------------------------------------------

Statement of Operations Data:
<S>                                                            <C>         <C>       <C>       <C>       <C>
Net sales....................................................  $ 68,328    $ 86,958  $122,198  $147,045  $122,195
Interest income related to sales-type leases.................     1,939       3,863     5,348     5,432     3,243

Cost of sales................................................    46,311      59,846    85,054    96,099    80,820
Operating Expenses (3).......................................    40,181      40,491    44,381    41,055    29,070
(Loss) income before income tax (benefit) provision......       (15,786)   (10,369)    (6,066)   14,255    15,170

Income tax (benefit) provision...............................      (224)       972     (1,848)    6,059     6,402
(Loss) Income before cumulative effect of accounting
change.......................................................        -     (11,635)        -         -         -
Cumulative effect of accounting change....................           -       2,187)        -         -         -
Net (loss) income (2).........................................  (15,671)   (13,822)(2  (4,608)    8,196     8,768
Basic net (loss) income per share (1).........................   $(1.72)    $(1.48)    $(0.49)    $0.92     $1.13

Diluted net (loss) income per share (1).......................   $(1.72)    $(1.48)    $(0.49)    $0.89     $1.10
Shares used in the calculation of basic
  net (loss) income per share (1).............................    9,112      9,348      9,413     8,953     7,782
Shares used in the calculation of diluted
  net (loss) income per share (1).............................    9,112      9,348      9,436     9,236     7,967

<FN>

(1)  Basic and  diluted  net income  per share  figures  and shares  used in the
     calculation  of diluted net income per share for fiscal year 1997 have been
     retroactively  adjusted to reflect the adoption of SFAB No. 128,  "Earnings
     per Share".

(2)  Net of the cumulative effect of SAB101 accounting change.

(3)  Fiscal year 2001 SG&A  includes a write-down  of impaired  goodwill of $7.6
     million.
</FN>
</TABLE>
<TABLE>
<CAPTION>

                                                                       January 31,
                                                               (in thousands of dollars)

Hirsch International Corp. and Subsidiaries         2001        2000      1999       1998        1997
-----------------------------------------------------------------------------------------------------

Balance Sheet Data:
<S>                                              <C>         <C>        <C>       <C>      <C> <C>
Working capital................................. $ 25,214    $ 29,627   $ 51,939  $ 40,169 (5) $ 22,004
Total assets....................................   54,030      80,216    106,935   114,832 (5)   83,696
Long-term debt, less current maturities.........       79         989     15,640     1,421       13,194 (4)

Stockholders' equity............................   40,278      56,253     70,207    75,623 (5)   41,682

<FN>

(4)  Included in long-term debt, less current  maturities at January 31, 1997 is
     $11,645,000 of debt relating to the acquisitions of SMX and Sedeco.

(5)  In June 1997,  in  connection  with a Secondary  Offering  (the  "Secondary
     Offering"),  the Company received net proceeds of approximately $24,300,000
     after deducting expenses of the Secondary Offering).
</FN>
</TABLE>



Hirsch International Corp
Summarized Quarterly Data

<TABLE>
<CAPTION>

$ in thousands, except for per share amounts                                 Fiscal Quarter
2001                                                   First        Second        Third        Fourth         Total
----                                                   -----        ------        -----        ------         -----
<S>                                                   <C>           <C>          <C>           <C>           <C>
Revenue                                               18,726        18,544       19,732        13,265        70,267
Gross Profit                                           7,203         6,975        6,383         3,395        23,956
Impairment of Goodwill                                    -             -            -          7,640         7,640
Net Earnings (Loss)                                     (969)       (1,705)      (1,035)      (11,960)      (15,669)
-------------------                                     -----       -------      -------      --------      --------
Basic and Diluted (Loss) Per Share                     (0.11)        (0.19)       (0.11)        (1.31)        (1.72)
                                                       ======        ======       ======        ======        ======

2000
----
Revenue                                               25,376        20,392       21,064        23,989        90,821
Gross Profit                                           9,335         6,955        5,882         8,803        30,975
Cumulative Effect of Accounting Change                (2,187)           -            -             -         (2,187)
Net Earnings (Loss)                                   (2,917)       (1,383)      (2,582)       (6,940)      (13,822)
Basic and Diluted Earnings (Loss) Per Share Before
    Cumulative Effect of Accounting Change             (0.08)        (0.15)       (0.28)        (0.74)        (1.25)
Cumulative Effect of Accounting Change                 (0.23)           -            -             -          (0.23)
                                                       ------        -----        ------        ------        ------
Basic and Diluted (Loss) Per Share                     (0.31)        (0.15)       (0.28)        (0.74)        (1.48)
                                                       ======        ======       ======        ======        ======
</TABLE>


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


     The following discussion and analysis contains  forward-looking  statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company  or  its  management  are  intended  to  identify  such  forward-looking
statements.  The Company's  actual results,  performance or  achievements  could
differ   materially   from  the  results   expressed  in  or  implied  by  these
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences should be read in conjunction with, and is qualified in its entirety
by,  the  Company's  Consolidated  Financial  Statements,  including  the  Notes
thereto.  Historical  results  are  not  necessarily  indicative  of  trends  in
operating  results for any future  period.  As used  herein,  "fiscal  year" and
"fiscal"  refers  to  the  applicable  fiscal  year  ending  January  31 of  the
applicable calendar year.


General

     Hirsch  International Corp. ("Hirsch" or the "Company") is a leading single
source  supplier of  electronic  computer-controlled  embroidery  machinery  and
related  value-added  products  and  services to the  embroidery  industry.  The
Company  offers  a  complete  line  of  technologically   advanced  single-  and
multi-head embroidery machines,  proprietary  application software and a diverse
line of embroidery  supplies and accessories.  Hirsch believes its comprehensive
customer  service,  user training,  software support and broad product offerings
combine  to place the  Company  in a superior  competitive  position  within its
marketplace.  The  Company  sells  embroidery  machines  manufactured  by Tajima
Industries Ltd.  ("Tajima") and Tajima USA, Inc. ("TUI"), a subsidiary formed in
fiscal 1998,  as well as a wide variety of embroidery  supplies,  microcomputers
manufactured  by Dell  Computer  Corporation  and software  manufactured  by the
Company's wholly-owned subsidiary, Pulse Microsystems Ltd. ("Pulse").

     The  Company's  focus from 1995 through 1998 was on growth and expansion of
its installed  machine base and  increasing  the breadth of its offerings to the
embroidery  industry.  The  acquisitions of SMX and Sedeco increased the area in
which the Company is the exclusive  distributor of Tajima  embroidery  equipment
from 26 states to 39 states.  In January  1997,  Tajima  granted the Company the
exclusive  right to distribute  small (one through  six-head "FX" models) Tajima
embroidery  machines in nine western  states and Hawaii.  With this expansion of
the Company's small machine territory to the West Coast, Hirsch gained the right
to distribute  Tajima  machines  throughout  the  continental  United States and
Hawaii.  In fiscal 1998 Hirsch formed TUI for the purpose of  assembling  Tajima
embroidery  machines in the United States.  Production at TUI consists of models
in  configurations  of up to six  heads  per  machine.  In  January  1998  Tokai
Industries (Tajima's  manufacturing arm) purchased a 45 percent interest in TUI.
This investment  reflects their continuing  confidence in this endeavor and will
be a contributing  factor in the  long-range  growth of TUI. In July 1999 Tajima
granted to Hirsch the  non-exclusive  right to  distribute  to its  existing  US
customers who have expanded their facilities into the Caribbean region.

     The  Company  grew  rapidly  from the time of its initial  public  offering
through  fiscal  1998.  Growth was  fueled by rapid  technological  advances  in
software and hardware, the continued strong demand for embroidered products, the
creation  of new  embroidery  applications  and the  continued  strength  of the
"embroidery  entrepreneur" as a growing segment of the marketplace.  The Company
believes that the  purchasers of smaller  embroidery  machines are a significant
source of repeat business for the sale of multi-head  embroidery machines as the
entrepreneurs'  operations  expand.  The Company  initiated  several programs to
broaden the product  offering to these smaller  machine  customers in the latter
part of fiscal 2000.

     Fiscal 2001 continued the trend begun in the industry in fiscal 1999,  with
retrenchment driven by the relocation and continued investment offshore of large
multi-head  equipment  customers.   While  growth  of  small  machine  customers
stabilized in the domestic market,  the market continued to experience a decline
in large  machine  sales,  continuing  the change in the sales mix of embroidery
machines  and an  overall  decline  in  demand.  It was  further  compounded  by
weakening value in foreign  exchange of the Yen versus the US dollar,  resulting
in dollar  price  pressure  for machine  sales.  All  Japanese  equipment  based
competitors  in the  industry  faced  difficulty  in  meeting  these new  market
demands. In fiscal 1999 the Company initiated a restructuring program to address
the market shifts in the industry,  including closing and consolidating  certain
divisions,  reducing  total  employment,  and  disposing of facilities no longer
required to support its new business model (See Note 8 of Notes to  Consolidated
Financial Statements).  The Company continued to reduce overhead operating costs
throughout  fiscal  2000 and 2001,  as the market  continued  to seek a level of
stability.  The Company  believes the continued  implementation  of the overhead
cost  reduction  program will position it to return to profitable  operations at
anticipated reduced revenue levels.

Results of Operations

     The following table presents  certain income statement items expressed as a
percentage of total  revenue for the fiscal years ended  January 31, 2001,  2000
and 1999.


                                           2001           2000          1999
                                           ----           ----          ----

Net sales                                  97.2%          95.7%         95.8%

Interest income related
  to sales-type leases                      2.8%           4.3%          4.2%
                                          ------         ------        ------
Total revenue                             100.0%         100.0%        100.0%

Cost of                                    65.9%          65.9%         66.7%
sales

Operating expenses                         57.2%          44.6%         36.7%

Interest expense, net                       0.5%           1.4%          1.2%

Other expense (income), net                -1.1%          -0.5%          0.2%
                                          ------         ------        ------
(Loss) income before income
  taxes and minority interest             -22.5%         -11.4%         -4.8%

Income tax (benefit) provision             -0.3%           1.1%         -1.5%

Cumulative Effect of Accounting
 Change                                     -             -2.4%          0.0%

Minority Interest                           0.2%           0.3%          0.3%
                                          ------         ------        ------
Net (loss) income                         -22.3%         -15.2%         -3.6%
                                          ======         ======        ======


                Fiscal Year 2001 as Compared to Fiscal Year 2000


     Net sales. Net sales for fiscal year 2001 were $68.3 million, a decrease of
$18.7  million,  or 21.5%,  compared to $ 87.0 million for fiscal year 2000. The
Company believes that the reduction in the sales level for the fiscal year ended
January  31,  2001 is  attributable  to a  decrease  in  overall  demand for new
multi-head  embroidery  machines,  stability  in  demand  for  small  embroidery
machines,  coupled with increased  competition and a weakened Yen exchange rate,
resulting in downward pressure in US dollar pricing.

     Sales of new embroidery machinery represented approximately 66.4% and 72.8%
of net sales for fiscal  year's 2001 and 2000,  respectively.  Small  embroidery
machines (one through six-head "FX" models)  represented  approximately 66.5% of
total new  embroidery  machine  sales for fiscal year 2001 as compared to 57.7%,
for fiscal year 2000.  Large embroidery  machines  (six-head "DC" models through
thirty-head  models)  represented  approximately  33.5% of total new  embroidery
machine  sales during  fiscal year 2001 as compared to  approximately  42.3% for
fiscal year 2000.

     Revenue from the sale of the Company's used machines, computer hardware and
software,  parts and service,  application  software and embroidery supplies for
fiscal year 2001  aggregated  approximately  $25.8  million as compared to $23.6
million for fiscal year 2000.

     Interest  income  related to  sales-type  leases.  HAPL's  interest  income
decreased  49.8%,  to $1.9  million for fiscal  year 2001 from $3.9  million for
fiscal  year 2000.  This  decrease is  directly  related to the  decrease in new
embroidery machine sales. The percentage of new equipment sales which are leased
was 28.9% of total new equipment sales for fiscal year 2001 as compared to 42.5%
for fiscal year 2000. This also reflects  tightened  credit criteria used by the
leasing organization.

     Cost of sales.  For fiscal year 2001, cost of sales decreased $13.5 million
or 21.9%, to $46.3 million from $59.8 million for fiscal year 2000. The decrease
was a result  of the  related  decrease  in net sales  for  fiscal  year 2001 as
compared to fiscal year 2000. The  fluctuation of the dollar against the yen has
historically  had a minimal  effect  on Tajima  equipment  gross  margins  since
currency fluctuations are generally reflected in pricing adjustments in order to
maintain  consistent  gross margins on machine  revenues.  The  Company's  gross
margin  declined for fiscal year 2001 to 34.1%,  as compared to 34.7% for fiscal
year 2000. The reductions in gross margin are mainly  attributable to aggressive
pricing used to meet competitive products, and changes in overall sales mix.

     Operating  Expenses.  As reported for fiscal year 2001,  operating expenses
decreased  $0.3 million or 0.8%,  to $40.2 million from $40.5 million for fiscal
year 2000. Operating expenses increased as a percentage of revenues to 57.2% for
fiscal year 2001, from 44.6% for fiscal year 2000.  During the fourth quarter of
fiscal 2001 in view of the  overall  industry  decline in demand for  embroidery
equipment  and  related  products,  the  resulting  decline in  Company  revenue
delivered in the territories  associated with the acquisition of SMX Corporation
and Sedeco  Corporation  and the Company's  impairment  evaluation,  the Company
wrote-off  approximately  $7.6  million of goodwill as an  impairment  charge to
operations.  This write-off includes the remaining value of goodwill  associated
with its  acquisition of the digitizing  embroidery  business  assets of All Pro
Punching, Inc. of approximately $0.2 million, reflecting discontinuance of those
operations.  The goodwill  write-off  represented a per-share net loss of $ 0.84
both on a basic and  diluted  basis for  fiscal  year  2001.  The  Company  also
continued  to incur  development  costs  associated  with the  Hometown  Threads
business initiative. While operating expenses continue to decline as a result of
the Company's cost reduction  programs,  of the percentage increase in operating
expenses versus revenues for fiscal 2000, a significant  portion is attributable
to these  non-recurring and developmental  expenses.  Based upon the decrease in
net sales,  the Company  continues to implement  its cost  reduction  plan.  The
Company anticipates that actions taken in accordance with the plan will continue
to  reduce  costs  through  the   consolidation   of  support  and  back  office
infrastructure  and  reduction of overhead.  The Company  anticipates  this will
bring operating expenses in line with revised sales projections.

