SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
                                   (Mark One)

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

                   For the fiscal year ended January 28, 2006

                                       OR

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

             For the transition period from __________ to _________

                         Commission file number 0-23434

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

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

      200 Wireless Boulevard, Hauppauge, NY                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

          Title of each class         Name of each exchange on which registered
   -------------------------------    -----------------------------------------
             (None)                                  (None)




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

                          Common Stock, $.01 Par value
                            ------------------------
                                    (CLASS A)


Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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.[  ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a non-accelerated  filers. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates* computed by reference to the closing price on July 29, 2005 (the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter), was approximately $7,919,000.

The number of shares  outstanding of each of the registrant's  classes of common
stock, as of April 5, 2006 were:


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

             Class A Common Stock                7,961,601
               Par Value $.01

             Class B Common Stock                  525,018
               Par Value $.01


*For purpose of this  report,  the number of shares held by  non-affiliates  was
determined by aggregating the number of shares held by Officers and Directors of
Registrant,  and  subtracting  those  shares  from the  total  number  of shares
outstanding.

<PAGE>

                           Hirsch International Corp.
                                    Form 10-K
                   For the Fiscal Year ended January 28, 2006
                                Table of Contents


Part I                                                                  Page

Item 1.   Business                                                       4-9
Item 1A.  Risk Factors                                                   9-11
Item 1B.  Unresolved Staff Comments                                      11
Item 2.   Properties                                                     11-12
Item 3.   Legal Proceedings                                              12
Item 4.   Submission of Matters to a Vote of Security Holders            12

Part II
Item 5.   Market for Registrant's Common Equity, Related Stockholder
          Matters and Issuer Purchases of Equity Securities              12-13
Item 6.   Selected Financial Data                                        14-15
Item 7.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                  15-22
Item 7A.  Quantitative and Qualitative Disclosures
          About Market Risk                                              22-23
Item 8.   Financial Statements and Supplementary Data                    23
Item 9.   Changes in and Disagreements on Accounting
          And Financial Disclosure                                       23
Item 9A.  Controls and Procedures                                        23
Item 9B.  Other Information                                              23

Part III
Item 10.  Directors and Executive Officers of the Registrant             24-26
Item 11.  Executive Compensation                                         27-34
Item 12.  Security Ownership of Certain Beneficial
          Owners and Management and Related Stockholder
          Matters                                                        34-35
Item 13.  Certain Relationships and Related Transactions                 35-36
Item 14.  Principal Accountant Fees and Services                         36-37

Part IV
Item 15.  Exhibits, Financial Statement Schedules                        37
          Exhibit Index                                                  37-39
          Signatures and Certifications                                  40

<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.   Through  its  distribution   agreements  with  Tajima
Industries,  Ltd. ("Tajima"), the Company markets itself under the brand "Tajima
USA Sales and Support by Hirsch  International Corp." and offers a complete line
of  technologically   advanced  single-  and  multi-head   embroidery  machines,
proprietary  application  software,  and a  diverse  line of  embroidery  parts,
supplies,  accessories and embroidery products.  In addition,  Hirsch provides a
comprehensive  service  program,  and user  training  and  support.  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  Company's  customer  base  includes  large  operators who run numerous
machines (which accounts for a smaller percentage of the Company's business than
in  years  past)  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 and certain  non-exclusive rights to distribute
to US based customers who expand their  operating  facilities into the Caribbean
region.  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  enjoys a good  relationship  with  Tajima,  having  spanned 30
years.  Hirsch  is  one of  Tajima's  largest  distributors  in  the  world  and
collaborates  with Tajima in the  development  of new  embroidery  equipment and
enhancements to existing equipment.  Until early 1997, all Tajima equipment sold
in the US was  assembled in Japan.  At that time,  in  cooperation  with Tajima,
Hirsch formed a new subsidiary,  Tajima USA, Inc ("TUI"), to assemble two, four,
six and  eight-head  Tajima  machines in the United  States.  In December  1997,
Hirsch sold a  forty-five  (45%)  percent  interest  in TUI to Tokai  Industrial
Sewing Machine Company, Ltd. ("Tokai"),  Tajima's parent company's manufacturing
arm. As of January 31, 2004,  the Company sold its remaining  interest in TUI to
Tajima Industries,  Ltd. The sale has been reflected in the financial statements
as a  discontinued  operation  for all  periods  presented.  (See  Note 7 to the
Consolidated Financial Statements).

     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  is now a
distributor  in the United States of software  developed by its former  software
subsidiary,  Pulse  Microsystems  Ltd.  ("Pulse").  Pulse  develops and supplies
proprietary  application  software  programs  which  enhances and simplifies the
embroidery  process,  as  well as  enables  the  customization  of  designs  and
reduction of production costs.

     Until the fourth quarter of fiscal 2002 the Company's  leasing  subsidiary,
HAPL Leasing Co., Inc. ("HAPL Leasing"),  had provided a wide range of financing
options to customers wishing to finance their purchases of embroidery equipment.
In the fourth  quarter of fiscal  2002,  the  Company  determined  that its HAPL
Leasing subsidiary was not strategic to its business objectives and discontinued
its  operations  (See  Note 7 to the  Consolidated  Financial  Statements).  The
Company has  continued to assist its  customers in obtaining  financing  through
independent leasing and financing  companies,  as an attractive  alternative for
purchasers looking to begin or expand operations.  Accordingly,  the Company has
reported it HAPL Leasing as  discontinued  operations in accordance with APB 30.
The consolidated  financial  statements have been  reclassified to segregate the
assets and liabilities and operating  results of these  discontinued  operations
for all periods  presented.  In the fourth  quarter of fiscal 2006,  the Company
completed the wind down of the remaining assets of HAPL Leasing's portfolio.

     Hirsch  also sells a broad range of  embroidery  supplies,  machine  parts,
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,  an e-commerce  presence and trade shows. The Company's long-term goal
is to leverage its reputation, knowledge of the marketplace, Tajima distribution
rights, industry expertise and technological innovation to enable it to increase
the overall size of the embroidery equipment market and its market share.

The Embroidery Industry

     The embroidery industry today uses electronic computer-controlled machinery
that,  on a world-wide  basis,  benefits  from the demand for licensed  products
distributed  by  apparel  and other  manufacturers.  Licensed  names,  logos and
designs  provided by, among other sources,  professional  and collegiate  sports
teams and the entertainment industry appear on caps, shirts, outerwear,  luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being  embroidered have attracted  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.

     During  fiscal  2005,  Tajima  introduced   MicroSmart(TM)  technology  and
launched  the  all-new  M  series  family  of   computer-controlled   embroidery
equipment. MicroSmart(TM) - a Tajima exclusive - is a groundbreaking proprietary
technology that acts as the "brains" of the machine.  MicroSmart(TM)  Technology
optimizes microchip integration into the design and operation of the machine and
simultaneously  executes  each task command in the stitch  production  process -
thereby   producing  the  world's  smartest  and  easiest  machine  to  operate.
MicroSmart(TM)  Technology  integrates certain  mechanical  innovations into the
production process creating the most powerful  capabilities  available anywhere.
Frame drive is MicroSmart(TM)  controlled  yielding a more precise stitch length
and higher quality embroidery.

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. To achieve this
goal,  the Company has  developed a  comprehensive  approach  under which it (i)
sells a broad range of Tajima  embroidery  machines,  (ii)  distributes  Pulse's
proprietary application software programs for embroidery machines, (iii) sells a
broad range of embroidery  supplies,  accessories and products,  (iv) sells used
embroidery machinery, and (v) 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.   To  complement  its
comprehensive  approach  effectively  and  efficiently,  the Company's  business
strategy includes the following:


     Embroidery  Machines.  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  and  possess an  excellent  reputation  in the market.  The Company
markets and distributes over 80 models of Tajima 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.  Embroidery  equipment may contain single or multiple  sewing heads.  The
selling prices of these machines range from approximately  $10,000 (for a single
head machine) to $150,000 (for a 30 head machine).  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.

     Former Assembly Operations. The Company's former TUI subsidiary maintains a
facility located in Rancho Dominguez, California. Assembly of Tajima machines of
up to eight heads are  completed at this  location,  using both Tajima  supplied
sub-assembly kits and locally supplied  components.  Shorter lead times required
for the Company's orders coupled with Tajima's  production  flexibility  enables
the Company to be responsive to changing needs of the market.

     Pulse Software.  Pulse, a former  subsidiary of the Company,  offers a wide
range of proprietary  application  software products to enhance and simplify the
embroidery process.  Pulse's  computer-aided design software packages target the
different  functions  performed  by  embroiderers,   and  are  contained  in  an
integrated product line. A majority of Pulse's proprietary  application software
products  are  designed  to  operate  in  the  Microsoft(R),  Windows(R)  98 and
Windows(R) XP environments  that the Company  believes will enhance  creativity,
ease of use  and  user  flexibility.  All  Tajima  machines,  as  well as  other
manufacturers'  embroidery machines, can be networked through Pulse software. It
is the Company's  established practice to aggressively market this software with
embroidery  equipment  and as an upgrade to its  installed  base of over  21,000
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.

     Embroidery Supplies, Accessories, Machine Parts and 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.  Moreover,  the  expansion of the Company's
marketing efforts is directed toward trade publications,  advertising as well as
both  industry and trade show  participation.  During  fiscal 2005,  the Company
launched  an on-line  embroidery  store  allowing  customers  to order parts and
supplies  24 hours a day,  7 days a week.  The  Company  offers  a full  line of
consumable supplies,  parts and materials utilized in the embroidery process and
continues to market special purpose  embroidery  replacement  parts and products
which act to simplify the embroidery process.

     Used Embroidery  Machinery.  The Company, on a case by case basis,  accepts
used  embroidery  machines from  customers on a trade-in basis as a condition to
the sale of a new machine.  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 used
embroidery machines represents an established share of the machine market.

     Customer Support.  The Company provides  comprehensive  customer  training,
support and service for the embroidery  machines and software that it sells. The
Company's service department includes field service  technicians  throughout the
US who are directed by two centrally  located  regional  technicians.  After the
Company  delivers an embroidery  machine to a customer,  the  Company's  trained
personnel  may assist in the  installation,  setup and operation of the machine.
The  Company   employs  or  contracts   with  a  staff  of   technical   service
representatives who provide assistance to its customers by telephone. While many
customer problems or inquiries can be handled by telephone,  where necessary the
Company dispatches one of its field service technicians to the customer.

     Pulse  provides  telephone-based  software  support for the Pulse  software
distributed by the Company. In addition,  the Company provides  introductory and
advanced  training  programs  to  assist  customers  in the use,  operation  and
maintenance of the embroidery machines and software it sells.

Discontinued Operations

     In the fourth quarter of fiscal 2002, the Company  determined that its HAPL
Leasing  subsidiary was not strategic to its ongoing objectives and discontinued
HAPL's Leasing's operations.  Accordingly, the Company has reported HAPL Leasing
as  discontinued   operations.   The  consolidated   financial  statements  have
segregated the assets,  liabilities and operating results of these  discontinued
operations for all periods presented.  In the fourth quarter of fiscal 2006, the
Company  completed  the wind  down of the  remaining  net  assets  of the  lease
portfolio.  In conjunction  with the  termination of the portfolio,  the Company
reversed as part of  discontinued  operations,  $270,000 of reserves  previously
recorded in fiscal 2002.

     Effective  October 31, 2002,  the Company  completed the sale of all of the
outstanding  equity interests in its Pulse subsidiary,  pursuant to the terms of
the purchase  agreement by and between Hirsch and 2017146 Ontario  Limited.  All
periods  presented have been restated to reflect the  discontinue  operations of
Pulse.

     During the quarter ended April 30, 2004,  the Company  determined  that its
Hometown Threads,  LLC ("Hometown  Threads") subsidiary was not strategic to the
Company's  long-term   objectives.   On  October  22,  2004,  the  Company  sold
substantially all of the assets of its Hometown Threads subsidiary to Embroidery
Acquisition  LLC, a wholly owned subsidiary of PCA, LLC pursuant to the terms of
a certain  Asset  Purchase  Agreement.  Hometown  Threads was  accounted  for as
discontinued operations in the consolidated financial statements for all periods
presented  (See Note 7 to the  Consolidated  Financial  Statements).  During the
fourth  quarter  of  fiscal  2006,  the  Company  resolved  the  remaining  open
contingencies  related  to the  sale and  recognized  income  from  discontinued
operations of approximately $177,000.

     Effective  January 31, 2004 , the Company executed an Agreement with Tajima
pursuant  to which the  Company  sold all of the  common  stock  (the  "Shares")
constituting a 55% equity interest of its TUI subsidiary  owned by it to Tajima.
The Company's  Consolidated  Financial  Statements have been restated to reflect
the  discontinued  operations of TUI (See Note 7 to the  Consolidated  Financial
Statements).

Marketing and Customer Support

     The Company has been selling embroidery  equipment since 1976 and is one of
the  leading  distributors  of Tajima  equipment  in the world and,  through its
distribution agreements with Tajima, markets its products under the name "Tajima
USA Sales and  Support by Hirsch  International  Corp." The  Company  reinforces
recognition of its name through trade magazine  advertising and participation in
seminars and over 20 trade shows  annually.  The  Company's  sales and marketing
staff is headed by Kris Janowski,  Executive  Vice-President Sales and Marketing
for the Company,  and currently  consists of salespeople  who maintain  frequent
contact with customers in order to understand and satisfy each customer's needs.
The Company's  products are  generally  considered by the industry to consist of
the highest quality embroidery equipment available, and consequently the Company
does  not  attempt  to  compete  exclusively  on a  price  basis  but  rather  a
value-added  basis,  through  its  reputation,  knowledge  of  the  marketplace,
investment in  infrastructure  and  experience in the industry.  In a climate of
intense price competition with lower cost  manufacturers,  the Company attempts,
to the best degree  possible,  to maintain a balance  between  market  share and
profit margin.

     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 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 its customers with manuals
as  training  tools.   Company  personnel  also  provide  technical  support  by
telephone,  field maintenance  services and quality control testing,  as well as
advice  with  respect  to matters  generally  affecting  embroidery  operations.
Telephone software support is provided by Pulse.

     The  Company  maintains  a  training  center  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.

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

Supplier Relationships with Tajima

     On August 30, 2004, the Company entered into new consolidated  distribution
agreements (the "Consolidated Agreements" with Tajima Industries Ltd. ("Tajima")
granting  the  Company  certain  rights  to  distribute  the full line of Tajima
commercial embroidery machines and products.

     The  Consolidated  Agreements grant the Company  distribution  rights on an
exclusive basis in 39 states for the period  February 21, 2004 through  February
21, 2011 (the "Main  Agreement").  In  addition,  the  Company was also  granted
certain  non-exclusive  distribution  rights in the remaining 11 western  states
(the "West  Coast  Distribution  Agreement")  for the period  February  21, 2004
through February 21, 2005. The Company is currently  negotiating an extension of
the West Coast Agreement. The Consolidated Agreements supercede all of the other
distribution agreements between the Company and Tajima.

     Each agreement may be terminated upon the failure by the Company to achieve
certain minimum sales quotas. For fiscal 2006 the minimum sales quotas were met.
During  fiscal 2005,  the Company  failed to meet these  minimum  sales  quotas;
however, Tajima waived the Company's failure for fiscal 2005.  Furthermore,  the
agreements may be terminated if (a) Henry Arnberg is no longer  Chairman  and/or
CEO of the Company or (b) if Tajima  determines  that a change in control of the
Company has occurred.

     Although  there  can be no  assurance  that  the  Company  will  be able to
maintain its relationship with Tajima,  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 30 years and is one of
Tajima's largest distributors; (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; and (iii) the Company supports
Tajima's development activities.

Other Supplier Relationships

     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.  There are no major
customers who exceed 10% of revenues.

Competition

     The  Company  competes  with  original  equipment  manufacturers,  such  as
Barudan,  Brother  International,  Happy,  Melco Industries and SWF, all of whom
distribute products directly into the Company's markets. The Company believes it
competes against these  competitors on the basis of its knowledge and experience
in the marketplace,  name  recognition,  customer service and the quality of the
embroidery equipment it distributes. Due to the recent decline in overall demand
for the  embroidery  industry,  potential  customers  may  emphasize  price over
technology when selecting a machine. Although the Company attempts to compete on
the  basis of price to the best  degree  possible  and to  maintain  its  profit
margins,  there can be no assurance  that the Company will be able to do so, the
failure of which would have a material adverse effect on the Company.

     Further,  the Company's customers are subject to competition from importers
of  embroidered  products,  which  could  materially  and  adversely  affect the
Company's  customers,  and consequently  could 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.  The failure of Tajima to produce
technologically  superior  products at a competitive price could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

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

Employees

     As of January 28, 2006, the Company  employed  approximately 98 persons who
are  engaged in sales,  service,  customer  care,  finance,  administration  and
management for the Company.  None of the Company's  employees are represented by
unions. The Company believes its relationship with its employees is good.

Item 1A. RISK FACTORS

Dependence on Tajima

     For the fiscal year ended  January  28,  2006,  approximately  75.5% of the
Company's  revenues resulted from the sale of embroidery  equipment  supplied by
Tajima.  Two  separate  distributorship  agreements  (collectively,  the "Tajima
Agreements")  govern  the  Company's  rights  to  distribute  Tajima  embroidery
equipment in the United States and the Caribbean. 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 50 states.  The Main  Agreement,
which now covers 39 states, is effective from February 21, 2004 through February
21, 2011.  The Main  Agreement may be terminated by Tajima and/or the Company on
not less than two  years'  prior  notice.  Under the  non-exclusive  West  Coast
Agreement which covers nine western continental  states,  Alaska and Hawaii, the
Company is a  distributor  of Tajima's  complete  line of  standard  embroidery,
chenille embroidery and certain specialty  embroidery.  The West Coast Agreement
expired  February  20,  2005.  The Company is in the process of  negotiating  an
extension of the West Coast Agreement,  however,  there can be no assurance that
an agreement can be reached on terms  acceptable to the Company.  The failure of
the  Company  to  obtain  an  extension  of the West  Coast  Agreement  on terms
acceptable  to the  Company  could  result in a loss of the  Company's  right to
distribute  embroidery  machines  in the  territories  covered by the West Coast
Agreement which would have a material adverse effect on the Company's  business,
operations and financial  condition.  Each of the agreements  contains  language
that permits  termination if the Company fails to achieve  certain minimum sales
quotas or annual  targets.  In fiscal 2006, the Company met its sales quotas and
in fiscal  2005,  the Company  obtained a waiver from Tajima for failure to meet
its sales quotas. Furthermore, the agreements may be terminated for, among other
reasons, if (a) Henry Arnberg is no longer Chairman and/or CEO of the Company or
(b) if Tajima  determines  that a change in control of the Company has occurred.
The termination of the Tajima agreements would have a material adverse effect on
the Company's business, financial condition and results of operations.

     Importing  Tajima's  equipment  from Japan subjects the Company to risks of
engaging in business overseas,  including  international  political and economic
conditions,  changes in the exchange rates between currencies,  tariffs, foreign
regulation of trade with the United States, and work stoppages. The interruption
of supply or a  significant  increase  in the cost of Tajima  equipment  for any
reason could have a material adverse effect on the Company's business, financial
condition  and  results of  operation.  In  addition,  Tajima  manufactures  its
embroidery  machines  in  several  locations  in  Japan.  The  Company  could be
materially and adversely  affected  should any of these  facilities 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 competition from the
introduction by other manufacturers of technological  advances and new products.
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 of the highest  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,  including  price  competition.
There  can  be no  assurance  that  Tajima  will  be  able  to  keep  pace  with
technological  change in the  embroidery  industry,  the current  demands of the
marketplace or compete  favorably on price. The failure of Tajima to do so could
have a material adverse effect on the Company's business,  financial  conditions
and results of operations.

Decline in Domestic Embroidery Industry

     Beginning in fiscal 1999 and  continuing  to present  day,  the  embroidery
industry  experienced;  (i) a decline in demand for large  embroidery  machines,
and; (ii) a trend toward the relocation of  manufacturing  facilities to Mexico,
the  Caribbean,  Far East and South America  (which is outside of the geographic
area the Company is authorized to distribute embroidery machines pursuant to the
distribution  agreements with Tajima),  all of which have had a material adverse
effect on the operations of the Company, its business and financial condition. A
decrease in consumer  preferences for embroidered  products,  a general economic
downturn or other events having an adverse effect on the embroidery  industry as
a whole would also have an adverse effect on the Company.

Foreign Currency Risks

     The Company pays for its Tajima  embroidery  machinery in Japanese Yen. Any
change in the  valuation  of the U.S.  Dollar  compared to the  Japanese Yen can
change  the cost to the  Company of its  embroidery  machine  inventory  and can
result in competitive  pressures for reduced US dollar  pricing among  Yen-based
equipment distributors and manufacturers. The Company has generally been able to
recover  increased costs through price increases to its customers or, in limited
circumstances, price reductions from Tajima; however, dollar price reductions do
reduce  dollar  contribution  margins and as a result create  overhead  coverage
pressure.  There can be no  assurance  that the Company  will be able to recover
such increased costs in the future or reduce  overheads to the necessary  degree
to obtain  profitability.  The failure on the part of the Company to do so could
have a  material  adverse  effect  on the  business,  operations  and  financial
condition.  These  transactions  are not currently hedged through any derivative
currency product. Currency gains and losses in foreign exchange transactions are
recorded in the statement of operations.

