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, 2000

[ ]  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 6,523,488 shares of Class A Common Stock
held by non-affiliates of the Company as of May 5, 2000 is $6,523,488.

     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, 2000.


<PAGE>


                                     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  venture,  the
Company has been test  marketing its retail  embroidery  services  concept.  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  2000,  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 which resulted in a shift in the sales mix
of  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 exclusive
right to distribute  Tajima small (one through six-head "FX" models) machines in
the continental United States and Hawaii and large (six-head "DC" models through
thirty-head  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 recently,  all Tajima  equipment was
assembled in Japan.  In 1997,  Hirsch formed a new  subsidiary,  Tajima USA, Inc
("TUI"), which currently assembles two, four and six-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") an affiliate
of Tajima.

     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 enabling the  customization of designs and reduced  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 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 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
benefited  from the sudden  growth,  beginning in the late 1980s,  in the use of
licensed products 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  venture,  is currently
test  marketing its concept to provide  retail  embroidery  services at Wal*Mart
Stores,  Inc.  ("Wal*Mart")  retail  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 and  Windows(R) NT  environments  which 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  16,000
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  and has  developed  a  business  plan to  commercialize  this  product
capability.  Pulse has  bolstered  its  software  development  team to support a
leadership position in the enhanced embroidery software market.

     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 continued
to  focus  on  the   development   of  the  "Building   Blocks"   product  line,
infrastructure and brand during fiscal 2000, and consequently,  recorded minimal
sales revenues for the Building Blocks division during the fiscal year.

     Retail Embroidery  Services.  During fiscal 1999, the Company together with
Jacobs Management  Corporation  ("JMC") formed a joint venture known as Hometown
Threads(TM)  for the purpose of  providing  retail  embroidery  services  within
Wal*Mart  establishments.  During  fiscal  2000,  the  Company  purchased  JMC's
interest  in Hometown  Threads(TM)  and  currently  owns and  operates  Hometown
Threads(TM)  as a  wholly-owned  subsidiary.  Hometown  Threads(TM) is currently
concluding  the  pilot  phase of  test-marketing  its  concept  at two  Wal*Mart
locations  in  Texas  and  anticipates  expanding  these  operations  to a  more
comprehensive test phase in additional Wal*Mart retail establishments 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 service  technicians  operating out of its
headquarters  and  regional  service  centers.  After the  Company  delivers  an
embroidery  machine  to a  customer,  its  trained  personnel  may assist in the
installation  of the  machine  and with its setup  and  operation.  The  Company
employs  a staff  of  service  representatives  who  provide  assistance  to its
customers by  telephone.  Although  most  customer  problems or inquiries can be
handled by telephone,  where necessary the Company dispatches one of its service
technicians to the customer. In addition,  the Company provides introductory and
advanced  training  programs to assist customers in the use and operation of the
embroidery machines and software it sells. The Company has recently undertaken a
program to significantly  upgrade its technical  support staff and operations on
the West  Coast due to  increasing  sales  activity  in this area and  resulting
demand for  technical  support  services.  This will continue as the Company has
been  granted  semi-exclusive  rights  to  distribute  large  Tajima  embroidery
machines to the West Coast.


<PAGE>



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.  The Company  initiated a pilot program with Wal*Mart in
late fiscal  1999 and  developed  and refined it  throughout  fiscal  2000.  The
objective  was to  establish a retail  embroidery  service  business  within the
Wal*Mart  environment  and  determine if such a "store  within a store"  concept
could be  financially  feasible  for both  Wal*Mart  and an  independent  retail
embroidery  operator  in  that  environment.  Hometown  ThreadsTM  has  obtained
approval  from  Wal*Mart  to expand to the test  phase of  project  development,
including an increased  number of store  locations in fiscal 2001. The learnings
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.   The  Company  has   continued   its   investment  in  the  West  Coast
infrastructure   during  fiscal  2000.  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.
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 six 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, 2000 were approximately $17.3 million.


     Embroidery Equipment

     Embroidery  equipment  may contain  single or multiple  sewing  heads.  The
selling prices of these machines range from  approximately  $15,000 to $180,000.
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) 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 developed  what the Company  believes is the
first Internet-compatible design software in the market.

     Pulse has expanded its  distribution  network by  establishing  distributor
relationships  in over 40  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  42.5% of the  Company's  new  machine  sales  were  financed
through HAPL Leasing for the year ended January 31, 2000,  compared to 50.7% for
the year ended  January 31, 1999.  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 2000. 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, 2000,  HAPL Leasing had sold
approximately 89.1% 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 is steadily  growing  and has  established  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  journal  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. Through its reputation,  knowledge
of the marketplace, investment in infrastructure and experience in the industry,
the Company  believes it has  maintained its market share for both machinery and
value-added products and services.

     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  one-year  warranty  against
malfunctions  from defects in material or workmanship on the Tajima  machines it
distributes.  The warranty  covers parts and labor.  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 (and is subject to
review after a one year trial period)  permits the Company to distribute  Tajima
machines to US-based  customers  who are operating  expansion  facilities in the
Caribbean region.

     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  distributors  such  as  Macpherson,  Inc.,  a
subsidiary  of  Willcox & Gibbs,  Inc.,  a  distributor  of  Barudan  multi-head
embroidery machines and Meistergram  single-head embroidery machines, as well as
with smaller  distributors.  On April 20, 1999,  Willcox & Gibbs,  Inc.  filed a
joint plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
U.S.  Bankruptcy  Court  for  the  District  of  Delaware.  The  Barudan  parent
organization  has since  re-acquired  the  rights  to  directly  distribute  its
products in the US. 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.  The  Company  also
competes with original equipment  manufacturers,  such as Brother  International
and Melco  Industries,  which  distribute  products  directly into the Company's
markets.  A new  competitor  trading  under the  "SWF"  brand  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.  Tajima has
challenged SWF for patent  infringements  incorporated in its machines,  and the
results are pending in various  stages of  litigation.  It is uncertain what the
results of that litigation will conclude.

     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  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:
"Method For Modifying Embroidery Design Programs",  "Embroidery Design Systems",
"Method For Creating  Self-Generating  Embroidery Pattern," two patents entitled
"Method for Automatically  Generating Chain Stitches" and three patents entitled
"Method  for  Automatically  Generating  A  Chenille-Filled   Embroidery  Stitch
Pattern." Pulse also has several other patents  pending.  Pulse has been granted
the  following  patent in the  European  Patent  Office:  "Method for  Modifying
Embroidery  Design Programs." 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 March 31,  2000,  the  Company  employed  approximately  335  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,  2000,  approximately  92.6% 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 is  terminable  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") is for a one-year trial period,  effective July 27,
1999,  that permits the Company to distribute  Tajima  equipment to its existing
US-based customers who establish  expansion  facilities in the Caribbean region.
Each of the first three Tajima Agreements may be terminated if the Company fails
to achieve  certain  minimum  sales quotas.  The fourth  agreement is subject to
review after the one-year  trial period  expires on July 26, 2000.  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,  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.

Revolving Credit Facility

     The Company was in default of the financial  covenant in its Agreement with
PNC Bank (the  "Bank") at year-end  and is  negotiating  to receive a waiver for
such default for the fiscal quarter ended January 31, 2000 and amendment to such
financial covenant for all periods thereafter.  The Company believes,  but there
can be no assurance,  that the Company will be successful in these negotiations.
If the  Company is  unsuccessful  in  obtaining  the waiver  since  mending  the
Agreement  with the  Bank,  it  could  have a  material  adverse  effect  on the
business, operations and financial results of the Company.


Foreign Currency Risks

     The Company pays for its Tajima  embroidery  machinery in Japanese Yen. Any
devaluation of the U.S.  Dollar  compared to the Japanese Yen increases the cost
to the Company of its embroidery  machine  inventory.  The Company has generally
been able to recover  these  increased  costs  through  price  increases  to its
customers or, in limited  circumstances,  price reductions from Tajima.  However
there  can be no  assurance  that  the  Company  will be able  to  recover  such
increased costs in the future.

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.  Tajima  provides the Company with  technical  assistance  and support.
While TUI  operations  were  profitable  in fiscal 2000,  the  throughput of the
facility  is largely  dependent  on  continued  demand for  embroidery  machines
generated by the Hirsch sales organization.