     Interest  Expense.  Interest  expense for fiscal year 2001 was $0.4 million
versus  interest  expense of $1.3  million  for fiscal  year 2000.  The  Company
continued its aggressive  inventory  reduction  program in fiscal year 2001. The
results of this program  directly  reflect  increased  liquidity  and  decreased
interest expense as a result of reduced working capital  borrowings  outstanding
against the Company's Revolving Credit Agreements during fiscal 2001 as compared
to fiscal 2000.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective  tax benefit rate of  approximately  0.3% for the twelve  months ended
January 31, 2001 as compared to an income tax rate of 9.6% for fiscal year 2000.
The difference of the above rates to the federal statutory rate is the valuation
allowance  established on deferred tax assets since the company cannot determine
the future utilization of those assets.

     Net (Loss) income.  The net loss for fiscal year 2001 was $15.7 million,  a
decline of $1.9 million, compared to a net loss of $13.8 million for fiscal year
2000.  The net margin  declined to (22.2%) for fiscal year 2001 from (15.2%) for
fiscal year 2000.  These declines are attributable to the decrease in net sales,
an increase in operating  expenses as a percentage  of revenues,  and a goodwill
impairment  charge of $7.6  million.  The  reported  loss for  fiscal  year 2000
included a cumulative effect for accounting change of $2.2 million; without that
change the  difference  between fiscal year 2001 and fiscal year 2000 would have
been $2.2 million greater.

                Fiscal Year 2000 as Compared to Fiscal Year 1999


     Change in accounting method. On December 3, 1999, The SEC issued its "Staff
Advisory Bulletin No. 101- Revenue  Recognition in Financial  Statements," ("SAB
101")  which  represents  a  clarification  of  "Generally  Accepted  Accounting
Principles" ("GAAP") regarding the timing of revenue recognition. Beginning with
the  reporting  of fiscal  year 2000  statements,  Hirsch  has  implemented  the
recommendations  contained  in SAB 101.  SAB 101  establishes  the  basis  for a
conservative  approach to revenue  recognition,  including a deferral of revenue
recognition of equipment sales based upon customer  acceptance of  installation,
rather  than upon  shipment by the  distributor,  where such  installation  is a
substantive part of the sale. Historically,  as the value of the installation is
not material to the sale, Hirsch accounting  practice,  in accordance with GAAP,
had been to accrue the expense where  installation  was not yet completed.  This
change in accounting  method  requires an adjustment of fiscal year 2000 results
in the form of an after-tax expense, which reflects the cumulative effect on the
fiscal years' results due to the application of the changed  accounting  method.
Prior years'  comparisons  are  discussed  as  originally  reported  without the
accounting change applied.

     Net sales. Net sales for fiscal year 2000 were $87.0 million, a decrease of
$34.9  million,  or 28.6%,  compared  to $122.2  million  for fiscal  year 1999.
Applied on a pro-forma  basis  retroactively  to remove the  accounting  change,
fiscal  year 2000  sales  would  have been $84.3  million,  a decrease  of $37.9
million,  or 31.0% compared to fiscal year 1999.  The Company  believes that the
reduction  in the sales  level for the fiscal  year ended  January  31,  2000 is
attributable  to a decrease  in  overall  demand  for new  embroidery  machines,
coupled with increased competition.

     Sales of new embroidery machinery represented approximately 72.8% and 79.0%
of net sales for fiscal  years  2000 and 1999,  respectively.  Small  embroidery
machines (one through six-head "FX" models)  represented  approximately 57.7% of
total new  embroidery  machine  sales for fiscal year 2000 as compared to 51.1%,
for fiscal year 1999.  Large embroidery  machines  (six-head "DC" models through
thirty-head  models)  represented  approximately  42.3% of total new  embroidery
machine  sales during  fiscal year 2000 as compared to  approximately  48.9% for
fiscal year 1999.

     Revenue from the sale of the Company's used machines, computer hardware and
software,  parts and service,  application  software and embroidery supplies for
fiscal year 2000  aggregated  approximately  $23.6  million as compared to $25.7
million for fiscal year 1999.

     Interest  income  related to  sales-type  leases.  HAPL's  interest  income
decreased  28.8%,  to $3.9  million for fiscal  year 2000 from $5.3  million for
fiscal  year 1999.  This  decrease is  directly  related to the  decrease in new
embroidery machine sales. The percentage of new equipment sales which are leased
was 42.5% of total new equipment sales for fiscal year 2000 as compared to 50.7%
for fiscal year 1999.

     Cost of sales.  For fiscal year 2000, cost of sales decreased $25.3 million
or 30.2%, to $59.8 million from $85.1 million for fiscal year 1999. The decrease
was a result  of the  related  decrease  in net sales  for  fiscal  year 2000 as
compared to fiscal year 1999. The  fluctuation of the dollar against the yen has
historically  had a minimal  effect  on Tajima  equipment  gross  margins  since
currency fluctuations are generally reflected in pricing adjustments in order to
maintain  consistent  gross margins on machine  revenues.  The  Company's  gross
margin  declined for fiscal year 2000 to 34.7%,  as compared to 36.0% for fiscal
year 1999. The reductions in gross margin are mainly  attributable to aggressive
pricing used to increase sales of slower moving new machine inventory as well as
substantial write-downs and increased reserves for slow-moving new machinery.

     Operating Expenses. For fiscal year 2000, operating expenses decreased $3.9
million or 8.7%,  to $40.5  million  from $44.4  million  for fiscal  year 1999.
Operating  expenses  increased as a  percentage  of revenues to 44.6% for fiscal
year 2000, from 34.8% for fiscal year 1999. Additional expenses were incurred in
the  replacement  of the  Company's  revolving  credit  facilities,  as  well as
development  costs incurred for Building  Blocks and Hometown  Threads  business
initiatives.  While  operating  expenses  continue to decline as a result of the
Company's  cost  reduction  programs,  of the  percentage  increase in operating
expenses versus revenues for fiscal 2000, a significant  portion is attributable
to these  non-recurring and developmental  expenses.  Based upon the decrease in
net sales,  the Company  continues to implement  its cost  reduction  plan.  The
Company anticipates that actions taken in accordance with the plan will continue
to  reduce  costs  through  the   consolidation   of  support  and  back  office
infrastructure  and  reduction of overhead.  The Company  anticipates  this will
bring operating expenses in line with revised sales projections.

     Interest  Expense.  Interest  expense  for fiscal year 2000  decreased  $.3
million,  or 16.5%,  to $1.3 million from $1.6 million for fiscal year 1999. The
Company undertook an aggressive inventory reduction program in fiscal year 2000.
The results of this program directly reflect a decrease in interest expense as a
result of reduced working capital borrowings  outstanding  against the Company's
Revolving Credit Agreements during fiscal 2000 as compared to fiscal 1999.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective tax rate of approximately 9.6% for the twelve months ended January 31,
2000 as compared  to an income tax  benefit  rate of 30.5% for fiscal year 1999.
The principal  components of the deferred income tax assets recognized in fiscal
1999 resulted from allowances and accruals that were not then deductible for tax
purposes and differences in amortization  periods between book and tax bases. In
fiscal 2000 the Company has established a 100% valuation allowance against these
deferred  tax  assets,   however,   the  Company   anticipates   that  over  the
nineteen-year  life of the tax loss  carry-forward,  this  will be  realized  as
profits are earned in the future.

     Net (Loss) income.  The net loss for fiscal year 2000 was $13.8 million,  a
decline of $9.2 million,  compared to a net loss of $4.6 million for fiscal year
1999.  The net margin  declined  to (15.2%) for fiscal year 2000 from (3.6%) for
fiscal year 1999.  These declines are attributable to the decrease in net sales,
the increase in SG&A  expenses as a percentage  of revenues,  and the  valuation
allowance reserved against the deferred tax asset.

Liquidity and Capital Resources

     Operating Activities and Cash Flows

     The  Company's  working  capital  was $25.2  million at January  31,  2001,
decreasing $4.4 million or 14.9%,  from $29.6 million,  at January 31, 2000. The
decrease in working  capital was  principally  due to  continued  reductions  in
inventory,  accounts  receivable  and accounts  payable,  reflecting an absolute
lower  level of business  activity.  The Company  has  financed  its  operations
principally  through  long-term  financing of certain capital  expenditures  and
working capital  borrowings  under its revolving credit  facilities,  along with
cash generated by operations.

     During fiscal year 2001,  the Company's  cash  increased by $6.2 million to
$7.5 million.  Net cash of $10.5 million was provided by the Company's operating
activities  and was  largely  driven by  decreases  in the  balance of  accounts
receivable, inventory and net investment in sales-type leases.

     The  Company's  strategy is to mitigate  its  exposure to foreign  currency
fluctuations by utilizing purchases of foreign currency on the current market as
well as forward  contracts to satisfy specific purchase  commitments.  Inventory
purchase  commitments  may be matched with  specific  foreign  currency  futures
contracts or covered by current purchases of foreign currency. Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to  outstanding  trade  acceptances  payable.  The  cost of such  contracts  are
included in the cost of inventory.

     Cash  generated  from  operations  of $171,000 was used for the purchase of
134,620  shares of the  Company's  stock in the open market  during  fiscal year
2001, at an average cost of approximately $1.30 per share.

     Revolving Credit Facility and Borrowings

     Effective as of September 30, 1999 the Company  entered a Revolving  Credit
and Security  Agreement (the "Agreement") with PNC Bank. The Agreement  provides
for a commitment of $20.0 million for Hirsch and all wholly-owned  subsidiaries.
The Agreement is used for working capital loans,  letters of credit and deferred
payment  letters of credit and bears interest as defined in the  Agreement.  The
terms of the  Agreement,  as  amended,  restrict  additional  borrowings  by the
Company and require the Company to maintain  certain  interest  expense coverage
ratios, as defined therein. There were no outstanding working capital borrowings
against the  Agreement at January 31, 2001.  The  Agreement  was used to support
trade acceptances payable of approximately $4.0 million as of that date.

     HAPL  sells  most of its  leases  to  financial  institutions  on  either a
non-recourse basis or a limited-liability  basis within several months after the
commencement of the lease term thereby reducing its financing requirements. HAPL
Leasing,  which was fully activated in May 1993, has closed approximately $230.5
million in lease  agreements  through  January 31, 2001. As of January 31, 2001,
approximately  $209.1 million, or 90.7%, of the leases written have been sold to
third-party financial institutions.

     On October 27, 1994,  Hirsch entered into a ten-year,  $2,295,000  mortgage
agreement with a bank (the "Mortgage") for its new corporate  headquarters.  The
Company  satisfied the remaining  balance of  approximately  $1.0 million of the
Mortgage prior to the originally  scheduled  maturity date, in the first quarter
of fiscal 2001, in accordance with the agreement, as amended.

     Future Capital Requirements

     Subsequent  to the  close of the  year,  the  Company  sold  its  corporate
headquarters  facility.  This provided  approximately $4.0 million in cash to be
made available for operations.  The Company  believes these  proceeds,  with its
existing cash and funds  generated from  operations,  together with its existing
revolving  credit  facility,  will be sufficient to meet its working capital and
capital expenditure requirements and to finance planned growth.

     Backlog and Inventory

     The ability of the Company to fill orders  quickly is an important  part of
its customer service strategy.  The embroidery machines held in inventory by the
Company are generally  shipped within a week from the date the customer's orders
are  received,  and as a result,  backlog is not  meaningful  as an indicator of
future sales.

     Inflation

     The Company  does not believe that  inflation  has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.

     Recent Accounting Pronouncements

In December 1999, The SEC issued its "Staff Accounting Bulletin No. 101- Revenue
Recognition   in  Financial   Statements,"   ("SAB  101")  which   represents  a
clarification of "Generally Accepted Accounting  Principles"  ("GAAP") regarding
the timing of revenue  recognition.  Beginning with the reporting of fiscal year
2000 results,  the Company has implemented the recommendations  contained in SAB
101. SAB 101 establishes and clarifies the basis for revenue recognition.

In June 2000, the FASB issued  Statement of Financial  Accounting  Standards No.
138 ("FAS 138"),  "Accounting  for Certain  Derivative  Instruments  and Certain
Hedging  Activities"  which  amended FAS 133. The  amendments in FAS 138 address
certain implementation issues and relate to such matters as the normal purchases
and normal  sales  exception,  the  definition  of interest  rate risk,  hedging
recognized foreign currency denominated assets and liabilities, and intercompany
derivatives.  Effective February 1, 2001, the Company will adopt FAS 133 and FAS
138. The initial impact of adoption on the Company's  financial  statements will
be recorded in the first  quarter of fiscal 2002 and will not be  material.  The
ongoing effect of adoption on the Company's  consolidated  financial  statements
will be  determined  each  quarter by several  factors,  including  the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions at the end of each period.