Inventory

     The Company's  ordering cycle for new embroidery  machines is approximately
three to eight  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 the relatively long lead times of the ordering cycle,
any significant unanticipated downturn or upturn in equipment sales could result
in an increase in inventory levels or shortage of product,  respectively,  which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

Competition

     The Company competes with  distributors of embroidery  machines produced by
manufacturers  other than Tajima and with  manufacturers  who  distribute  their
embroidery  machines  directly  as well as with other  providers  of  embroidery
products and services.  The Company  believes that competition in the embroidery
industry  is  based  on  technological  capability  and  quality  of  embroidery
machines,  price and service. If other manufacturers develop embroidery machines
which are more  technologically  advanced  than  Tajima's  or if 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  customer  training,  support  and
services.  Due to the decline in overall  demand in the industry  which occurred
during  the  last  several  years,   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 ability to provide
its  customers  with  value-added  services  and  support.  Although the Company
attempts to compete on the basis of price, to the best degree  possible,  and to
maintain profit margins, there can be no assurance that the Company will be able
to do so. 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.

Dependence on Existing Management

     Changes  in  the  embroidery  industry  and  recent  restructuring  of  the
Company's  business have resulted in increased  responsibilities  for management
and have placed increased  demands upon the Company's  operating,  financial and
technical   resources.   The  Company's  continued  success  will  depend  to  a
significant  extent upon the abilities and continued  efforts of Henry  Arnberg,
Chairman of the Board of the Company,  and Paul  Gallagher,  its Chief Executive
Officer.  Mr.  Gallagher  is  bound  by a 2 year  agreement  that  commenced  on
September  11, 2004.  It should also be noted that the  Distribution  Agreements
with Tajima  provide that Tajima may terminate  each  agreement for, among other
reasons, if (a) Henry Arnberg is no longer Chairman and/or CEO of the Company or
(b) if Tajima  determines  that a change in control of the Company has occurred.
The loss of the  services of Messrs.  Arnberg or  Gallagher,  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 1B. UNRESOLVED STAFF COMMENTS

     Not applicable.

ITEM 2. PROPERTIES

     The Company's corporate headquarters is in Hauppauge,  New York in a 50,000
square  foot  facility.  During  fiscal  2002,  this  facility  was sold to M3GH
Properties,  LLC.  and  approximately  24,500  square  feet was leased back in a
concurrent   transaction   (See  Note  10(B)  to  the   Consolidated   Financial
Statements).  During fiscal year 2003 the Company  leased back the 25,500 square
feet of the  building  that had  remained  empty  since  March  2001 in order to
consolidate  certain  operations  in  Hauppauge,  NY. This  property  houses the
Company's  executive offices,  the Northeast sales office,  technical  services,
machine and parts warehousing,  and order fulfillment. On February 23, 2006, the
Company  surrendered  this  lease  and  concurrently  signed  a  new  lease  for
approximately  15,000 square feet in a facility  also located in Hauppauge,  New
York which will become the Company's new headquarters facility.  (See Note 16 to
the Consolidated Financial Statements). In conjunction with the lease surrender,
the Company  terminated  the $0.5  million  standby  letter of credit  (shown as
restricted  cash at  year-end)  which was  backing  the  lease of the  Company's
Hauppauge facility.

     In addition to the Company's  headquarters,  the Company leases 22 regional
satellite offices under  non-cancelable  operating leases. These offices consist
of regional sales offices and training  centers.  All leased space is considered
adequate for the operation of our business,  and no difficulties are foreseen in
meeting any future space requirements.

ITEM 3. LEGAL PROCEEDINGS

     There are no material legal proceedings pending against the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The  Company's  2006 Annual  Meeting of  Stockholders  was held January 25,
2006. At the meeting, the Company's  stockholders voted upon (1) the election of
directors;  (2) the approval of an amendment to the Company's  2003 Stock Option
Plan;  and  the  approval  of BDO  Seidman,  LLP as  the  Company's  independent
registered  public  accounting  firm for the year ended  January 28,  2006.  The
following is a tabulation of the votes:

<TABLE>
<CAPTION>

(1) Election of Directors
<S>                          <C>                  <C>                <C>          <C>

                                                    For              Against
                                                    ---              -------
Marvin Broitman (Class A)                        6,780,993           52,666
Mary Ann Domuracki (Class A)                     6,780,993           53,166
Henry Arnberg (Class B)                            400,018              -0-
Paul Gallagher (Class B)                           400,018              -0-
Christopher J. Davino (Class B)                    400,018              -0-

(2) Approval of amendment to 2003
    Stock Option Plan

                            For                   Against       Abstain          Broker non-votes
                            ---                   -------       -------          ----------------
                          979,708                 186,180       24,986               6,041,803

(3) Approval of BDO Seidman, LLP as the
    Company's Independent Registered
    Public Accounting Firm

                            For                   Against     Abstain
                            ---                   -------     -------
                         7,208,239                17,206      8,232
</TABLE>


                                    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  Small Cap  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 by the
     NASDAQ Stock Market.  Trading began in the Class A Common Stock on February
     17, 1994. Class B stock is not publicly traded.

Fiscal 2006                                                 High         Low
-----------                                                 ----         ---

Fourth Quarter ended January 28, 2006................       $1.54        $1.06
Third Quarter ended October 29, 2005.................       $1.93        $1.00
Second Quarter ended July 30, 2005...................       $1.61        $0.98
First Quarter ended April 30, 2005...................       $1.48        $0.85

Fiscal 2005                                                 High         Low
-----------                                                 ----         ---

Fourth Quarter ended January 29, 2005................       $1.63        $0.96
Third Quarter ended October 30, 2004.................       $1.13        $0.81
Second Quarter ended July 31, 2004...................       $1.75        $0.81
First Quarter ended April 30, 2004...................       $2.48        $1.35

     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 07, 2006,  the Company  believes that there were  approximately
     116 record holders of its Class A Common Stock.

(c)  During the first  quarter of fiscal 2005,  the Company  declared and paid a
     quarterly  dividend  of $.01 per share on its Common  Stock.  There were no
     dividends  declared for the remaining  quarters of fiscal 2005. 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. No dividends were declared for Fiscal 2006.

(d)  Equity Compensation Plan Information

<TABLE>
<CAPTION>

                                         (a) Number of               (b) Weighted-             (c) Number of securities
                                         securities to be            average exercise          remaining available for
                                         issued upon exercise        price of                  future issuance under equity
                                         of outstanding              outstanding               compensatin plans
                                         options, warrants           options, warrants         [excluding securities
Plan Category                            and righhts                 and rights                reflected in column (a)]
-----------------------------------      ----------------------      -------------------       ------------------------------
<S>                                          <C>                           <C>                           <C>
Equity compensation plans approved           1,346,000                     $0.68                         1,424,000
by security holders
Equity compensation plans not                  100,000                     $0.50                             0
approved by security holders
                                         ----------------------      --------------------      ------------------------------
TOTAL                                        1,446,000                     $0.67                         1,424,000
                                         ----------------------      -------------------       ------------------------------
</TABLE>


One independent  Board member and one past Board member were granted warrants to
purchase 50,000 shares each of Class A Common Stock at $0.50 per share for their
past and ongoing services to the Company.  The Board of Directors approved these
grants  on  January  25,  2002.  These  individuals  were also  granted  certain
registration  rights for the shares of Class A Common  Stock  issuable  upon the
exercise  of  the  warrants  pursuant  to the  terms  of a  registration  rights
agreement between the Company and such non-affiliated Board members.

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 28, 2006 and January 29, 2005 and for the fiscal years ended January 28,
2006,  January 29, 2005 and January 31, 2004 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, 2004,  2003 and 2002 and for the fiscal  years ended  January 31,
2003 and 2002 are derived from audited  Consolidated  Financial  Statements  not
included herein.

<TABLE>
<CAPTION>
                                                                           Year Ended January
                                                             (in thousands of dollars, except per share amounts)
                                                  28,              29,               31,            31,                31,
---------------------------------------------  -----------    -------------     -----------    -------------      -------------
Hirsch International Corp. and Subsidiaries      2006             2005             2004            2003               2002
---------------------------------------------  -----------    -------------     -----------    -------------      -------------

Statement of Operations Data:

<S>                                              <C>              <C>             <C>               <C>                <C>
Net sales...................................     $51,139          $44,394         $47,116           $42,723            $50,156

Cost of sales (6)...........................      34,033           30,660          32,003            29,435             36,495

Operating expenses (1)(2)...................      16,484           15,874          17,488            16,793             24,925

Income (loss)  from continuing operations            122          (2,139)         (2,025)           (3,451)           (16,990)
   before income tax provision (benefit) (5)

Income tax provision (benefit)..............          32                9              25             (504)            (5,881)

Income (loss) from continuing operations              90          (2,148)         (2,050)           (2,947)           (11,109)

Income (loss) from discontinued operations           447              376           2,494           (2,603)            (7,216)
  (3)(4)  ..................................

Net Income (loss) (1).......................        $537         $(1,772)           $ 444          $(5,550)          $(18,325)

Net income (loss) per share from continuing
   operations...............................
Basic.......................................       $0.01          $(0.26)        $ (0.24)           $(0.34)           $ (1.25)
Diluted.....................................       $0.01          $(0.26)        $ (0.24)           $(0.34)           $ (1.25)

Net income (loss) per share.................
Basic.......................................       $0.06          $(0.21)          $ 0.05           $(0.64)           $ (0.81)
Diluted.....................................       $0.06          $(0.21)          $ 0.05           $(0.64)           $ (0.81)

Shares used in the calculation of net income
  (loss) per share:
Basic......                                        8,481            8,351           8,571             8,789              8,894
Diluted.....................................       9,617            8,351           8,571             8,789              8,894
</TABLE>

(1)  In fiscal year 2004, the Company  completed its plan of  restructuring  and
     reversed,  as a reduction of operating expenses,  $716,000 of restructuring
     costs that had been previously provided for facilities and severance costs.

(2)  Fiscal  year 2002  operating  expenses  included a  write-down  of impaired
     goodwill of $3.5 million and restructuring costs of $2.7 million.

(3)  Fiscal years 2005,  2004,  2003, and 2002 have been restated to reflect the
     discontinued operations of HTT, TUI, HAPL and Pulse.

(4)  In fiscal  year  2004,  the  Company  reversed  $2.0  million  of  reserves
     associated with the UNL lease portfolio which was sold to Beacon Funding in
     September 2003.

(5)  In fiscal 2006, the Company expensed  approximately $605,000 of transaction
     costs   associated   with  the  terminated   merger  with  Sheridan  Square
     Entertainment, LLC (See Note 16 to the Consolidated Financial Statements).

(6)  Fiscal years 2005,  2004,  2003 and 2002 have been  restated to include the
     gain/(loss) in foreign currency in cost of sales from other income.

<TABLE>
<CAPTION>

Hirsch International Corp. and Subsidiaries                                   (in thousands of dollars)
--------------------------------------------------
                                                      January 28,      January 29,                   January 31,
                                                         2006             2005           2004          2003          2002
                                                      ------------     ------------    ----------    ----------   -----------
Balance Sheet Data:
<S>                                                       <C>              <C>           <C>           <C>           <C>
    Working capital...........................            $12,118          $13,388       $14,698       $14,616       $16,161

Total assets..................................             26,354           26,626        30,346        30,796        33,430

Long-term debt, less current maturities.......                  0            1,270         1,418         1,559         1,642

Stockholders' equity..........................            $14,618          $14,055       $15,848       $16,065       $21,459

</TABLE>

Hirsch International Corp
Summarized Quarterly Data**
<TABLE>
<CAPTION>

$ in thousands, except for per share amounts                                           Fiscal Quarter
                                                                 ------------------------------------------------------------

2006                                                                First          Second           Third          Fourth
                                                                 ------------    ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>             <C>
Net Sales.......................................                     $13,723         $12,587         $12,854         $11,975
Gross profit....................................                       4,232           4,366           4,194           4,314
Income (loss) from discontinued operations                                 0               0               0             447
Net income (loss)...............................                         102             491             235           (291)
                                                                 ------------    ------------    ------------    ------------

Basic income (loss) per share...................                       $0.01           $0.06           $0.03         ($0.04)
                                                                 ============    ============    ============    ============
Diluted income (loss) per share.................                       $0.01           $0.05           $0.02         ($0.02)
                                                                 ============    ============    ============    ============

2005                                                                First          Second           Third          Fourth
                                                                 ------------    ------------    ------------    ------------
Net Sales.......................................                      $9,540         $10,796         $12,090         $11,968
Gross profit....................................                       3,073           3,606           3,732           3,323
Gain on sale of Hometown Threads...........                                0               0             943               0
Income (loss) from discontinued operations                              (83)           (110)           (374)               0
Net income (loss)...............................                     (1,107)           (650)             508           (523)
                                                                 ------------    ------------    ------------    ------------

Basic and diluted income (loss) per share.......                     ($0.13)         ($0.08)           $0.06         ($0.06)
                                                                 ============    ============    ============    ============
</TABLE>


**Note: The quarterly data has been restated to reflect the  reclassification of
        currency gains/(losses) into cost of sales from other income.


ITEM 7. 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 are  qualified  in their
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  in  January  of the
applicable calendar year.

Company Overview

     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 through Pulse and broad product  offerings  combine to place the Company
in a competitive  position within its marketplace.  The Company sells embroidery
machines manufactured by Tajima and TUI, as well as a wide variety of embroidery
supplies.

     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 eight  heads per  machine.  In  January  1998 Tokai
Industries (Tajima's  manufacturing arm) purchased a 45 percent interest in TUI.
In July 1999 Tajima granted to Hirsch the  non-exclusive  right to distribute to
its existing US customers who have expanded their  operations into the Caribbean
region. As of January 31, 2004, the Company sold its majority interest in TUI to
Tajima.

     The  Company  grew  rapidly  from the time of its initial  public  offering
through fiscal 1998. Growth during this period was fueled by rapid technological
advances in software and hardware,  the strong demand for embroidered  products,
the creation of new embroidery  applications and the 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 additional  embroidery  machines as the  entrepreneurs'
operations expand.

     The market is and has been  affected  by the  fluctuating  value in foreign
exchange of the US dollar versus the Yen resulting in dollar price  pressure for
machine  sales.  Most  Japanese  based  equipment  competitors  in the  industry
(including the Company) faced difficulty in meeting these new market demands. In
fiscal 2002 the Company initiated a restructuring  program to address the market
shifts in the industry,  including closing and consolidating  certain divisions,
reducing total  employment,  and  consolidating  facilities  that were no longer
required  to  support  its new  business  model.  In fiscal  2004,  the  Company
completed its plan of  restructuring  and reversed,  as a reduction of operating
expenses,  $716,000 of  restructuring  costs that had been accrued for the lease
termination in Solon, Ohio and the remaining severance costs associated with the
restructuring.

Results of Operations

     The following table presents  certain income statement items expressed as a
percentage of total revenue for the fiscal years ended January 28, 2006, January
29, 2005 and January 31, 2004.
<TABLE>
<CAPTION>

                                                                           2006            2005             2004
                                                                      ------------    ------------    -------------

<S>                                                                          <C>             <C>              <C>
Net sales...................................................                 100%            100%             100%

Cost of sales...............................................                66.6%           69.1%            67.9%

Operating expenses..........................................                32.2%           35.8%            37.1%

Interest expense............................................                 0.3%            0.4%             0.5%

Other expense (income), net.................................                 0.7%           -0.4%            -1.2%
                                                                      ------------    ------------    -------------

Income (loss) from continuing operations before
  income taxes                                                               0.2%           -4.9%            -4.3%

Income tax provision........................................                 0.1%            0.0%             0.1%

  Income from discontinued operations, net of tax...........                 0.9%            0.9%            -5.3%
                                                                      ------------    ------------    -------------

  Net Income (loss).........................................                 1.0%           -4.0%             0.9%
                                                                      ============    ============    =============
</TABLE>


Note: The   results  of   operations   have  been   restated   to  reflect   the
     reclassification  of currency  gains/(losses) into cost of sales from other
     income.


Use of Estimates and Critical Accounting Policies

     The  preparation  of  Hirsch's  financial  statements  in  conformity  with
accounting   principles   generally  accepted  in  the  United  States  requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial  statements and revenues and
expenses during the period. Future events and their effects cannot be determined
with absolute certainty;  therefore, the determination of estimates requires the
exercise  of  judgment.   Actual  results  inevitably  will  differ  from  those
estimates,  and such  differences  may be material to our financial  statements.
Management continually evaluates its estimates and assumptions,  which are based
on  historical  experience  and other factors that are believed to be reasonable
under the circumstances.

Critical Accounting Policies

     Management  believes the following critical  accounting policies affect its
more  significant  estimates  and  assumptions  used in the  preparation  of its
consolidated financial statements:

     Revenue Recognition - The Company distributes  embroidery equipment that it
offers for sale. 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.  In fiscal
years  2006,  2005  and  2004,  most  sales  of new  equipment  did not  require
installation  as a  substantive  part of its sales and  accordingly  the Company
recorded its sales at the time the machinery was shipped.  Service  revenues and
costs  are  recognized  when  services  are  provided.  Sales  of  software  are
recognized when shipped  provided that no significant  vendor and  post-contract
and support  obligations  remain and collection is probable.  Sales of parts and
supplies are recognized when shipped.

     Long lived Assets - 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  will be less  than the
carrying amount of the assets

     Income  Taxes - Current  income tax  expense is the amount of income  taxes
expected  to be payable  for the current  year.  A deferred  income tax asset or
liability is established  for the expected  future  consequences  resulting from
temporary  differences  in the  financial  reporting and tax bases of assets and
liabilities.  The Company  provides a valuation  allowance  for its deferred tax
assets when, in the opinion of management,  it is more likely than not that such
assets will not be realized.

     Allowance  for Doubtful  Accounts - The Company  maintains an allowance for
estimated  losses resulting from the inability of its customers to make required
payments.  An estimate of uncollectable amounts is made by management based upon
historical bad debts,  current  customer  receivable  balances,  age of customer
receivable  balances,  the customer's  financial  condition and current economic
trends. If the actual  uncollected  amounts  significantly  exceed the estimated
allowance, then the Company's operating results could be significantly adversely
affected.

     Inventories - Inventories  are valued at the lower of cost or market.  Cost
is determined  using the "FIFO" weighted average cost for supplies and parts and
specific cost for embroidery machines and peripherals.  The inventory balance is
recorded net of an estimated  allowance for obsolete or unmarketable  inventory.
The  estimated  allowance for obsolete or  unmarketable  inventory is based upon
management's  understanding of market conditions and forecasts of future product
demand. If the actual amount of obsolete or unmarketable inventory significantly
exceeds the estimated  allowance,  the Company's cost of sales, gross profit and
net income (loss) could be significantly adversely affected.

     Warranty  - The  Company  provides a  five-year  limited  warranty  for its
embroidery  machines.  The Company's  policy is to accrue the estimated  cost of
satisfying future warranty claims on a quarterly basis. In estimating its future
warranty obligations,  the Company considers various relevant factors, including
the Company's stated warranty policies and practices,  the historical  frequency
of claims, and the cost to replace or repair its products under warranty. If the
number  of actual  warranty  claims or the cost of  satisfying  warranty  claims
significantly  exceeds the estimated warranty reserve,  the Company's  operating
expenses and net income (loss) could be significantly adversely affected.

Fiscal Year 2006 as Compared to Fiscal Year 2005

     Net sales.  Net sales for fiscal year 2006 were $51.1 million,  an increase
of $6.7 million,  or 15.1%  compared to $44.4 million for fiscal year 2005.  The
Company  believes  that the  increase in sales  volume for fiscal 2006 is mainly
attributable to increases in all sizes of embroidery  machines and better market
penetration  compared  to the prior  year.  The market  for small and  multihead
machines has demonstrated some moderate growth in fiscal year 2006. There are no
major customers who exceed 10% of revenues.

     Cost of sales.  For fiscal year 2006,  cost of sales increased $3.4 million
or 11.0%, to $34.0 million from $30.7 million for fiscal year 2005. The increase
was directly a result of the related  increase in net sales for fiscal year 2006
as compared to fiscal year 2005. Included in cost of sales for fiscal 2006 was a
currency  gain of $0.5  million and in fiscal 2005  included a currency  loss of
$0.3  million.  The  Company's  gross margin  increased  for fiscal year 2006 to
33.5%,  as compared to 30.9% for fiscal year 2005. The fluctuation of the dollar
against the yen,  which is the currency the  Company's  embroidery  machines are
priced in,  has  affected  and is likely to  continue  to affect  the  Company's
machine sales pricing competitiveness.  Embroidery machinery prices have changed
in US dollars due to these exchange rate fluctuations. Some, but not, all of the
Company's competitors face similar circumstances.

     Operating  Expenses.  For fiscal  year  2006,  overall  operating  expenses
increased  $0.6 million or 3.8%,  to $16.5 million from $15.9 million for fiscal
year 2005.  Selling,  general and  administrative  expenses  associated with the
Company's ongoing operations increased $0.4 million or 2.9% primarily related to
selling costs directly  associated with the Company's increase in sales revenues
which includes  approximately  $1.0 million in bonus costs.  Included in overall
operating expenses for fiscal 2006 is $147,000 of restructuring costs related to
severance.