Acquisitions and Creation of Additional Revenue Streams

     Since  June  1996,  the  Company  has  acquired  four  (4)  companies  (the
"Acquisitions").  These acquisitions (i) increased the area in which the Company
is the exclusive distributor of the complete line of Tajima embroidery equipment
from 26 states to 39 states; and (ii) increased the Company's ability to offer a
customer  value for its used  embroidery  equipment.  In  January  1997,  Tajima
granted  the  Company  the  exclusive  right to  distribute  small (one  through
six-head) Tajima embroidery machines in nine western states and Hawaii. In March
1998,  the  Company  was  granted  certain  rights to  distribute  large  Tajima
embroidery machines,  six-head "DC" models through thirty-head models throughout
certain West Coast states,  and the Company has invested  substantial  assets to
support  the West Coast  expansion.  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 to successfully integrate the operations
of the Acquisitions 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 new territories.

     During fiscal year 1999, the Company announced the establishment of its new
Building  Blocks  division  for the purpose of creating and  distributing  stock
embroidery designs and associated  software products to the retail market. As of
the end of fiscal 2000,  investment in Building Blocks  operations was less than
$.3 million and revenues have been minimal. The Company believes that additional
start-up costs and  investment  will be required in order to continue to develop
Building Blocks' operations and brand.  Although the Company believes it will be
able to access the substantial home and retail  embroidery  market,  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.

     In addition,  the Company  announced during the fiscal year the acquisition
from Jacobs  Management  Corporation  of its  interest in the  Hometown  Threads
venture.  Hometown  Threads was created for the purpose of  establishing  retail
embroidery  service centers within Wal-Mart retail  locations.  As of the end of
fiscal 2000,  Hometown  Threads had commenced  operations on a pilot test market
basis at two Wal*Mart  centers  located in Texas.  As of the end of fiscal 2000,
the  Company's  net  investment  in Hometown  Threads was less than $.7 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  89.1% of the leases it has written
to date,  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 five  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 has caused the Company to experience  higher than projected
inventory  costs.  Any failure in the future to properly manage inventory levels
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 Vice  President-Finance  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.  The Company had  previously
entered into five year  employment  agreements  with Messrs.  Arnberg and Levine
which  expired as of  February  20,  1999 with their  employment  by the Company
continuing  on an  at-will  basis on  roughly  the  same  terms  and  conditions
contained  in their  expired  employment  agreements  except  for  substantially
reduced salaries. 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 fourth  year of a five-year
employment  agreement.  Mr.  Richer  is  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.  This property houses the Company's executive offices, the
Northeast sales office, technical service, software support and warehouse space.
Additionally,   both  HAPL  Leasing  and  the  Company's  parts,   supplies  and
accessories  businesses  operate out of this facility.  On October 27, 1994, the
Company entered into a ten year,  $2,295,000 mortgage agreement (the "Mortgage")
and note ("Note") with a bank for its new corporate  headquarters.  The Mortgage
as  amended  bears  interest  at a fixed  rate of 11.3% and is  payable in equal
monthly principal  installments of $19,125. The Company's  obligations under the
Mortgage  are secured by a lien on the  premises  and the  related  improvements
thereon. The Company was in violation of a covenant contained in the mortgage as
of January 31, 2000.  Pursuant to a waiver and  amendment  dated as of April 27,
2000, the Company  obtained a waiver of the covenant  violation and an amendment
to the Debt Service  Coverage  Ratio  covenant,  contained in the  Mortgage.  In
addition,  simultaneously  therewith,  the Company entered into an Agreement and
Modification  of Note pursuant to which the note was amended to  accelerate  the
maturity date to April 20, 2001, from October 27, 2004.

     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.,
operates a machine assembly  facility.  The lease provides for lease payments of
approximately $132,000 per annum.

     In addition to the Company's  headquarters,  the Company leases 13 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.

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

<S>                                                       <C>              <C>
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

Fiscal 1998                                                High             Low
-----------                                                ----             ---

First Quarter ended April 30, 1997........................$22.750          $16.500
Second Quarter ended July 31, 1997........................$24.750          $16.500
Third Quarter ended October 31, 1997......................$26.250          $17.250
Fourth Quarter ended January 31, 1998.....................$22.000          $17.000
</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, 2000,  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.


<PAGE>



                                    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, 2000 and 1999 and for the fiscal years ended January 31, 2000, 1999,
and  1998  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, 1997,
and 1996 and for the fiscal  years  ended  January 31, 1997 and 1996 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                             2000         1999        1998        1997         1996
--------------------------------------------------------------------------------------------------------------------------------


<S>                                                                   <C>         <C>          <C>         <C>          <C>
Statement of Operations Data:
Net sales.........................................................    $86,958     $127,546     $147,045    $122,195     $87,974
Interest income related to sales-type leases......................      3,863        5,348        5,432       3,243       3,022

Cost of sales.....................................................     59,846       85,054       96,099      80,820      58,836
Selling, general and administrative expenses......................     40,491       44,381       41,055      29,070      20,638
(Loss) income before income tax (benefit) provision......             (10,369)      (6,066)      14,255      15,170      11,402
Income tax (benefit) provision....................................        972       (1,848)       6,059       6,402       4,837
(Loss) income before Cumulative Effect of Accounting Change           (11,635)      (4,608)       8,196       8,768       6,565
Cumulative Effect of Accounting Change                                 (2,187)           -            -           -           -
Net (loss) income (3).............................................    (13,822)      (4,608)       8,196       8,768       6,565

Basic net (loss) income per share (1), (2)........................   $  (1.48)    $  (0.49)     $  0.92     $  1.13     $  1.10
Diluted net (loss) income per share (1), (2)......................   $  (1.48)    $  (0.49)     $  0.89     $  1.10     $  1.09
Shares used in the calculation of basic
  net (loss) income per share (1), (2)............................      9,348        9,413        8,953       7,782       5,960
Shares used in the calculation of diluted
  net (loss) income per share (1), (2)............................      9,348        9,436        9,236       7,967       6,002
<FN>

(1) Basic and  diluted  net income  per share  figures  and  shares  used in the
calculation of diluted net income per share have been retroactively adjusted to
reflect 25% stock dividends which were paid in July 1996 and 1995, respectively
and a 5% stock dividend which was paid in August 1994.

(2) Basic and  diluted  net income  per share  figures  and  shares  used in the
calculation  of diluted net income per share for Fiscal  years 1995 through 1997
have been  retroactively  adjusted  to reflect  the  adoption  of SFAB No.  128,
"Earnings per Share".

(3) Net of the cumulative effect of SAB101 accounting  change.
</FN>
</TABLE>
<TABLE>
<CAPTION>

                                                                                      Year Ended January 31,
                                                                                    (in thousands of dollars)

Hirsch International Corp. and Subsidiaries                          2000         1999        1998        1997       1996
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                <C>         <C>        <C>           <C>        <C>
Balance Sheet Data:
Working capital................................................    $ 29,627    $ 51,939   $ 40,169 (6)  $ 22,004   $ 16,847 (4)
Total assets...................................................      80,216     106,935    114,832 (6)    83,696     47,872 (4)
Long-term debt, less current maturities........................         989      15,640      1,421        13,194 (5)  1,779
Stockholders' equity...........................................      56,253      70,207     75,623 (6)    41,682     29,134 (4)
<FN>

(4) In January  1996, in  connection  with its  Secondary  Offering (the "Second
Offering"),  the Company  received net proceeds of $1,906,000  (after  deducting
expenses of the Second Offering).

(5) 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.

(6) 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>


<PAGE>



        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 and expects that they will begin to  contribute  incremental
revenue streams in the future.

     Fiscal 1999 and 2000 were years of retrenchment for the industry, driven by
the relocation and continued  investment offshore of large multi-head  equipment
customers.  While small  machine  customers  continued  to grow in the  domestic
market,  their growth rate could not offset the decline in large machine  sales,
resulting  in a change in the sales mix of  embroidery  machines  and an overall
decline in demand. It was further compounded by dramatic swings in the US dollar
/ Yen exchange rate. All industry  competitors 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 7 of
Notes to Consolidated  Financial  Statements).  The Company  continued to reduce
overhead costs  throughout  fiscal 2000, as the market continued to seek a level
of  stability.  The Company  believes the  implementation  of the overhead  cost
reduction program will position it to return to profitable operations at revenue
levels reflecting today's market realities.


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, 2000,  1999
and 1998.
<TABLE>
<CAPTION>


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

<S>                                                      <C>                      <C>                     <C>
              Net sales                                  95.7%                    95.8%                   96.4%

              Interest income related
                to sales-type leases                      4.3%                     4.2%                    3.6%
                                                   -------------------------------------            ------------

              Total revenue                             100.0%                   100.0%                  100.0%

              Cost of                                    65.9%                    66.7%                   63.0%
              sales

              Operating expenses                         44.6%                    36.7%                   26.9%

              Interest expense, net                       1.4%                     1.2%                    0.6%

              Other expense (income), net                -0.5%                     0.2%                    0.1%
                                                   ------------            -------------            ------------

              (Loss) income before income
                taxes and minority interest             -11.4%                    -4.8%                    9.4%

              Income tax (benefit) provision              1.1%                    -1.5%                    4.0%

              Cumulative Effect of Accounting
               Change                                    -2.4%                     0.0%                    0.0%

              Minority Interest                           0.3%                     0.3%                    0.0%
                                                   ------------            -------------            ------------

              Net (loss) income                         -15.2%                    -3.3%                    5.4%
                                                   ============            =============            ============
</TABLE>



<PAGE>



                Fiscal Year 2000 as Compared to Fiscal Year 1999


     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 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.