In September 2000, the FASB issued Statement of Financial  Accounting  Standards
No. 140 ("FAS 140"), "Accounting for Transfers and Servicing of Financial Assets
and  Extinguishments  of Liabilities a replacement  of FAS 125".  This Statement
replaces FAS 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments  of  Liabilities.  It revises the standards for  accounting  for
securitizations  and other  transfers of  financial  assets and  collateral  and
requires certain  disclosures,  but it carries over most of FAS 125's provisions
without reconsideration. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001.  This  Statement is effective  for  recognition  and  reclassification  of
collateral  and for  disclosures  relating to  securitization  transactions  and
collateral for fiscal years ending after December 15, 2000. The Company believes
the adoption of this standard  will not have a material  effect on its operating
results and disclosures.

     Market Risk Sensitivity

     The  Company  is  exposed to various  market  risks,  including  changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from  adverse  changes in market rates and prices,  such as foreign
currency  exchange  and  interest  rates.  The Company has a formal  policy that
prohibits the use of currency  derivatives or other  financial  instruments  for
trading  or  speculative  purposes.  The  policy  permits  the use of  financial
instruments  to manage and  reduce  the  impact of  changes in foreign  currency
exchange  rates that may arise in the normal course of the  Company's  business.
Currently, the Company does not use interest rate derivatives.

     The Company may enter into forward foreign exchange  contracts  principally
to hedge the  currency  fluctuations  in  transactions  denominated  in  foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates. During fiscal 2001, the principal transactions hedged
were purchases of machinery from the Company's  major  supplier.  The periods of
the forward foreign exchange  contracts  correspond to the periods of the hedged
transactions.  The cost of such contracts is included in the cost of the related
machinery in  inventory.  A 5%  strengthening  or  weakening of the U.S.  dollar
against purchases  denominated in foreign  currencies would have approximately a
$2.2 million annualized impact on the cost of sales of the Company.  The Company
does not use foreign exchange contracts to hedge expected earnings.

     Any Company  debt, if utilized,  is U.S.  dollar  denominated  and floating
rate-based. At year-end, there was no usage of the revolving credit facility. If
the Company had utilized its credit  facility,  it would have exposure to rising
and falling rates, and an increase in such rates would have an adverse impact on
net pre-tax  expenses.  The Company does not use interest  rate  derivatives  to
protect its exposure to interest rate market movements.

ITEM 8.  FINANCIAL STATEMENTS IN SUPPLEMENTARY DATA

     The information contained in pages F-1 through F-23 hereof.

ITEM 9. CHANGES IN A  DISAGREEMENT  WITH  ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE

     None

                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
              FORM 8-K
<TABLE>
<CAPTION>

(a)(1)   CONSOLIDATED FINANCIAL STATEMENTS                                                          PAGE(S)
         ---------------------------------                                                          -------
<S>                                                                                                 <C>
Index to Consolidated Financial Statements..........................................................F-1

Independent Auditors' Report........................................................................F-2


Consolidated Balance Sheets.........................................................................F-3


Consolidated Statements of Income ..................................................................F-5


Consolidated Statements of Stockholders' Equity.....................................................F-6


Consolidated Statements of Cash Flows...............................................................F-7


Notes to Consolidated Financial Statements...................................................F-11- F-26
</TABLE>

<TABLE>
<CAPTION>

(a)(3)  EXHIBITS
        --------

<S>                  <C>
%3.1                 Restated Certificate of Incorporation of the Registrant
^3.2                 Amended and Restated By-Laws of the Registrant
*4.1                 Specimen of Class A Common Stock Certificate
*4.2                 Specimen of Class B Common Stock Certificate
^10.1                $60,000,000  Revolving  Credit Facility and $10,000,000  Credit Facility Dated as of September 26,
                     1997 among Hirsch  International  Corp., HAPL Leasing Co., Inc.,  Sewing Machine  Exchange,  Inc.,
                     Pulse  Microsystems,  Ltd.,  Sedeco,  Inc., The Bank of New York,  Mellon Bank,  N.A., Fleet Bank,
                     N.A., and The Bank of New York, as agent.
++10.2               Second Amendment to Loan Agreement among Hirsch International Corp., HAPL Leasing Co., Inc.,
                     Sewing Machine Exchange, Inc., Pulse Microsystems Ltd., Sedeco, Inc., Hirsch Equipment
                     Connection, Inc., The Bank of New York, Fleet Bank, N.A., Mellon Bank N.A., and The Bank of New
                     York, as agent.
++10.3               Waiver Agreement among Hirsch International Corp., HAPL Leasing Co., Inc., Sewing Machine
                     Exchange, Inc., Pulse Microsystems Ltd., Sedeco, Inc., Hirsch Equipment Connection, Inc., The
                     Bank of New York, Fleet Bank, N.A., Mellon Bank N.A., and The Bank of New York, as agent.
**10.4               $2,295,000 Mortgage Note from Hirsch International Corp. to Chemical Bank
**10.5               Mortgage between Hirsch International Corp. and Chemical Bank
**10.6               Guaranty of Payment of HAPL Leasing Co, Inc. and Pulse Microsystems Ltd. to Chemical Bank
++10.7               Waiver and First Amendment to Mortgage between Hirsch International Corp. and The Chase Manhattan
                     Bank, dated as of April 30, 1999.
++10.8               Agreement of Modification of Note between Hirsch International Corp. and The Chase Manhattan Bank
                     dated as of April 30, 1999.
++10.9               Joinder by Guarantors among HAPL Leasing Co., Inc., Pulse Microsystems, Ltd. and The Chase
                     Manhattan Bank.
****10.10            Stock Purchase Agreement, dated June 7, 1996 by and among Hirsch International Corp. and Ronald
                     H. Krasnitz and Martin Krasnitz
*****10.11           Stock Purchase Agreement, Dated December 20, 1996 by and between Hirsch International Corp. and
                     Jimmy L. Yates.
*10.12               Employment Agreement between Henry Arnberg and the Registrant
*10.13               Employment Agreement between Paul Levine and the Registrant
*10.14               Employment Agreement between Tas Tsonis and Pulse Microsystems, Ltd.
*10.15               Employment Agreement between Brian Goldberg and Pulse Microsystems, Ltd.
***10.16             Employment Agreement between Ronald H. Krasnitz and Sewing Machine Exchange, Inc.
***10.17             Employment Agreement between Martin Krasnitz and Sewing Machine Exchange, Inc.
@10.18               Employment Agreement between Jimmy L. Yates and Sedeco, Inc.
+10.19               Amendment to Employment Agreement between Tas Tsonis and Pulse Microsystems, Ltd.
+10.20               Amendment to Employment Agreement between Brian Goldberg and Pulse Microsystems, Ltd.
*10.21               Distributorship Agreement Dated February 21, 1991 together with Supplements and Amendments
                     thereto, among Tajima Industries, Ltd., Nomura Trading Co. Ltd., Nomura (America) Corp. and
                     Hirsch International Corp. ("Hirsch Distributorship Agreement")
@10.22               Amendment Number Two to Hirsch Distributorship Agreement, Dated June 7, 1996
@10.23               Distributorship Agreement, Dated February 21, 1991, together with Supplement Dated February 21,
                     1996, among Tajima Industries, Ltd., Nomura Trading Co. Ltd., Nomura (America) Corp., and Sedeco,
                     Inc.
@10.24               West Coast Distributorship Agreement, Dated February 21, 1997, among Tajima Industries, Ltd.,
                     Nomura Trading Co. Ltd. and Nomura (America) Corp., and Hirsch International Corp.
%10.25               Stock Option Plan, as Amended
#10.26               1994 Non-Employee Director Stock Option Plan
@10.27               Registration Rights Agreement, Dated December 20, 1996, between Hirsch International Corp. and
                     Jimmy L. Yates
@10.28               Non-Qualified Stock Option Agreement between Hirsch International Corp. and Jimmy L. Yates, Dated
                     December 6, 1996
@10.29               Non-Qualified Stock Option Agreement between Hirsch International Corp. and Ronald H. Krasnitz,
                     Dated June 7, 1996
@10.30               Non-Qualified Stock Option Agreement between Hirsch International Corp. and Martin Krasnitz,
                     Dated June 7, 1996
+10.31               Agreement dated as of December 20, 1997 between the Registrant and Tokai Industrial Sewing
                     Machine Company, Ltd. for sale of a forty-five (45%) per cent interest in Tajima USA, Inc.
10.32                Waiver to Mortgage between Hirsch International Corp. and The Chase Manhattan Bank, dated as of
                     April 27, 2000.
10.33                Agreement of Modification of Note between Hirsch International Corp. and The Chase Manhattan Bank
                     dated as of April 27, 2000.
10.34                Joinder by Guarantors among HAPL Leasing Co., Inc., Pulse Microsystems, Ltd. and The Chase
                     Manhattan Bank dated as of April 27, 2000.
10.35                Memorandum of Request for Business with Mexico, Latin American and Caribbean Countries among
                     Hirsch International Corp., Tajima Industries Ltd. and TM Trading Co., Ltd. dated as of July 27,
                     1999.
+++10.36             Loan Agreement among Hirsch International Corp., HAPL Leasing Co., Inc., Sewing Machine Exchange,
                     Inc., Pulse Microsystems Ltd., Sedeco, Inc., Hirsch Equipment Connection, Inc., Hometown Threads,
                     LLC, HJ Grassroots, LLC and PNC Bank, NA dated September 30, 1999.
10.37                Waiver and Amendment to Loan Agreement among Hirsch International Corp., HAPL Leasing Co., Inc.,
                     Sewing Machine Exchange, Inc., Pulse Microsystems Ltd., Sedeco, Inc., Hirsch Equipment
                     Connection, Inc., Hometown Threads, LLC, HJ Grassroots, LLC and PNC Bank, NA dated October 30,
                     2000.
21.1                 List of Subsidiaries of the Registrant
++++                 Auditor's letter of concurrence with management's change in accounting method adopting SAB 101
                     dated May 3, 2000.

----------------------
<FN>

         %Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended July 31, 1997.

         ^Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended October, 31, 1997.

         *Incorporated by reference from the Registrant's Registration Statement
on Forms S-1, Registration Number 33-72618.

         **Incorporated by reference from the Registrant's Form 10-K filed for
the fiscal year ended January 21, 1995.

         #Incorporated by reference from the Registrant's Registration Statement
on Form S-1, Registration No. 33-80563.

         ***Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended July 31, 1996.

         ****Incorporated by reference from Registrant's Form 8-K filed with the
Commission on June 19, 1996.

         *****Incorporated by reference from Registrant's Form 8-K filed with
the Commission on January 3, 1997.

              @Incorporated by reference from the Registrant's Form 10-K filed
for the year ended January 31, 1997.

         + Incorporated by reference from Registrant's Form 10-K filed for the
fiscal year ended January 31, 1998.

         ++ Incorporated by reference from Registrant's Form 10-K filed for the
fiscal year ended January 31, 1999.

            +++ Incorporated by reference from Registrant's Form 10-Q filed for
the quarter ended October 31, 1999.

         ++++ Incorporated by reference from Registrant's Form 10-K filed for
the fiscal year ended January 31, 2000.
</FN>
</TABLE>

<PAGE>


                                   SIGNATURES

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

                           HIRSCH INTERNATIONAL CORP.
                                   Registrant

                                      By:/s/ Henry Arnberg
                                         -----------------
                                         Henry Arnberg, Chief Executive Officer
Dated:  May 9, 2001

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

             Signature                                        Title                                   Date
             ---------                                        -----                                   ----

<S>                                    <C>                                                         <C>
/s/ Henry Arnberg                      Chairman of the Board of Directors and Chief                May 9, 2001
---------------------------             Executive Officer (Principal Executive Officer)
Henry Arnberg

/s/ Paul Levine                        President and Director                                      May 9, 2001
------------------------------
Paul Levine

/s/ Tas Tsonis                         Vice President and Director                                 May 9, 2001
------------------------------
Tas Tsonis

/s/ Richard Richer                     Executive Vice President-Finance and                        May 9, 2001
---------------------------              Administration, and Chief Financial Officer
Richard Richer                          (Principal Accounting and Financial Officer)

/s/ Ronald Krasnitz                    Executive Vice President, Chief Operating Officer,          May 9, 2001
---------------------------             Secretary and Director
Ronald Krasnitz

/s/ Marvin Broitman                    Director                                                    May 9, 2001
-------------------
Marvin Broitman

/s/ Herbert M. Gardner                 Director                                                    May 9, 2001
------------------------
Herbert M. Gardner

/s/ Douglas Schenendorf                Director                                                    May 9, 2001
------------------------
Douglas Schenendorf
</TABLE>



Independent Auditors' Report


Board of Directors
Hirsch International Corp.
Hauppauge, New York


We  have  audited  the  accompanying   consolidated  balance  sheets  of  Hirsch
International  Corp. and  subsidiaries  as of January 31, 2001 and 2000, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the two years in the period  ended  January  31,  2001.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion of these  consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits 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 Hirsch International
Corp. and  subsidiaries as of January 31, 2001 and 2000 and the results of their
operations  and their cash  flows for each of the two years in the period  ended
January 31, 2001 in conformity with accounting  principles generally accepted in
the United States of America.

As discussed in Notes 2 and 14 to the  consolidated  financial  statements,  the
Company  changed its method of accounting for revenue  recognition  for the year
ended January 31, 2000.


/s/ BDO Seidman, LLP
BDO Seidman, LLP
May 3, 2001


INDEPENDENT AUDITORS' REPORT


Board of Directors
Hirsch International Corp.
Hauppauge, New York

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'   equity,  and  cash  flows  of  Hirsch  International  Corp.  and
Subsidiaries for the year ended January 31, 1999. 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 audit.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the consolidated results of the operations and the cash flows
of Hirsch  International  Corp. and  Subsidiaries for the year ended January 31,
1999 in conformity with accounting  principles  generally accepted in the United
States of America.