     Interest Expense. Interest expense for fiscal year 2006 was $166,000 versus
$185,000 for fiscal year 2005. Interest expense is primarily associated with the
sale/leaseback transaction of the corporate headquarters.

     Other (Income) Expense.  Other income for fiscal 2006 was ($271,000) versus
($186,000)  for fiscal 2005.  In fiscal 2006,  other income  included a $119,000
gain on sale of assets, $133,000 in interest income and $18,000 of other income.
In fiscal  2005,  other  expense  included  a  $119,000  gain on sale of assets,
interest income of $41,000, and other income was $26,000.

     Transaction   Costs.   As  of  January  28,   2006  the  Company   expensed
approximately  $605,000 of transaction  costs associated with the termination of
the merger between Sheridan Square Entertainment and Hirsch. (See Note 16 to the
Consolidated Financial Statements).

     Income tax provision.  The income tax provision  reflected an effective tax
rate of 36.8% for the twelve  months  ended  January  28, 2006 as compared to an
income tax benefit rate of 0% for fiscal year 2004.  The difference of the above
rate  to  the  federal  statutory  rate  for  2005  is the  valuation  allowance
established on deferred tax assets since the Company cannot determine the future
utilization of those assets.

     Income from Discontinued Operations.  In the fourth quarter of Fiscal 2002,
the Company determined that its HAPL Leasing subsidiary was not strategic to the
Company's ongoing objectives and discontinued  operations.  The Company has made
provisions  for the cost of winding down the operations as well as the potential
losses that could be incurred in  disposing  of its minimum  lease  payments and
residual receivables.  The Company's Statements of Operations have been restated
to reflect the results of the HAPL Leasing subsidiary as discontinued operations
(See Note 7 to the Consolidated Financial Statements).  In the fourth quarter of
fiscal 2006, the Company  completed the wind down of the remaining assets of the
lease  portfolio.  In conjunction  with the  termination  of the portfolio,  the
Company  reversed,  as part of  discontinued  operations,  $270,000  of reserves
recorded in fiscal 2002.

     During the quarter ended April 30, 2004,  the Company  determined  that its
Hometown  Threads  subsidiary  was  not  strategic  to the  Company's  long-term
objectives.  On October 22,  2004,  the Company  sold  substantially  all of the
assets of  Hometown  Threads  to  Embroidery  Acquisition  LLC,  a wholly  owned
subsidiary of PCA, LLC. (See Note 7 to the Consolidated  Financial  Statements.)
As a result of the sale of Hometown  Threads,  the Company  recognized a gain of
approximately  $943,000.  The Buyer had withheld $200,000 from the selling price
primarily associated with a note receivable on the books of Hometown Threads and
$142,000 in deferred  income from  deposits  received for stores not yet opened.
The  Company  deferred  the  recognition  of  income  on these  items  until the
contingencies  were  resolved.  During the fourth  quarter of fiscal  2006,  the
Company  resolved the remaining open  contingencies  and recognized  income from
discontinued  operations  of $177,000.  Hometown  Threads was  accounted  for as
discontinued operations in the consolidated financial statements for all periods
presented.

     Net Income (Loss). The net income for fiscal year 2006 was $0.5 million, an
increase of $2.3  million,  compared to net loss of $1.8 million for fiscal year
2005.

Fiscal Year 2005 as Compared to Fiscal Year 2004

     Net sales. Net sales for fiscal year 2005 were $44.4 million, a decrease of
$2.7  million,  or 5.7%  compared to $47.1  million  for fiscal  year 2004.  The
Company believes that the reduction in the sales level for fiscal 2005 is mainly
attributable to an on-going  decrease in demand for large multi-head  embroidery
machines and greater  competition  in the small machine market which resulted in
lower prices for embroidery  machines.  There are no major  customers who exceed
10% of revenues.

     Cost of sales.  For fiscal year 2005,  cost of sales decreased $1.3 million
or 4.2%, to $30.7 million from $32.0 million for fiscal year 2004.  The decrease
was partially a result of the related decrease in net sales for fiscal year 2005
as compared  to fiscal year 2004.  Included in cost of sales for fiscal 2005 and
2004 were losses on currency of $0.3 million and $0.2 million, respectively. The
Company's  gross margin  decreased for fiscal year 2005 to 30.9%, as compared to
32.1% for fiscal year 2004.  The recent  fluctuation  of the dollar  against the
yen, which is the currency the Company's  embroidery machines are priced in, has
adversely  affected and is likely to continue to adversely  affect the Company's
machine sales pricing  competitiveness.  Embroidery machinery prices have either
been maintained or risen in US dollars due to these exchange rate  fluctuations.
As a result,  in order for the Company to maintain  various  product margins for
its  imported  embroidery  machines,  its  competitiveness  has  been  adversely
affected.  Some,  but  not,  all  of  the  Company's  competitors  face  similar
circumstances.

     Operating  Expenses.  As reported for fiscal year 2005,  operating expenses
decreased  $1.6 million or 9.2%,  to $15.9 million from $17.5 million for fiscal
year 2004. The decrease in operating  expenses for the fiscal year ended January
29,  2005 is directly  related to the  Company's  continuing  efforts to control
operating costs in relation to the overall decline in sales revenues. During the
year ended January 31, 2004, the Company  reversed,  as a reduction of operating
expenses,  $716,000 of restructuring costs associated with the completion of the
restructuring plan.

         Interest Expense. Interest expense for fiscal year 2005 and fiscal year
2004 remained constant at $0.2 million. Interest expense is primarily associated
with the sale/leaseback transaction of the corporate headquarters.

     Other (Income) Expense.  Other income for fiscal 2005 was ($186,000) versus
income of ($565,000)  for fiscal 2004. In fiscal 2005,  other income  included a
$119,000 gain on sale of assets,  interest income of $41,000 and other income of
$26,000.  In fiscal 2004 other income  included a $230,000 gain on sale of fixed
assets,  $10,000 in  interest  income,  $3,000 in other  income and  $322,000 in
interest income on the refund of NOL carryback claims.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective  tax  rate of 0% for the  twelve  months  ended  January  29,  2005 as
compared to an income tax benefit rate of 1.2% for fiscal year 2004. The benefit
rate for the fiscal 2004 year is a direct  result of the Job Creation and Worker
Assistance Act temporarily  extending the carryback of Net Operating Losses from
two years to five years. This change has enabled the Company to carryback recent
years  losses and obtain a refund of  approximately  $6 million.  During  fiscal
2004,  the Company  received the carryback  claim refund from the IRS along with
applicable interest through the refund date. The difference of the above rate to
the federal  statutory rate for 2005 is the valuation  allowance  established on
deferred tax assets since the Company cannot determine the future utilization of
those assets.

     Income  (Loss)  from  Discontinued  Operations.  The  Company  executed  an
Agreement with Tajima pursuant to which the Company sold all of the common stock
(the "Shares") constituting a 55% equity interest of its TUI subsidiary owned by
it to Tajima,  upon the terms and conditions set forth in a certain Purchase and
Sale Agreement by and among the Company,  Tajima and TUI (the "Agreement").  The
sale was effective as of January 31, 2004.  Upon the  consummation  of the sale,
Tajima owned 100% of the issued and outstanding common stock of TUI.

     The purchase price (the  "Purchase  Price") for the Shares was equal to the
Book  Value  (as  defined  in the  Agreement),  calculated  in  accordance  with
generally  accepted  accounting  principles.  At the  closing,  Tajima  paid the
Company the sum of $500,000  (the "Initial  Payment") in partial  payment of the
Purchase  Price.  The remaining  balance due on the Purchase Price of $4,482,000
was paid promptly thereafter in accordance with the terms of the Agreement.

         In addition, the Company paid TUI the sum of $7,182,002, representing
amounts owed by the Company to TUI as of January 31, 2004 (the "Net Intercompany
Payable"). The Net Intercompany Payable was paid as follows:

     (a)  the Initial Payment  ($500,000) was paid by Tajima to TUI on behalf of
          the Company,

     (b)  the  assignment  by the Company to TUI of its right to receive the sum
          of  $2,200,000  from  Tajima  upon  payment of the  balance due on the
          Purchase Price, and

     (c)  the payment by the Company of the sum of  $4,482,000 in five (5) equal
          monthly installments of $735,167 each and a sixth payment of $806,165,
          commencing February 29, 2004 and continuing through and including July
          31, 2004.

     The  Consolidated  Financial  Statements  have been restated to reflect the
discontinued operations of TUI for all periods presented.

     During the quarter ended April 30, 2004,  the Company  determined  that its
Hometown  Threads  subsidiary  was  not  strategic  to the  Company's  long-term
objectives.  On October 22,  2004,  the Company  sold  substantially  all of the
assets of Hometown  Threads to Embroidery  Acquisition  LLC ("Buyer"),  a wholly
owned  subsidiary  of PCA, LLC ("PCA")  pursuant to the terms of a certain Asset
Purchase  Agreement  ("Agreement")  entered into  between the Company,  Hometown
Threads,  Buyer and PCA.  Prior to the  transaction,  Hometown  Threads had been
engaged in the business of operating and franchising  retail embroidery  service
centers in Wal-Mart  stores and other retail  locations  (the  "Business").  The
purchase  price for the assets  acquired by Buyer was  $1,500,000.  In addition,
Buyer  agreed to assume  certain  enumerated  liabilities  of Hometown  Threads.
Pursuant to the  Agreement,  PCA guaranteed  the  obligations of the Buyer.  The
Company and  Hometown  Threads  entered a  Non-Competition,  Non-Disclosure  and
Non-Solicitation  Agreement, the Company and Hometown Threads are precluded from
directly and  indirectly  competing with Buyer for seven (7) years in the United
States.  The Company and Hometown Threads are also required to keep confidential
certain  Confidential  Information (as defined therein) for a period of ten (10)
years. Pursuant to the Agreement,  The Company,  Hometown Threads and Buyer have
entered into a certain Supply Agreement  having a term of five (5) years.  Under
the terms of the Supply  Agreement,  the  Company  agreed to supply to Buyer and
Buyer is required to purchase from the Company all products previously purchased
by  Hometown  Threads  from the Company and  utilized in the  Business  upon the
prices, terms and conditions contained therein.

     As a result of the sale of Hometown Threads,  the Company recognized a gain
of approximately $943,000.

     The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits  received for stores not yet opened.  The Company  deferred
the  recognition of income on these items until the  contingencies  are resolved
during the six month  hold-back  period.  The  Company  expects  to resolve  the
contingencies in the early part of fiscal 2006,  however,  the Company is unable
to predict the outcome at this time.

     Hometown  Threads  was  accounted  for as  discontinued  operations  in the
consolidated financial statements for all periods presented.

     Net Income  (Loss).  The net loss for fiscal year 2005 was  $1,772,000,  an
increase of $2.2  million,  compared  to net income of $444,000  for fiscal year
2004.

Liquidity and Capital Resources

     The  Company's  working  capital  decreased  $1.3  million or 9.7% to $12.1
million at January 28, 2006 from $13.4  million at January  29,  2005.  This was
primarily the result of the  capitalized  lease  terminated  effective  June 30,
2006, which is now classified as a current liability.

     During fiscal 2006,  the  Company's  cash  (exclusive  of restricted  cash)
increased $6.8 million or 106% to $13.2 million from $6.4 million at January 29,
2005. The majority of the increase was cash provided by financing  activities of
$5.0 million.  The cash provided by financing  activities of $5.0 million during
fiscal 2006 was primarily  the result of the  unrestricting  of cash  previously
used to  collateralize a standby letter of credit,  which was terminated  during
early  Fiscal  2006.  Additional  cash of $2.8 million was provided by operating
activities primarily from the Company having net income of $0.5 million versus a
net  loss of $1.7  in  fiscal  2005  and  $1.0  million  was  used in  investing
activities.

Future Commitments

     The  following  table  shows  the  Company's  contractual  obligations  and
commitments  (See  Notes 10 and 15 to the  Consolidated  Financial  Statements).
Payments due by period (in thousands)

<TABLE>
<CAPTION>

                                                   Total         Less than           1-3              4-5           More than
                                                                   1 year           years            years           5 years
Contractual Obligations/Commitments
----------------------------------------------   -----------    -------------    -------------    ------------     ------------

<S>                                                  <C>             <C>                   <C>            <C>              <C>
Capital lease obligations.....................       $1,270          $ 1,270               $0             $ 0              $ 0

Operating lease obligations...................        1,584              463              627             491                3

Purchase commitments..........................        3,300            1,200            2,100               0                0
                                                 -----------    -------------    -------------    ------------     ------------

Total                                                $6,154           $2,933           $2,727            $491               $3
                                                 ===========    =============    =============    ============     ============
</TABLE>

Revolving Credit Facility and Borrowings

     The Company has a Loan and Security  Agreement  ("the Congress  Agreement")
with Congress  Financial  Corporation  ("Congress")  for a three year term which
originally  expired on November  26, 2005.  The  Congress  Agreement as amended,
August 31, 2004,  provides  for a credit  facility of $12 million for Hirsch and
all subsidiaries.  Advances made pursuant to the Congress  Agreement may be used
by the Company and its subsidiaries for working capital loans, letters of credit
and deferred  payment  letters of credit.  The terms of the  Congress  Agreement
require the Company to maintain certain financial covenants.  The Company was in
compliance  with all  financial  covenants at January 28, 2006.  The Company has
placed $0.5 million in restricted  cash to support the standby  letter of credit
backing the lease on the Company's facilities in Hauppauge. On October 21, 2005,
the Company  signed  Amendment  No. 5 to the Loan and Security  Agreement.  This
amendment provides for, among other things, an extension of the maturity date of
our  existing  credit  agreement  from  November  26,  2005 until and  including
February 28, 2006.  As of February 28, 2006,  the Company  signed a  Termination
Agreement  with  Wachovia  Bank,  National  Association  (successor by merger to
Congress Financial Corporation). The Company, at this time, does intend to enter
into a new banking agreement.

Future Capital Requirements

     Subsequent to the close of fiscal 2002, the Federal  Government  passed the
Job Creation and Worker  Assistance Act temporarily  extending the carry back of
Net Operating Losses from two years to five years.  This provided  approximately
$6.0 million in cash available for  operations.  Approximately  $3.0 million was
received  during the fiscal  year ended  January  31,  2003 and the  balance was
received  during  fiscal  2004,  along with  applicable  interest.  The  Company
believes  these  proceeds,  with its  existing  cash and  funds  generated  from
operations will be sufficient to meet its working capital requirements.  Capital
expenditures are expected to be immaterial.

Backlog and Inventory

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

Inflation

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

Recent Accounting Pronouncements -

     See note 2(q) to the consolidated financial statements

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     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 from time to time 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. The Company did not enter
into any forward contracts during Fiscal 2006.

     Any Company  debt, if utilized,  is U.S.  dollar  denominated  and floating
rate-based.  At year-end,  there was no usage of the revolving  credit  facility
that the  Company  had  maintained  through  February  28,  2006  with  Congress
Financial.  If the  Company  had  utilized  its credit  facility,  it would have
exposure to rising and falling  rates,  and an increase in such rates would have
an adverse  impact on net pre-tax  expenses.  The Company  does not use interest
rate derivatives to protect its exposure to interest rate market movements.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information contained in pages F-1 through F-26 hereof.


ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A. CONTROLS AND PROCEDURES

     Under  the  supervision  and  with  the   participation  of  the  Company's
management,  including  the Chief  Executive  Officer  and the  Chief  Financial
Officer,  the Company  carried out an  evaluation  of the  effectiveness  of the
design and operation of the disclosure  controls and  procedures,  as defined in
Rules  13a-15e and 15d-15e of the  Securities  Exchange Act of 1934,  as amended
(the "Exchange Act"). Based upon that evaluation,  the Company's Chief Executive
Officer and Chief  Financial  Officer  concluded  that the  Company'  disclosure
controls and procedures  are  effective,  as of the end of the period covered by
this  Report,  in ensuring  that  material  information  relating to the Company
required  to be  disclosed  by the  Company in reports  that it files or submits
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange  Commission's rule and
forms,  including  ensuring that such material  information is  accumulated  and
communicated  to  the  Company's  Management,   including  the  Company's  Chief
Executive  Officer and Chief Financial  Officer,  as appropriate to allow timely
decisions regarding required disclosure.

     There  have  been  no  changes  in the  Company's  internal  controls  over
financial reporting that occurred during the fourth quarter that have materially
affected,  or are reasonably likely to affect,  the Company's  internal controls
over financial reporting.

ITEM 9B. OTHER INFORMATION.

     None.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


Information Regarding Executive Officers and Directors

     The  following  table  sets  forth  the  names  and  ages of the  Company's
directors and executive officers and the positions they hold with the Company:


Name                     Age     Position
----                     ---     --------
Henry Arnberg..........  63      Chairman of the Board of Directors
Paul Gallagher.........  56      Chief Executive Officer, President and Director
Marvin Broitman........  67      Director
Mary Ann Domuracki ....  51      Director
Christopher Davino ....  40      Director
Beverly Eichel.........  48      Executive Vice President, Finance and
                                 Administration, Chief Financial Officer
                                 and Secretary
Kristof Janowski.......  53      Executive Vice President, Sales and Marketing
Nicholas Paccione......  51      Vice President, Operations


     Henry Arnberg,  has held the position of Chairman of the Board of the Board
of Directors  since 1980 and served as President of the Company  until  December
1998 and its Chief Executive Officer until November 2004. Mr. Arnberg received a
Bachelor of Science in Accounting  from the University of Bridgeport in 1965 and
an MBA in Finance and Management from the Adelphi University in 1971.

     Paul  Gallagher,  joined  the  Company  as its Chief  Operating  Officer in
September  2001. In early 2003,  Mr.  Gallagher was also appointed the Company's
President  as well as a  director.  On  December  1,  2004,  Mr.  Gallagher  was
appointed Chief Executive Officer.  Prior thereto, Mr. Gallagher was employed by
Cornerstone  Group Inc., a consulting firm focused on corporate  turnarounds and
restructurings,  as well as mergers and acquisitions.  Mr. Gallagher  received a
Bachelor of Science from the  University  of  Cincinnati in 1976 and an MBA from
Xavier University in 1978.

     Marvin  Broitman has served as a director of the Company  since April 1994,
and is  currently  Vice  President of Uniwave,  Inc.,  a company  engaged in the
engineering  and  manufacturing  of automation  accessory  equipment for textile
machinery since 1968. Mr. Broitman received a Bachelor of Electrical Engineering
degree from City College in 1961 and an MBA from the Harvard  Business School in
1968. Mr. Broitman serves on the Audit, Stock Option and Compensation Committees
of the Board of Directors.

     Mary Ann Domuracki has served as a director of the Company since  September
2001,  and is a managing  Director  of  Restructuring  at  Financo,  Inc.  since
September 2001. Ms.  Domuracki has more than 25 years  experience of accounting,
advisory and operating  management  services.  Her industry experience includes,
senior  management  positions  as  President of Danskin,  Inc.,  Executive  Vice
President of  Administration  and Finance of Kasper  A.S.L.,  and most recently,
Executive Vice President and Chief  Financial  Officer of Pegasus Apparel Group,
Inc.  Ms.  Domuracki  is a CPA and a member of the AICPA,  and has a Bachelor of
Business   Administration   from  the  Pennsylvania   State  University  with  a
concentration in Accounting. Ms. Domuracki serves on the Audit, Stock Option and
Compensation Committees of the Board of Directors.

     Christopher  Davino has served as a director of the Company  since  October
2004, he was previously  Chief  Operating  Officer of E-Rail  Logistics  Inc., a
waste  management  transportation  company.  Prior to that position,  Mr. Davino
worked as a restructuring  professional at Financo Inc. Mr. Davino is a seasoned
restructuring  professional  having provided  strategic and financial  advice to
Fortune 500 companies, financial sponsors and strategic buyers, commercial banks
and  bondholders  with  respect to  corporate  restructurings  and  mergers  and
acquisitions  over the last 14 years.  Prior to joining Financo,  Mr. Davino was
Managing  Director at Miller Buckfire Lewis Ying, LLC, the former  restructuring
group of Wasserstein Perella and subsequently Dresdner Kleinwort Wasserstein. In
that capacity,  Mr. Davino advised  companies as well as their various  creditor
constituencies in a wide range of industries  including  construction,  consumer
products,   electronics,   energy,  financial  services,   gaming,   healthcare,
insurance,  manufacturing,  metals, minerals,  steel, real estate and technology
telecommunications.  Prior to Wasserstein  Perella,  Mr. Davino was a consultant
with Zolfo Cooper & Co., an internationally recognized turnaround consulting and
crisis  management  firm. Mr. Davino received his Bachelor of Science in Finance
from Lehigh University.

     Beverly   Eichel,   has  been  Executive  Vice  President  of  Finance  and
Administration  and Chief  Financial  Officer of the Company  since  February 1,
2002. Ms. Eichel has also served as the Company's  Secretary since October 2002.
Prior thereto,  she was Executive Vice President and Chief Financial  Officer of
Donnkenny,  Inc.  from  October  1998 to June 2001.  From June 1992 to September
1998, Ms. Eichel served as Executive Vice President and Chief Financial  Officer
of Danskin, Inc. and had been its Corporate Controller from October 1987 to June
1992. Ms. Eichel is a Certified Public Accountant in the State of New York and a
member of the AICPA.  Ms.  Eichel  received a Bachelor of Science in  Accounting
from the University of Maryland in 1980.