     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 61.8%
of net sales for fiscal  year's 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 $5.4  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 $25.7 million
or 30.2%, to $59.3 million from $85.0 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.

     Selling,  General and  Administrative  ("SG&A")  Expenses.  For fiscal year
2000,  SG&A  decreased $3.9 million or 8.7%, to $40.5 million from $44.3 million
for fiscal year 1999.  SG&A  expenses  increased as a percentage  of revenues to
44.6% for fiscal year 2000,  from 34.8% for fiscal year 1999.  The Company  took
substantial write-downs and increased reserves for slow-moving new machinery and
uncollectable accounts in this fiscal year. 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 SG&A 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 SG&A 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,  since the Company cannot determine the future  utilization
of such assets.

     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.

                Fiscal Year 1999 as Compared to Fiscal Year 1998

     Net sales.  Net sales for fiscal year 1999 were $122.2 million,  a decrease
of $24.8 million, or 16.9%, compared to $147.0 million for fiscal year 1998. The
Company believes that the reduction in the sales level for the fiscal year ended
January  31,  1999 is  attributable  to a  softening  of  demand  for new  large
(six-head "DC" models through  thirty-head  models) machines.  In addition,  the
reduction in sales revenue during fiscal year 1999 is also attributable to lower
average  machine  selling prices as compared to fiscal year 1998. This reduction
in average selling price was mainly the result of the strong dollar/yen exchange
rate.

     The  sale  of new  embroidery  machinery  represented  approximately  $96.5
million,  or 79.0% and  $120.6  million,  or 82.0%,  of net sales for the fiscal
years  1999 and 1998,  respectively.  Small  embroidery  machines  (one  through
six-head  "FX"  models)  and large  embroidery  machines  (six-head  "DC" models
through thirty-head  models) represented  approximately $49.3 million, or 51.1%,
and $47.2 million,  or 48.9% of total new embroidery machine sales during fiscal
year 1999 as  compared  to  approximately  $51.4  million,  or 42.6%,  and $69.2
million, or 57.4%, respectively for fiscal year 1998.

     Revenue from the sale of the Company's used machines, computer hardware and
software,  parts,  service,  application  software and  embroidery  supplies for
fiscal year 1999 was approximately  $25.7 million,  as compared to $26.5 million
for fiscal year 1998.

     Interest  income  related to  sales-type  leases.  HAPL's  interest  income
decreased  1.6% to $5.3  million for fiscal year 1999 from $5.4  million for the
comparable  period of the prior year.  This small  decrease  in HAPL's  interest
income as compared to the decrease in new  embroidery  machine sales is a result
of the  continued  expansion of HAPL's  operations.  Their  diversified  leasing
programs have resulted in a 37.4% increase in the number of new equipment  sales
which are leased to 50.7% of total new equipment sales for fiscal year 1999 from
36.9% for fiscal year 1998. This is primarily  attributable to HAPL's  continued
penetration  into the  small  machine  market,  which  represented  51.1% of new
machine sales in fiscal 1999 as compared to 42.6% of new machine sales in fiscal
1998.

     Cost of sales. For fiscal year 1999, cost of sales decreased $11.0 million,
or 11.5%, to $85.1 million from $96.1 million for fiscal year 1998. The decrease
was a result of the related decrease in net sales for fiscal 1999 as compared to
fiscal 1998,  offset by the  inventory  write-down  of $3.5 million  recorded in
fiscal 1999.  The inventory  write-down  related to the Company's  restructuring
plan and includes the write-down of used machine and ESW inventories (See Note 7
of Notes to Consolidated  Financial  Statements).  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.
Exclusive of the inventory write-down recorded in fiscal 1999, there was a small
decrease in the Company's gross margin for fiscal year 1999 to 36.0% as compared
to 37.0% for fiscal year 1998. This is primarily  attributable to an increase in
sales of used embroidery  machines,  which typically  yields lower gross margins
than those obtained in the sale of new embroidery machines.

     Selling, general and administrative ("SG&A") expenses. For fiscal year 1999
SG&A  increased  $3.3 million,  or 8.1%, to $44.4 million from $41.1 million for
fiscal year 1998.  SG&A expenses  increased as a percentage of revenues to 34.8%
from 26.9%.  The  increase in SG&A as a  percentage  of revenues for fiscal year
1999 as compared  to fiscal  1998 is  primarily  attributable  to the  Company's
investment  in its  infrastructure  to  support  anticipated  sales  levels.  In
addition,  approximately  $.3 million of SG&A  expenses  were incurred in fiscal
1999 in connection with the formation of the Hometown Threads joint venture with
Jacobs  Management  Corporation  and the Company's  creation of its new Building
Blocks division. Based upon the decrease in net sales in fiscal 1999 as compared
to fiscal 1998, the Company has developed and implemented a cost reduction plan.
The  purpose of the plan is to reduce  costs  through the  consolidation  of our
support and back office infrastructure and reduction of our overhead.  This will
bring the Company's expenses in line with revised sales projections.

     Interest  expense.  Interest  expense  for fiscal year 1999  increased  $.6
million,  or 67.8%,  from $.9  million  in fiscal  year 1998 to $1.6  million in
fiscal year 1999.  This increase in interest  expense is the result of increased
working capital borrowings  outstanding  against the Company's  Revolving Credit
Facility during fiscal year 1999 as compared to fiscal year 1998.

     Income  tax  (benefit)  provision.  The  income tax  benefit  reflected  an
effective  benefit rate of approximately  30.5% for fiscal year 1999 as compared
to an income tax provision  reflecting an effective tax rate of 42.5% for fiscal
year 1998.  Differences from the federal  statutory rate consisted  primarily of
provisions  for state  income taxes net of Federal tax  benefit.  The  principal
components of the deferred income tax assets result from allowances and accruals
that  are  not  currently   deductible  for  tax  purposes  and  differences  in
amortization periods between book and tax bases. The Company has not established
any  valuation  allowances  against  these  deferred  tax  assets as  management
believes it is more likely than not that the Company will  realize  these assets
in the future based upon the historical profitable operations of the Company.

     Net (loss)  income.  The net loss for fiscal year 1999 was $4.6 million,  a
decrease  in income of $12.8  million,  or 156.2%,  as compared to net income of
$8.2 million for fiscal year 1998. The net margin  decreased to (3.6%) in fiscal
year  1999  from  5.4% in  fiscal  year  1998.  These  decreases  are  primarily
attributable to the  restructuring  costs and inventory  write-down  recorded in
connection  with  the  Company's  restructuring  plan  (See  Note 7 of  Notes to
Consolidated Financial Statements), as well as an increase in SG&A expenses.


Liquidity and Capital Resources

     Operating Activities and Cash Flows

     The  Company's  working  capital  was $29.6  million at January  31,  2000,
decreasing $22.3 million or 43.0%, from $51.9 million,  at January 31, 1999. The
decrease in working  capital was  principally  due to  reductions  in inventory,
write-offs  and  incremental  reserves in  accounts  receivable,  the  valuation
reserve against the deferred tax asset and the  classification of the new credit
facility as  short-term  debt versus the old  facility as  long-term  debt.  The
Company has financed its operations  principally  through long-term financing of
certain capital  expenditures and working capital borrowings under its revolving
credit facilities.

     During fiscal year 2000,  the Company's  cash  decreased by $1.8 million to
$1.3 million,  in accordance with the terms of the Revolving Credit and Security
Agreement  of  September  30,  1999 with PNC Bank,  National  Association  ("PNC
Bank"),  which calls for the  reduction  of cash  balances to minimum  practical
levels.  Net cash of $12.2  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.  It  was
substantially offset by cash used for repayments of long-term debt.

     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  was  partially  used for the purchase of
236,000  shares of the  Company's  stock in the open market  during  fiscal year
2000, at an average cost of approximately $1.50 per share.