/s/ Deloitte & Touche LLP

Jericho, New York
April 22, 1999



<TABLE>
<CAPTION>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND 2000
-------------------------------------------------------------------------------

ASSETS                                                     2001               2000

CURRENT ASSETS:

<S>                                                    <C>                 <C>
  Cash and cash equivalents                            $7,544,000          $1,290,000
  Accounts receivable, net of an allowance for
  possible losses of approximately $2,570,000
  and $5,632,000, respectively                          9,840,000          17,293,000
  Net investment in sales-type leases -
   current portion (Note 6)                             2,576,000           2,583,000
  Inventories, net (Notes 4, 8 and 15)                 15,154,000          25,711,000
  Prepaid income taxes (Note 10)                        1,762,000           3,673,000
  Other current assets                                    274,000             423,000
                                                       ----------          ----------
          Total current assets                         37,150,000          50,973,000

NET INVESTMENT IN SALES - TYPE LEASES - Noncurrent
  portion (Note 6)                                      6,110,000           8,207,000

EXCESS OF COST OVER NET ASSETS ACQUIRED - Net
  of accumulated amortization of approximately
  $12,656,000 and $3,851,000, respectively
  (Notes 3,8 and 16)                                    4,169,000          12,974,000

PURCHASED TECHNOLOGIES - Net of accumulated
  amortization of approximately $1,323,000 and
  $1,132,000, respectively                                16,000              207,000

PROPERTY, PLANT AND EQUIPMENT - Net of accumulated     5,447,000            6,544,000
  depreciation and amortization (Notes 7 and 9)
OTHER ASSETS                                           1,138,000            1,311,000
                                                     -----------         ------------
TOTAL ASSETS                                         $54,030,000         $ 80,216,000
                                                     ===========         ============
See notes to consolidated financial statements.

                                                                           (Continued)



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND 2000
-------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY                      2001               2000

CURRENT LIABILITIES:

  Trade acceptances payable (Note 9)                   $3,974,000          $6,199,000
  Accounts payable and accrued expenses (Note 8)        7,924,000          12,805,000
  Current maturities of long term debt (Note 9)            38,000           2,342,000
                                                       ----------          ----------
          Total current liabilities                    11,936,000          21,346,000

LONG-TERM DEBT - Less current maturities (Note 9)          79,000             989,000
                                                       ----------          ----------
     Total liabilities                                 12,015,000          22,335,000
                                                       ----------          ----------
MINORITY INTEREST (Note 1)                              1,737,000           1,628,000
                                                       ----------          ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 15)

STOCKHOLDERS' EQUITY (Notes 1 and 11):
  Preferred stock, $.01 par value; authorized:
   1,000,000 shares; issued: none                           -                   -

  Class A common stock, $.01 par value;
   authorized: 20,000,000 shares; issued and outstanding;
   6,815,000 and 6,112,000 shares, respectively,
   at January 31, 2001;and 6,815,000 and 6,488,700
   shares, respectively at January 31, 2000;               68,000              68,000
  Class B common stock, $.01 par value;
   authorized: 3,000,000 shares, outstanding:
   2,668,000 shares                                        27,000              27,000
  Additional paid-in capital                           41,397,000          41,397,000
  Retained earnings                                        50,000          15,721,000
  Accumulated other comprehensive income                   88,000             221,000
                                                       ----------          ----------
                                                       41,630,000          57,434,000
  Less: Treasury Class A Common stock at cost,
        461,000 and 326,300 shares, respectively        1,352,000           1,181,000
                                                       ----------          ----------
        Total stockholders' equity                     40,278,000          56,253,000
                                                       ----------          ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $54,030,000        $ 80,216,000
                                                       ==========         ===========
</TABLE>






              HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                        Three Years Ended January 31,

                                                             2001                  2000                  1999
                                                        ----------------      ----------------      ----------------


REVENUES
<S>                                                         <C>                 <C>                  <C>
   Net Sales                                                $68,328,000         $86,958,000          $122,198,000
Interest income related to sales-type leases                  1,939,000           3,863,000             5,348,000
                                                        ----------------      ----------------      ----------------
            Total revenue                                    70,267,000          90,821,000            127,546,000
                                                        ----------------      ----------------      ----------------

COST OF SALES
   Cost of sales (Note 15)                                   46,311,000          59,846,000            81,604,000
   Inventory write-down (Notes 4 & 8)                          -                   -                    3,450,000
                                                        ----------------      ----------------      ----------------
           Total cost of sales                               46,311,000          59,846,000            85,054,000
                                                        ----------------      ----------------      ----------------

GROSS PROFIT                                                 23,956,000          30,975,000            42,492,000
                                                        ----------------      ----------------      ----------------

OPERATING EXPENSES
   Selling, general and administrative expenses              32,541,000          40,491,000            44,381,000
   Impairment of Goodwill (Note 18)                           7,640,000            -                     -
   Restructuring costs (Note 3 & 8)                            -                   -                    2,377,000
                                                        ----------------      ----------------      ----------------
           Total operating expenses                          40,181,000          40,491,000            46,758,000
                                                        ----------------      ----------------      ----------------

OPERATING (LOSS)                                            (16,225,000)         (9,516,000)           (4,266,000)
                                                        ----------------      ----------------      ----------------
OTHER EXPENSE (INCOME)
   Interest expense (Note 9)                                    389,000           1,308,000             1,567,000
   Other                                                       (828,000)           (455,000)              233,000
                                                        ----------------      ----------------      ----------------
           Total other (income) expense - net                  (439,000)            853,000              1,800,000
                                                        ----------------      ----------------      ----------------


   (LOSS) BEFORE (BENEFIT) PROVISION
   FOR INCOME TAXES AND MINORITY
   INTEREST IN NET EARNINGS OF
   CONSOLIDATED SUBSIDIARY                                 (15,786,000)         (10,369,000)           (6,066,000)

INCOME TAX (BENEFIT) PROVISION (Note 10)                      (224,000)              972,000           (1,848,000)

MINORITY INTEREST IN NET EARNINGS
   OF CONSOLIDATED SUBSIDIARY (Note 1)                          109,000              294,000               390,000
                                                        ----------------      ----------------      ----------------

(LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE                                (15,671,000)          (11,635,000)           (4,608,000)

CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2 & 14)                                          -                   (2,187,000)             -
                                                        ----------------      ----------------      ----------------

NET (LOSS)                                                ($15,671,000)         ($13,822,000)          ($4,608,000)
                                                        ================      ================      ================

(LOSS) PER SHARE:
   Basic:
    (Loss) before cumulative effect
     of accounting change                                    ($1.72)               ($1.25)               ($0.49)
Cumulative effect of accounting                                 -                    (.23)                  -
   change (Notes 2 and 14)
                                                        ----------------      ----------------      ----------------
     Net (Loss) per share                                    ($1.72)               ($1.48)               ($0.49)
                                                        ================      ================      ================

   Diluted:
     (Loss) before cumulative
   effect
     of accounting change                                    ($1.72)               ($1.25)               ($0.49)
     Cumulative effect of accounting                            -                  ($0.23)                  -
   change    (Notes 2 and 14)
                                                        ----------------      ----------------      ----------------

     Net (Loss) per share                                    ($1.72)               ($1.48)               ($0.49)
                                                        ================      ================      ================

WEIGHTED AVERAGE NUMBER OF SHARES
   IN THE CALCULATION OF (LOSS)
   PER SHARE (Note 16)
     Basic                                                    9,112,200          9,348,500             9,413,000
                                                        ================      ================      ================
      Diluted                                                 9,112,000          9,348,500             9,436,000
                                                        ================      ================      ================
See notes to consolidated financial statements.
</TABLE>





<TABLE>
<CAPTION>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------
                                                     Class A                      Class B
                                                  Common Stock                  Common Stock
                                                    (Note 11)                     (Note 11)             Additional
                                             ----------------------         ----------------------        Paid-In
                                             Shares          Amount         Shares          Amount        Capital
                                             ------          ------         ------          ------        -------


<S>              <C> <C>                    <C>          <C>               <C>         <C>            <C>
BALANCE, JANUARY 31, 1998                   6,811,000    $     68,000      2,668,000   $      27,000  $ 41,377,000

  Exercise of stock options                     4,000           --             --              --           20,000
  Purchase of treasury shares (Note 12)          --             --             --              --             --
Comprehensive income:
    Net loss                                     --             --             --              --             --
Total comprehensive income:                      --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------
BALANCE, JANUARY 31, 1999                   6,815,000         68,000      2,668,000          27,000     41,397,000

  Purchase of treasury shares (Note 12)          --             --             --              --             --
Comprehensive income:
    Gain on Foreign Currency Translation         --             --             --              --             --
    Net loss                                                    --             --              --             --
Total comprehensive income:                      --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------
BALANCE, JANUARY 31, 2000                   6,815,000         68,000      2,668,000          27,000     41,397,000

  Purchase of treasury shares (Note 12)          --             --             --              --             --
Comprehensive income:
    Gain on Foreign Currency Translation         --             --             --              --             --
    Net loss                                                    --             --              --             --
Total comprehensive income:                      --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------
BALANCE, JANUARY 31, 2001                   6,815,000   $     68,000      2,668,000    $     27,000   $ 41,397,000
                                          ============   ============   ============    ============   ============
</TABLE>



<TABLE>
<CAPTION>


                                            Accumulated
                                              other
                                           Comprehensive       Retained        Treasury
                                              Income           Earnings         Stock           Total
                                              ------           --------         -----           -----
                                              (Note 2)



<S>              <C> <C>                    <C>             <C>             <C>             <C>
BALANCE, JANUARY 31, 1998                   $      --       $34,151,000     $       --      $75,623,000

  Exercise of stock options                        --              --              --            20,000
  Purchase of treasury shares (Note 12)            --              --          (828,000)       (828,000)
Comprehensive income:
    Net loss                                       --        (4,608,000)           --              --
Total comprehensive income:                        --              --              --        (4,608,000)
                                           -------------   ------------    -------------   -------------
BALANCE, JANUARY 31, 1999                          --        29,543,000        (828,000)     70,207,000

  Purchase of treasury shares (Note 12)            --              --          (353,000)       (353,000)
Comprehensive income:
    Gain on Foreign Currency Translation         221,000           --              --
    Net loss                                       --       (13,822,000)           --
Total comprehensive income:                        --              --              --       (13,601,000)
                                            ------------    ------------    ------------    ------------
BALANCE, JANUARY 31, 2000                        221,000      15,721,000    (  1,181,000)     56,253,000

Purchase of treasury shares (Note 12)              --              --         (  171,000)       (171,000)
Comprehensive income:
    Gain on Foreign Currency Translation        (133,000)          --              --
    Net loss                                       --        (15,671,000)          --
Total comprehensive income:                        --              --              --        (15,804,000)
                                            ------------    ------------    ------------    ------------
BALANCE, JANUARY 31, 2001                   $     88,000     $    50,000    ($ 1,352,000)   $ 40,278,000
                                            ============    ============    ============    ============

</TABLE>

    See notes to consolidated financial statements.



<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
-------------------------------------------------------------------------------
                                                                 2001           2000             1999
                                                                 ----           ----             ----

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                         <C>             <C>             <C>
 Net (loss) .............................................   $(15,671,000)   $(13,822,000)   $ (4,608,000)
 Adjustments to reconcile net loss to net cash
  (used in) provided by operating activities:
  Depreciation and amortization .........................      3,425,000       3,920,000       3,754,000
  Provisions for reserves ...............................        436,000       5,151,000       1,643,000
  Deferred income taxes .................................        130,000       4,542,000      (2,826,000)
  Minority interest .....................................        108,000         294,000         390,000
  Write-off of goodwill .................................      7,640,000            --           711,000

  Changes in assets and liabilities:
   Accounts receivable ..................................      5,836,000       1,630,000      10,598,000
   Net investments in sales-type leases .................      2,104,000       2,870,000         213,000
   Inventories ..........................................     11,738,000       9,506,000      (3,467,000)
   Other current assets and other assets ................        197,000         228,000         614,000
   Trade acceptances payable ............................     (2,225,000)      4,035,000     (13,122,000)
   Accounts payable and accrued expenses ................     (4,879,000)     (4,533,000)     (3,375,000)
   Prepaid income taxes and income taxes payable ........      1,781,000      (1,887,000)     (2,521,000)
                                                            ------------    ------------    ------------
      Net cash (used in) provided by operating activities     10,620,000      11,934,000     (11,996,000)
                                                            ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures ...................................       (848,000)     (1,029,000)     (1,314,000)
                                                            ------------    ------------    ------------
      Net cash (used in) investing activities ...........       (848,000)     (1,029,000)     (1,314,000)
                                                            ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds of bank financing .............................           --         6,952,000      26,021,000
 Repayments of long-term debt ...........................     (3,214,000)    (19,513,000)    (11,781,000)
 Proceeds from issuance of stock and
   exercise of stock options and warrants ...............           --              --            20,000
 Purchase of treasury shares ............................       (171,000)       (353,000)       (828,000)
                                                            ------------    ------------    ------------
Net cash provided by (used in) financing activities .....     (3,385,000)    (12,914,000)     13,432,000
                                                            ------------    ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................       (133,000)        221,000            --
                                                            ------------    ------------    ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........      6,254,000      (1,788,000)        122,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............      1,290,000       3,078,000       2,956,000
                                                            ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................   $  7,544,000    $  1,290,000    $  3,078,000
                                                            ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest and bank fees paid ...........................   $    389,000    $  1,308,000    $  1,483,000
                                                            ============    ============    ============
  Income taxes paid .....................................   $    400,000    $    527,000    $  3,537,000
                                                            ============    ============    ============

See notes to consolidated financial statements.
</TABLE>



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------


1.   BUSINESS   ORGANIZATION   AND  BASIS  OF  PRESENTATION   The   accompanying
     consolidated   financial   statements   include  the   accounts  of  Hirsch
     International  Corp.  ("Hirsch"),  HAPL Leasing Co., Inc.  ("HAPL" or "HAPL
     Leasing"), Pulse Microsystems Ltd. ("Pulse"), Sewing Machine Exchange, Inc.
     ("SMX"),  Sedeco,  Inc.  ("Sedeco"),   Hirsch  Equipment  Connection,  Inc.
     ("HECI"),  Hirsch  Business  Concepts  LLC  ("HBC"),  Hometown  Threads LLC
     ("Hometown"), and Tajima USA, Inc. ("TUI") (collectively, the "Company").