     Kristof  Janowski has worked for the Company since 1987.  From 1987 through
1994 he was sales  manager  for the  Midwest  Region.  In October  1994,  he was
promoted to Vice  President of Midwest  sales.  In 1999, he was promoted to Vice
President  of National  Sales and most  recently  Mr.  Janowski  was promoted to
Executive Vice President - Sales and Marketing effective March 1, 2005.

     Nicholas  Paccione  joined  the  Company  in June of  2003 as  Director  of
Information  Technology  and was  promoted to Vice  President of  Operations  in
February  of 2005.  Prior to joining the  Company,  Mr.  Paccione  owned his own
independent  consultancy  specializing  in  computer  network  design.  Prior to
starting  his  consulting  firm,  Mr.  Paccione was Chief  Operating  Officer at
Heathology,  an online  health  education  company,  Senior  Vice  President  of
Operations for Primedia  Workplace  learning,  and Vice President of Systems and
Technology for the Primedia Information Group.

Committees of the Board of Directors

     The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee.  Each member of the Audit Committee is an "independent
director" as defined in Rule  4200(a)(15)  of the NASDAQ  Capital  Market,  Inc.
listing standards, as applicable and as may be modified or supplemented. MaryAnn
Domuracki,  Chairman of the Audit  Committee,  is a financial  expert within the
meaning of Item 401(h)(2) of Regulation S-K privileged  under the Act. The audit
committee has adopted a written Audit Committee charter.

     The Company does not have a Nominating Committee.  The view of the Board of
Directors is that it is appropriate for the Company not to have such a committee
as each member of the Board participates in the consideration of the nominee. Of
the five  current  Board  members,  three are  "independent"  under the existing
standards of NASDAQ Capital Market issuers and director nominees are required to
be approved by a majority of the entire Board and a majority of the  independent
directors.   The  Board  generally   relies  on  its  network  of  industry  and
professional  contacts in connection with  identifying  potential Board members.
The Board is also open to  presentation  of  nominees  recommended  by  security
holders  provided  that  sufficient  information  about  the  proposed  nominees
business,  industry and  financial  background is provided to the Board and such
information is received not less than 120 days prior to the release of the proxy
statement to our  shareholders.  The Board will only consider nominess that have
the requisite  industry or financial  experience to be able to advise and direct
senior management in the Company's  operations.  At a minimum, each nominee: (i)
must  be  prepared  to  represent  the  best  interest  of all of the  Company's
shareholders,  (ii) must be an  individual  who has  demonstrated  integrity and
ethics in his/her personal and  professional  field and has established a record
of professional accomplishment in his/her chosen field, (iii) must not have (and
his/her  family  members  must not have) any  material  personal,  financial  or
professional interest in any present or potential competitor of the Company; and
(iv)  must be  prepared  to  participate  fully in Board  activities,  including
attendance at, and active  participation  in, meetings of the Board and not have
other personal or professional  commitments that would interfere or limit his or
her ability to do so.

     Messrs.  Broitman and Davino and Ms.  Domuracki  serve on the  Compensation
Committee,  the Audit Committee, and on the Stock Option Committee. The function
of the Compensation  Committee is to determine and make  recommendations  to the
Board regarding the compensation of the Company's  executives.  The Stock Option
Committee administers the Company's stock option plans and awards stock options.

Code of Ethics

     The  Company  has  adopted a code of  ethics  applicable  to the  Company's
Executive Officer and financial officer,  which is a "Code of Ethics" defined by
the  applicable  rules of the Securities  and Exchange  Commission.  The Company
undertakes to provide to any person with out charge, upon request, a copy of the
Company's  Standards of Business Conduct.  Requests for such copy should be made
in writing to the  Company at its  principal  office,  which is set forth on the
first page of this Form 10-K,  attention Chief Financial Officer. If the Company
makes any amendment to its code of ethics, other than technical,  administrative
or non-substantive amendments, or grants any waivers, including implicit waivers
from a  provision  of the code of ethics to the  Company's  principal  executive
officer,  principal  financial officer or persons  performing similar functions,
the Company will disclose the motive for the amendment or waiver,  its effective
date and to what it applied  on a report on Form 8-K filed  with the  Securities
and Exchange Commission.

Code of Conduct

     The  Company  adopted a Code of  Conduct  that  applies  to all  employees,
including  all  executive  officers.  Print  copies of the Code of  Conduct  are
available to any stockholder that requests a copy.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive  officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities collectively, the "Reporting
Persons"  to file  reports  of  ownership  and  changes  in  ownership  with the
Securities  and  Exchange  Commission  and to furnish the Company with copies of
these reports.  Based solely on the Company's review of the copies of such forms
received  by it during the fiscal  year ended  January  28,  2006,  the  Company
believes  that  the  Reporting  Persons  complied  with all  filing  requirement
applicable to them.


ITEM 11.  EXECUTIVE COMPENSATION

     The  following  table sets forth the  compensation  earned during the three
fiscal years ended  January 28,  2006,  January 29, 2005 and January 31, 2004 by
the Company's Chief Executive Officer and by the four most highly paid Company's
Executive  Officers whose total  compensation for such periods exceeded $100,000
(the "Named Executives"):

Summary Compensation Table
<TABLE>
<CAPTION>

                                                                                  Long-term compensation
                                                                                  ------------------------
                                             Annual compensation                   Awards                     Payouts
                              --------------------------------------------------  ----------    ----------    ----------
                                                                       Other
                                                                       Annual      Restricted   Securities                 All Other
                                                                       Compen-     Stock        Underlying     LTIP        Compen-
                              Fiscal       Salary         Bonus        sation      Awards(s)    Options/       Payout      sation
Name and Principal Position    Year         ($)            ($)           ($)         ($)        SARs (#)         ($)         ($)
----------------------------  --------    ----------     ---------    ----------  ----------    ----------    ----------   --------

Henry Arnberg
   Chairman of the Board
<S>                            <C>        <C>            <C>       <C>
   of Directors                2006       $150,000       $60,000   2      -           -             -             -
                               2005       $218,000          -             -           -             -             -          $2,919
                               2004       $250,000          -             -           -             -             -          $2,060

Paul Gallagher                 2006       $335,000       $350,000  2      -           -          100,000          -
  Chief Executive Officer      2005       $310,000          -             -           -          150,000          -          $4,187
                               2004       $300,000       $150,000  1      -           -             -             -          $3,675
                                                                                                                  -
Beverly Eichel
  Executive VP-Finance,
  Chief Financial Officer
  and Secretary                2006       $265,000       $185,000  2      -           -          50,000           -             -
                               2005       $265,000          -             -           -          40,000           -             -
                               2004       $250,000        $87,500  1      -           -             -             -             -

Kristof Janowski
  Executive Vice President
  - Sales and Marketing        2006       $250,000       $175,000  2      -           -          20,000           -             -
                               2005       $250,000          -             -           -             -             -             -
                               2004       $289,000        $50,000  1      -           -             -             -             -

Nicholas Paccione
  Vice President -
Operations                     2006       $175,000       $87,500   2      -           -          20,000           -             -
                               2005       $155,000                        -           -             -             -             -
                               2004        $82,500       $21,500   1      -           -          20,000           -             -
</TABLE>

1 Bonuses were earned in fiscal 2004 but paid in fiscal 2005
2 Bonuses were earned in fiscal 2006 but paid in fiscal 2007


The  following  table sets forth the  individual  grants of stock  options  made
during the fiscal year ended January 28, 2006 by the  Company's  Chairman of the
Board and the Named Executives:

Options/SAR Grants Table
<TABLE>
<CAPTION>

                                              Percent of
                           Number of            total
                           Securities         Options/SARs      Exercise
                           Underlying         Granted to        or Base
                           Options/SARs       Employees in       Price       Expiration         5%             10%
Name                       Granted (#)        fiscal year       ($/Sh)          date            ($)            ($)
-------------------        -----------        -----------       --------      ---------        -----          -----

<S>                          <C>                  <C>             <C>         <C>              <C>            <C>
   Henry Arnberg                -                  -                -             -               -              -

  Paul Gallagher             100,000              45%             $1.34       1/27/2011        $171,000       $179,000

  Beverly Eichel              50,000              22%             $1.34       1/27/2011         $85,000        $90,000

  Kristof Janowski            20,000               9%             $0.97        4/1/2010        $25,000        $26,000

  Nicholas Paccione           20,000               9%             $0.97        4/1/2010        $25,000        $26,000

</TABLE>


Option Exercises and Holdings

     The following table sets forth information concerning the exercise of stock
options by the Named  Executives  during the Company's fiscal year ended January
28, 2006 the number of options  owned by the Named  Executives  and the value of
any in-the-money unexercised stock options as of January 28, 2006.

<TABLE>
<CAPTION>

                          Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

                                                                      Number of Unexercised           Value of Unexercised
                                                                           Options at                 In-the-Money Options at
                                                                      Fiscal Year End (#)             Fiscal Year End ($)
Name                     Shares Acquired           Value
                         on Exercise (#)         Realized             Exercisable/Unexercisable       Exercisable/Unexercisable
---------------------   -------------------    ---------------      ---------------------------    ------------------------------

<S>                             <C>                  <C>                       <C>                                <C>    <C>
Henry Arnberg                   0                    $0                             0/0                   $            0/0
Paul Gallagher                  0                    $0                  625,000/25,000                   $ 356,000/26,000
Beverly Eichel                  0                    $0                  294,000/14,000                   $ 210,000/15,000
Kris Janowski                   0                    $0                   81,000/20,000                   $   85,000/7,000
Nicholas Paccione               0                    $0                   13,000/27,000                   $   6,000/10,000
</TABLE>


Employment Agreements

Paul Gallagher - President and Chief Executive Officer

     As of September 11, 2004, Mr. Gallagher entered into a two-year  employment
agreement to serve as the Company's  President,  Chief  Operating  Officer and a
director.  Mr.  Gallagher  was  subsequently  appointed to the position of Chief
Executive Officer upon the retirement of Henry Arnberg.

     Mr. Gallagher's  employment agreement provides for the payment of an annual
base salary of $325,000  during the first year of the  agreement,  and  $350,000
during the  second  year of the  agreement.  The  agreement  also  entitles  Mr.
Gallagher  to  participate  in and  receive a bonus under the  Company's  annual
incentive plan for key employees with a possible  maximum bonus of up to 100% of
Mr.  Gallagher's  annual base salary.  In  addition,  the  employment  agreement
provides for the  reimbursement of certain business  expenses,  the provision of
health insurance and an automobile allowance.

     The  employment  agreement  requires  Mr.  Gallagher  to devote  his entire
business time and attention to the Company and provides for termination upon his
death or disability  (defined as the  inability to perform  duties for three (3)
consecutive months or six (6) months in any nine (9) month period), or for cause
(as defined in the Gallagher Agreement).

     In the event the Company terminates the employment agreement other than for
cause,  or materially  breaches its  obligations  thereunder,  Mr.  Gallagher is
entitled  to receive  payment of his salary for up to six months plus a pro-rata
portion, based upon his period of service to the Company, of the amount, if any,
he  would  have  been  entitled  to  receive  under  the  Incentive  Plan if his
employment  had  continued  until the end of the  fiscal  year.  The  employment
agreement  also provides that Mr.  Gallagher  shall not compete with the Company
during the term of the agreement and for a period of one (1) year thereafter.  A
change of control  provision  under  which Mr.  Gallagher  would be  entitled to
receive an amount  equal to his base  salary for a period of one year  following
the termination of employment is included, in addition to any and all health and
dental,  disability,  survivor  income and life  insurance plan or other benefit
plan maintained by the Company.


Beverly Eichel - Executive Vice President, Chief Financial Officer and Secretary

     As of February  1, 2006,  Ms.  Eichel  entered  into a two-year  employment
agreement  to  serve  as  the  Company's  Executive  Vice-President-Finance  and
Administration, Chief Financial Officer and Secretary

     Ms.  Eichel's  employment  agreement  provides for the payment of an annual
salary of $275,000  during the first year of the agreement,  and $290,000 during
the second year of the  agreement.  The  agreement  also  entitles Ms. Eichel to
participate in and receive a bonus under the Company's annual incentive plan for
key employees with a possible  maximum bonus of 70% of Ms.  Eichel's annual base
salary.  In  addition,  Ms.  Eichel's  employment  agreement  provides  for  the
reimbursement  of business  expenses  including an automobile and cellular phone
allowance, the provision of health insurance and related benefits.

     The employment  agreement requires Ms. Eichel to devote her entire business
time and attention to the Company and provides for termination upon her death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment  agreement).  The employment  agreement also provides that Ms.
Eichel not compete with the Company  during the term of the  agreement and for a
period of one (1) years  thereafter.  A change of control  provision under which
Ms. Eichel would be entitled to receive an amount equal to her base salary for a
period of one year following the  termination of employment,  in addition to any
and all health and dental,  disability,  survivor income and life insurance plan
or other benefit plan maintained by the Company, is included.

Director's Compensation

     Directors who are employees of the Company or its  subsidiaries  receive no
compensation,  as  such,  for  service  as  members  of  the  Board  other  than
reimbursement of expenses incurred in attending meetings.  Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or  stockholder's  meeting attended and $1,000
for each  meeting  of an  executive  committee  of the Board  attended,  and are
reimbursed for expenses  incurred in attending such meetings.  In addition,  all
non-employee  directors  participate in the Company's 2004 Non-Employee Director
Stock  Option  Plan.  Under the terms of our 2004  Non-Employee  Director  Stock
Option Plan, each non-employee  director receives a grant of 10,000 options upon
their appointment to the Board. In addition, each non-employee director receives
an  automatic  grant of 10,000  options  on the date of our  Annual  Meeting  of
Stockholder's,  the exercise  price for all of these  options is the fair market
value on the date grant.  In fiscal  2002,  the Board  approved  the issuance of
50,000  warrants  to one  independent  director  and one  retired  director  for
services  rendered  to the  Company.  The  director  was  also  granted  certain
registration  rights associated with the warrants.  The warrants had an exercise
price of $.50 per share,  which was the fair market  value on the date of grant.
In fiscal 2006,  each  independent  director was issued 10,000 options under the
Company's 2004 Non-Employee  Stock Option. The options have an exercise price of
$1.33 per share, which was the fair market value as of the date of the grant.

Compensation  Committee  Interlocks and Insider  Participation  in  Compensation
Decisions

     The Company's  Compensation Committee of the Board of Directors consists of
Marvin  Broitman,  Mary Ann Domuracki  and  Christopher  Davino,  all of who are
independent  outside  directors of the  Company.  The  Compensation  Committee's
primary responsibility is for reviewing the Company's compensation practices for
executive officers and key employees.

The  Compensation  Committee has  furnished  the  following  report on executive
compensation.

Compensation Committee Report

     The Compensation  Committee of the Board of Directors (the  "Committee") is
composed of three independent outside directors of the Company.

     The Committee focuses on compensating  Company  executives on a competitive
basis with other comparably sized and managed  companies in a manner  consistent
and supportive of overall  Company  objectives  and through a compensation  plan
which  balances  the  long-term  and  short-term  strategic  initiatives  of the
Company. The Committee intends that the Company's executive compensation program
will:

     (1)  reward  executives for strategic  management,  the  achievement of key
          business objectives and enhancement of stockholder value;

     (2)  reflect each executive's success at resolving key operational issues;

     (3)  facilitate both the short-term and long-term planning process; and

     (4)  attract  and retain key  executives  believed  to be  critical  to the
          long-term success of the Company.

     The  Company's   compensation  program  for  executive  officers  generally
consists  of (i) a fixed base  salary,  (ii)  performance-related  annual  bonus
awards and (iii) long-term incentive  compensation in the form of stock options.
In addition, Company executives are able to participate in various benefit plans
generally available to other full-time employees of the Company.  Each executive
officer's  compensation package is designed to provide an appropriately weighted
mix of these  elements,  which in the aggregate  provide a level of compensation
the committee believes is approximately equal to those provided by comparatively
sized and managed companies.

     In reviewing the Company and executives'  performance,  the Committee takes
into  consideration,  among other things, the following  performance  factors in
making its compensation recommendations: revenues, net income and cash flow. The
Committee  has  received  and  considered  outside  guidance  from  compensation
consultants  in  its  efforts  to  have  comparability  and  fairness  in  their
determinations.

Base Salary

     Base salary for the Company's executives is intended to provide competitive
remuneration for services  provided to the Company over a one-year period.  Base
salaries are set at levels designed to attract and retain the most appropriately
qualified  individuals for each of the key management level positions within the
Company.

Short-Term Incentives

     Short-term  incentives are paid primarily to recognize  specific  operating
performance  achieved within the last fiscal year. Since such incentive payments
are related to a specific  year's  performance,  the Committee  understands  and
accepts that such payments may vary  considerably from one year to the next. The
Company's bonus program generally ties executive  compensation  directly back to
the annual performance of both the individual executive and the Company overall.
Those  executives  not signatory to an  employment  agreement are able to earn a
percentage of their base salary as a  performance-related  bonus. Where there is
an  employment  agreement,  an  executive  may earn a  percentage  of their base
salary,   pursuant   to  the   Company's   annual   incentive   program,   as  a
performance-related bonus.

Long-Term Incentives

     In  order  to  align  long-term   executive   compensation  with  long-term
stockholder  value  improvements,  the  Committee  has from time to time awarded
stock option grants to executives of the Company in  recognition of the value of
these grants in motivating  long-term  strategic  decision making. The Company's
long-term  performance  ultimately  determines  compensation  from stock options
because stock option value is entirely  dependent on the long-term growth of the
Company's  Common  Stock price.  During the fiscal year ended  January 28, 2006,
190,000 stock options were granted to the Company's senior  executive  officers.
During the fiscal year ended January 29, 2005,  190,000  options were granted to
the Company's senior executive officers.

Chief Executive Officer

     Mr.  Gallagher's  base  salary and  long-term  incentive  compensation  are
determined by the Compensation Committee based upon the same facts as those used
by the Compensation Committee for executives in general. Effective September 11,
2004,  Mr.  Gallagher  entered into a two year  agreement  that provides for his
annual base salary at $325,000  for the first year and  $350,000  for the second
year.  In  formulating  the terms of Mr.  Gallaghers  agreement,  the  Committee
engaged and received  guidance from an independent  compensation  consultant who
advised them on the  comparability and fairness to the stockholders of the terms
of the employment  agreement.  Mr. Gallagher will receive a short-term incentive
bonus payment from the Company for fiscal 2006.

     In addition to his base salary, Mr. Gallagher is eligible to participate in
the short-term  and long-term  incentive  programs  outlined above for the other
Named Executives (including the Company's annual incentive program). The targets
in the  annual  incentive  program  for  Mr.  Gallagher  were  developed  by the
Compensation  Committee  with the input and guidance of an outside  compensation
consultant.

                             COMPENSATION COMMITTEE:

                          Marvin Broitman (Chairperson)
                               Mary Ann Domuracki
                               Christopher Davino

Stock Option Plans

     The Company  maintains  two active  stock  option  plans  pursuant to which
options to purchase an aggregate of 1,424,000 shares of Class A Common Stock may
be granted.  In addition,  certain  options  granted  pursuant to the  Company's
expired 1993 Stock Option Plan and 1994 Non-Employee  Director Stock Option Plan
remained outstanding.

     1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the Board
of  Directors  in  December  1993 and was  approved by the  stockholders  of the
Company in July 1994 (the "1993 Plan"). The 1993 Plan, as amended, had 1,750,000
shares of Class A Common Stock  reserved for issuance  upon  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 1993  Plan to  employees  and  officers  of the
Company.  Non-qualified  options  are  permitted  to be granted to  consultants,
directors  (whether  or not they are  employees),  employees  or officers of the
Company.

     The purpose of the 1993 Plan was to  encourage  stock  ownership by certain
directors,  officers  and  employees  of the Company and certain  other  persons
instrumental  to the success of the Company and to give them a greater  personal
interest in the success of the  Company.  The 1993 Plan is  administered  by the
Stock Option Committee. The Committee,  within the limitations of the 1993 Plan,
determined the persons to whom options were granted,  the number of shares to be
covered by each option,  whether the options  granted were  intended to be ISOs,
the duration and rate of exercise of each option,  the option purchase price per
share and the manner of  exercise,  the time,  manner  and form of payment  upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company were to be imposed on shares subject to options.  Options  granted under
the 1993 Plan were not to be granted at a price less than the fair market  value
of the Class A Common  Stock on the date of grant (or 110% of fair market  value
in the case of persons  holding 10% or more of the voting stock of the Company).
The  aggregate  fair market value of shares for which ISOs granted to any person
were  exercisable  for the first time by such person  during any  calendar  year
(under all stock  option plans of the Company and any related  corporation)  may
not exceed  $100,000.  The 1993 Plan was terminated in December  2003;  however,
options  granted  under the 1993 Plan will  expire not more than five years from
the date of grant.  Options  granted  under  the 1993 Plan are not  transferable
during an optionee's  lifetime but are  transferable  at death by will or by the
laws of descent and distribution.