     Revolving Credit Facility and Borrowings

     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 and  replaced  it with a new  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 restrict additional borrowings by the Company and require
the  Company to  maintain  certain  levels of  shareholders  equity,  as defined
therein.  The Company was in default of the financial  covenant in its Agreement
with PNC Bank at year-end  and is  currently  negotiating  to obtain a waiver of
such default for the fiscal  quarter  ended January 31, 2000 and an amendment of
the financial  covenant  contained in the Agreement for all periods  thereafter.
Outstanding   working  capital  borrowings  against  the  Agreement   aggregated
approximately  $2.1 million at January 31, 2000.  The Agreement was also used to
support trade acceptances payable of approximately $6.2 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 $218.2
million in lease  agreements  through  January 31, 2000. As of January 31, 2000,
approximately  $194.4 million, or 89.1%, 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.  From
October 27, 1994 through  April 29, 1999,  the Mortgage bore interest at a fixed
annual rate of 8.8  percent.  During  fiscal  2000,  the Mortgage was amended to
provide  for an increase  in the  interest  rate to 9.3 percent per annum and to
11.3 percent per annum in successive quarters, subject to a quarterly review and
adjustment.  The Mortgage is payable in equal monthly principal  installments of
approximately  $19,000.  The obligation under the Mortgage is secured by a first
priority lien on the premises and the related improvements  thereon. The Company
was in default of the  financial  covenant  contained in the Mortgage at January
31, 2000 and has received an amendment and waiver of such default from the bank.
The  Company   anticipates  that  it  will  satisfy  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.

     Future Capital Requirements

     The  Company  believes  that 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.

     Year 2000 Date Compliance

     The Year 2000 issue existed because many computer  systems and applications
used  two-digit  date fields to  designate a year.  The  Company  established  a
Steering  Committee  (the  "Committee")  to address Year 2000 issues,  including
senior members of the management team, which reported  regularly to the Board of
Directors. The committee initiated a program to upgrade its internal information
systems to address any Year 2000 compliance  issues.  The Company  completed its
Year 2000 program on a timely basis.  The Company has  implemented  new computer
systems that addressed the Year 2000 transition problems.

     The Company has made a thorough review of its proprietary software products
and  believes  that its current  products are Year 2000  compliant.  Many of the
Company's  customers may,  however,  be using earlier  versions of the Company's
software  products,  which  may not be Year  2000  compliant.  The  Company  has
notified such customers of the risks associated with using these products and as
a result the majority of such customers  have migrated to the Company's  current
software products.

     Based upon the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program were within the anticipated $300,000 allocated for such
expenditures.  These  costs  were  incurred  primarily  in fiscal  year 2000 and
consisted mainly of remediation of and/or upgrades to existing computer hardware
and software and telecommunication  systems. Such costs did not include internal
management  time and the deferral of other  projects,  the effects of which were
not material to the Company's results of operations or financial condition.

     The Company believes that no further material  exposure exists in regard to
the Year 2000 issue and has concluded the activities of the Committee.

     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  Pronouncements of the Financial  Accounting Standards Board and the
SEC

     Recent  pronouncements of the Financial Accounting Standards Board ("FASB")
which  are not  required  to be  adopted  at this  date  include,  Statement  of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and Hedging  Activities" ("SFAS 133"). SFAS 133 is effective for fiscal quarters
of all fiscal years beginning  after June 15, 1999.  Based upon current data the
adoption of this  pronouncement is not expected to have a material impact on the
Company's consolidated financial statements.

     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 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.

     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 2000, 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
$2.5 million annualized impact on the cost of sales of the Company.  The Company
does not use foreign exchange contracts to hedge expected earnings.

     All  of  the  Company  debt  is  U.S.  dollar  denominated.   At  year-end,
approximately   67.6%  of  this  indebtedness  to  third  parties  was  floating
rate-based.  Although the Company has exposure to rising and falling rates, a 1%
rise in rates on the average outstanding  floating rate-based  borrowings during
the fiscal year would have  approximately $.1 million  annualized adverse impact
on net pre-tax  expenses.  The Company does not use interest rate derivatives to
protect its exposure to interest rate market movements.


<PAGE>



ITEM 8. FINANCIAL STATEMENTS IN SUPPLEMENTARY DATA

     The information contained in pages F-1 through F-32 hereof.

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

     None


<PAGE>


                                     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' Repors........................................................................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


(a)(2)  FINANCIAL STATEMENT SCHEDULE

 ....................................................................................................S-1
</TABLE>

(a)(3)  EXHIBITS
        --------
<TABLE>
<CAPTION>

<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 May 12, 2000.

10.33                Agreement of Modification of Note between Hirsch
                     International Corp. and The Chase Manhattan Bank
                     dated as of May 12, 2000.

10.34                Joinder by Guarantors among HAPL Leasing Co., Inc., Pulse
                     Microsystems, Ltd. and The Chase Manhattan Bank dated as
                     of May 12, 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.

21.1                 List of Subsidiaries of the Registrant

27.1                 Financial Data Schedule

----------------------
</TABLE>


     %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.


<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 15, 2000

     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 15, 2000
--------------------------
Henry Arnberg                          Executive Officer (Principal Executive Officer)


/s/ Paul Levine                        President and Director                                      May 15, 2000
--------------------------
Paul Levine


/s/ Tas Tsonis                         Vice President and Director                                 May 15, 2000
--------------------------
Tas Tsonis


/s/ Richard Richer                     Vice President-Finance and Chief Financial Officer          May 15, 2000
--------------------------             (Principal Accounting and Financial Officer)
Richard Richer


/s/ Ronald Krasnitz                    Chief Operating Officer and Director                        May 15, 2000
--------------------------
Ronald Krasnitz


/s/ Marvin Broitman                    Director                                                    May 15, 2000
--------------------------
Marvin Broitman


/s/ Herbert M. Gardner                 Director                                                    May 15, 2000
--------------------------
Herbert M. Gardner


/s/ Douglas Schenendorf                Director                                                    May 15, 2000
--------------------------
Douglas Schenendorf


</TABLE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

TABLE OF CONTENTS
--------------------------------------------------------------------------------


                                                                          Page

INDEPENDENT AUDITORS' REPORTS                                             F1-5

CONSOLIDATED FINANCIAL STATEMENTS FOR THE
 YEARS ENDED JANUARY 31, 2000, 1999 AND 1998:

   Consolidated Balance Sheets                                            F6-7

   Consolidated Statements of Operations                                   F8

   Consolidated Statements of Stockholders' Equity                         F9

   Consolidated Statements of Cash Flows                                   F10

   Notes to Consolidated Financial Statements                           F11-31



                                       F1
<PAGE>
Independent Auditors' Report


Board of Directors
Hirsch International Corp.
Hauppauge, New York


We  have  audited  the  accompanying   consolidated   balance  sheet  of  Hirsch
International  Corp.  and  subsidiaries  as of January 31, 2000, and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the year ended January 31, 2000. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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,  2000  and the  results  of  their
operations  and  their  cash  flows  for the  year  ended  January  31,  2000 in
conformity with generally accepted accounting principles.

As discussed in Notes 2 and 12 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, 2000

                                       F2
<PAGE>
May 3, 2000


Mr. Richard Richer, CFO
Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788

Dear Mr. Richer:

As stated in Note 12 to the financial  statements of Hirsch  International Corp.
for the year  ended  January  31,  2000,  the  Company  changed  its  method  of
accounting for revenue  recognition and states that the newly adopted accounting
method is preferable in the  circumstances  because 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
and recommendations  contained in SAB 101. SAB 101 establishes and clarifies the
basis for revenue recognition. Revenue is recorded on equipment sales based upon
customer  acceptance of installation,  rather than upon shipment by the Company.
In connection with our audit of the above  mentioned  financial  statements,  we
have evaluated whether the newly adopted  accounting  principle is preferable in
the circumstances.

Based on our audit,  we concur in  management's  judgment that the newly adopted
accounting principle described in Note 12 is preferable in the circumstances.

Very truly yours,
/s/ BDO Seidman, LLP
     BDO Seidman, LLP






INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation by reference in Post Effective  Amendment No. 1
to Registration  Statement No. 33-94914 on Form S-8,  Registration No. 333-30237
on Form S-8 and Registration  No. 333-22535 on Form S-3 of Hirsch  International
Corp. and Subsidiaries of our report dated May 3, 2000, appearing in this Annual
Report on Form 10-K of Hirsch  International Corp. and Subsidiaries for the year
ended January 31, 2000.




/s/ BDO SEIDMAN LLP
     BDO Seidman, LLP
Melville, New York
May 12, 2000

                                       F3
<PAGE>

INDEPENDENT AUDITORS' REPORT


Board of Directors
Hirsch International Corp.
Hauppauge, New York

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Hirsch
International  Corp.  and  Subsidiaries  as of January  31, 1999 and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the  years  ended  January  31,  1999 and  1998.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the consolidated  financial position of Hirsch International
Corp. and  Subsidiaries as of January 31, 1999 and the  consolidated  results of
their  operations  and their cash flows for the years ended January 31, 1999 and
1998 in conformity with generally accepted accounting principles.