     On January 6, 1998, Tokai Industrial Sewing Machine Company  ("Tokai"),  an
     affiliate of Tajima,  the Company's major supplier,  purchased a 45 percent
     interest in TUI for $900,000. For financial reporting purposes, the assets,
     liabilities and earnings of TUI are consolidated in the Company's financial
     statements.  Tokai's  45  percent  interest  in TUI has  been  reported  as
     minority interest in the Company's  Consolidated  Balance Sheet and Tokai's
     share of the  earnings  has  been  reported  as  minority  interest  in the
     Company's Consolidated Statements of Operations.

     The Company is a single  source  provider of  sophisticated  equipment  and
     value  added  products  and  services  to  the  embroidery  industry.   The
     embroidery  equipment  and value  added  products  sold by the  Company are
     widely  used by contract  embroiderers,  large and small  manufacturers  of
     apparel and fashion accessories, retail stores and embroidery entrepreneurs
     servicing specialized niche markets. HAPL Leasing provides leasing services
     to customers of the Company.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.   Principles of Consolidation - The consolidated financial statements include
     the accounts of the Company and its  wholly-owned  subsidiaries,  and since
     January  1998,  the  majority  interest  in  the  operations  of  TUI.  All
     inter-company   balances  and   transactions   have  been   eliminated   in
     consolidation.

b.   Revenue Recognition - The Company distributes  embroidery equipment that it
     offers  for sale or lease.  Prior to the  issuance  by the SEC of the Staff
     Accounting  Bulletin  No. 101 ("SAB 101"),  revenue  related to the sale of
     equipment was recorded at the time of shipment. The Company has adopted the
     recommendation  of SAB 101 effective  with  reporting for fiscal year 2000.
     Where  installation  and customer  acceptance are a substantive part of the
     sale,  by its terms,  the Company has deferred  recognition  of the revenue
     until such customer acceptance of installation has occurred. Comparisons of
     financial  performance  have been  retroactively  adjusted  to reflect  the
     impact of this  change in  accounting  method (See Note 12). In fiscal year
     2001 most sales of new  equipment did not require  installation  within the
     terms of the sales contract.

     Lease   contracts  which  meet  the  criteria  of  Statement  of  Financial
     Accounting  Standards No. 13,  "Accounting for Leases" are accounted for as
     sales-type  leases.  Under this method,  revenue is recognized as a sale at
     the later of the time of shipment or  acceptance by the lessee in an amount
     equal to the present value of the rental  payments and the present value is
     amortized  over the term of the lease so as to produce a constant  periodic
     rate of return on the net investment in the lease.  The operating method of
     accounting for leases is followed for lease contracts not meeting the above
     criteria.  Under this method of accounting,  aggregate rental revenue would
     be recognized over the term of the lease.

     Service revenues and costs are recognized when services are provided. Sales
     of computer hardware and software are recognized when shipped provided that
     no significant vendor and post-contract and support  obligations remain and
     collection is probable.

c.   Cash Equivalents - Cash  equivalents  consist of money market accounts with
     initial maturities of three months or less.

d.   Allowance  for  Possible  Losses - The Company  provides an  allowance  for
     possible  losses  determined  by a specific  identification  of  individual
     accounts and a general  reserve to cover other accounts based on historical
     experience.  The Company writes off receivables upon  determination that no
     further collections are probable.

e.   Inventories  -  Inventories  consisting of machines and parts are stated at
     the lower of cost or market.  Cost for  machinery is determined by specific
     identification  and for all other  items on a  first-in,  first-out  basis.
     Reserves are established to record  provisions for slow moving  inventories
     in the period in which it becomes  reasonably  evident  that the product is
     not  salable  or the  market  value is less than  cost  (see Note 4).  Used
     equipment is valued based on an assessment of age,  condition,  model type,
     accessories, capabilities and demand in the used machine market.

f.   Foreign  Operations  - The  functional  currency of the  Company's  foreign
     subsidiary was the US dollar during the fiscal year ended January 31, 1999.
     During the year ended  January 31, 2000,  the  functional  currency of this
     subsidiary  changed to the Canadian  dollar.  Assets and liabilities of the
     Company's  foreign  subsidiary are translated at year-end  exchange  rates.
     Results of  operations  are  translated  using the  average  exchange  rate
     prevailing  throughout the year. Gains or losses resulting from translation
     adjustments  are  included in  accumulated  other  comprehensive  income in
     stockholders'  equity. Gains and losses from foreign currency  transactions
     are included in net income and are not significant.

     The Company makes only limited use of derivative financial  instruments and
     does not use them for  trading  purposes.  Trade  acceptances  payable  are
     denominated  in Japanese  yen and are related to the  purchase of equipment
     from the Company's major supplier.  At times the Company  purchases foreign
     currency forward  contracts (which may be up to approximately six months in
     duration)  to hedge  the  risk  associated  with  fluctuations  in  foreign
     currency  exchange  rates (see Note 13b).  The cost of such  contracts  are
     included in the cost of the related machinery in inventory.

g.   Property, Plant and Equipment - Property, plant and equipment are stated at
     cost less accumulated depreciation and amortization.  Capitalized values of
     property  under  leases  are  amortized  over the life of the  lease or the
     estimated  life  of  the  asset,   whichever  is  less.   Depreciation  and
     amortization are provided on the straight-line or declining balance methods
     over the following estimated useful lives:

                    Asset Category                          Lives in Years
                    --------------                          --------------

               Building                                           39
               Furniture and fixtures                             3-7
               Machinery and equipment                            3-7
               Automobiles                                        3-5
               Leasehold improvements                             3-20


h.   Software  Development  Costs - The development of new software products and
     enhancements   to  existing   products  are  expensed  as  incurred   until
     technological   feasibility  has  been  established.   After  technological
     feasibility is  established,  any additional  costs would be capitalized in
     accordance  with  Statement  of  Financial  Accounting  Standards  No.  86,
     "Accounting  for the Costs of  Computer  Software  to Be Sold,  Leased,  or
     Otherwise  Marketed."   Capitalized  software  costs  are  amortized  on  a
     straight-line basis over the estimated useful product lives (normally three
     years)  commencing in the month following  product release.  Such costs are
     included in other assets on the accompanying  consolidated  balance sheets.
     Amortization  expense for the years ended  January 31, 2001,  2000 and 1999
     was approximately $191,000, $100,000 and $205,000, respectively.

i.   Impairment of Long-Lived Assets - In accordance with Statement of Financial
     Accounting  Standards No. 121, "Accounting for the Impairment of Long-Lived
     Assets and for  Long-Lived  Assets to be  Disposed  Of" ("SFAS  121"),  the
     Company  reviews  its  long-lived  assets,  including  property,  plant and
     equipment,  identifiable intangibles (goodwill) and purchased technologies,
     for impairment  whenever events or changes in  circumstances  indicate that
     the  carrying  amount  of the  assets  may  not be  fully  recoverable.  To
     determine  recoverability of its long-lived  assets,  the Company evaluates
     the probability  that future  undiscounted net cash flows will be less than
     the  carrying  amount of the  assets.  During the fourth  quarter of fiscal
     2001,  $7,640,000  of  goodwill  associated  with the  acquisitions  of SMX
     Corporation,  Sedeco Corporation and All Pro Punching, Inc. was written off
     in accordance with SFAS121. (See Note 16).

j.   Excess of Cost Over Net Assets  Acquired  (Goodwill) - Goodwill  represents
     the difference  between the purchase price and the fair market value of net
     assets acquired in business combinations treated as purchases.  Goodwill is
     amortized on a  straight-line  basis.  Management has reassessed the useful
     life of goodwill for these  acquisitions  from an original life of 15 years
     to a  remaining  life of 5 years for SMX and 2 years  for  Sedeco in fiscal
     2001 which changes were applied  prospectively  from the fourth  quarter of
     fiscal 2001. This change in accounting  estimate did not materially  change
     amortization expense in the fourth quarter of fiscal year 2001.

k.   Leases  -  Leases  (in  which  the  Company  is  lessee)   which   transfer
     substantially  all of the risks and benefits of ownership are classified as
     capital leases, and assets and liabilities are recorded at amounts equal to
     the lesser of the present value of the minimum  lease  payments or the fair
     value of the leased  properties  at the beginning of the  respective  lease
     terms.  Interest expense  relating to the lease  liabilities is recorded to
     effect  constant  rates of interest  over the terms of the  leases.  Leases
     which do not meet such criteria are classified as operating  leases and the
     related rentals are charged to expense as incurred.

l.   Purchased  Technologies  -  Purchased  technologies  represent  the cost in
     excess of the fair value of the assets of Pulse at the date of acquisition.
     Purchased  technologies  are being  amortized  over a period of seven years
     using the straight-line method.

m.   Income Taxes - The Company  accounts for income taxes pursuant to Statement
     of Financial  Accounting  Standards No. 109,  "Accounting for Income Taxes"
     ("SFAS No. 109"). SFAS No. 109 requires  recognition of deferred tax assets
     and  liabilities  for the expected  future tax  consequences of events that
     have been included in the Company's  consolidated  financial  statements or
     tax returns.  Under this method,  deferred tax assets and  liabilities  are
     determined  based on the differences  between the financial  accounting and
     tax bases of assets and  liabilities  using enacted tax rates in effect for
     the year in which  the  differences  are  expected  to  reverse.  Valuation
     allowances are  established  when the Company  cannot  determine the future
     utilization of some portion or all of the deferred tax asset.

n.   Earnings Per Share - The Company has adopted Financial Accounting Standards
     No.  128  "Earnings  per Share"  ("SFAS  No.  128"),  which  requires  dual
     presentation  of basic and  diluted  earnings  per share on the face of the
     income statement.

     Basic earnings per share are based on the weighted average number of shares
     of common stock outstanding  during the period.  Diluted earnings per share
     are based on the  weighted  average  number  of shares of common  stock and
     common stock  equivalents  (options and  warrants)  outstanding  during the
     period, computed in accordance with the treasury stock method.  Outstanding
     options and warrants were  anti-dilutive for the fiscal years ended January
     31, 2001, 2000 and 1999.

o.   Stock-Based  Compensation - The Company accounts for stock-based  awards to
     employees  using the intrinsic  value method in accordance with APB No. 25,
     "Accounting for Stock Issued to Employees" ("APB 25").

p.   Comprehensive  Income - In fiscal 1999,  the Company  adopted  Statement of
     Financial  Accounting Standards No. 130. "Reporting  Comprehensive  Income"
     ("SFAS 130"). This statement established rules for reporting  comprehensive
     income and its  components.  Comprehensive  income  consists of net income,
     holding gains and losses on short term investments  available for sale, and
     foreign   exchange   translation   adjustments  and  is  presented  in  the
     consolidated statements of stockholders' equity.

q.   Use of Estimates - The  preparation  of financial  statements in conformity
     with  accounting  principles  generally  accepted  in the United  States of
     America  requires  management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and  liabilities  at the date of the  financial  statements  and the
     reported  amounts of revenues and  expenses  during the  reporting  period.
     Actual results could differ from those estimates.

r.   Fair  Value  of  Financial  Instruments  -  Financial  instruments  consist
     primarily  of  investments  in  cash,  cash   equivalents,   trade  account
     receivables, accounts payable and debt obligations. At January 31, 2001 and
     2000, the fair value of the Company's  financial  instruments  approximated
     the carrying value.

s.   Recent  Accounting  Pronouncements  - In December  1999, The SEC issued its
     "Staff  Accounting  Bulletin  No. 101-  Revenue  Recognition  in  Financial
     Statements,"  ("SAB 101") which  represents a  clarification  of "Generally
     Accepted  Accounting  Principles"  ("GAAP") regarding the timing of revenue
     recognition.  Beginning with the reporting of fiscal year 2000 results, the
     Company has implemented the  recommendations  contained in SAB 101. SAB 101
     establishes and clarifies the basis for revenue recognition.

     In June 1998, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement  of  Financial   Accounting   Standards   No.  133  ("FAS  133"),
     "Accounting for Derivative  Instruments and Hedging Activities." FAS 133 is
     required for  transactions  entered into by the Company  after  January 31,
     2001. FAS 133 requires that all  derivative  instruments be recorded on the
     balance sheet at fair value.  Changes in the fair value of derivatives  are
     recorded  each period in current  earnings or other  comprehensive  income,
     depending  on  whether  a  derivative  is  designated  as part of the hedge
     transaction and the type of hedge transaction.  The ineffective  portion of
     all hedges will be recognized in earnings.

     In June 2000, the FASB issued Statement of Financial  Accounting  Standards
     No. 138 ("FAS 138"),  "Accounting  for Certain  Derivative  Instruments and
     Certain  Hedging  Activities"  which amended FAS 133. The amendments in FAS
     138 address certain implementation issues and relate to such matters as the
     normal  purchases and normal sales  exception,  the  definition of interest
     rate risk,  hedging  recognized  foreign  currency  denominated  assets and
     liabilities, and intercompany derivatives.

     Effective February 1, 2001, the Company will adopt FAS 133 and FAS 138. The
     initial impact of adoption on the Company's  financial  statements  will be
     recorded in the first quarter of 2001 and will not be material. The ongoing
     effect of adoption on the Company's  consolidated financial statements will
     be  determined  each  quarter by several  factors,  including  the specific
     hedging  instruments in place and their  relationships  to hedged items, as
     well as market conditions at the end of each period.