     1994  Non-Employee  Director  Stock  Option  Plan.  The  1994  Non-Employee
Director Stock Option Plan, as amended,  (the  "Directors  Plan") was adopted by
the Board of Directors in September 1994 and was approved by the stockholders of
the  Company in June 1995.  The  Directors  Plan had  234,375  shares of Class A
Common Stock reserved for issuance. Pursuant to the terms of the Directors Plan,
each independent  unaffiliated  Director was  automatically  granted without any
further  action by the Board of Directors or the Stock Option  Committee:  (i) a
non-qualified  option to  purchase  10,000  shares of Class A Common  Stock upon
their  election to the Board of Directors;  and (ii) a  non-qualified  option to
purchase  10,000  shares  of  Class A Common  Stock  on the date of each  annual
meeting of stockholders following their election to the Board of Directors.  The
exercise price of each option was the fair market value of the Company's Class A
Common Stock on the date of grant.  Each option expires five years from the date
of grant and vests in three  annual  installments  of 33 1/3% 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. The
plan expired in September 2004.

     2003 Stock Option Plan. The 2003 Plan, as amended, was adopted by the Board
of Directors in May 2003 and was approved by the  stockholders of the Company in
July 2003 (the "2003  Plan") and  amended on  January  25,  2006.  The 2003 Plan
currently  has 1,750,000  shares of Common Stock  reserved for issuance upon the
exercise of options  designated as either (i) incentive  stock options  ("ISOs")
under the Code or (ii)  non-qualified  stock options.  ISOs may be granted under
the 2003 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. In certain circumstances,  the exercise of
stock  options may have an adverse  effect on the market price of the  Company's
Common Stock.

     The purpose of the 2003 Plan is to  encourage  stock  ownership  by certain
directors,  officers  and  employees  of the Company and certain  other  persons
instrumental  to the  success of the  Company  and give them a greater  personal
interest in the success of the  Company.  The 2003 Plan is  administered  by the
Stock Option Committee. The Committee,  within the limitations of the 2003 Plan,
determines the persons to whom options will be granted,  the number of shares to
be covered by each option,  whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option,  the option purchase price per
share and the manner of  exercise,  the time,  manner  and form of payment  upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company  are to be imposed on the shares  subject to  options.  Options  granted
under  the 2003 Plan may not be  granted  at a price  less than the fair  market
value of the Common Stock on the date of the grant (or 110% of fair market value
in the case of persons  holding 10% or more of the voting stock of the Company).
The  aggregate  fair market value of shares for which ISOs granted to any person
are  exercisable  for the first time by such  person  during any  calendar  year
(under all stock  option plans of the Company and any related  corporation)  may
not exceed $100,000. The 2003 Plan will terminate in December,  2013 which means
no options may be granted after such date.  Options  granted under the 2003 Plan
will  expire  not more than five  years  from the date of  grant;  however,  any
options outstanding on the termination date of the 2003 Plan will continue until
they  expire  by their  terms.  Options  granted  under  the  2003  Plan are not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution.

     2004 Non-Employee  Director Stock Option Plan. The 2004 Plan was adopted by
the Board of Directors in August 2004 and  approved by the  stockholders  of the
Company in January 2005 (the "2004 Plan"). The 2004 Plan reserves 148,042 shares
of  Class  A  Common  Stock  for  issuance  to  the  Company's  independent  and
unaffiliated directors.  Pursuant to the terms of the 2004 Plan each independent
and  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 10,000 shares of Class
A Common  Stock upon  their  initial  election  or  appointment  to the Board of
Directors;  and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders  following their
election or  appointment  to the Board of Directors.  The exercise price of each
option is the fair market  value of the  Company's  Class A Common  Stock on the
date of grant.  Each option  expires five years from the date of grant and vests
in three  annual  installments  of 33 1/3% each on the  first,  second and third
anniversary  of the date of grant.  Options  granted  under the 2004 Plan  would
generally  not be  transferable  during  an  optionee's  lifetime  but  would be
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 would
immediately  terminate and become 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.

Corporate Peformance Graph

     We  believe  that  we are the  only  publicly-held  firm in the  embroidery
equipment industry, and therefore do not believe that we can reasonably identify
an embroidery  industry-based peer group. We have elected to define a peer group
based on a group of four industrial distributors,  trading in similar SIC Codes,
with relatively low market  capitalization for a benchmark.  The following graph
and table compares the change in the cumulative total stockholder return for the
five-year  period beginning on January 31, 2002, and ending on January 28, 2006,
based upon the market  price of the  Company's  Class A Common  Stock,  with the
cumulative  total  return of the NASDAQ  Composite  Index and the  defined  Peer
Group.  The Peer Group  includes the following  companies:  Lancer Corp.;  Quipp
Inc.;  Paul Mueller  Company;  and Key Technology  Inc. The graph assumes a $100
investment  on January 31, 2002 in each of the indices and the  reinvestment  of
any and all dividends.

[GRAPHIC OMITTED]



             Comparison of Five-Year Cumulative Total Return Among
               Hirsch International Corp., NASDAQ Composite Index
          and an industry-based market capitalization-based peer group

                             1/31/02    1/31/03   1/31/04    1/29/05    1/28/06
                             -------    -------   -------    -------    -------

Hirsch International Corp.    $100       $ 85      $458       $202       $254
NASDAQ Composite Index         100         68       107        107        119
Peer Group                     100        102       139        157        187


ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS


The  following  table sets forth the  beneficial  ownership of shares of Class A
Common Stock and Class B Common  Stock as of March 30, 2006,  by (i) each person
who owns  more than 5% of the  outstanding  shares of Class A and Class B Common
Stock;  (ii) each executive  officer and director of the Company;  and (iii) all
officers and directors of the Company as a group:

<TABLE>
<CAPTION>

Name and Address                                                             Amount and Nature of
of Beneficial Owner (1)                           Title of Class (2)         Beneficial Ownership              Percent of Class
-----------------------------------------    --------------------------    --------------------------       --------------------

<S>                                                   <C>                              <C>                            <C>
Henry Arnberg.................                        Class A                         981,658                        12.3%
                                                      Class B                         500,018(3)                     95.2%

Paul Levine...................                        Class A                       1,074,621(4)                     13.5%
                                                      Class B                            -                             -

Paul Gallagher................                        Class A                         920,000(8)                     11.6%
                                                      Class B                            -                             -

Marvin Broitman...............                        Class A                          92,500(5)                      1.2%
                                                      Class B                            -                             -

Mary Ann Domuracki............                        Class A                          40,001(6)                       *
                                                      Class B                            -                             -

Christopher Davino............                        Class A                          10,000(7)                       *
                                                      Class B                            -                             -

Beverly Eichel................                        Class A                         324,000(9)                      4.0%
                                                      Class B                            -                             -

All Officers and Directors as                         Class A                       3,442,780                        43.1%
a group (six persons)                                 Class B                         500,018                        95.2%

</TABLE>

*    Less than one percent

(1)  All addresses are c/o Hirsch  International  Corp., 200 Wireless Boulevard,
     Hauppauge, New York 11788.

(2)  The Company's  outstanding  Common Stock  consists of two classes.  Class A
     Common  Stock and Class B Common  Stock.  The Class A Common  Stock and the
     Class B Common Stock are substantially  identical except that two-thirds of
     the  directors of the Company will be elected by the holders of the Class B
     Common Stock, as long as the number of outstanding Shares of Class B Common
     Stock equals or exceeds 400,000 shares.

(3)  Includes  400,018 shares of Class B Common Stock held by an estate planning
     entity for the benefit of Mr.  Arnberg's  children.  Mr. Arnberg  exercises
     voting control over these shares

(4)  Includes 100,000 shares of Class A Common Stock owned by trusts created for
     the  benefit  of his minor  children  as to which he  disclaims  beneficial
     ownership.

(5)  Includes  options to purchase  10,000  shares of Class A Common Stock at an
     exercise  price of  $0.96,  12,500  shares  of  Class A Common  Stock at an
     exercise  price of  $0.27,  10,000  shares  of  Class A Common  Stock at an
     exercise price of $0.92 per share,  6,667 shares of Class A Common Stock at
     an exercise  price of $1.02 per share and options to purchase  3,333 shares
     of Class A Common  Stock at an  exercise  price of $1.33  per  share.  Also
     includes  warrants to  purchase  50,000  shares of Class A Common  Stock at
     $0.50 per share. Does not include options to purchase 3,333 shares of Class
     A Common  Stock at an  exercise  price of $1.02 per share  and  options  to
     purchase  6,667  shares of Class A Common  Stock at and  exercise  price of
     $1.33.

(6)  Includes  options to purchase  10,000  shares of Class A Common Stock at an
     exercise  price of  $0.89,  10,000  shares  of  Class A Common  Stock at an
     exercise  price of  $0.27,  10,000  shares  of  Class A Common  Stock at an
     exercise price of $0.92 per share,  6,667 shares of Class A Common Stock at
     an exercise  price of $1.02 per share and options to purchase  3,334 shares
     of Class A Common Stock at an exercise  price of $1.33 per share.  Does not
     include  options  to 3,333  shares of Class A Common  Stock at an  exercise
     price of $1.02 per share and  options to purchase  6,666  shares of Class A
     Common Stock at and exercise price of $1.33.

(7)  Includes  options to purchase  6,667  shares of Class A Common  Stock at an
     exercise  price of $1.01 per share and options to purchase  3,333 shares of
     Class A Common  Stock at an  exercise  price of $1.33 per  share.  Does not
     include  options to  purchase  3,333  shares of Class A Common  Stock at an
     exercise  price of $1.01 per share and options to purchase  6,667 shares of
     Class A Common Stock at and exercise price of $1.33.

(8)  Includes options to purchase 100,000,  275,000,  150,000 and 100,000 shares
     of Class A Common  Stock at an exercise  price of $0.95,  $0.27,  $1.12 and
     $1.34 per share  respectively.  Does not include options to purchase 25,000
     shares of Class A Common Stock at an exercise price of $0.27 per share.

(9)  Includes options to purchase 50,000,  154,000,  40,000 and 50,000 shares of
     Class A Common Stock at an exercise price of $0.52,  $0.27, $1.12 and $1.34
     per share respectively.  Does not include options to purchase 14,000 shares
     of Class A Common Stock at an exercise price of $0.27 per share.

     The Company is unaware of any arrangements  between  stockholders  that may
     result in a change in control of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Effective  January  31,  2004.  we  executed a TUI  Agreement  with  Tajima
pursuant  to which we sold all of the  common  stock  constituting  a 55% equity
interest of our TUI subsidiary owned by us to Tajima. The Company's Consolidated
Financial  Statements have been restated to reflect the discontinued  operations
of TUI (See Note 7 to the Consolidated Financial Statements).

     During the quarter ended April 30, 2004,  we  determined  that our Hometown
Threads subsidiary was not strategic to our long-term objectives. On October 22,
2004, we sold substantially all of the assets of our Hometown Threads subsidiary
to Embroidery Acquisition LLC, a wholly owned subsidiary of PCA, LLC pursuant to
the terms of a certain Asset Purchase Agreement.  Hometown Threads was accounted
for as discontinued  operations in the consolidated financial statements for all
periods presented (See Note 7 to the Consolidated Financial Statements).

     Prior to January 2003, we had advanced  approximately $496,000 for premiums
on split dollar life insurance for Henry Arnberg,  the Company's Chairman of the
Board and Paul Levine, our former Vice-Chairman of the Board. The spouse of each
Messrs.  Arnberg and Levine are the beneficiaries of these respective  policies.
These advances are  collateralized  by the cash surrender value of the policies,
which  totaled in the aggregate  approximately  $989,000 at January 28, 2006 for
both policies.  The premiums for these policies are currently  being paid out of
the accumulated dividends for the policies.

     On April 2, 2004, we entered into a 36 month consulting agreement with Paul
Levine, former Vice-Chairman of the Board of Directors. Under the agreement, Mr.
Levine  resigned  from the Board of Directors  and was relieved of all fiduciary
positions or committees. Mr. Levine is longer an employee of the Company and for
the term of the agreement is considered an independent contractor. A monthly fee
of  $9,166.67  will be paid to Mr.  Levine,  in  addition to the cost of medical
benefits as provided to executive level  employees of the Company,  premiums for
his  disability  policy and payments  under an  automobile  lease which  expired
January 18, 2005. Mr. Levine will provide  consulting  services for up to 4 days
per month during the term of the agreement including  attendance at trade shows,
business  development  activities,  contact with key customer accounts,  product
assessment and undertaking special projects.

     During the fourth quarter of fiscal 2005, Howard Arnberg,  former President
of Hometown Threads,  received a lump sum payment in the amount of $92,500. This
payment was made  pursuant  to a change of control  provision  in an  employment
agreement  between  Mr.  Howard  Arnberg and us in  connection  with the sale of
Hometown Threads in October,  2004.  Howard Arnberg is no longer affiliated with
the Company.

     On December 1, 2004, we entered into a 36 month  consultant  agreement with
Henry  Arnberg,  Chairman of the Board of Directors.  Under the  agreement,  Mr.
Arnberg is no longer an employee of the company, but will remain Chairman of the
Board of Directors. A monthly fee of $12,500 will be paid to Mr. Arnberg in lieu
of any other compensation for his service on the Board of Directors. Mr. Arnberg
would continue to receive medical benefits as provided to the executive level of
employees of the Company,  premiums for his disability policy and payments under
the current  automobile lease until the lease expires.  Mr. Arnberg will provide
consulting services for up to 10 days per month during the term of the agreement
including attendance at trade shows, contact with key customer accounts, product
assessment and undertaking special projects.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The policy of the Audit Committee is to review and  pre-approve  both audit
and  non-audit  services  to be provided by our  independent  registered  public
accounting firm (other than certain  exceptions  permitted by the Sarbanes Oxley
Act of 2002). The Audit Committee  negotiates the annual audit fee directly with
our independent registered public accounting firm. Any work in addition to these
pre-approved  services in a quarter  requires the advance  approval of the Audit
Committee.  The Audit Committee  considered and discussed with BDO Seidman,  LLP
and  management as to whether the provision of permitted  non-audit  services is
compatible with maintaining BDO Seidman,  LLP's independence.  All fees for both
audit and tax services were pre-approved by the Audit Committee.

     The  following  table  sets  forth  the fees paid to BDO  Seidman,  LLP for
professional  services for each of the two fiscal  years ended  January 28, 2006
and January 29, 2005:

                                             2006                 2005
                                         ----------------     --------------
       Audit Fees......................    $157,000             $160,500
       Audit-Related Fees..............      17,000              114,000
       Tax Fees........................      30,500               30,500
                                         ----------------     --------------
                                           $204,500             $305,000
                                         ================     ==============

     Audit fees  include  fees billed for (a) the audit of Hirsch  International
Corp. and its consolidated  subsidiaries,  (b) the review of quarterly financial
information,  (c)  attendance  at the annual  stockholders'  meeting and (d) the
statutory audit for one subsidiary.

     Audit-Related  Fees include fees billed for (a)  consultation on accounting
matters and (b) the audit of an employee  benefit plan and (c)  assistance  with
the proposed merger with Sheridan Square Entertainment.

     Tax Fees  include  fees  billed  for the  preparation  of tax  returns  and
consulting on tax examinations and planning matters.


                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


The following documents are filed as part of this report:

    (a)(1) All financial statements                              Page(s)
    Index to Consolidated Financial Statements..................  F-1
    Report of Independent Registered Public Accounting Firm.....  F-2
    Consolidated Balance Sheets.................................  F-3 to F-4
    Consolidated Statements of Operations.......................  F-5
    Consolidated Statements of Stockholders' Equity.............  F-6
    Consolidated Statements of Cash Flows.......................  F-7
    Notes to Consolidated Financial Statements..................  F-8 to F-27
    Exhibits....................................................  F-28 to F-32

    (a)(3) Exhibits which are listed on the Exhibit Index below

                                  EXHIBIT INDEX

  Exhibit No.       Description of Exhibit
----------------    ----------------------------------------------------------

     %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 Distributorship  Agreement dated as of April, 2004 among the Company,
          Tajima  Industries Ltd ("Tajima"),  Tajima USA, Inc ("TUI") and Tajima
          America Corp.("TAC")

     @10.2 Distributorship  Agreement dated as of April, 2004 among the Company,
          Tajima  Industries Ltd ("Tajima"),  Tajima USA, Inc ("TUI") and Tajima
          America Corp.("TAC")

  +++10.3 1993 Stock Option Plan, as amended

  ***10.4 2003 Stock Option Plan, as amended

  +++10.5 1994 Non-Employee Director Stock Option Plan, as amended

*****10.6 2004 Non-Employee Director Stock Option Plan

   **10.7 Lease  Agreement  dated  March  8,  2001  between  the  Company  and
          Brandywine Operating Partnership, L.P.

   ++10.8 First Amendment to Lease dated December 2001 between the Company and
          Brandywine Operating Partnership, L.P.

 ****10.9 Loan and Security  Agreement dated as of November 26, 2002, by and
          between  Congress   Financial   Corporation,   as  Lender  and  Hirsch
          International Corp., as Borrower.

++++10.10 Amendment No.1 to Loan and Security  Agreement  dated as of April
          28, 2003

   #10.11 Amendment No.2 to Loan Security Agreement dated as of July 16, 2003

   +10.12 Amendment No.3 to Loan and Security Agreement dated April 30, 2004

   @10.13 Amendment  No. 4 to Loan and  Security  Agreement  dated  August 31,
          2004.

  ## 10.14 Agreement and Plan of Merger dated July 20, 2005.

    10.15 Lease  Agreement  dated  February 23, 2006 between the Company and 50
          Engineers Road H LLC.

     21.1 List of Subsidiaries of the Registrant

     23.1 Independent Registered Public Accounting Firm Consent

     31.1 Certification of Chief Executive  Officer pursuant to Rules 13a-14 and
          15d-14 of the Securities Exchange Act of 1934.

     31.2 Certification of Chief Financial  Officer pursuant to Rules 13a-14 and
          15d-14 of the Securities Exchange Act of 1934.

     32.1 Certification  of Chief Executive  Officer  pursuant to Section 906 of
          the Sarbanes-Oxley Act of 2002.

     32.2 Certification  of Chief Financial  Officer  pursuant to Section 906 of
          the Sarbanes-Oxley Act of 2002.

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

     %    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  Form 10-Q filed for
          the quarter ended July 31, 2004.

     +    Incorporated  by reference from  Registrant's  Form 10-K filed for the
          year ended January 29, 2005.

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

     **   Incorporated by reference from  Registrant's  Report on Form 8-K filed
          with the Commission March 15, 2001.

     ++   Incorporated by reference from  Registrant's  Form 10-K for the fiscal
          year ended January 31, 2002.

     +++  Incorporated by reference from Registrant's definitive proxy statement
          filed with the Commission on May 30, 2002.

     ***  Incorporated by reference from Registrant's definitive proxy statement
          filed with the Commission on December 21, 2005.

     **** Incorporated  by reference from  Registrant's  Report on Form 8-K with
          the Commission on December 6, 2002.

    ***** Incorporated  by  reference  from   Registrant's   definitive   proxy
          statement filed with the Commissions on August 6, 2004.

     ++++ Incorporated by reference from Registrant's  Report on Form 10-K filed
          with the Commission on April 30, 2003.

     #    Incorporated by reference from Registrant's  Report on Form 10-Q filed
          with the Commission on September 15, 2003.

     ##   Incorporated by reference from  Registrant's  Report on Form 8-K filed
          with the Commission on July 26, 2005.

<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:
                                     -----------------------------
                                     Paul Gallagher, President
                                     Chief Executive Officer and
                                     Chief Operating Officer
Dated:  April 27, 2006

     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>
----------------------------------    Chairman of the Board of Directors                          April 27, 2006
Henry Arnberg


----------------------------------    President, Chief Executive Officer (Principal               April 27, 2006
Paul Gallagher                        Executive Officer), Chief Operating Officer and
                                      Director



----------------------------------    Executive VP-Finance and Administration, and Chief          April 27, 2006
Beverly Eichel                        Financial Officer (Principal Accounting and Financial
                                      Officer), Secretary


----------------------------------    Corporate Controller                                        April 27, 2006
Daniel Vasquez


----------------------------------    Director                                                    April 27, 2006
Marvin Broitman


----------------------------------    Director                                                    April 27, 2006
Mary Ann Domuracki


----------------------------------    Director                                                    April 27, 2006
Christopher Davino
</TABLE>


<PAGE>


                          INDEX TO FINANCIAL STATEMENTS
                           HIRSCH INTERNATIONAL CORP.