/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Jericho, New York
April 22, 1999

                                       F4
<PAGE>

INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation by reference in Post Effective  Amendment No. 1
to Registration  Statement No. 33-94914 on Form S-8,  Registration No, 333-30237
on Form S-8 and Registration  No. 333-22535 on Form S-3 of Hirsch  International
Corp.  and  Subsidiaries  of our report dated April 22, 1999,  appearing in this
Annual Report on Form 10-K of Hirsch  International  Corp. and  Subsidiaries for
the year ended January 31, 2000.


/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Jericho, New York
May 10, 2000



                                       F5
<PAGE>

<TABLE>
<CAPTION>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
-------------------------------------------------------------------------------

ASSETS                                                     2000               1999

CURRENT ASSETS:
<S>                                                    <C>                 <C>
  Cash and cash equivalents                            $1,290,000          $3,078,000
  Accounts receivable, net of an allowance for
  possible losses of approximately $5,632,000
  and $4,033,000, respectively                         17,293,000          22,956,000
  Net investment in sales-type leases -
   current portion (Note 6)                             2,583,000           2,254,000
  Inventories, net (Notes 4, 8 and 13)                 25,711,000          36,335,000
  Prepaid income taxes (Note 10)                        3,673,000           1,786,000
  Other current assets (Note 10)                          423,000           5,284,000
                                                       ----------          ----------
          Total current assets                         50,973,000          71,693,000

NET INVESTMENT IN SALES - TYPE LEASES - Noncurrent
  portion (Note 6)                                      8,207,000          11,256,000

EXCESS OF COST OVER NET ASSETS ACQUIRED - Net
  of accumulated amortization of approximately
  $3,851,000 and $2,686,000, respectively
  (Notes 3 and 8)                                      12,974,000          14,139,000

PURCHASED TECHNOLOGIES - Net of accumulated
  amortization of approximately $1,132,000 and
  $940,000, respectively                                 207,000              399,000

PROPERTY, PLANT AND EQUIPMENT - Net of accumulated     6,544,000            7,602,000
  depreciation and amortization (Notes 7 and 9)
OTHER ASSETS (Note 10)                                 1,311,000            1,846,000
                                                     -----------         ------------
TOTAL ASSETS                                         $80,216,000         $106,935,000
                                                     ===========         ============
See notes to consolidated financial statements.

                                                                           (Continued)

</TABLE>

                                       F6
<PAGE>
<TABLE>
<CAPTION>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
-------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY                      2000               1999

CURRENT LIABILITIES:
<S>                                                    <C>                 <C>
  Trade acceptances payable (Note 9)                   $6,199,000          $2,164,000
  Accounts payable and accrued expenses (Note 8)       12,805,000          17,338,000
  Current maturities of bank debt (Note 9)              2,342,000             252,000
                                                       ----------          ----------
          Total current liabilities                    21,346,000          19,754,000

LONG-TERM DEBT - Less current maturities (Note 9)         989,000          15,640,000
                                                       ----------          ----------
     Total liabilities                                 22,335,000          35,394,000
                                                       ----------          ----------
MINORITY INTEREST (Note 1)                              1,628,000           1,334,000
                                                       ----------          ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 13)

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 6,488,700 shares, respectively,
   at January 31, 2000;and 6,815,000 and 6,724,700
   shares, respectively at January 31, 1999;               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                                    15,721,000          29,543,000
  Accumulated other comprehensive income                  221,000               -
                                                       ----------          ----------
                                                       57,434,000          71,035,000
  Less: Treasury Class A Common stock at cost,
        326,300 and 90,300 shares, respectively         1,181,000             828,000
                                                       ----------          ----------
        Total stockholders' equity                     56,253,000          70,207,000
                                                       ----------          ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $80,216,000        $106,935,000
                                                       ==========         ===========
</TABLE>


                                       F7
<PAGE>

              HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                        Three Years Ended January 31,

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

<S>                                                         <C>                  <C>                   <C>
REVENUES
   Net Sales                                                $86,958,000          $122,198,000          $147,045,000
   Interest income related to sales-type leases               3,863,000             5,348,000             5,432,000
                                                        ----------------      ----------------      ----------------
            Total revenue                                    90,821,000           127,546,000           152,477,000
                                                        ----------------      ----------------      ----------------

COST OF SALES
   Cost of sales (Note 13)                                   59,846,000            81,604,000            96,099,000
   Inventory write-down (Notes 4 & 8)                          -                    3,450,000                 -
                                                        ----------------      ----------------      ----------------
           Total cost of sales                               59,846,000            85,054,000            96,099,000
                                                        ----------------      ----------------      ----------------

GROSS PROFIT                                                 30,975,000            42,492,000            56,378,000
                                                        ----------------      ----------------      ----------------

OPERATING EXPENSES
   Selling, general and administrative expenses              40,491,000            44,381,000            41,055,000
   Restructuring costs (Note 8)                                -                    2,377,000                 -
                                                        ----------------      ----------------      ----------------
           Total operating expenses                          40,491,000            46,758,000            41,055,000
                                                        ----------------      ----------------      ----------------

OPERATING (LOSS) INCOME                                     (9,516,000)           (4,266,000)            15,323,000
                                                        ----------------      ----------------      ----------------
OTHER EXPENSE (INCOME)
   Interest expense (Note 9)                                  1,308,000             1,567,000               934,000
   Other                                                      (455,000)               233,000                90,000
                                                        ----------------      ----------------      ----------------
           Total other expense - net                            853,000             1,800,000             1,024,000
                                                        ----------------      ----------------      ----------------


   (LOSS) INCOME BEFORE (BENEFIT) PROVISION
   FOR INCOME TAXES AND MINORITY
   INTEREST IN NET EARNINGS OF
   CONSOLIDATED SUBSIDIARY                                 (10,369,000)           (6,066,000)            14,299,000

INCOME TAX (BENEFIT) PROVISION (Note 10)                        972,000           (1,848,000)             6,059,000

MINORITY INTEREST IN NET EARNINGS
   OF CONSOLIDATED SUBSIDIARY (Note 1)                          294,000               390,000                44,000
                                                        ----------------      ----------------      ----------------

(LOSS) INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE                                (11,635,000)           (4,608,000)             8,196,000

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

NET (LOSS) INCOME                                         ($13,822,000)          ($4,608,000)            $8,196,000
                                                        ================      ================      ================

(LOSS) EARNINGS PER SHARE:
   Basic:
    (Loss) Income before cumulative effect
     of accounting change                                       ($1.25)               ($0.49)                 $0.92
     Cumulative effect of accounting                              (.23)              -                     -
   change (Notes 2 and 12)
                                                        ----------------      ----------------      ----------------
     Net (Loss) Income per share                                ($1.48)               ($0.49)                 $0.92
                                                        ================      ================      ================

   Diluted:
     (Loss) Income before cumulative
   effect
     of accounting change                                       ($1.25)               ($0.49)                 $0.89
     Cumulative effect of accounting                            ($0.23)              -                     -
   change    (Notes 2 and 12)
                                                        ----------------      ----------------      ----------------

     Net (Loss) Income per share                                ($1.48)               ($0.49)                 $0.89
                                                        ================      ================      ================

WEIGHTED AVERAGE NUMBER OF SHARES
   IN THE CALCULATION OF (LOSS)
   EARNINGS PER SHARE (Note 14)
     Basic                                                    9,348,500             9,413,000             8,953,000
                                                        ================      ================      ================
      Diluted                                                 9,348,500             9,436,000             9,236,000
                                                        ================      ================      ================
See notes to consolidated financial statements.
</TABLE>

                                       F8
<PAGE>
<TABLE>
<CAPTION>



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------------------
                                                   Class A                      Class B
                                                 Common Stock                 Common Stock
                                                  (Note 10)                    (Note 10)             Additional
                                             ---------------------        --------------------       Paid-In
                                             Shares        Amount         Shares        Amount        Capital
                                             ------        ------         ------        ------        -------

<S>                                         <C>               <C>         <C>          <C>            <C>
BALANCE, JANUARY 31, 1997                   5,313,000         53,000      2,732,000    $     27,000   $ 15,626,000

  Proceeds from public offering
    of common stock, net (Note 1)           1,333,000         13,000           --              --       24,289,000
  Issuance of shares in connection
    with acquisitions (Note 3)                 20,000           --             --              --          392,000
  Issuance of Class A stock                    49,000          1,000           --              --          819,000
  Transfer of Class B stock to
    Class A stockholder                        64,000           --          (64,000)           --             --
  Exercise of stock options and warrants       32,000          1,000           --              --          251,000
  Comprehensive income:
    Unrealized holding loss                      --             --             --              --             --
    Net income                                   --             --             --              --             --
  Total comprehensive income:                    --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------