     In  September  2000,  the FASB issued  Statement  of  Financial  Accounting
     Standards No. 140 ("FAS 140"),  "Accounting  for Transfers and Servicing of
     Financial  Assets and  Extinguishments  of Liabilities a replacement of FAS
     125".  This  Statement  replaces  FAS 125,  Accounting  for  Transfers  and
     Servicing  of  Financial  Assets and  Extinguishments  of  Liabilities.  It
     revises  the  standards  for  accounting  for   securitizations  and  other
     transfers  of  financial   assets  and  collateral  and  requires   certain
     disclosures,  but it  carries  over  most of FAS 125's  provisions  without
     reconsideration. This Statement is effective for transfers and servicing of
     financial assets and  extinguishments of liabilities  occurring after March
     31, 2001. This Statement is effective for recognition and  reclassification
     of collateral and for disclosures  relating to securitization  transactions
     and collateral for fiscal years ending after December 15, 2000. The Company
     believes the adoption of this standard  will not have a material  effect on
     its operating results and disclosures.


3. ACQUISITIONS

     Acquisition  of  Equipment  Connection  - On March 26,  1997,  the  Company
     acquired  all of the assets of  Equipment  Connection,  Inc.  ("ECI").  The
     acquisition  was accounted for as a purchase in accordance  with Accounting
     Principles  Board Opinion No. 16, "Business  Combinations"  ("APB 16") and,
     accordingly, the acquired assets and assumed liabilities have been recorded
     at their  estimated  fair  market  values at the date of  acquisition.  The
     purchase  price  was  $805,000,  paid in the form of  $605,000  in cash and
     $200,000  in the  company's  Class A  Common  Stock.  Concurrent  with  the
     acquisition,  the Company entered into five-year  employment contracts with
     ECI's two former principals.

     In the fourth  quarter of the year ended  January  31,  1999,  the  Company
     commenced  a   restructuring   plan  in  connection  with  certain  of  its
     operations, including the closing of ECI. In connection with the closing of
     ECI, the ECI goodwill was written off (Note 8).

4. INVENTORIES


                                                          January 31,
                                                       2001           2000
                                                       ----           ----

          New machines                            $ 9,732,000    $20,455,000
          Used machines                             2,567,000      4,795,000
          Parts and accessories                     5,305,000      4,092,000
          Less: Reserve for slow-moving inventory  (2,450,000)    (3,631,000)
                                                  -----------     ----------
          Total                                   $15,154,000    $25,711,000


5.    CHANGES IN RESERVES
<TABLE>
<CAPTION>


Allowance for Possible Losses:
------------------------------

                                       Opening         Additions       Write Offs       Ending
                                       -------         ---------       ----------       ------
                                       Balance                                          Balance
                                       -------                                          -------

<S>                                    <C>               <C>           <C>               <C>
Year ended January 31, 2001            $ 5,632,000       $    274,000  $(3,336,000)      $2,570,000

Year ended January 31, 2000            $ 4,033,000       $  1,615,000  $   (16,000)      $5,632,000

Year ended January 31, 1999            $ 3,160,000       $    930,000  $   (57,000)      $4,033,000



Inventory Reserve
-----------------

                                       Opening         Additions       Write Offs       Ending
                                       -------         ---------       ----------       ------
                                       Balance                                          Balance
                                       -------                                          -------

Year ended January 31, 2001            $ 3,631,000       $    162,000   $(1,343,000)     $2,450,000

Year ended January 31, 2000            $ 2,513,000       $  1,437,000   $  (319,000)     $3,631,000

Year ended January 31, 1999            $ 2,255,000       $    258,000   $       -        $2,513,000
</TABLE>


6.    NET INVESTMENT IN SALES-TYPE LEASES


<TABLE>
<CAPTION>

                                                                                January 31,
                                                                         2001                2000
                                                                         ----                ----


<S>                                                                   <C>                 <C>
     Total minimum lease payments receivable                          $6,267,000          $9,688,000
     Estimated residual value of leased property (unguaranteed) (A)    5,251,000           4,848,000
     Reserve for estimated uncollectible lease payments               (1,100,000)         (1,100,000)
     Less: Unearned income                                            (1,732,000)         (2,646,000)
                                                                      ----------          ----------
     Net investment                                                    8,686,000          10,790,000
     Less: Current portion                                             2,576,000           2,583,000
                                                                      ----------          ----------
     Non-current portion                                              $6,110,000          $8,207,000
                                                                      ==========          ==========
</TABLE>



(A)  The estimated  residual value of leased  property will  fluctuate  based on
     volume of transactions,  financial structure of the transactions,  sales of
     residuals to third party financing  organizations and periodic  recognition
     of the increased net present value of the residuals over time.

     At January 31, 2001 future  annual  lease  payments  receivable  (including
     estimated residual values) under sales-type leases are as follows:


          Fiscal Year
            Ending
          January 31,
          -----------

             2002                  $ 3,863,000
             2003                    2,419,000
             2004                    2,276,000
             2005                    2,028,000
             2006                      916,000
          Thereafter                    16,000
                                   -----------
                                   $11,518,000


7. PROPERTY, PLANT AND EQUIPMENT

                                                        January 31,
                                                  2001             2000
                                                  ----             ----


     Land and building                       $ 2,767,000        $ 2,767,000
     Machinery and equipment                   6,903,000          6,514,000
     Furniture and fixtures                    2,038,000          1,936,000
     Rental Equipment                            722,000          1,113,000
     Automobiles                                 296,000            322,000
     Leasehold improvements                    1,705,000          1,650,000
                                              ----------         ----------
     Total                                    14,431,000         14,302,000
     Less: Accumulated depreciation and
           amortization                       (8,984,000)        (7,758,000)
                                              ----------         ----------
     Property, plant and equipment, net      $ 5,447,000         $6,544,000
                                              ==========         ==========



8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                       January 31,
                                                  2001              2000
                                                  ----              ----

     Accounts payable                        $ 5,864,000         $ 7,573,000
     Accrued restructuring costs (A)                -                776,000
     Accrued commissions payable                  72,000             236,000
     Accrued payroll costs                       421,000             276,000
     Accrued warranty and installation costs     560,000             580,000
     Customer deposits payable                   344,000             562,000
     Deferred revenue                             64,000           1,237,000
     Other accrued expenses                      599,000           1,565,000
                                             -----------         -----------
     Total accounts payable and accrued
          expenses                            $7,924,000         $12,805,000
                                             ===========         ===========



(A)  In the fourth  quarter of the year ended  January  31,  1999,  the  Company
     initiated  a   restructuring   plan  in  connection  with  certain  of  its
     operations. The plan was designed to eliminate certain operating divisions,
     enhance the  interface  of  operations  to meet the  changing  needs of the
     Company's  customers and to improve its cost structure and efficiency.  The
     restructuring  initiatives  involve the closing of the ECI operations,  the
     consolidation  of the parts and supplies  operations  with existing  Hirsch
     operations  and  the  closing  of four  decentralized  sales  and  training
     offices.  The  restructuring  costs of $2,377,000  related to severance and
     related benefits  ($454,000),  lease  termination costs  ($1,012,000),  the
     write down of ECI Goodwill ($711,000) and other costs ($200,000).  Payments
     and  adjustments  of  $122,000  and  $338,000  were made for these costs in
     fiscal  years ended  January 31,  1999 and 2000,  respectively.  All of the
     remaining  restructuring  costs  were  paid  in  fiscal  year  2001.  As an
     additional  part of the  plan,  which is  recorded  as cost of  sales,  the
     Company  wrote-down to net realizable  value used machine and ESW parts and
     supplies inventories by $3,450,000.


9.    LONG TERM DEBT



                                                     January 31,
                                               2001               2000
                                               ----               ----

 Revolving credit facility (A)           $     -               $2,064,000
 Long-term bank debt
 Mortgage (B)                                  -                1,090,000
 Other                                       117,000              177,000
                                         -----------          -----------
 Total                                       117,000            3,331,000
 Less: Current maturities                     38,000            2,342,000
                                         -----------          -----------
 Long-term maturities                    $    79,000            $ 989,000
                                         ===========          ===========


(A)  Effective  as of  September  30,  1999  the  Company  satisfied  all of its
     obligations  and exited its Revolving  Credit Facility with a syndicate led
     by Bank of New York that had been in place for  approximately the prior two
     years. It was replaced with a new Revolving  Credit and Security  Agreement
     (the "Agreement") with PNC Bank. The Agreement provides for a commitment of
     $20  million  for Hirsch and all  subsidiaries,  collateralized  by assets,
     primarily  accounts  receivable  and  inventory.  The Agreement is used for
     working  capital loans,  letters of credit and deferred  payment letters of
     credit and bears  interest as scheduled and defined in the  Agreement.  The
     terms of the Agreement,  as amended,  restrict additional borrowings by the
     Company and require the Company to maintain an interest  coverage ratio, as
     defined  therein.  There were no  outstanding  working  capital  borrowings
     against the  Agreement as of January 31, 2001.  The Agreement was also used
     to support trade  acceptances  payable of approximately  $4.0 million as of
     that date.  The Company was in compliance  with all financial  covenants at
     year-end.

(B)  As reported in the  Company's  first quarter  financial  report as filed on
     Form 10Q, the Company satisfied the remaining balance of approximately $1.0
     million of the Mortgage prior to the originally scheduled maturity date, in
     accordance with the agreement, as amended.

(C)  Long-term debt (including  capitalized lease obligations) of the Company at
     January 31, 2001 matures as follows:

               Fiscal Year
                 Ending
               January 31,
               -----------
                  2002             $   38,000
                  2003                 39,000
                  2004                 40,000
                                   ----------
                                   $  117,000
                                   ==========


10. INCOME TAXES

The income tax (benefit) provision for each of the periods presented herein is
as follows:



<TABLE>
<CAPTION>
                                                       January 31,
                                             2001          2000          1999
                                             ----          ----          ----

<S>                                     <C>           <C>             <C>
Current:
 Federal                                $    23,000   $(3,074,000)    $  456,000
 State and foreign                         (377,000)     (770,000)       522,000
                                        -----------    ----------     ----------
Total current                              (354,000)   (3,844,000)       978,000
                                        -----------    ----------     ----------
Deferred:
 Federal                                    100,000     3,853,000     (2,491,000)
 State and foreign                           30,000       963,000       (335,000)
                                        -----------    ----------     ----------
Total deferred                              130,000     4,816,000     (2,826,000)
                                        -----------    ----------     ----------
Total income tax (benefit) provision    $  (224,000)  $   972,000    $(1,848,000)
                                         ===========    ==========     ==========
</TABLE>

The tax effects of temporary differences that give rise to deferred income tax
liabilities at January 31, 2001 and deferred income tax assets at January 31,
2000 are as follows:

<TABLE>
<CAPTION>

                                                       January 31, 2001               January 31, 2000
                                              Net Current         Net Long-       Net Current        Long-Term
                                              Deferred Tax        Term Deferred   Deferred Tax       Deferred Tax
                                                 Assets           Tax Assets         Assets           Assets
                                             ---------------------------------  ---------------------------------

<S>                                          <C>                 <C>            <C>                 <C>
     Accounts receivable                     $    471,000        $    -         $  1,840,000        $    -
     Inventories                                1,083,000             -            1,625,000             -
     Accrued warranty costs                       224,000             -              232,000             -
     Other accrued expenses                        25,000             -              214,000             -
     Purchased technologies and goodwill            -             2,175,000            -               258,000
     Net operating loss                             -             5,295,000          754,000             -
     Net investments in sales-type leases
      (allowance for possible losses)               -               540,000           -                820,000
     Capitalized software development
      costs                                         -                 -                -                 -
                                             ------------        ----------     ------------        ----------
                                                1,803,000         8,010,000        4,665,000         1,078,000
     Less valuation allowance                  (1,803,000)       (8,010,000)      (4,665,000)       (1,078,000)
                                             ------------        ----------     ------------        ----------
</TABLE>


A valuation  allowance  for such  deferred  tax assets has been  established  at
January 31, 2001 and January 31, 2000,  since the Company  cannot  determine the
future utilization of those assets.

At January 31, 2001 a deferred tax liability of $130,000 resulted from temporary
differences  in  unrealized  foreign  currency  exchange gain and is included in
accrued expenses.

A reconciliation of the differences between the federal statutory tax rate of 34
percent and the Company's effective income tax rate is as follows:


<TABLE>
<CAPTION>

                                                         Year Ended January 31,
                                                    2001          2000          1999
                                                    ----          ----          ----

<S>                                               <C>            <C>            <C>
     Federal statutory income tax rate            (34.0)%        (34.0)%        34.0%
     State income taxes, net of Federal benefit     5.0            5.0           5.0
     Permanent differences                           -             2.1)         (1.5)
     Valuation Allowance                           27.6           36.5            -
                                                  ------         -------        -----
     Effective income tax rate                     (1.4)%           9.6 %       (30.5)%
                                                  ======         =======        =====
</TABLE>


11. STOCKHOLDERS' EQUITY

a.   Common  Stock - The  Class A Common  Stock  and  Class B Common  Stock  has
     authorizations of 20,000,000 and 3,000,000 shares, respectively.  The Class
     A Common Stock and Class B Common Stock are substantially  identical in all
     respects,  except that the holders of Class B Common Stock elect two-thirds
     of the  Company's  Board of  Directors  (as long as the number of shares of
     Class B Common  Stock  outstanding  equals or exceeds  400,000),  while the
     holders of Class A Common Stock elect  one-third of the Company's  Board of
     Directors.  Each share of Class B Common Stock automatically  converts into
     one share of Class A Common  Stock upon  transfer  to a  non-Class B common
     stockholder. The 1,000,000 shares of preferred stock are authorized and may
     be issued  from time to time,  in such  series and with such  designations,
     rights and preferences as the Board may determine.

b.   Stock Option Plans - The Company  maintains two stock option plans pursuant
     to which an aggregate of approximately 1,284,000 shares of Common Stock may
     be granted.