<TABLE>
<CAPTION>

Report of Independent Registered Public Accounting Firm                          F-2

Consolidated Financial Statements

<S>                                   <C> <C>              <C> <C>                 <C> <C>
         Balance Sheets as of January 28, 2006 and January 29, 2005              F-3-F-4

         Statements of Operations for the years ended
                  January 28, 2006, January 29, 2005 and January 31, 2004        F-5

         Statements of Stockholders' Equity for the years ended
                  January 28, 2006, January 29, 2005 and January 31, 2004        F-6

         Statements of Cash Flows for the years ended
                  January 28, 2006, January 29, 2005 and January 31, 2004        F-7

         Notes to the Consolidated Financial Statements                          F-8-F-27
</TABLE>

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
Hirsch International Corp.
Hauppauge, New York


     We have  audited the  accompanying  consolidated  balance  sheets of Hirsch
International  Corp.  and  subsidiaries  as of January  28, 2006 and January 29,
2005,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three  years in the period  ended  January
28, 2006.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
controls over financial reporting. Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of Hirsch
International  Corp.  and  subsidiaries  as of January  28, 2006 and January 29,
2005,  and the results of their  operations and their cash flows for each of the
three years in the period ended January 28, 2006, in conformity  with accounting
principles generally accepted in the United States of America.



-----------------------------
BDO Seidman, LLP
Melville, New York

March 31, 2006, except for Note 16 which is April 26, 2006.


<PAGE>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>
                                                                              JANUARY 28,           JANUARY 29,
ASSETS                                                                           2006                   2005
                                                                         ---------------------  ---------------------

CURRENT ASSETS:
<S>                                                                          <C>                      <C>
   Cash and cash equivalents                                                 $13,166,000              $6,398,000
   Restricted cash (Note 2c)                                                     510,000               5,650,000

   Accounts receivable, net of an allowance for possible losses
   of $372,000 and $630,000, respectively (Notes 4 and 15c)                    4,929,000               4,914,000
   Inventories, net (Notes 3, 4 and 15c)                                       4,128,000               5,776,000
   Other current assets                                                          513,000                 393,000
   Assets of discontinued operations (Note 7)                                          -                 831,000
                                                                         ---------------------  ---------------------
                          Total current assets                                23,246,000              23,962,000
                                                                         ---------------------  ---------------------

PROPERTY, PLANT AND EQUIPMENT, Net (Note 6)                                    1,574,000               1,949,000
OTHER ASSETS (Note 8)                                                          1,534,000                 715,000
                                                                         ---------------------  ---------------------
                              TOTAL ASSETS                                   $26,354,000             $26,626,000
                                                                         =====================  =====================
</TABLE>


See notes to consolidated financial statements.


<PAGE>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                JANUARY 28,                   JANUARY 29,
LIABILITIES AND STOCKHOLDERS' EQUITY                                               2006                          2005
                                                                            ---------------------         ---------------------

CURRENT LIABILITIES:

   Accounts payable and accrued expenses (Notes 4,9,15(d))                           $9,428,000                    $8,346,000
<S>                                                <C>                                <C>                             <C>
   Capitalized lease obligation - short term (Note 10)                                1,270,000                       148,000
   Customer deposits and other                                                          430,000                       585,000
   Liabilities of discontinued operations (Note 7)                                           -                      1,495,000

                                                                            ---------------------         ---------------------
                  Total current liabilities                                          11,128,000                    10,574,000

CAPITALIZED LEASE OBLIGATIONS - Less current maturities (Note 10)                             -                     1,270,000
DEFERRED GAIN - (Note 10)                                                               608,000                       727,000
                                                                            ---------------------         ---------------------
                                                                                     11,736,000                    12,571,000
   Total liabilities                                                        ---------------------         ---------------------

COMMITMENTS AND CONTINGENCIES (Note 15, 16)

STOCKHOLDERS' EQUITY (Note 12):
   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; 9,104,000 and 9,002,000 shares respectively                   91,000                        90,000
   Class B common stock, $.01 par value; authorized: 3,000,000 shares,
   outstanding: 525,000 and 600,000 shares, respectively                                  5,000                         6,000
   Additional paid-in capital                                                        41,471,000                    41,465,000
   Accumulated deficit                                                             (24,952,000)                  (25,489,000)
                                                                            ---------------------         ---------------------
                                                                                     16,615,000                    16,072,000
   Less: Treasury Class A Common stock at cost - 1,143,000 shares at
   January 28, 2006 and 1,164,000 shares at January 29, 2005 (Note 13)                1,997,000                     2,017,000
                                                                            ---------------------         ---------------------
        Total stockholders' equity                                                   14,618,000                    14,055,000
                                                                            ---------------------         ---------------------
                                                                                    $26,354,000                   $26,626,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  =====================         =====================

See notes to consolidated financial statements.
</TABLE>


<PAGE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                             Years Ended
                                                                         January 28,          January 29,         January 31,
                                                                            2006                2005                2004
                                                                       ----------------    ----------------    ----------------
                                                                          $51,139,000         $44,394,000         $47,116,000
NET SALES

<S>                 <C>                                                    <C>                 <C>                 <C>
COST OF SALES (Note 15d,e)                                                 34,033,000          30,660,000          32,003,000
                                                                       ----------------    ----------------    ----------------
                                                                           17,106,000          13,734,000          15,113,000
GROSS PROFIT
                                                                       ----------------    ----------------    ----------------

OPERATING EXPENSES
    Selling, general and administrative expenses                           16,337,000          15,874,000          18,204,000
    Restructuring costs (income)                                              147,000                   -           (716,000)
                                                                       ----------------    ----------------    ----------------
                  Total operating expenses                                 16,484,000          15,874,000          17,488,000
                                                                       ----------------    ----------------    ----------------

OPERATING INCOME (LOSS)                                                       622,000         (2,140,000)         (2,375,000)
                                                                       ----------------    ----------------    ----------------

OTHER INCOME  (EXPENSE)
    Interest expense                                                        (166,000)           (185,000)           (215,000)
    Transaction costs (Note 16)                                             (605,000)                   -                   -
    Other income (expense) - net                                              271,000             186,000             565,000
                                                                       ----------------    ----------------    ----------------
                  Total other (expense) income                              (500,000)               1,000             350,000
                                                                       ----------------    ----------------    ----------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME
TAXES, AND DISCONTINUED OPERATIONS                                            122,000          (2,139,000)         (2,025,000)

INCOME TAX PROVISION (Note 11)                                                 32,000               9,000              25,000
                                                                       ----------------    ----------------    ----------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                                       90,000         (2,148,000)         (2,050,000)

INCOME FROM DISCONTINUED OPERATIONS - NET (Note 7)
(Includes $943,000 gain on sale
of Hometown Threads for fiscal 2005)                                          447,000             376,000           2,494,000
                                                                       ----------------    ----------------    ----------------
                                                                             $537,000        ($1,772,000)            $444,000
NET INCOME (LOSS)
                                                                       ================    ================    ================

INCOME/(LOSS) PER SHARE:
    BASIC:
    Income (loss) from continuing operations                                    $0.01             ($0.26)             ($0.24)
    Income (loss) from discontinued operations                                   0.05                0.05                0.29

                                                                       ================    ================    ================
         Net income (loss)                                                      $0.06            ($0.21)                $0.05
                                                                       ================    ================    ================

    DILUTED:
    Income (loss) from continuing operations                                    $0.01             ($0.26)             ($0.24)
    Income (loss) from discontinued operations                                   0.05                0.05                0.29

                                                                       ================    ================    ================
         Net income (loss)                                                      $0.06             ($0.21)               $0.05
                                                                       ================    ================    ================

WEIGHTED AVERAGE NUMBER OF SHARES IN THE CALCULATION
OF INCOME (LOSS) PER SHARE
    Basic                                                                   8,481,000           8,351,000           8,571,000
                                                                       ================    ================    ================
    Diluted                                                                 9,617,000           8,351,000           8,571,000
                                                                       ================    ================    ================
See notes to consolidated financial statements.
</TABLE>


<PAGE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
       YEARS ENDED JANUARY 28, 2006, JANUARY 29, 2005 AND JANUARY 31, 2004
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                             Class A                         Class B
                                                          Common Stock                     Common Stock
                                                            (Note 12)                      (Note 12)
                                               --------------------------------   ------------------------------
                                                  Shares          Amount          Shares            Amount         Additional
                                                                                                                  Paid-In Capital
                                               ---------------   --------------   ------------    --------------  ----------------

<S>              <C> <C>                             <C>                <C>          <C>               <C>            <C>
BALANCE, JANUARY 31, 2003                            6,815,000          $68,000      2,668,000         $27,000        $41,397,000
     Exercise of stock options & warrants               12,000               --             --              --             11,000
    Dividends                                               --               --             --              --                 --
    Purchase of treasury shares (Note 13)                   --               --             --              --                 --
  Net income                                                --               --             --              --                 --
                                               ---------------   --------------   ------------    --------------  ----------------
BALANCE, JANUARY 31, 2004                            6,827,000           68,000      2,668,000          27,000         41,408,000
   Exercise of stock options & warrants                107,000            1,000             --              --             57,000
   Dividends                                                --               --             --              --                 --
  Transfers                                          2,068,000           21,000    (2,068,000)        (21,000)                 --
    Net loss                                                --               --             --              --                 --
                                               ---------------   --------------   ------------    --------------  ----------------
BALANCE, JANUARY 29, 2005                            9,002,000           90,000        600,000           6,000         41,465,000
   Exercise of stock options & warrants                 27,000               --             --              --              6,000
  Transfers                                             75,000            1,000       (75,000)         (1,000)                 --
  Treasury shares issued for services                       --               --             --              --                 --
    Net income                                              --               --             --              --                 --
                                               ---------------   --------------   ------------    --------------  ----------------
BALANCE, JANUARY 28, 2006                            9,104,000          $91,000        525,000          $5,000        $41,471,000
                                               ===============   ==============   ============    ==============  ================



                                                                        Treasury
                                                   Accumulated            Stock
                                                     Deficit             (Note 13)            Total
                                               --------------------    ---------------    ---------------

BALANCE, JANUARY 31, 2003                          $ (23,825,000)      $ (1,602,000)        $16,065,000
    Exercise of stock options & warrants                       --                 --             11,000
    Purchase of treasury shares (Note 13)                      --          (415,000)          (415,000)
    Dividends                                           (257,000)                 --          (257,000)
     Net income                                           444,000                 --           $444,000
                                               --------------------    ---------------    ---------------
BALANCE, JANUARY 31, 2004                            (23,638,000)        (2,017,000)        $15,848,000
    Exercise of stock options & warrants                       --                 --             58,000
    Dividends                                            (79,000)                 --           (79,000)
     Net loss                                         (1,772,000)                 --        (1,772,000)
                                               --------------------    ---------------    ---------------
BALANCE, JANUARY 28, 2005                            (25,489,000)        (2,017,000)         14,055,000
    Exercise of stock options & warrants                       --                 --              6,000
  Treasury shares issued for services                          --             20,000             20,000
     Net income                                           537,000                 --            537,000
                                               --------------------    ---------------    ---------------
BALANCE, JANUARY 28, 2006                           $(24,952,000)       $(1,997,000)        $14,618,000
                                               ====================    ===============    ===============

See notes to consolidated financial statements.
</TABLE>


<PAGE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               YEARS ENDED JANUARY

------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                             January 28,         January 29,          January 31,
                                                                                 2006                2005                 2004
                                                                                 ----                ----                 ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                             <C>              <C>                      <C>
   Net income (loss)                                                            $537,000         $(1,772,000)            $444,000
   Adjustments to reconcile net income (loss) to net cash provided
   by (used in) operating activities:
   Depreciation and amortization                                                 582,000              786,000             887,000
   Gain on sale of assets                                                              -                    -            (50,000)
   Recognized gain on sale of building                                         (119,000)            (119,000)           (119,000)
   Provision for (reversal of) reserves                                          570,000            (200,000)           (140,000)
   Minority interest                                                                   -                    -            235,000
   Reversal of restructuring accrual reserves                                          -                    -           (716,000)
   Gains from discontinued operations                                          (447,000)            (943,000)         (2,000,000)
   Treasury stock issued for services                                             20,000

CHANGES IN ASSETS AND LIABILITIES:
   Accounts receivable                                                          (65,000)            1,838,000         (2,493,000)
   Net investments of sales type leases                                           43,000             (85,000)            553,000
   Inventories                                                                 1,298,000            1,142,000          1,431,000
   Other current assets and other assets                                           9,000            (315,000)            453,000
   Trade acceptances payable                                                           0          (1,324,000)            355,000
   Accounts payable and accrued expenses                                         426,000              280,000          1,994,000
   Prepaid income taxes and income taxes payable                                 (6,000)              (8,000)          3,176,000
                                                                          ---------------    -----------------    -----------------
     Net cash provided by (used in) operating activities                       2,848,000            (720,000)          4,010,000
                                                                          ---------------    -----------------    -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                         (49,000)            (166,000)           (552,000)
   Proceeds from sale of fixed assets                                                                       -            100,000
   Proceeds from sale of subsidiary                                                                 1,139,000            500,000
   Investment in Sheridan Square Entertainment, LLC                          (1,000,000)
                                                                          ---------------    -----------------    -----------------
     Net cash (used in) provided by investing activities                     (1,049,000)              973,000             48,000
                                                                          ---------------    -----------------    -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Restricted cash                                                             5,140,000          (2,650,000)         (2,100,000)
   Repayments of long-term debt                                                (177,000)            (147,000)           (123,000)

   Exercise of stock options                                                       6,000               58,000             11,000
   Payment of dividends                                                                              (79,000)           (170,000)
   Purchase of treasury shares                                                                              -           (415,000)
                                                                          ---------------    -----------------    -----------------
     Net cash provided by (used in) financing activities                       4,969,000          (2,818,000)         (2,797,000)
                                                                          ---------------    -----------------    -----------------
 NCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               6,768,000          (2,565,000)          1,261,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   6,398,000            8,963,000          7,702,000
                                                                          ---------------    -----------------    -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                        13,166,000           $6,398,000         $8,963,000
                                                                          ===============    =================    =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest and bank fees paid                                                  $569,000             $566,000           $584,000
                                                                          ===============    =================    =================
   Income taxes paid                                                             $41,000              $50,000           $350,000
                                                                          ===============    =================    =================
</TABLE>

Supplemental  Disclosure of non-cash investing activity:  In connection with the
sale of its TUI  subsidiary  effective  January 31, 2004,  the Company  incurred
accounts payable to TUI in the amount of $4.5 million.

See notes to consolidated financial statements.


<PAGE>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       YEARS ENDED JANUARY 28, 2006, JANUARY 29, 2005 AND JANUARY 31, 2004

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

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"),   Hirsch  Business   Concepts  LLC  ("HBC"),   Hometown  Threads  LLC
("Hometown")  through  October 22, 2004,  and Tajima USA, Inc.  ("TUI")  through
January 31, 2004 (collectively, the "Company").

     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.

     As of January  31, 2004 the Company  sold its  majority  position in TUI to
Tajima  Industries,  Ltd.  ("Tajima")  and its  earnings  have been  reported as
discontinued operations.

     See  Note 7 to  the  Consolidated  Financial  Statements  for  discontinued
operations of HAPL, Hometown and TUI.

     Due to the  discontinuation  of entities noted above, the Company currently
only operates in a single reportable segment.

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.
          All  material   inter-company  balances  and  transactions  have  been
          eliminated in consolidation.

     b.   Revenue  Recognition - The Company distributes  embroidery  equipment.
          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.
          In fiscal years 2006,  2005, and 2004, most sales of new equipment did
          not  require  installation  as a  substantive  part of its  sales  and
          accordingly; these sales were recorded at the time of shipment.

          Service  revenues and costs are recognized when services are provided.
          Sales  of  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.  As of January 28,
          2006,  the Company had $0.5 million in restricted  cash which was used
          as a security  deposit for the  Company's  corporate  headquarters  in
          Hauppauge, NY. As of January 29, 2005, the Company had $5.7 million in
          restricted cash which was used to  collateralize  outstanding  standby
          letters of credit.  During  fiscal 2006,  the Company  terminated  the
          standby  letter  of  credit  related  to  machine  purchases,  thereby
          unrestricting  $5.2 million in cash. On February 23, 2006, the Company
          terminated its lease for its corporate headquarters and terminated its
          standby letter of credit which then in turn unrestricted its cash.

     d.   Allowance for Doubtful  Accounts - The Company  maintains an allowance
          for estimated  losses resulting from the inability of its customers to
          make required payments.  An estimate of uncollectible  amounts is made
          by  management  based  upon  historical  bad debts,  current  customer
          receivable  balances,   age  of  customer  receivable  balances,   the
          customer's  financial  condition and current economic  trends.  If the
          actual  uncollected   amounts   significantly   exceed  the  estimated
          allowance, then the Company's operating results would be significantly
          and adversely affected.

     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  weighted average 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.  Used  equipment is valued based on an
          assessment of age, condition,  model type,  accessories,  capabilities
          and demand in the used machine market.

     f.   Foreign  Currency   Transactions  -  Trade  acceptances   payable  are
          denominated  in  Japanese  yen  and are  related  to the  purchase  of
          equipment  from the Company's  major  supplier.  Gains and losses from
          foreign currency transactions are included in cost of sales.

     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:

                Furniture and fixtures                         3-7
                Machinery and equipment                        3-7
                Software                                       3
                Automobiles                                    3-5
                Leasehold improvements                         3-20
                Property under capital lease                   10


     h.   Impairment  of  Long-Lived  Assets - The  Company  reviews  long-lived
          assets whenever events or changes in  circumstances  indicate that the
          carrying value of any of these assets may not be recoverable.  In that
          regard the Company will assess the recoverability of such assets based
          upon estimated undiscounted cash flow forecasts.

     i.   Warranty - The Company has a five-year limited warranty policy for its
          embroidery  machines.  The Company's policy is to accrue the estimated
          cost of satisfying  future  warranty  claims on a quarterly  basis. In
          estimating  its future  warranty  obligations,  the Company  considers
          various  relevant  factors,  including the Company's  stated  warranty
          policies and practices,  the historical  frequency of claims,  and the
          cost to replace or repair its products under  warranty.  If the number
          of actual  warranty  claims or the cost of satisfying  warranty claims
          significantly  exceeds the estimated  warranty reserve,  the Company's
          operating  expenses  and net  income  (loss)  could  be  significantly
          adversely affected.

     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.   Income Taxes - The Company records 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.

     l.   Income  (Loss) Per Share - 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  dilutive  common stock
          equivalents  (options  and  warrants)  outstanding  during the period,
          computed in accordance  with the treasury  stock  method.  Outstanding
          options and  warrants of 1,136,000  were  dilutive for the fiscal year
          ended  January  28,  2006 and  160,000  outstanding  options  were not
          dilutive. Outstanding options and warrants of 1,253,000, and 1,258,000
          were  anti-dilutive  for the fiscal  years ended  January 29, 2005 and
          January 31, 2004,  respectively.  Included in the calculation of basic
          and diluted earnings per share were 1,143,000 in treasury shares.

     m.   Stock-Based Compensation - The Company accounts for stock-based awards
          to employees using the intrinsic value method.

          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  (loss) and earnings
          (loss) 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 at the date of the  grant  using  the  Black-Scholes  option
          pricing model with the following weighted average assumptions:  Fiscal
          2006:  dividend  yield  of  0.00%,  volatility  of 78% and  risk  free
          interest  rate of 4.45% for  grants on  1/27/06,volatility  of 71% and
          risk free interest rate of 3.84% for grants on 6/10/05,  volatility of
          74% and risk free  interest  rate of 3.72% for grants on 4/1/05 and an
          expected  life of 5 years.  Fiscal  2005:  dividend  yield  of  0.00%,
          volatility  of 67% and risk free  interest rate of 3.72% for grants on
          12/1/2004, 77% volatility and 3.40% risk free interest rate for grants
          on 9/8/2004 and 77%  volatility and 3.35% risk free rate for grants on
          9/17/2004.  Fiscal 2004:  dividend yield of 4.00%,  volatility of 72%,
          risk-free  interest rate of 2.37% for grants on 06/02/2003,  2.14% for
          grants  on  06/16/2003  and  2.63% for  grants  on  07/09/2003  and an
          expected life of 5 years.  The Company's  calculations  are based on a
          multiple option  valuation  approach and forfeitures are recognized as
          they occur.  The weighted  average  fair value of the options  granted
          during 2006, 2005 and 2004 was $1.24, $1.11 and $0.84, respectively.

          If  compensation  cost  for  the  Company's  stock  options  had  been
          determined  consistent  with SFAS No. 123,  the  Company's  net income
          (loss) and  earnings  (loss)  per share  would have been the pro forma
          amounts indicated below:

<TABLE>
<CAPTION>

                                                                    Year Ended
                                           January 28               January 29              January 31
                                              2006                     2005                    2004
                                              ----                     ----                    ----

Net income (loss):
<S>                                         <C>                    <C>                       <C>
  Net income (loss) as reported             $537,000               $(1,772,000)              $444,000

Deduct Total stock-based employee
compensation expense determined
under fair value method                      229,000                  103,000                 70,000
                                       --------------------     --------------------    --------------------
  Pro forma net income (loss)               $308,000               $(1,875,000)              $374,000
                                       ====================     ====================    ====================
Earnings (loss) per share:
  Basic - as reported                         $0.06                   $(0.21)                  $0.05
  Basic - pro forma                           $0.04                   $(0.22)                  $0.04

  Diluted - as reported                       $0.06                   $(0.21)                  $0.05
  Diluted- pro forma                          $0.03                   $(0.22)                  $0.04
</TABLE>

     n.   Comprehensive Income - Statement of Financial Accounting Standards No.
          130.  "Reporting  Comprehensive  Income" ("SFAS 130") is equivalent to
          the Company's net income for fiscal years 2006, 2005 and 2004.