BALANCE, JANUARY 31, 1998                   6,811,000         68,000      2,668,000          27,000     41,337,000

  Exercise of stock options                     4,000           --             --              --           20,000
  Purchase of treasury shares (Note 11e)         --             --             --              --             --
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 11e)         --             --             --              --             --
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
                                          ============   ============   ============    ============   ============
</TABLE>
<TABLE>
<CAPTION>


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

<S>                                        <C>             <C>                     <C>       <C>
BALANCE, JANUARY 31, 1997                  $     21,000    $ 25,955,000            --        41,682,000

  Proceeds from public offering
    of common stock, net (Note 1)                  --              --              --        24,302,000
  Issuance of shares in connection
    with acquisitions (Note 3)                     --              --              --           392,000
  Issuance of Class A stock                        --              --              --           820,000
  Transfer of Class B stock to
    Class A stockholder                            --              --              --              --
  Exercise of stock options and warrants           --              --              --           252,000
  Comprehensive income:
    Unrealized holding loss (Note 2o)           (21,000)           --              --              --
    Net income                                     --         8,196,000            --              --
  Total comprehensive income:                      --              --              --         8,175,000
                                            ------------    ------------    ------------    ------------

BALANCE, JANUARY 31, 1998                          --        34,151,000             --       75,623,000

  Exercise of stock options                        --              --              --            20,000
  Purchase of treasury shares (Note 11e)           --              --          (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 11e)           --              --          (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
                                            ============    ============    ============    ============
</TABLE>

    See notes to consolidated financial statements.

                                       F9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
                                                               2000               1999               1998
<S>                                                       <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net (loss) income                                        $(13,822,000)      $  (4,608,000)     $   8,196,000
 Adjustments to reconcile net income to net cash
  (used in) provided by operating activities:
  Depreciation and amortization                              3,920,000           3,754,000          3,214,000
  Provisions for reserves                                    5,151,000           1,643,000            807,000
  Deferred income taxes                                      4,542,000          (2,826,000)          (621,000)
  Gain on disposal of assets                                     -                   -                (42,000)
  Minority interest                                            294,000             390,000             44,000
  Write-off of goodwill                                          -                 711,000               -

  Changes in assets and liabilities:
   Accounts receivable                                       1,630,000          10,598,000        (14,382,000)
   Net investments in sales-type leases                      2,870,000             213,000         (3,591,000)
   Inventories                                               9,506,000          (3,467,000)       (18,749,000)
   Other current assets and other assets                       228,000             614,000         (1,251,000)
   Trade acceptances payable                                 4,035,000         (13,122,000)         1,954,000)
   Accounts payable and accrued expenses                    (4,533,000)         (3,375,000)         8,254,000
   Prepaid income taxes and income taxes payable            (1,887,000)         (2,521,000)          (807,000)
                                                           -----------          ----------         ----------
      Net cash (used in) provided by operating activities   11,934,000         (11,996,000)         16,974,000
                                                           -----------          ----------         ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                       (1,029,000)         (1,314,000)        (2,096,000)
 Acquisition of Equipment Connection, Inc.                       -                   -               (553,000)
 Sales of short-term investments                                 -                   -              2,570,000
                                                           -----------          ----------         ----------
      Net cash (used in) investing activities               (1,029,000)         (1,314,000)           (79,000)
                                                           -----------          ----------         ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds of bank financing                                  6,952,000          26,021,000         17,260,000
 Repayments of long-term debt                              (19,513,000)        (11,781,000)       (31,390,000)
 Proceeds from public offering                                   -                   -             24,302,000
 Proceeds from issuance of stock and
   exercise of stock options and warrants                        -                  20,000          1,072,000
 Purchase of treasury shares                                  (353,000)           (828,000)             -
 Contributions from minority interest                            -                   -                900,000
                                                           -----------          ----------         ----------
Net cash provided by (used in) financing activities         12,914,000          13,432,000         12,144,000
                                                           -----------          ----------         ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                        221,000               -                   -
                                                           -----------          ----------         ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            (1,788,000)            122,000         (4,909,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                 3,078,000           2,956,000          7,865,000
                                                           -----------          ----------         ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                    $  1,290,000        $  3,078,000       $  2,956,000
                                                           ===========          ==========         ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                           $  1,308,000        $  1,483,000       $    966,000
                                                           ===========          ==========         ==========
  Income taxes paid                                       $    527,000        $  3,537,000       $  7,621,000
                                                           ===========          ==========         ==========

See notes to consolidated financial statements.
</TABLE>

                                      F10


<PAGE>


HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------


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"), and Tajima USA, Inc. ("TUI") (collectively,  the
     "Company").  The operations of HECI are included in consolidated operations
     since its  acquisition  on March 26, 1997 (Note 3). The  operations  of TUI
     have been included in consolidated operations since inception in June 1997.

     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  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.

     On June 6, 1997,  the Company  consummated a secondary  public  offering of
     Class A common stock (the "Secondary Offering"). The Company sold 1,210,528
     shares at $20.00 per share.  Another  750,022  shares  were sold by certain
     stockholders of the Company ("Selling Stockholders').  On July 7, 1997, the
     underwriters   exercised  their   over-allotment   option  to  purchase  an
     additional 294,082 shares of Class A common stock,  122,592 shares of which
     were  sold  by  the  Company  and  171,490   shares  sold  by  the  selling
     stockholders.  Net proceeds of  approximately  $24,300,000 were received by
     the Company after expenses and underwriting discount.


                                      F11
<PAGE>


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).

          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 years ended January 31,
          1999 and 1998.  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.

                                      F12
<PAGE>
          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  are  usually
          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,
          2000,  1999,  and  1998  was  approximately  $100,000,  $205,000,  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 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,  without  interest  charges,  will be less  than the
          carrying amount of the assets. Impairment is measured at fair value.

     j.   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.

     k.   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.

                                      F13

<PAGE>
     l.   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.

     m.   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, 2000 and 1999.

     n.   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").

     o.   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.

     p.   Use  of  Estimates  -  The  preparation  of  financial  statements  in
          conformity  with generally  accepted  accounting  principles  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.

     q.   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,
          2000 and 1999, the fair value of the Company's  financial  instruments
          approximated the carrying value (Note 2c).


                                      F14
<PAGE>




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  fiscal  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 (Notes 4 and 8).

4. INVENTORIES


                                                            January 31,
                                                       2000           1999

          New machines                            $20,455,000    $29,623,000
          Used machines                             4,795,000      3,194,000
          Parts and accessories                     4,092,000      6,031,000
          Less: Reserve for slow-moving inventory  (3,631,000)    (2,513,000)
                                                  -----------     ----------
          Total                                   $25,711,000    $36,335,000

          In connection with the Company's  restructuring  (Note 8), the Company
          wrote-down  used  machine  and parts and  accessories  inventories  by
          $3,450,000 in the fourth  quarter of fiscal 1999.  Such  write-down is
          included  in  cost  of  sales  on  the   accompanying   statements  of
          operations.


                                      F15
<PAGE>




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, 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

Year ended January 31, 1998            $ 2,578,000       $    582,000     $       -      $3,160,000


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

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

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

Year ended January 31, 1998            $ 2,003,000       $    252,000    $       -       $2,255,000
</TABLE>

                                      F16
<PAGE>






6.    NET INVESTMENT IN SALES-TYPE LEASES
<TABLE>
<CAPTION>

                                                                                January 31,
                                                                         2000                1999

<S>                                                                   <C>                 <C>
     Total minimum lease payments receivable                          $9,688,000          $9,944,000
     Estimated residual value of leased property (unguaranteed) (A)    4,848,000           7,360,000
     Reserve for estimated uncollectible lease payments               (1,100,000)         (1,100,000)
     Less: Unearned income                                            (2,646,000)         (2,694,000)
                                                                      ----------          ----------
     Net investment                                                   10,790,000          13,510,000
     Less: Current portion                                             2,583,000           2,254,000
                                                                      ----------          ----------
     Non-current portion                                              $8,207,000         $11,256,000
                                                                      ==========          ==========
</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. The largest
     portion of the decline in the estimated  residual value of leased  property
     from fiscal 1999 to fiscal 2000 was a sale of residuals to a third party of
     approximately $4.7 million.