     The 1993 Stock Option Plan (the "1993 Plan") has 1,050,000 shares of Common
     Stock  reserved for issuance  upon the  exercise of options  designated  as
     either (i) incentive stock options ("ISOs") under the Internal Revenue Code
     of 1986, as amended (the "Code"), or (ii) non-qualified  options.  ISOs may
     be granted  under the Stock  Option Plan to  employees  and officers of the
     Company.  Non-qualified  options may be granted to  consultants,  directors
     (whether or not they are employees), employees or officers of the Company.

     Stock option transactions during the years ended January 31, 2001, 2000 and
     1999 for the 1993 Plan are summarized below:

<TABLE>
<CAPTION>

                                                                   Exercise               Weighted Average
                                                  Shares          Price Range             Exercise Price
                                                  ------          -----------             --------------

<S>                                               <C>            <C>     <C>              <C>
Options outstanding - January 31, 1998            615,000        $4.88 - $24.20           $    13.74

 Options exercised                                 (2,000)            $4.88               $     4.88
 Options canceled                                 (78,000)       $4.88 - $17.00           $    15.66
                                                  -------       ---------------           ----------
Options outstanding - January 31, 1999            535,000        $4.88 - $24.20           $    15.53

 Options canceled                                 (88,000)       $4.88 - $24.20           $    15.53
 Options issued                                   264,000        $1.75 - $5.25            $     3.42
                                                  -------        --------------           ----------
Options outstanding - January 31, 2000            711,000        $1.75 - $24.20           $     9.91

 Options canceled                                 (49,000)       $1.75 - $24.20           $     9.91
 Options issued                                    20,000        $0.91 -   3.00            $    1.86
                                                -------        --------------           ----------
Options outstanding - January 31, 2001            682,000        $0.91 - $24.20           $     9.45
                                                  -------       ---------------           ----------
Options exerciseable at January 31, 2001          495,000        $1.75 - $24.20           $    14.87
                                                  =======       ===============           ==========
</TABLE>

<TABLE>
<CAPTION>

                                            Options Outstanding            Options Exercisable
                                          Weighted Avg.     Weighted                      Weighted
                                           Remaining        Average                       Average
       Range of               Number       Contractual      Exercise       Number         Exercise
    Exercise Prices         Outstanding    Life (yrs)       Price          Exerciseable     Price
    ---------------         -----------    ----------       -----          ------------     -----

     <S>     <C>              <C>            <C>            <C>               <C>           <C>
     $0.91 - $5.25            271,000        4.0            $  3.39           84,000        $  3.50
    $14.50 - $18.37           401,000        0.5            $ 16.48          401,000        $ 16.48
    $22.00 - $24.20            10,000        1.5            $ 23.10           10,000        $ 23.10
                              -------                                       --------
                              682,000                                        495,000

</TABLE>



     All  options  granted  for the fiscal  year  ended  January  31,  1995 were
     exercisable one year from the date of grant and expired five years from the
     date of grant.  All  options  issued  subsequent  to the fiscal  year ended
     January 31, 1995 vest in three annual  installments  of 33-1/3 percent each
     on the first, second, and third anniversary of the date of grant. There are
     approximately  361,000  shares  available  for future grants under the 1993
     Plan.

     The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") has
     approximately  234,000  shares  of  Common  Stock  reserved  for  issuance.
     Pursuant to the terms of the Directors Plan, each independent  unaffiliated
     Director shall automatically be granted,  subject to availability,  without
     any further action by the Board of Directors or the Stock Option Committee:
     (i) a  non-qualified  option to purchase  7,500 shares of Common Stock upon
     their election to the Board of Directors;  and (ii) a non-qualified  option
     to purchase 2,500 shares of Common Stock on the date of each annual meeting
     of  stockholders  following  their election to the Board of Directors.  The
     exercise  price under each option is the fair market value of the Company's
     Common  Stock on the date of grant.  Each option has a  five-year  term and
     vests in three  annual  installments  of 33-1/3  percent each on the first,
     second,  and third anniversary of the date of grant.  Options granted under
     the  Directors  Plan are generally  not  transferable  during an optionee's
     lifetime  but are  transferable  at death by will or by the laws of descent
     and  distribution.  In the event an  optionee  ceases to be a member of the
     Board of Directors (other than by reason of death or disability),  then the
     non-vested  portion of the option  immediately  terminates and becomes void
     and any vested but unexercised portion of the option may be exercised for a
     period of 180 days from the date the optionee  ceased to be a member of the
     Board of  Directors.  In the event of death or permanent  disability  of an
     optionee,  all options accelerate and become immediately  exercisable until
     the scheduled expiration date of the option.

     Stock option transactions during the years ended January 31, 2001, 2000 and
     1999 for the Directors' Plan are summarized below:

<TABLE>
<CAPTION>

                                                                        Exercise     Weighted Average
                                                      Shares          Price Range      Exercise Price
                                                      ------          -----------      --------------


<S>                                                    <C>            <C>     <C>         <C>
          Options outstanding - January 31, 1998       47,000         $5.36 - $22.00      $ 11.09

           Options exercised                           (2,000)        $     5.36          $  5.36
                                                      -------         --------------      -------
          Options outstanding - January 31, 1999       45,000         $5.36 - $22.00      $ 11.35

           Options cancelled                           (8,000)        $     9.36          $  9.36
           Options issued                               7,000         $     2.25          $  2.25
                                                      -------         --------------      -------
          Options outstanding - January 31, 2000       44,000         $2.25 - $22.00      $ 12.44

           Otions  cancelled                          (12,000)        $     9.12          $  9.12
                                                        -------         --------------      -------
          Options outstanding - January 31, 2001       32,000         $2.25 - $22.00      $ 12.16
                                                      =======         ==============      =======
          Options exerciseable - January 31, 2001      24,000         $7.81 - $22.00      $ 14.67
                                                      =======         ==============      =======
</TABLE>

<TABLE>
<CAPTION>

                                            Options Outstanding            Options Exercisable
                                          Weighted Avg.     Weighted                      Weighted
                                           Remaining        Average                       Average
       Range of               Number       Contractual      Exercise       Number         Exercise
    Exercise Prices         Outstanding    Life (yrs)       Price          Exerciseable     Price
    ---------------         -----------    ----------       -----          ------------     -----
<S>                           <C>            <C>            <C>              <C>          <C>
       $ 2.25                 7,000          3.5            $ 2.25           2,000        $ 2.25
       $ 7.81                 8,000          2.5            $ 7.81           5,000        $ 7.81
       $15.50                 9,000          1.5            $15.50           9,000        $15.50
       $22.00                 8,000          1.5            $22.00           8,000        $22.00
                             ------                                         ------
                             32,000                                         24,000
                             ======                                         ======
</TABLE>


     There are  approximately  182,000 shares  available for future grants under
     the Directors' Plan.

     In  connection  with the  acquisitions  of ECI,  Sedeco,  SMX,  and  Pulse,
     approximately 453,000 non-plan options have been issued as follows:

<TABLE>
<CAPTION>

                                                                             Exercise      Weighted Average
                                                            Shares          Price Range      Exercise Price
                                                            ------          -----------      --------------


<S>                                     <C> <C>      <C>    <C>            <C>     <C>         <C>
          Options outstanding - January 31, 1998 and 1999   453,000        $4.88 - $18.25      $ 15.69
           Options cancelled                                (49,000)       $4.88 - $18.25      $  8.42
                                                            -------        --------------      -------
          Options outstanding - January 31, 2000            404,000        $16.20 - $18.25     $ 16.57
                                                            =======        ===============     =======
          Options outstanding - January 31, 2001            404,000        $16.20 - $18.25     $ 16.57
                                                            =======        ===============     =======
          Options exerciseable at January 31, 2001          404,000        $16.20 - $18.25     $ 16.57
                                                            =======        ===============     =======

</TABLE>

<TABLE>
<CAPTION>

                                             Options Outstanding           Options Exercisable
                                          Weighted Avg.     Weighted                      Weighted
                                           Remaining        Average                       Average
       Range of               Number       Contractual      Exercise       Number         Exercise
    Exercise Prices         Outstanding    Life (yrs)       Price          Exerciseable     Price
    ---------------         -----------    ----------       -----          ------------     -----
<S>                           <C>            <C>            <C>              <C>          <C>
       $16.20                 331,000        0.5            $16.20           331,000      $16.20
       $18.25                  73,000        0.6            $18.25            73,000      $18.25
                              -------                                        -------
                              404,000                                        404,000
                              =======                                        =======

</TABLE>




     The options issued in connection with the Pulse acquisition are exercisable
     and have a life of five years.  The options  issued in connection  with the
     SMX,  Sedeco and ECI  acquisitions  vest in four annual  installments of 25
     percent each in the first,  second,  third,  and fourth  anniversary of the
     date of grant and expire  five years  from the date of grant.  The  options
     issued in connection with the Pulse  acquisition  expired in February 1999.
     49,000 options have been exercised or canceled.

     In addition,  pursuant to the IPO, the  underwriters  received  warrants to
     purchase  from the  Company  205,080  shares of Class A Common  Stock.  The
     warrants are  exercisable  for a period of four years  commencing  one year
     after the date of the IPO at exercise  prices  ranging  from 107 percent to
     128 percent of the initial public  offering  price.  During the fiscal year
     ended January 31, 1998,  2,700  warrants were exercised at a price of $5.56
     per share.  No warrants were  exercised  during 1999.  Approximately  4,080
     warrants  that were  exercisable  at a price of $5.90 per share  expired in
     February 1999.

c.   Additional  Stock Plan  Information  - As  discussed in Note 2, the Company
     continues to account for its  stock-based  awards using the intrinsic value
     method  in  accordance  with  APB  25  and  its  related   interpretations.
     Accordingly,  no compensation  expense has been recognized in the financial
     statements for employee stock arrangements.

     The Company follows  Statement of Financial  Accounting  Standards No. 123,
     "Accounting for Stock-Based  compensation," ("SFAS 123") which requires the
     disclosure of pro forma net income and earnings per share.  Under SFAS 123,
     the fair value of stock-based awards to employees is calculated through the
     use of option  pricing  models,  even though such models were  developed to
     estimate  the fair value of freely  tradable,  fully  transferable  options
     without vesting restrictions, which significantly differ from the Company's
     stock option  awards.  These models also  require  subjective  assumptions,
     including  future stock price  volatility  and  expected  time to exercise,
     which greatly affect the calculated values. The Company's calculations were
     made  using the  Black-Scholes  option  pricing  model  with the  following
     weighted average  assumptions for 2001, 2000 and 1999:  expected life, five
     years;  stock  volatility,  69.4 percent in 2001,  68.3 percent in 2000 and
     128.5 percent in 1999; risk free interest rate of 6.7 percent in 2001, risk
     free interest  rate of 6.0 percent in 2000 and 5.0 percent in 1999,  and no
     dividends during the expected term. The Company's calculations are based on
     a multiple option valuation approach and forfeitures are recognized as they
     occur.

     If  compensation  cost for the Company's  stock options had been determined
     consistent  with  Statement  of  Financial  Accounting  Standards  No. 123,
     "Accounting  for Stock-Based  Compensation to Employees"  ("SFAS No. 123"),
     the Company's  net (loss)  income and (loss)  earnings per share would have
     been the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                             Year Ended January 31,
                                                     2001            2000              1999
                                                     ----            ----              ----
          Net (loss):

<S>                                               <C>             <C>              <C>
           As reported                            $(15,671,000)   $(13,822,000)    $(4,608,000)
           Pro forma                              $(16,095,000)   $(16,510,000)    $(5,757,000)

          Basic (loss) per share:
           As reported                            $ (1.72)         $ (1.48)          $ (0.49)
           Pro forma                              $ (1.77)         $ (1.77)          $ (0.61)

          Diluted (loss) per share:
           As reported                            $ (1.72)         $ (1.48)          $ (0.49)
           Pro forma                              $ (1.77)         $ (1.77)          $ (0.61)

</TABLE>

12. TREASURY STOCK

     Treasury  stock at January 31, 2001  consists of 461,000  shares of Class A
     common  stock  purchased  in open market  transactions  for a total cost of
     approximately  $1,352,000 pursuant to a stock repurchase program authorized
     by the Board of Directors in fiscal year 1999.

13. PROFIT SHARING PLAN

     Profit  Sharing  Plan - The  Company has a  voluntary  contribution  profit
     sharing  plan (the  "Plan"),  which  complies  with  Section  401(k) of the
     Internal  Revenue Code.  Employees who have attained the age of 21 and have
     one year of continuous service are eligible to participate in the Plan. The
     Plan permits employees to make a voluntary  contribution of pre-tax dollars
     to a pension  trust,  with a  discretionary  matching  contribution  by the
     Company up to a maximum of two  percent of an  eligible  employee's  annual
     compensation.  The Company elected not to make matching  contributions  for
     fiscal years ended January 31, 1999,  2000 and 2001.  The Company funds all
     amounts when due.

14. CHANGE IN ACCOUNTING METHOD

     On December 3, 1999, The SEC issued its "Staff Accounting  Bulletin No.101-
     Revenue Recognition in Financial  Statements," ("SAB 101") which represents
     a clarification  of "Generally  Accepted  Accounting  Principles"  ("GAAP")
     regarding the timing of revenue  recognition.  Beginning with the reporting
     of fiscal year 2000 results,  Hirsch has  implemented  the  recommendations
     contained  in SAB 101.  SAB 101  establishes  and  clarifies  the basis for
     revenue  recognition.  Revenue is recorded on certain equipment sales based
     upon customer acceptance of installation,  rather than upon shipment by the
     Company.  Historically,  as the cost of the installation is not material to
     the sale,  Hirsch's  accounting  practice  had been to record the sale upon
     shipment and to accrue the installation  expense where installation was not
     yet completed.  This change in accounting  method results in an increase of
     $6.4 million in sales and $4.2 million in cost of sales during  fiscal year
     2000 which were  originally  reported in fiscal  year 1999 and  requires an
     adjustment  of fiscal  year 2000  results  in the  amount of $2.2  million,
     disclosed as the cumulative  effect on the fiscal year's results due to the
     application of the changed accounting  method.  This accounting change also
     results in a deferral of $3.7 million in sales  revenue and $2.5 million in
     cost of sales,  yielding a gross margin of $1.2 million  which has now been
     deferred  to fiscal  year  2001.  Prior  years'  financial  statements  are
     presented as originally reported without the accounting change applied. The
     following  table presents the proforma  effect of the accounting  change on
     the prior year.