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

     p.   Fair Value of Financial  Instruments - Financial  instruments  consist
          primarily of  investments  in cash,  cash  equivalents,  trade account
          receivables,  accounts  payable  and debt  obligations.  Where  quoted
          market prices are not  available,  fair values are estimated  based on
          assumptions  concerning the amount and timing of estimated future cash
          flow and assumed discount rates  reflecting  varying degrees of credit
          risk, at January 28, 2006 and January 29, 2005,  the fair value of the
          Company's financial instruments approximated the carrying value.

     q.   Recent Accounting  Pronouncements - The Financial Accounting Standards
          Board ("FASB") has issued the following:

               In  November  2004,  the FASB  issued  SFAS No.  151,  "Inventory
          Costs," which  clarifies the accounting  for abnormal  amounts of idle
          facility  expense,   freight,  handling  costs,  and  wasted  material
          (spoilage) by requiring these items to be recognized as current-period
          charges. SFAS No. 151 is effective for inventory costs incurred during
          fiscal years beginning  after June 15, 2005, with earlier  application
          permitted.  The  adoption  of SFAS No.  151 will have no impact on our
          results of operations or our financial position.

               In  December  2004,  the  FASB  issued  SFAS  123R,  "Share-Based
          Payment."  This statement is a revision of SFAS 123,  "Accounting  for
          Stock-Based Compensation" and supercedes APB 25, "Accounting for Stock
          Issued to Employees,"  and is effective  beginning the first annual or
          interim  period  after  December  15,  2005.  SFAS  123R   establishes
          standards on accounting  for  transactions  in which an entity obtains
          employee services in share-based payment transactions.  This statement
          measurement of the cost of employee  services received in exchange for
          an award of equity  instruments  based on the grant-date fair value of
          the award. The cost will be recognized over the period during which an
          employee  is required  to provide  service in exchange  for the award,
          which  is  usually  the  vesting  period.  SFAS  123R  also  addresses
          transactions  in which an entity  incurs  liabilities  in exchange for
          goods or  services  that are based on the fair  value of the  entity's
          equity  instruments  or that may be settled by the  issuance  of those
          equity  instruments.  The  adoption  of this  statement  could  have a
          material effect on our financial position or results of operations. We
          intend to  implement  this  statement  in the first  quarter of fiscal
          2007.

               In  December  2004,  the FASB  issued  SFAS  153,  "Exchanges  of
          Nonmonetary  Assets,"  which is effective  for fiscal years  beginning
          after  June  15,  2005.  SFAS  153  amends  APB  29,  "Accounting  for
          Nonmonetary  Transactions",  which  is  based  on the  principle  that
          exchanges of  nonmonetary  assets should be measured based on the fair
          value of the assets exchanged.  The guidance in APB29 included certain
          exceptions to that principle.  SFAS 153 amends APB 29 to eliminate the
          exception for nonmonetary  exchanges of similar  productive assets and
          replaces it with a general  exception  for  exchanges  of  nonmonetary
          assets that do not have commercial  substance.  A nonmonetary exchange
          has  commercial  substance  if the future cash flows of the entity are
          expected  to change  significantly  as a result of the  exchange.  The
          adoption of this  statement is not expected to have a material  effect
          on our financial position

               In June 2005, the FASB issued SFAS No. 154,  "Accounting  Changes
          and Error  Corrections," which changes the requirements for accounting
          for and  reporting of a change in accounting  principle.  SFAS No. 154
          requires   retrospective   application  to  prior  periods'  financial
          statements of a voluntary change in accounting  principle unless it is
          impracticable.  SFAS No. 154 also  requires that a change in method of
          depreciation,  amortization, or depletion for long-lived, nonfinancial
          assets be accounted  for as a change in  accounting  estimate  that is
          effected  by a  change  in  accounting  principle.  SFAS  No.  154  is
          effective for  accounting  changes and  corrections  of errors made in
          fiscal years  beginning  after  December 15, 2005, but does not change
          the transition  provisions of any existing accounting  pronouncements,
          including  those that are in a  transition  phase as of the  effective
          date of SFAS No.  154.  The  adoption  of SFAS No. 154 will not have a
          material  effect  on  our  results  of  operations  or  our  financial
          position.

               In March 2005, the FASB issued FASB  Interpretation  No. 47 ("FIN
          47"),  "Accounting for Conditional Asset Retirement  Obligations." FIN
          47 clarifies that the term "conditional  asset retirement  obligation"
          as  used  in  SFAS  No.  143,   "Accounting  for  Assets   Retirements
          Obligations,"  refers  to a  legal  obligation  to  perform  an  asset
          retirement  activity in which the timing  and/or  method of settlement
          are  conditional  on a future  event that may or may not be within the
          control of the entity.  Furthermore,  the uncertainty about the timing
          and  or  method  of  settlement  of  a  conditional  asset  retirement
          obligation  should be factored into the  measurement  of the liability
          when sufficient information exists. FIN 47 clarifies that an entity is
          required  to  recognize   the  liability  for  the  fair  value  of  a
          conditional  asset  obligation when incurred if the  liability's  fair
          value can be reasonably  estimated.  The adoption of this statement is
          not expected to have a material  effect on our  financial  position or
          results of  operations.  We intend to implement the provisions of this
          statement in the first  quarter of 2006.  Also in March 2005,  the SEC
          issued Staff Accounting Bulletin No. 107, "Share-Based Payments" ("SAB
          107").  SAB 107 expresses  views of the SEC regarding the  interaction
          between SFAS 123R and certain SEC rules and  regulations  and provides
          the SEC's views  regarding the valuation of  share-based  compensation
          for public companies.  We intend to apply the principles of SAB 107 in
          conjunction with our adoption of SFAS 123R.

     r.   Reclassifications  - Certain  reclassifications  have been  applied to
          prior year amounts to conform to current year presentation.

     s.   Shipping and handling  expenses - The Company  records freight charges
          to  customers  in net  sales  and the cost of the  freight  in cost of
          sales.  Other freight costs are expensed in operating  expenses on the
          statement of operations. These expenses were approximately;  $230,000,
          $200,000,  and  $334,000  during the years  ended  January  28,  2006,
          January 29, 2005, and January 31, 2004, respectively.

     t.   Advertising  expenses - The Company expenses  advertising as incurred.
          These expenses were approximately;  $419,000,  $673,000,  and $608,000
          during the years ended January 28, 2006, January 29, 2005, and January
          31, 2004, respectively

3. INVENTORIES

                                         January 28,           January 29,
                                      ------------------    -------------------
                                            2006                   2005
                                      ------------------    -------------------

New machines                                 $2,386,000             $3,824,000
Used machines                                   183,000                566,000
Parts and accessories                         2,868,000              2,979,000
Less reserve for slow-moving
inventory                                   (1,309,000)            (1,593,000)
                                      ------------------    -------------------
Total                                        $4,128,000             $5,776,000
                                      ------------------ -- -------------------


4. CHANGES IN RESERVES

Allowance for Doubtful Accounts:
--------------------------------
<TABLE>
<CAPTION>

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

<S>                     <C> <C>     <C>              <C>               <C>              <C>                <C>
     Year ended January 28, 2006    $   630,000      $ 150,000         $    408,000     $         0        $  372,000

     Year ended January 29, 2005    $   680,000      $       0         $          0     $   (50,000)       $  630,000

     Year ended January 31, 2004    $ 1,451,000      $ 230,000         $ (1,001,000)    $         0        $  680,000



     Inventory Reserve
     -----------------
                                       Opening                                                             Ending
                                       Balance        Additions         Write Offs       Adjustments       Balance
                                       -------        ---------         ----------       -----------       -------

     Year ended January 28, 2006    $ 1,593,000       $ 350,000       $    634,000       $          0      $1,309,000

     Year ended January 29, 2005    $ 1,582,000       $  59,000       $  (148,000)       $    100,000      $1,593,000

     Year ended January 31, 2004    $ 1,946,000       $  80,000       $          0       $   (444,000)     $1,582,000

     Warranty Reserve
     ----------------
                                       Opening                                                             Ending
                                       Balance        Additions         Write Offs       Adjustments       Balance
                                       -------        ---------         ----------       -----------       -------

     Year ended January 28, 2006    $   543,000       $  187,819       $         0       $   (117,819)    $  613,000

     Year ended January 29, 2005    $   543,000       $  233,602       $         0       $   (233,602)    $  543,000

     Year ended January 31, 2004    $   543,000       $  257,896       $         0       $   (257,896)    $  543,000

</TABLE>


During fiscal 2005, the Company reversed $50,000 in Accounts Receivable reserves
that were no longer necessary.  The Company also received a $100,000 credit from
TUI (a former subsidiary) included in inventory reserve. During fiscal 2004, the
Company reversed $444,000 in inventory reserves that were no longer necessary.


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

                                                                                   January 28,             January 29,
                                                                                --------------------    -------------------
                                                                                       2006                   2005
                                                                                --------------------    -------------------
<S>                                                                                             <C>              <C>
Total minimum lease payments receivable                                                         $0               $228,000
Estimated residual value of leased property (unguaranteed) (A)                                   0                461,000
Reserve for estimated uncollectible lease payments                                               0                (50,000)
Less: Unearned income                                                                            0                (56,000)
                                                                                --------------------    -------------------
Net investment - Included in Assets of discontinued operations                                  $0               $583,000
(See Note 7)
                                                                                ====================    ===================


     (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.


6. PROPERTY, PLANT AND EQUIPMENT

                                                                             January 28,           January 29,
                                                                         --------------------    -----------------
                                                                                2006                   2005
                                                                         --------------------    -----------------
Property Under Capital Lease Obligation                                           $1,786,000           $1,786,000
Software                                                                             614,000              614,000
Machinery and equipment                                                              800,000              760,000
Furniture and fixtures                                                               319,000              319,000
Automobiles                                                                           15,000               35,000
Leasehold improvements                                                               604,000              594,000
                                                                         --------------------    -----------------
Total                                                                              4,138,000            4,108,000
Less: Accumulated depreciation and amortization                                  (2,564,000)          (2,159,000)
                                                                         --------------------    -----------------
Property, plant and equipment, net                                                $1,574,000           $1,949,000
                                                                         ====================    =================
</TABLE>




7. DISCONTINUED OPERATIONS

     In the fourth quarter of Fiscal 2002, the Company  determined that its HAPL
Leasing  subsidiary  was not strategic to the Company's  ongoing  objectives and
discontinued its operations.  Accordingly, the Company reported its discontinued
operations in accordance with SFAS 144. The  consolidated  financial  statements
have  segregated  the  assets,   liabilities  and  operating  results  of  these
discontinued operations for all periods presented.

     In  September  2003,  the Company  entered into a  transaction  whereby the
Company sold to Beacon Funding Corporation the residual  receivables  associated
with the lease portfolio for  approximately  $375,000.  In the fourth quarter of
fiscal 2006, the Company  completed the wind down of the remaining assets of the
lease  portfolio.  In conjunction  with the  termination  of the portfolio,  the
Company reversed, as part of discontinued operations,  $270,000 of reserves that
had previously been recorded in fiscal 2002.

Assets and liabilities of discontinued operations of HAPL Leasing are as follows
(in thousands):

<TABLE>
<CAPTION>

                                                              For the year ended,
                                                       January 28,             January 29,
                                                           2006                   2005
                                                    -------------------      ----------------
 Assets:
<S>                                                        <C>                  <C>
   Accounts receivable.........................            $0                   $   92
   Minimum lease payments receivable and
   residuals (Note 5)......                                 0                      583
   Inventory...................................             0                        0
   Prepaid taxes and other assets.....                      0                        8
                                                    -------------------      ----------------
Total Assets...................................            $0                   $  683
                                                    ===================      ================

Liabilities:
   Accounts payable and accrued expenses                   $0                   $1,009
   Income taxes payable.......................              0                       87
                                                    -------------------      ----------------
Total Liabilities............................              $0                   $1,096
                                                    ===================      ================
</TABLE>

Summary operating results of the discontinued  operations of HAPL Leasing are as
follows (in thousands):

<TABLE>
<CAPTION>

                                               For the year ended
                                         January 28,       January 29,      January 31,
                                             2006             2005              2004
                                             ----             ----              ----
<S>                                          <C>              <C>              <C>
Revenue ...........................          $ 32             $107             $ 619
Gross profit.......................            32               85               278
Income (loss) from discontinued
operations.......                            $270             $  0            $2,000

</TABLE>


     Effective  January 29, 2005, the Company  executed an agreement with Tajima
Industries, Ltd. pursuant to which the Company sold all of the common stock (the
"Shares")  constituting a 55% equity interest of its TUI subsidiary  owned by it
to Tajima,  upon the terms and  conditions  set forth in a certain  Purchase and
Sale Agreement by and among the Company, Tajima and TUI (the "Agreement").  Upon
the consummation of the sale, Tajima owned 100% of TUI and the Company no longer
had an influence  over the  operations of TUI. TUI is reflected as  discontinued
operations in the financial statements.

     The purchase price (the  "Purchase  Price") for the Shares was equal to the
Book Value (as defined in the Agreement) calculated in accordance with generally
accepted accounting principles.  At the closing, Tajima paid the Company the sum
of $500,000 (the "Initial  Payment") in partial  payment of the Purchase  Price.
The remaining  balance due on the Purchase Price was paid in accordance with the
terms of the Agreement.

     In  addition,  the  Company  agreed  to  repay  TUI the sum of  $7,182,002,
representing amounts owed by the Company to TUI as of January 31, 2004 (the "Net
Intercompany Payable"). The Net Intercompany Payable was paid as follows:


     (a)  the Initial Payment  ($500,000) was paid by Tajima to TUI on behalf of
          the Company
     (b)  the  assignment  by the Company to TUI of its right to receive the sum
          of  $2,200,000  from  Tajima  upon  payment of the  balance due on the
          Purchase Price, and
     (c)  the payment by the Company of the sum of  $4,482,000 in five (5) equal
          monthly installments of $735,167 each and a sixth payment of $806,165,
          commencing  February 29,2004 and continuing through and including July
          31, 2004.

The  Consolidated  Financial  Statements  for all  periods  presented  have been
restated to reflect the discontinued operations of TUI.

Summary operating  results of the discontinued  operations of TUI (in thousands)
are as follows:

                                                      For the year
                                                         ended
                                                      January 31,
                                                         2004
                                                     --------------
    Revenue                                             $13,228
    Gross profit                                          1,812
    Income (Loss) from Discontinued Operations             $965


     During the quarter ended April 30, 2004,  the Company  determined  that its
Hometown  Threads,  LLC subsidiary was not strategic to the Company's  long-term
objectives.  On October 22,  2004,  the Company  sold  substantially  all of the
assets of its Hometown  subsidiary to Embroidery  Acquisition  LLC ("Buyer"),  a
wholly owned  subsidiary of PCA, LLC ("PCA")  pursuant to the terms of a certain
Asset  Purchase  Agreement  ("Agreement")  entered  into  between  the  Company,
Hometown,  Buyer and PCA. Pursuant to the Agreement,  the Company,  Hometown and
Buyer have entered  into a certain  Supply  Agreement  having a term of five (5)
years. Under the terms of the Supply Agreement,  the Company agreed to supply to
Buyer and Buyer is required to purchase from the Company all products previously
purchased by Hometown  from the Company and  utilized in the  Business  upon the
prices, terms and conditions contained therein.

     As a result of the sale of the  Hometown  Threads  subsidiary,  the Company
recognized a gain of approximately $943,000 in fiscal 2004.

     The Buyer  withheld  $200,000 from the selling price  primarily  associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits  received for stores not yet opened.  The Company  deferred
the recognition of income on these items until the contingencies  were resolved.
During the fourth  quarter of fiscal 2006,  the Company  resolved the  remaining
open  contingencies  and  recognized  income  from  discontinued  operations  of
approximately $177,000.

     Hometown Threads,  LLC was accounted for as discontinued  operations in the
consolidated financial statements for all periods presented.


Assets and liabilities of the discontinued operations of Hometown Threads, LLC
are as follows (in thousands):

                                                       January 29,
                                                          2005
                                                   ------------------
    Assets:
    Accounts receivable                                      148
    Property, Plant & Equipment                                -
    Other Assets                                               -
                                                   ------------------
    Total Assets                                           $ 148
                                                   ==================

    Liabilities:
    Accounts payable and accrued expenses                  $ 399
                                                   ------------------
                                                   ------------------
    Total Liabilities                                      $ 399
                                                   ==================

Summary  operating  results of the discontinued  operations of Hometown Threads,
LLC (in thousands) are as follows:

<TABLE>
<CAPTION>

                                                        For the year ended
                                           January 28,      January 29,     January 31,
                                               2006            2005             2004
                                          --------------- ---------------- ---------------
<S>                                                 <C>          <C>             <C>
    Revenue                                         $0           $1,425          $1,693
    Gross profit                                     0              646             867
    Gain on Sale                                     0              943               0
    Income (Loss) from
        Discontinued Operations                   $177          $ (567)         $ (471)
</TABLE>


8. OTHER ASSETS

                                               January 28,        January 29,
                                            ----------------   ---------------
                                                 2006                2005
                                            ----------------   ----------------
   Deferred financing costs (1)                          $0           $ 527,000
   Officers Loans Receivable (2)                    496,000             496,000
   Investment in SSE, LLC (3)                     1,000,000                   -
   Other                                             38,000              61,000
                                            ----------------   ----------------
   Total other assets                            $1,534,000          $1,084,000

   Accumulated amortization of Long Term
   Other Assets                                           -           (369,000)
                                            ----------------   ----------------

   Other Assets, net                            $ 1,534,000            $715,000
                                            ================   ================

     (1)  Deferred  financing  costs  related to the (3 year) Loan and  Security
          Agreement in November 2002, and were being  amortized over the term of
          the agreement from Congress Financial Corp.

     (2)  Related to split  dollar  life  insurance  policy on 2 officers of the
          Company. The Company no longer pays the premiums on the policies which
          are  collateralized  by the cash  surrender  value of the  policies of
          $989,000 at January 28, 2006.

     (3)  On  July  20,  2005  the  Company  entered  into a  definitive  merger
          agreement  with  Sheridan  Square   Entertainment,   Inc.   ("Sheridan
          Square"),  a  privately  held  producer  of  recorded  music,  and SSE
          Acquisition Corp, our wholly-owned subsidiary.  In connection with the
          merger agreement the Company purchased 20 shares of Series B Preferred
          Stock of Sheridan  Square for  $500,000.  On September  19, 2005,  the
          Company  purchased an additional 20 shares of series B Preferred stock
          for  $500,000.  The  Series B  Preferred  Stock is senior to all other
          equity securities of Sheridan in terms of dividends, distributions and
          liquidation preference.  Dividends, whether or not declared, accrue at
          the rate of 8% per annum of the sum of the stated  value of each share
          ($25,000)  commencing  January 1, 2006,  provided  that in the event a
          "Disposition   Transaction"   (as  defined  in  the   Certificate   of
          Designation of the Series B Preferred Stock) has not occurred by April
          1,  2006,  the  dividend  rate  shall  increase  to 14% per  annum and
          provided  further that if a Disposition  Transaction does not occur by
          July 1, 2006, the dividend rate shall increase to 18% per annum.  Upon
          the  consummation of the merger,  the Series B Preferred Stock will be
          cancelled and of no further force and effect.  As of January 28, 2006,
          the  Company  expensed  approximately  $605,000 in  transaction  costs
          associated with the termination of the merger between  Sheridan Square
          Entertainment and Hirsch.  (See Note 16 to the Consolidated  Financial
          Statements).

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                    January 28,         January 29,
                                                        2006              2005
                                                   ---------------    --------------
<S>                                                   <C>                 <C>
Other accrued expenses                                $ 1,232,000         $ 516,000
Accounts payable                                        6,302,000         6,887,000
Accrued payroll and bonus costs                         1,281,000           400,000
Accrued warranty                                          613,000           543,000
                                                   ---------------    --------------
Total accounts payable and accrued expenses           $ 9,428,000        $8,346,000
                                                   ===============    ==============
</TABLE>


10. LONG TERM OBLIGATIONS
<TABLE>
<CAPTION>

                                                    January 28,             January 29,
                                                        2006                    2005
                                                ---------------------    -------------------
<S>                                                       <C>                    <C>
                                                          $1,270,000             $1,418,000
Obligation Under Capital Lease (A)
Deferred Gain on Sale of Building (B)                        608,000                727,000
                                                ---------------------    -------------------

    Total                                                  1,878,000              2,145,000
Less: Current maturities                                 (1,270,000)              (148,000)
                                                ---------------------    -------------------
                                                            $608,000             $1,997,000
Long-term maturities                            =====================    ===================

</TABLE>

(A)  Obligation  Under  Capital Lease of the Company at January 28, 2006 matures
     as follows:


        Fiscal Year Ending January 28, 2006                   $ 1,705,000
        Less:  Amount representing interest                     (435,000)
                                                           -----------------
        Present value of net minimum lease payments             1,270,000
        Less current portion                                    1,270,000
                                                           -----------------
        Long term lease obligations                                    $0
                                                           =================


(B)  On March 8,  2001,  the  corporate  headquarters  facility  located  at 200
     Wireless Boulevard, Hauppauge, New York, was sold and partially leased back
     from Brandywine Realty Trust in a concurrent transaction.