     At January 31, 2000 future  annual  lease  payments  receivable  (including
     estimated residual values) under sales-type leases are as follows:


          Fiscal Year
            Ending
          January 31,

             2001                  $ 3,789,000
             2002                    2,760,000
             2003                    2,954,000
             2004                    2,682,000
             2005                    2,238,000
          Thereafter                   113,000
                                   -----------
                                   $14,536,000


                                      F17

<PAGE>




7. PROPERTY, PLANT AND EQUIPMENT

                                                        January 31,
                                                  2000             1999


     Land and building                       $ 2,767,000        $ 3,288,000
     Machinery and equipment                   6,514,000          5,131,000
     Furniture and fixtures                    1,936,000          1,930,000
     Rental Equipment                          1,113,000          1,195,000
     Automobiles                                 322,000            338,000
     Leasehold improvements                    1,650,000          1,798,000
                                              ----------         ----------
     Total                                    14,302,000         13,680,000
     Less: Accumulated depreciation and
           amortization                       (7,758,000)        (6,078,000)
                                              ----------         ----------
     Property, plant and equipment, net      $ 6,544,000         $7,602,000
                                              ==========         ==========



8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                       January 31,
                                                  2000              1999

     Accounts payable                        $ 7,573,000         $11,684,000
     Accrued restructuring costs (A)             776,000           1,544,000
     Accrued commissions payable                 236,000           1,091,000
     Accrued payroll costs                       276,000             316,000
     Accrued warranty and installation costs     580,000             922,000
     Customer deposits payable                   562,000             634,000
     Deferred revenue                          1,237,000               -
     Other accrued expenses                    1,565,000           1,147,000
                                             -----------         -----------
     Total accounts payable and accrued
          expenses                           $12,805,000         $17,338,000
                                             ===========         ===========


     (A) In  the  fourth  quarter  of  fiscal  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.  The Company
     anticipates that  substantially  all of the remaining  restructuring  costs
     will be 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.


                                      F18
<PAGE>



9.    BANK DEBT
<TABLE>
<CAPTION>

                                                             January 31,
                                                      2000                1999

<S>                                               <C>                  <C>
          Revolving credit facility (A)           $ 2,064,000          $14,500,000
          Long-term bank debt
          Mortgage (B)                              1,090,000            1,320,000
          Other                                       177,000               72,000
                                                  -----------          -----------
          Total                                     3,331,000           15,892,000
          Less: Current maturities                  2,342,000              252,000
                                                  -----------          -----------
          Long-term maturities                    $   989,000          $15,640,000
                                                  ===========          ===========
</TABLE>

(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.  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 levels of shareholders  equity,  as
     defined  therein.   Outstanding  working  capital  borrowings  against  the
     Agreement  aggregated  approximately  $2.1 million at January 31, 2000. The
     Agreement   was  also  used  to  support  trade   acceptances   payable  of
     approximately  $6.2 million as of that date.  The Company was in default of
     the financial  covenant at year-end and is currently  negotiating  with the
     Bank for an amendment to the Agreement.

(B)  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 Mortgage  currently  bears interest at a fixed rate of 11.3 percent and
     is payable in equal monthly principal installments of $19,125. The terms of
     the Mortgage,  among other things,  restrict  additional  borrowings by the
     Company,  and require the Company to maintain certain debt service coverage
     ratio levels, as defined in the Mortgage. The obligation under the Mortgage
     is secured by a lien on the premises and the related improvements  thereon.
     The Company was in default of the  financial  covenant at year-end  and has
     received a waiver from the bank for the fiscal  quarter  ending January 31,
     2000 and all four quarters of fiscal year 2001, and thereafter. The Company
     anticipates  that it will satisfy 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.

          Long-term  debt  (including  capitalized  lease  obligations)  of  the
          Company at January 31, 2000 matures as follows:

               Fiscal Year
                 Ending
               January 31,

                  2001             $2,342,000
                  2002                915,000
                  2003                 36,000
                  2004                 30,000
                  2005                  8,000
                                   ----------
                                   $3,331,000

                                      F19
<PAGE>

10. INCOME TAXES

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

                                                            January 31,
                                                 2000          1999          1998
<S>                                          <C>           <C>             <C>
     Current:
      Federal                                $(3,074,000)  $   456,000     $4,978,000
      State and foreign                         (770,000)      522,000      1,702,000
                                             -----------    ----------     ----------
     Total current                            (3,844,000)      978,000      6,680,000
                                             -----------    ----------     ----------
     Deferred:
      Federal                                  3,853,000     2,491,000       (527,000)
      State and foreign                          963,000      (335,000)       (94,000)
                                             -----------    ----------     ----------
     Total deferred                            4,816,000    (2,826,000)      (621,000)
                                             -----------    ----------     ----------
     Total income tax (benefit) provision    $   972,000   $(1,848,000)    $6,059,000
                                             ===========    ==========     ==========
</TABLE>



The tax effects of temporary  differences  that give rise to deferred income tax
assets at January 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>


                                                       January 31, 2000                 January 31, 1999
                                              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                     $  1,840,000        $    -         $  1,147,000        $    -
     Inventories                                1,625,000             -              790,000             -
     Accrued warranty costs                       232,000             -              264,000             -
     Other accrued expenses                       214,000             -              582,000             -
     Purchased technologies and goodwill            -               258,000            -               234,000
     Net operating loss                           754,000             -            1,400,000             -
     Net investments in sales-type leases
      (allowance for possible losses)               -               820,000            -               439,000
     Capitalized software development
      costs                                         -                 -                -               (40,000)
                                             ------------        ----------     ------------        ----------
                                                4,665,000         1,078,000        4,183,000           633,000
     Less valuation allowance                  (4,665,000)       (1,078,000)           -                 -
                                             ------------        ----------     ------------        ----------
     Net deferred tax asset                         -                 -         $  4,183,000        $  633,000
                                             ============        ==========     ============        ==========
</TABLE>


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


                                      F20
<PAGE>




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,
                                                    2000          1999          1998
<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           7.9
     Permanent differences                          2.1           (1.5)          0.5
     Valuation Allowance                           36.5             -             -
                                                  ------         -------        -----
     Effective income tax rate                      9.6%         (30.5)%        42.4%
                                                  ======         =======        =====
</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  options  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, 2000,
          1999 and 1998 for the 1993 Plan are summarized below:

                                      F21
<PAGE>
<TABLE>
<CAPTION>

                                                                   Exercise               Weighted Average
                                                  Shares          Price Range             Exercise Price

<S>                           <C> <C>             <C>            <C>     <C>              <C>
Options outstanding - January 31, 1997            308,000        $4.88 - $17.05           $    13.23

 Options granted                                  332,000       $17.00 - $24.20           $    17.10
 Options exercised                                (14,000)       $4.88 - $14.50           $    11.70
 Options canceled                                 (11,000)      $14.50 - $17.00           $    15.05
                                                  -------       ---------------           ----------
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 exerciseable at January 31, 2000          360,000       $14.50 - $24.20           $    17.99
                                                  =======       ===============           ==========
</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>            <C>
     $1.75 - $5.25            264,000        5.0            $  3.42             -              -
    $14.50 - $18.37           437,000        1.5            $ 13.67          354,000        $ 15.65
    $22.00 - $24.20            10,000        2.5            $ 23.10            6,000        $ 24.20
                              -------                                       --------
                              711,000                                        360,000

</TABLE>

          All options  granted  for the fiscal  year ended  January 31, 1995 are
          exercisable one year from the date of grant and expire 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.  Approximately  95,000  options have been
          canceled under this plan.

                                      F-22
<PAGE>
          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, 2000,
          1999 and 1998 for the Directors' Plan are summarized below:
<TABLE>
<CAPTION>
                                                                        Exercise     Weighted Average
                                                      Shares          Price Range      Exercise Price
<S>                                     <C> <C>        <C>            <C>     <C>         <C>
          Options outstanding - January 31, 1997       56,000         $5.36 - $15.50      $  7.83

           Options granted                              8,000         $    22.00          $ 22.00
           Options exercised                          (17,000)        $     5.36          $  5.36
                                                      -------         --------------      -------
          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
                                                      =======         ==============      =======
          Options exerciseable - January               29,000         $7.81 - $22.00      $ 13.19
                                                      =======         ==============      =======

                                      F-23
<PAGE>
</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>
       $ 2.25                 7,000          4.5            $ 2.25
       $ 7.81                 8,000          3.5            $ 7.81           3,000        $ 7.81
       $ 9.12                12,000          0.5            $ 9.12          12,000        $ 9.12
       $15.50                 9,000          2.5            $15.50           9,000        $15.50
       $22.00                 8,000          2.5            $22.00           5,000        $22.00
                             ------                                         ------
                             44,000                                         29,000
                             ======                                         ======

</TABLE>



     There are  approximately  182,000 shares  available for future grants under
     the Directors' Plan. 8,000 options have been cancelled under this 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>
          Options outstanding - January 31, 1997            427,000        $4.88 - $18.25      $ 15.54
           Options granted - ECI acquisition                 26,000        $    18.25          $ 18.25
                                                            -------        --------------      -------
          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 exerciseable at January 31, 2000          284,000        $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>          <C>
       $16.20                 331,000        1.5            $16.20           232,000      $16.20
       $18.25                  73,000        1.6            $18.25            52,000      $18.25
                              -------                                        -------
                              404,000                                        284,000
                              =======                                        =======
</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 are  exercisable  at a price of $5.90 per  share.
          These warrants expired in February 1999.