(All figures in $000,000)              Year Ended January 31,
                                               1999
                                               ----
Revenue:
As Reported                                 $ 127.5
Proforma                                    $ 135.6

Cost of sales:
As Reported                                 $  85.1
Proforma                                    $  90.4

Gross Profit:
As Reported                                 $  42.5
Proforma                                    $  45.3

Income (loss) before Provision for Taxes:
As Reported                                 $ (6.1)
Proforma                                    $ (3.3)

Net (loss)Income:
As Reported                                 $ (4.6)
Proforma                                    $ (2.5)


15.   COMMITMENTS AND CONTINGENCIES

a.   Minimum  Operating Lease Commitments - The Company has operating leases for
     various  automobiles and sales and service locations.  The annual aggregate
     rental commitments required under these leases,  except for those providing
     for month-to-month tenancy, are as follows:

          Fiscal Year
            Ending
          January 31,
          -----------

            2002            $1,105,000
            2003               783,000
            2004               482,000
            2005               272,000
            2006               232,000
            2007 and after     598,000
                            ----------
                            $3,472,000

     Rent expense was  approximately  $1,191,000,  $1,240,000 and $1,360,000 for
     the years ended January 31, 2001, 2000 and 1999, respectively.  The decline
     from  previous  years is the  result of  termination  of  various  facility
     leases.

b.   Foreign  Currency  Contracts - In connection with the purchase of equipment
     from its major supplier,  the Company may purchase foreign currency forward
     contracts (which may extend up to six months in duration) to hedge the risk
     associated with fluctuations in foreign currency exchange rates relating to
     all trade acceptances  payable and certain firm purchase  commitments.  The
     costs of such  contracts are included in the cost of the related  machinery
     in inventory.

     At January 31, 2001 and 2000, the Company did not hold any foreign currency
     contracts.

c.   Litigation - The Company is a defendant in various litigation matters,  all
     arising in the  normal  course of  business.  Based  upon  discussion  with
     Company counsel,  management does not expect that these matters will have a
     material adverse effect on the Company's consolidated financial position or
     results of operations.

d.   Employment  Agreements - The Company had entered into five-year  employment
     agreements  with  the  Company's   current  Chief  Executive   Officer  and
     President,  which  expired  by  their  terms  on  February  17,  1999.  The
     agreements   provided  that  each   executive   received   minimum   annual
     compensation of $350,000 (adjusted annually based upon the CPI).  Effective
     August  1,  1999,  the  Chief  Executive  Officer  and the  President  each
     voluntarily  reduced their salary to $100,000 on an annualized basis for an
     eighteen-month  period ending January 31, 2001.  Effective February 1, 2001
     an agreement  was reached with the  Compensation  Committee of the Board of
     Directors  to raise  their  salary to $300,000  each.  No bonus was paid to
     either  executive  relating  to the  Company's  fiscal  1999,  2000 or 2001
     financial  results.  Each executive is currently employed by the Company on
     an at-will basis on substantially  the same terms and conditions  contained
     in their expired employment  agreements with the exception of the voluntary
     salary  reduction  which  continued  through  fiscal  2001.  The Company is
     currently in the fifth year of a five-year  employment  agreement  with the
     Company's  Chief  Operating  Officer.  The  agreement  provides  for annual
     compensation  of  $300,000.   The  Company  also  entered  into  employment
     agreements  with the former  shareholders  of Pulse for an initial  term of
     five years.  Effective February 24, 1999, these employment  agreements were
     renewed at the  election of each  executive  for an  additional  three-year
     term.  The  agreements  provide each with an annual base salary of $300,000
     (adjusted  annually based upon the CPI) and an annual bonus based on annual
     pre-tax  profits of Pulse.  The Company is currently in the fifth year of a
     five year employment  agreement with the former shareholder of Sedeco. This
     agreement  provides for a current  annual  salary of $150,000.  The Company
     entered into a severance  agreement with the Vice President,  HAPL Leasing,
     and Marketing, equivalent to one-year of base compensation if terminated.

e.   Dependency  Upon Major Supplier - During the fiscal years ended January 31,
     2001,   2000,  and  1999,  the  Company  made  purchases  of  approximately
     $33,863,000,   $42,193,000,  and  $68,255,000  respectively,   from  Tajima
     Industries Ltd. ("Tajima"), the manufacturer of the embroidery machines the
     Company sells. This amounted to approximately 86, 94, and 84 percent of the
     Company's total  purchases for the years ended January 31, 2001,  2000, and
     1999, respectively.

     The Company has several  separate  distributorship  agreements  with Tajima
     which, collectively,  provide the Company the exclusive right to distribute
     Tajima's  complete  line of  embroidery  machines  in 39  states.  The main
     agreement  (the "East Coast / Midwest  Agreement")  which covers 33 states,
     including the original Hirsch territory and the additional  states acquired
     in the SMX territory,  became effective on February 21, 1991 and has a term
     of 20 years.  The East Coast / Midwest  Agreement is  terminable  by Tajima
     and/or the  Company on not less than two years'  prior  notice.  The second
     agreement (the "Southwest Agreement") covers the six states acquired in the
     Sedeco  territory,  became effective on February 21, 1997 and has a term of
     five years.

     In the states of  Arizona,  California,  Hawaii,  Idaho,  Montana,  Nevada,
     Oregon,  Utah,  Washington  and  Wyoming,  the  Company  is  the  exclusive
     distributor of Tajima's single, two, four, and six-head machines as well as
     chenille or chenille/standard embroidery machines with less than four heads
     or two stations,  respectively (the "West Coast Agreement"). The West Coast
     Agreement has a term of five years and contains a renewal  provision  which
     permits successive five-year renewals upon mutual agreement of the parties.
     Tajima may terminate the West Coast Agreement or its exclusivity on 30 days
     written  notice  or  upon  a  material   change  in  the  current  Class  B
     shareholders  in which case,  the West Coast  Agreement  can be  terminated
     earlier.

     The Company has satisfied its  obligations to Tajima under the agreement as
     to the minimum quantity of embroidery machines to be sold for calendar year
     2000-2001.  The minimum  quantity to be sold in calendar year  2001-2002 is
     approximately 1,309 machines in various designations, as defined.


16. RECONCILIATION OF BASIC EARNINGS PER SHARE

     In  accordance  with SFAS No.  128,  basic  earnings  per common  share are
     computed based on the weighted-average  number of common shares outstanding
     during each period. Diluted earnings per common share are computed based on
     the  weighted-average  number  of common  shares,  after  giving  effect to
     diluted  common  stock  equivalents  outstanding  during each  period.  The
     following  table  provides  a  reconciliation  between  basic  and  diluted
     earnings per share:

<TABLE>
<CAPTION>

                                                     For the Year Ended January 31,
                               2001                               2000                              1999
               ----------------------------------  -----------------------------------   -----------------------------
                  Loss        Shares    Per Share   Loss         Shares    Per Share     Loss   Shares   Per Share
                                                  (In Thousands, Except Per Share Amounts)

Basic EPS
 Income
 available to
 common
<S>            <C>            <C>       <C>       <C>             <C>       <C>           <C>        <C>      <C>
 stockholders  $(15,671)      9,112     $(1.72)   $(13,822)       9,349     $  (1.48)     $(4,608)   9,413    $(0.49)

Effect of
 dilutive
 securities:
 Options/
 warrant          -             -          -           -              -            -            -       -        -
              ----------------------------------  -----------------------------------   -----------------------------
Diluted EPS
 Income
 available to
 common
 stockholders
 plus assumed
 exercises     $(15,671)      9,112     $(1.72)    $(13,822)       9,349     $  (1.48)     $(4,608)   9,413    ($0.49)
             ===================================  ====================================  =============================
</TABLE>


17. INDUSTRY SEGMENTS

     The Company operates in two reportable  segments;  embroidery equipment and
     leasing. The Embroidery segment consists principally of the sale of new and
     used  embroidery   equipment  and  value  added  products  such  as  parts,
     accessories and software.  The Leasing segment provides leasing services to
     customers of the Company.

     Summarized  financial  information   concerning  the  Company's  reportable
     segments is shown in the following  table.  The accounting  policies of the
     segments  are the same as those  described  in the  summary of  significant
     accounting  policies.  The "Corporate"  column includes  corporate  related
     items  not  allocated  to  reportable   segments  and  the  elimination  of
     intercompany  transactions.  Identifiable  assets  are those  tangible  and
     intangible assets used in operations in each reportable segment.  Corporate
     assets are  principally  the Company's  land and building and the excess of
     cost over fair value of net assets acquired.

<TABLE>
<CAPTION>

                                              Embroidery          Leasing        Corporate      Consolidated
                                              ----------          -------        ---------      ------------

Year Ended January 31, 2001
---------------------------
<S>                                          <C>                 <C>           <C>             <C>
Sales to unaffiliated customers              $ 65,677,000        $ 4,590,000   $     -         $ 70,267,000
Transfers between segments                     14,362,000                -       (14,362,000)             -
                                             ------------        ------------   ------------   ------------
Total revenues                               $ 80,039,000        $  4,590,000   $(14,362,000)  $ 70,267,000
                                             ============        ============   ============   ============
Interest expense                             $    372,000        $     17,000   $     -        $    389,000
                                             ============        ============   ============   ============
Depreciation and amortization expense        $  1,437,000        $    345,000   $  1,643,000   $  3,425,000
                                             ============        ============   ============   ============
Loss before income tax provision             $  6,366,000        $     70,000   $  9,350,000   $ 15,786,000
                                             ------------        ------------   ------------   ------------
Income tax benefit                            $   224,000         $              $     -       $    224,000
                                             ============        ============   ============   ============
Total assets                                 $ 36,782,000        $ 10,509,000   $  6,739,000   $ 54,030,000
                                             ============        ============   ============   ============



Year Ended January 31, 2000
---------------------------

Sales to unaffiliated customers              $ 85,536,000        $  5,285,000   $     -        $ 90,821,000
Transfers between segments                     21,829,000                -       (21,829,000)             -
                                             ------------        ------------   ------------   ------------
Total revenues                               $107,365,000        $  5,285,000   $(21,829,000)  $ 90,821,000
                                             ============        ============   ============   ============
Interest expense                             $  1,272,000        $     36,000   $     -        $  1,308,000
                                             ============        ============   ============   ============
Depreciation and amortization expense        $  1,725,000        $    401,000   $  1,792,000   $  3,918,000
                                             ============        ============   ============   ============
(Loss) income before income tax
   provision                                 $ (8,449,000)       $ (1,056,000)  $   (864,000)  $(10,369,000)
                                             ------------        ------------   ------------   ------------
Income tax provision                         $    710,000        $    262,000   $     -        $    972,000
                                             ============        ============   ============   ============
Total assets                                 $ 53,048,000        $ 13,987,000   $ 13,181,000   $ 80,216,000
                                             ============        ============   ============   ============
Year Ended January 31, 1999
---------------------------
Sales to unaffiliated customers              $118,889,000        $  8,657,000   $     -        $127,546,000
Transfers between segments                     37,478,000                -       (37,478,000)             -
                                             ------------        ------------   ------------   ------------
Total revenues                               $156,367,000        $  8,657,000   $(37,478,000)  $127,546,000
                                             ============        ============   ============   ============
Interest expense                             $  1,550,000        $     17,000   $     -        $  1,567,000
                                             ============        ============   ============   ============
Depreciation and amortization expense        $  1,910,000        $    332,000   $  1,512,000   $  3,754,000
                                             ============        ============   ============   ============
(Loss) income before income tax
  (benefit) provision                        $ (6,951,000)       $  1,381,000   $  (496,000)   $ (6,066,000)
                                             ------------        ------------   ------------   ------------
Income tax (benefit) provision               $ (2,400,000)       $    552,000   $     -        $ (1,848,000)
                                             ============        ============   ============   ============
Total assets                                 $ 71,862,000        $ 17,667,000   $ 17,406,000   $106,935,000
                                             ============        ============   ============   ============
</TABLE>

18. GOODWILL IMPAIRMENT

     During the fourth  quarter of fiscal 2001 in view of the  overall  industry
     decline  in demand for  embroidery  equipment  and  related  products,  the
     resulting   decline  in  Company  revenue   delivered  in  the  territories
     associated with the  acquisition of SMX Corporation and Sedeco  Corporation
     and  the   Company's   impairment   evaluation,   the   Company   wrote-off
     approximately $7,640,000 of Goodwill as an impairment charge to operations.
     This write-off includes the remaining value of goodwill associated with its
     acquisition  of the  digitizing  embroidery  business  assets  of  All  Pro
     Punching, Inc. of approximately $0.2 million,  reflecting discontinuance of
     those operations. The goodwill write-off represents a per-share net loss of
     $(.84) both on a basic and diluted basis for the fiscal 2001.

19. SUBSEQUENT EVENT - SALE OF BUILDING

     Subsequent  to the close of the fiscal  year,  the  corporate  headquarters
     facility located at 200 Wireless Boulevard,  Hauppauge,  New York, was sold
     and  partially  leased back from  Brandywine  Realty  Trust in a concurrent
     transaction,  the details of which were  reported as filed on Form 8K dated
     March 15, 2001. The financial  results of the transaction  will be reported
     in the first quarter of fiscal year 2002.