                                      F24
<PAGE>
     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 2000, 1999, and 1998: expected life,
          five years following vesting; stock volatility,  68.3 percent in 2000,
          128.5 percent in 1999 and 54 percent in 1998;  risk free interest rate
          of 6.0 percent in 2000,  5.0 percent in 1999,  and 5.5 percent in 1998
          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,
                                                     2000             1999              1998

          Net (loss) income:
<S>                                               <C>              <C>               <C>
           As reported                            $(13,822,000)    $(4,608,000)      $8,196,000
           Pro forma                              $(16,510,000)    $(5,757,000)      $7,597,000

          Basic (loss) earnings par share:
           As reported                            $ (1.48)         $ (0.49)          $  0.92
           Pro forma                              $ (1.77)         $ (0.61)          $  0.85

          Diluted (loss) earnings per share:
           As reported                            $ (1.48)         $ (0.49)          $  0.89
           Pro forma                              $ (1.77)         $ (0.61)          $  0.82
</TABLE>


     d.   Treasury  Stock -  Treasury  stock at January  31,  2000  consists  of
          326,300  shares  of  Class A common  stock  purchased  in open  market
          transactions for a total cost of approximately  $1,181,000 pursuant to
          a stock  repurchase  program  authorized  by the Board of Directors in
          fiscal year 1999.

     e.   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
          and 2000. The Company contributed  approximately $148,000 for the year
          ended January 31, 1998. The Company funds all amounts when due.

                                      F25

<PAGE>




12. 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  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 years.



(All figures in $000,000)                   Year Ended January 31,
                                               1999         1998
Revenue:
As Reported                                 $ 127.5      $ 152.5
Proforma                                    $ 135.6      $ 150.7

Cost of sales:
As Reported                                 $  85.1      $  96.1
Proforma                                    $  90.4      $  94.9

Gross Profit:
As Reported                                 $  42.5      $  56.4
Proforma                                    $  45.3      $  55.8

Income (loss) before Provision for Taxes:
As Reported                                 $ (6.1)      $  14.3
Proforma                                    $ (3.3)      $  13.7

Net (loss)Income:
As Reported                                 $ (4.6)      $   8.2
Proforma                                    $ (2.5)      $   7.8



                                      F26
<PAGE>

13.   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,

            2001            $  626,000
            2002               496,000
            2003               109,000
            2004                 2,000
                              --------
                            $1,233,000


          Rent expense was approximately  $1,240,000,  $1,360,000 and $1,292,000
          for the years ended January 31, 2000, 1999 and 1998, 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 usually  approximate 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,  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.

                                      F27
<PAGE>
     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 a six-month  period  ending  January  31,  2000.
          Effective  January  31,  2000,  the Chief  Executive  Officer  and the
          President  each  voluntarily  continued  their  salary at the  reduced
          annualized   rate  until  an  agreement  could  be  reached  with  the
          Compensation  Committee of the Board of Directors.  In addition,  each
          employment  agreement  provided  for an  annual  bonus  equal  to five
          percent of pre-tax profits of the Company. No bonus was paid to either
          executive  relating  to the  Company's  fiscal  1999  or  fiscal  2000
          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 as noted above. It is anticipated that
          in fiscal 2001 the  Compensation  Committee  of the Board of Directors
          will consider an employment agreement for each executive.  The Company
          is  currently in the fourth 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 fourth  year of a five year  employment
          agreement with the former  shareholder  of Sedeco,  now Regional Sales
          Director.  This  agreement  provides  for a current  annual  salary of
          $200,000.  The  Company is  currently  in the first year of a two-year
          memorandum of compensation  with the Vice President of the Hirsch Used
          Machine  Division.  It provides  for an annual base salary of $300,000
          and an annual bonus based on annual  pre-tax  profits of the division.
          The Company is currently in the fourth year of a five-year  employment
          agreement  with the National Vice  President of Sales.  This agreement
          provides for annual compensation of $200,000 plus commissions based on
          sales within a specific territory. On November 1, 1999 the Company and
          the executive amended the agreement in principle by agreeing to a base
          salary of $300,000  through the term of the agreement  coupled with an
          incentive  tied to Company  performance  for  achievement  of targeted
          sales  goals  and  margins.  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, 2000,  1999, and 1998, the Company made purchases of approximately
          $42,193,000,  $68,255,000,  and $90,300,000 respectively,  from Tajima
          Industries  Ltd.  ("Tajima"),   the  manufacturer  of  the  embroidery
          machines the Company sells. This amounted to approximately 94, 84, and
          80  percent  of the  Company's  total  purchases  for the years  ended
          January 31, 2000, 1999, and 1998, respectively.

          The Company has two 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.

                                      F28
<PAGE>
          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 as to the minimum  quantity
          of  embroidery  machines to be sold for calendar year  1999-2000.  The
          minimum   quantity  to  be  sold  in  calendar   year   2000-2001   is
          approximately 1,625 machines in various designations, as defined.





<PAGE>




14. 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,
                               2000                               1999                              1998
               ----------------------------------  -----------------------------------   -----------------------------
                  Loss        Shares    Per Share   Loss         Shares    Per Share     Income   Shares   Per Share
                                                (In Thousands, Except Per Share Amounts)
<S>             <C>           <C>       <C>        <C>            <C>       <C>           <C>        <C>       <C>
Basic EPS
 Income
 available to
 common
 stockholders  $(13,822)      9,349     $(1.48)    $(4,608)       9,413     $  (0.49)      $8,196    8,953     $0.92

Effect of
 dilutive
 securities:
 Options/
 warrant          -             -          -           -             23           -            -       283     (0.03)
              ----------------------------------  -----------------------------------   -----------------------------
Diluted EPS
 Income
 available to
 common
 stockholders
 plus assumed
 exercises     $(13,822)      9,349     $(1.48)    $(4,608)       9,436     $  (0.49)      $8,196    9,236     $0.89
             ===================================  ====================================  =============================
</TABLE>



                                      F29

<PAGE>



15. 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, 2000
---------------------------
<S>                                          <C>                 <C>            <C>            <C>
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
                                             ============        ============   ============   ============
Identifiable assets                          $ 56,993,000        $ 13,987,000   $ 13,181,000   $ 84,161,000
                                             ============        ============   ============   ============
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)
                                             ============        ============   ============   ============
Identifiable assets                          $ 71,862,000        $ 17,667,000   $ 17,406,000   $106,935,000
                                             ============        ============   ============   ============
Year Ended January 31, 1998
---------------------------
Sales to unaffiliated customers              $144,557,000        $ 7,920,000   $     -         $152,477,000
Transfers between segments                     22,386,000                -       (22,386,000)             -
                                             ------------        ------------   ------------   ------------
Total revenues                               $166,943,000        $  7,920,000   $(22,386,000)  $152,477,000
                                             ============        ============   ============   ============
Interest expense                             $    930,000        $      4,000   $     -        $    934,000
                                             ============        ============   ============   ============
Depreciation and amortization expense        $  1,736,000        $     24,000   $  1,454,000   $  3,214,000
                                             ============        ============   ============   ============
Income before income tax provision           $ 11,136,000        $  3,640,000   $   (477,000)  $ 14,299,000
                                             ------------        ------------   ------------   ------------
Income tax provision                         $  4,617,000        $  1,442,000   $     -        $  6,059,000
                                             ============        ============   ============   ============
Identifiable assets                          $ 79,049,000        $ 16,275,000   $ 19,508,000   $114,832,000
                                             ============        ============   ============   ============
</TABLE>
                                      F30
<PAGE>




16. FOURTH QUARTER ADJUSTMENTS

     In the fourth quarter of fiscal year 2000 the Company recorded material net
     adjustments that increased its net loss by approximately  $4.5 million for:
     Allowances  for  Possible  Losses;  write  off the  deferred  tax asset not
     definitively  recoverable;  overaccruals;  and  to  adjust  residual  lease
     carrying amounts.  In addition the accounting change referred to in Note 12
     was recorded in the fourth quarter.


                                      F-31