     In fiscal 2003, the Company leased the entire facility and the lease of the
     remaining portion of the building was accounted for as an operating lease.

     Concurrent  sale and leaseback  transactions  are subject to specific rules
     regarding  the  timing of the  recognition  of the gain.  This  transaction
     results in a non-recurring  gain of $1.2 million  deferred over the life of
     the lease, a period of ten years.  The related lease  obligation  meets the
     rules requiring classification as a capital lease. The operating expense is
     therefore  reported as interest and  depreciation on a straight-line  basis
     over the life of the  lease,  with both  current  and  long-term  portions,
     rather than rent expense.  The capitalized lease obligation and the related
     asset were booked at an aggregate  value of $1.8  million,  and the term of
     the lease is ten years.  Cash proceeds of  approximately  $4.0 million were
     provided by the sale.

     On February 23, 2006, the Company  terminated  this lease and  concurrently
     signed a new operating  lease of a facility also located in Hauppauge,  New
     York.

     In the first  quarter of Fiscal  2007,  the Company  will write off certain
     balance sheet items related to the sales leaseback  transaction  previously
     recorded in connection  with the  termination  of the lease.  The remaining
     assets of  approximately  $1.2 million will be netted against the remaining
     liabilities of approximately  $1.2 million.  In addition,  after payment of
     surrender fees of approximately $500,000, related to the termination of the
     lease, the Company will recognize the remaining $100,000 in deferred gain.

11. INCOME TAXES


     The income tax provision from continuing operations for each of the periods
presented herein is as follows:

<TABLE>
<CAPTION>

                                                  January 28,            January 29,           January 31,
                                                -----------------     ------------------     -----------------
                                                      2006                  2005                    2004
                                                -----------------     ------------------     -----------------
        Current:
           Federal                                        $ -                    $ -                   $ -
<S>                                                       <C>                     <C>                  <C>
           State                                          32,000                  9,000                25,000
                                                -----------------     ------------------     -----------------
        Total current                                     32,000                  9,000                25,000
                                                -----------------     ------------------     -----------------
        Deferred:
           Federal                                             -                      -                     -
           State and foreign                                   -                      -                     -
                                                -----------------     ------------------     -----------------
        Total deferred:                                        -                      -                     -
                                                -----------------     ------------------     -----------------
        Total income tax provision                        $32,000                 $9,000               $25,000
                                                =================     ==================     =================
</TABLE>


The tax effects of temporary differences that give rise to deferred income tax
assets and liabilities at January 28, 2006 and January 29, 2005 are as follows:

<TABLE>
<CAPTION>

                                                     January 28, 2006                           January 29, 2005
                                                     ----------------                           ----------------
                                                                                       Net Current
                                             Net Current          Net Long-              Deferred              Net Long-
                                            Deferred Tax        Term Deferred              Tax               Term Deferred
                                               Assets             Tax Assets              Assets              Tax Assets
                                           ----------------    -----------------    -------------------    ------------------


<S>                                               <C>                                         <C>                          <C>
Accounts receivable                               $149,000                     -              $231,000                     $-
Inventories                                        556,000                     -               681,000                      -
Accrued warranty costs                             245,000                     -               217,000                      -
Acquisition costs                                  256,000                     -                     -                      -
Other accrued expenses                               9,000                     -                10,000                      -
Property, Plant and Equipment                            -               332,000                     -                      -
Purchased technologies and goodwill                      -             1,658,000                     -              1,958,000
Net operating loss                                       -            11,151,000                     -             10,079,000
Reserves for discontinued operations                     -                     -               377,000                      -
Gain on sale of building                           243,000                     -                     -                291,000
                                           ----------------    -----------------                           ------------------
                                                 1,458,000            13,141,000             1,516,000             12,328,000
Less valuation allowance                       (1,458,000)          (13,141,000)           (1,516,000)           (12,328,000)
                                           ----------------    -----------------    -------------------    ------------------
                                                        $-                    $-                    $-                     $-
                                           ================    =================    ===================    ==================
</TABLE>

A full valuation  allowance for such deferred tax assets has been established at
January 28, 2006 and January 29, 2005,  since the Company  cannot  determine the
future utilization of those assets.


Net operating loss carry-forwards of $19.9 million for federal and $48.8 million
for state expire on various dates through 2024.


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 28,         January 29,          January 31,
                                                          ----------------    -----------------    ----------------
                                                               2006                 2005                2004
                                                          ----------------    -----------------    ----------------

<S>                                                            <C>                <C>                  <C>
Federal statutory income tax rate                              34.0%              (34.0)%              (34.0)%
State income taxes, net of Federal benefit                     36.8                  -                   1.0
Permanent differences                                          41.4               (45.0)                27.3
Valuation Allowance                                           (75.4)                 79                  6.9
                                                          ----------------    -----------------    ----------------
Effective income tax rate                                      36.8%                 0%                   1.2%
                                                          ================    =================    ================
</TABLE>


12. STOCKHOLDERS' EQUITY

     a.   Common  and  Preferred  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 (one member of the Company's  current  management
          and  his  affiliates)  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  stock
          holder. 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 active stock option
          plans (2003 and 2004) pursuant to which an aggregate of  approximately
          1,424,000 shares of Common Stock may be granted. In addition,  certain
          options  granted  pursuant to the Company's  expired stock option plan
          and 1994 Non-Employee Director Stock Option Plan remained outstanding.

The 1993 Stock  Option  Plan (the "1993  Plan") had  1,750,000  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 28, 2006, January 29,
2005 and January 31, 2004 for the 1993 Plan are summarized below:

<TABLE>
<CAPTION>

                                                        Shares                Exercise              Weighted Average
                                                                             Price Range             Exercise Price
                                                    -----------------    ---------------------    ----------------------
<S>                           <C> <C>                     <C>                    <C>   <C>                  <C>
Options outstanding - January 31, 2003                    1,058,000              $0.27-$1.00                $0.50

   Options canceled                                        (18,000)             $0.27-$21.13                $1.09
   Options exercised                                       (12,000)              $0.27-$1.00                $1.88
   Options issued                                            40,000              $0.72-$0.86                $0.79
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 31, 2004                    1,068,000              $0.27-$5.25                $0.50

   Options canceled                                        (95,000)              $0.27-$5.25                $1.36
   Options exercised                                      (100,000)              $0.27-$1.00                $0.56
   Options issued                                                 -                        -                    -
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 29, 2005                      873,000              $0.27-$2.72                $0.40

   Options canceled                                        (34,000)              $0.27-$2.72                $0.68
   Options exercised                                       (27,000)              $0.99-$1.33                $1.11
   Options issued                                                 -                        -                    -
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 28, 2006                      812,000              $0.27-$0.95                $0.38
                                                    =================    =====================    ======================
                                                            767,000              $0.27-$0.95                $0.39
Options exercisable at January 28, 2006             =================    =====================    ======================
</TABLE>


<TABLE>
<CAPTION>
                                                          Options Outstanding                   Options Exercisable

                                                     Weighted Avg.        Weighted                             Weighted
 Range of Exercise Price                               Remaining           Average                              Average
                                    Number            Contractual         Exercise            Number           Exercise
                                 Outstanding           Life (yrs)           Price           Exercisable          Price
----------------------------    ----------------    -----------------    -------------    ----------------    -------------
<S>       <C>                      <C>                    <C>               <C>               <C>                <C>
          $0.95                    100,000                1.0               $0.95             100,000            $0.95
       $0.27-$0.52                 692,000                2.0               $0.29             654,000            $0.29
          $0.86                     20,000                3.0               $0.86             13,000             $0.86
                                ----------------                                          ----------------
                                   812,000                                                    767,000
</TABLE>

     Most options  issued vest in three annual  installments  of 33-1/3  percent
     each on the  first,  second,  and  third  anniversary  of the date of grant
     except  for  50,000  issued in 2003  which  vested  immediately.  This plan
     expired in December 2003.

     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 10,000 shares of Common Stock upon
     their election to the Board of Directors;  and (ii) a non-qualified  option
     to  purchase  10,000  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 28, 2006, January
     29, 2005 and January 31, 2004 for the Directors' Plan are summarized below:

<TABLE>
<CAPTION>

                                                                           Exercise           Weighted Average
                                                        Shares           Price Range           Exercise Price
                                                    ---------------    -----------------    ----------------------
<S>                                                    <C>               <C>   <C>                  <C>
Options & Warrants outstanding -
January 31, 2003                                       160,000           $0.27-$0.96                $0.54
Options issued                                          30,000              $0.92                   $0.92
                                                    ---------------    -----------------    ----------------------
Options & Warrants outstanding -                       190,000           $0.27-$0.96                $0.68
January 31, 2004
Options exercised                                      (6,000)              $0.91                   $0.91
Options cancelled                                      (24,000)          $0.27-$0.96                $0.82
                                                    ---------------    -----------------    ----------------------
Options & Warrants outstanding -                       160,000           $0.27-$0.96                $0.58
January 29, 2005                                    ---------------    -----------------    ----------------------
Options exercised                                         -                   -                       -
Options cancelled                                         -                   -                       -
                                                    ---------------    -----------------    ----------------------
Options & Warrants outstanding -                       160,000           $0.27-$0.96                $0.58
January 28, 2006
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 28, 2006                    60,000           $0.27-$0.96                $0.71
                                                    ===============    =================    ======================
Warrants exercisable-January 28, 2006                  100,000              $0.50                   $0.50
                                                    ===============    =================    ======================

This plan expired in September 2004.

                                                          Options Outstanding                   Options Exercisable

                                                     Weighted Avg.        Weighted                             Weighted
 Range of Exercise Price                               Remaining           Average                              Average
                                    Number            Contractual         Exercise            Number           Exercise
                                 Outstanding           Life (yrs)           Price           Exercisable          Price
----------------------------    ----------------    -----------------    -------------    ----------------
       $0.89-$0.96                  20,000                1.0               $0.93             20,000             $0.93
          $0.27                     20,000                2.0               $0.27             20,000             $0.27
          $0.92                     20,000                3.0               $0.92             20,000             $0.92
                                ----------------                                          ----------------
                                    60,000                                                    60,000
</TABLE>

     The 2003 Stock Option  Plan,  as amended,  (the "2003 Plan") has  1,750,000
     shares of Common Stock  reserved for issuance  upon the exercise of options
     designated as either (i) incentive  stock options  ("ISOs") under the Code,
     or (ii) non-qualified  options.  ISOs may be granted under the 2003 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.  In certain  circumstances,  the exercise price of
     stock  options  may  have an  adverse  effect  on the  market  price of the
     Company's Common Stock.

     Stock  option  transactions  during the year  ended  January  28,  2006 and
     January 29, 2005 for the 2003 Plan are summarized below:

<TABLE>
<CAPTION>

                                                                              Exercise              Weighted Average
                                                        Shares               Price Range             Exercise Price
                                                    -----------------    ---------------------    ----------------------
<S>                           <C> <C>                             <C>                      <C>                  <C>
Options outstanding - January 31, 2004                            0                 0                           0
   Options issued                                           190,000             $1.12                       $1.12
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 29, 2005                      190,000             $1.12                       $1.12
   Options issued                                           224,000          $0.97-$1.34                    $1.23
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 28, 2006                      414,000          $0.97-$1.34                    $1.18

Options exercisable at January 28, 2006                     340,000          $1.12-$1.34                    $1.22
                                                    =================    =====================    ======================
</TABLE>

<TABLE>
<CAPTION>

                                                          Options Outstanding                   Options Exercisable

                                                     Weighted Avg.        Weighted                             Weighted
 Range of Exercise Price                               Remaining           Average                              Average
                                    Number            Contractual         Exercise            Number           Exercise
                                 Outstanding           Life (yrs)           Price           Exercisable          Price
----------------------------    ----------------    -----------------    -------------    ----------------
<S>       <C>                      <C>                    <C>               <C>               <C>                <C>
          $1.12                    190,000                4.0               $1.12             190,000            $1.12
       $0.97-$1.34                 224,000                5.0               $1.23             150,000            $1.34
                                ----------------                                          ----------------
                                   414,000                                                    340,000
</TABLE>


     Most options  issued vest in three annual  installments  of 33-1/3  percent
     each on the  first,  second,  and  third  anniversary  of the date of grant
     except for 190,000  issued in 2004 50% of which  vested  December 31, 2004,
     and 50% of which will vest  December  31, 2005 and  150,000  issued in 2005
     which vested immediately.  There are approximately 336,000 shares available
     for future grants under the 2003 Plan.

     The 2004 Non-Employee Director Stock Option Plan (the "Directors Plan") The
     2004 Plan was adopted by the Board of Directors  in August  2004.  The 2004
     Plan  reserves  148,042  shares of Class A Common Stock for issuance to the
     Company's independent and unaffiliated directors.  Pursuant to the terms of
     the 2004 Plan, as proposed each independent and 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 10,000 shares of Class A Common Stock upon
     their initial election or appointment to the Board of Directors; and (ii) a
     non-qualified  option to purchase  10,000 shares of Class A Common Stock on
     the date of each annual meeting of stockholders following their election or
     appointment to the Board of Directors. The exercise price of each option is
     the fair market value of the Company's  Class A Common Stock on the date of
     grant.  Each option  expires five years from the date of grant and vests in
     three annual  installments  of 33 1/3% each on the first,  second and third
     anniversary of the date of grant. Options granted under the 2004 Plan would
     generally not be  transferable  during an optionee's  lifetime but would be
     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 would  immediately  terminate  and become 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  28, 2006 and
     January 29, 2005 for the Directors' Plan are summarized below:

<TABLE>
<CAPTION>

                                                                           Exercise           Weighted Average
                                                        Shares           Price Range           Exercise Price
                                                    ---------------    -----------------    ----------------------
<S>                         <C> <C>                       <C>                 <C>                     <C>
Options outstanding-January 31, 2004                      0                   0                       0
     Options issued                                     30,000           $1.01-$1.02                $1.02
     Warrants issued                                      -                   -                       -
     Options cancelled                                    -                   -                       -
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 29, 2005                    30,000           $1.01-$1.02                $1.02
     Options issued                                     30,000              $1.33                   $1.33
     Warrants issued                                      -                   -                       -
     Options cancelled                                    -                   -                       -
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 28, 2006                    60,000           $1.01-$1.33                $1.17
                                                    ===============    =================    ======================
Options exercisable-January 28, 2006                    30,000           $1.01-$1.33                $1.12
                                                    ===============    =================    ======================
</TABLE>


<TABLE>
<CAPTION>

                                                          Options Outstanding                   Options Exercisable

                                                     Weighted Avg.        Weighted                             Weighted
 Range of Exercise Price                               Remaining           Average                              Average
                                    Number            Contractual         Exercise            Number           Exercise
                                 Outstanding           Life (yrs)           Price           Exercisable          Price
----------------------------    ----------------    -----------------    -------------    ----------------
<S>    <C>   <C>                    <C>                   <C>               <C>               <C>                <C>
       $1.01-$1.02                  30,000                4.0               $1.02             20,000             $1.02
          $1.33                     30,000                5.0               $1.33             10,000             $1.33
                                ----------------                                          ----------------
                                    60,000                                                    30,000
</TABLE>

     There are approximately 88,000 shares available for future grants under the
     Directors' Plan

13. TREASURY STOCK

     Treasury  stock at January  28,  2006 and  January  29,  2005  consists  of
1,143,000 and 1,164,000  shares of Class A common stock purchased in open market
transactions  for a  total  cost of  approximately  $1,997,000  and  $2,017,000,
respectively  pursuant to a stock repurchase  program authorized by the Board of
Directors in fiscal year 1999.

14. PROFIT SHARING PLAN

     Profit  Sharing  Plan - The  Company has a  voluntary  contribution  profit
sharing plan (the "Plan"),  which  complies with Section  401(k) of the Internal
Revenue  Code.  Employees  who have  attained the age of 21 and have one year of
continuous  service are eligible to  participate  in the Plan.  The Plan permits
employees  to make a  voluntary  contribution  of  pre-tax  dollars to a pension
trust, with a discretionary matching contribution by the Company up to a maximum
of two  percent of an  eligible  employee's  annual  compensation.  The  Company
elected not to make  matching  contributions  for fiscal years ended January 28,
2006, January 29, 2005 and January 31, 2004.

15. COMMITMENTS AND CONTINGENCIES

a.   Minimum  Operating  Lease  Commitments  - The  Company  has  non-cancelable
     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,
         2007                                     463,000
         2008                                     337,000
         2009                                     290,000
         2010                                     260,000
         2011                                     231,000
         2012 and after                             3,000
                                        ------------------
                                               $1,584,000
                                        ==================

     Rent expense was  approximately  $508,000,  $473,000,  and $584,000 for the
     years ended  January  28,  2006,  January  29,  2005 and January 31,  2004,
     respectively.


b.   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 and cash flows.

c.   The Company had a Loan and Security  Agreement  ("the Congress  Agreement")
     with  Congress  Financial  Corporation  ("Congress")  for a three year term
     expiring on November 26, 2005.  The Congress  Agreement as amended,  August
     31, 2004,  provides for a credit facility of $12 million for Hirsch and all
     subsidiaries.  Advances made pursuant to the Congress Agreement may be used
     by the Company and its subsidiaries  for working capital loans,  letters of
     credit and deferred  payment  letters of credit.  The terms of the Congress
     Agreement require the Company to maintain certain financial covenants.  The
     Company was in compliance with all financial covenants at January 28, 2006.
     The  Company  has placed  $0.5  million in  restricted  cash to support the
     standby letter of credit  backing the lease on the Company's  facilities in
     Hauppauge.  On October 21, 2005, the Company signed  Amendment No. 5 to the
     Loan and Security  Agreement.  This  amendment  provides  for,  among other
     things,  an extension of the maturity date of our existing credit agreement
     from November 26, 2005 until and  including  February 28, 2006. On February
     23, 2006,  the Company  terminated its lease for its facility in Hauppauge,
     New York.  As of  February  28,  2006,  the  Company  signed a  Termination
     Agreement with Wachovia Bank, National Association  (successor by merger to
     Congress Financial Corporation).  In conjunction with this transaction, the
     standby letter of credit  (classified as restricted  cash as of January 28,
     2006) of $0.5 million was terminated.  The Company,  at this time, does not
     intend to enter into a new bank agreement.

d.   Dependency  Upon Major Supplier - During the fiscal years ended January 28,
     2006,  January 29, 2005 and January 31, 2004; the Company made purchases of
     $24,660,000,  $22,067,000, and $21,115,000,  respectively,  from Tajima and
     TUI.  This  amounted  to  approximately  82,  73,  and 74,  percent  of the
     Company's total purchases for the years ended January 28, 2006, January 29,
     2005 and January 31, 2004, respectively. Purchases directly from Tajima are
     purchased under letters of credit.  Outstanding  bankers  acceptances as of
     January 28, 2006 are reflected in accounts  payable and accrued expenses on
     the  balance  sheet.  The  Company  had  outstanding  letters  of credit of
     approximately $2.5 million at January 28, 2006.

     On August 30, 2004, the Company entered into new consolidated  distribution
     agreements (the "Consolidated Agreements") with Tajima granting the Company
     certain rights to distribute the full line of Tajima commercial  embroidery
     machines and products.

          The Consolidated  Agreements grant the Company  distribution rights on
     an  exclusive  basis in 39 states for the period  February 21, 2004 through
     February  21,  2011.  In  addition,  the Company was also  granted  certain
     non-exclusive distributorship rights in the remaining 11 western states for
     the period  February 21, 2004 through  February 21, 2005. The Company is in
     the process of  negotiating an extension of the West Coast  Agreement.  The
     Consolidated  Agreements supercede all of the other distribution agreements
     between the Company and Tajima.  Each agreement may be terminated  upon the
     failure of the Company to achieve certain  minimum sales quotas.  In fiscal
     2006,  the  Company met its minimum  sales  quota and in fiscal  2005,  the
     Company  failed to meet these  minimum  sales quotas and Tajima  waived the
     Company's  failure.  The termination of the Tajima  agreements would have a
     material adverse effect on the Company's business,  financial condition and
     results of operations.

e.   Purchase  Commitments  - The  Company  entered  into a three  year  minimum
     purchase  commitment with Pulse  Microsystems,  Ltd. (a former  subsidiary)
     under which the Company is obligated to purchase  $100,000 of software each
     month. The commitment was effective November 1, 2005 and runs until October
     31, 2008. As of January 28, 2006 there was $3,300,000  remaining under this
     commitment.


16. SUBSEQUENT EVENTS

a)   On February 23, 2006,  the Company  terminated  its lease for its Corporate
     Headquarters  in Hauppauge,  New York  effective on or about June 30, 2006.
     The agreement  stipulates that the Company will pay M3GH Properties,  LLC a
     surrender fee of $500,000. Upon the execution of the agreement, the Company
     paid the landlord the initial fee of $200,000.  The  agreement  states that
     the  Company  will also pay the  landlord  commencing  on July 1, 2006 on a
     quarterly  basis in ten equal  installments  of thirty  thousand  ($30,000)
     dollars every October 1, January 1, April 1 and July 1 thereafter until the
     remainder of $300,000 is paid in full.

          In the first  quarter  of Fiscal  2007,  the  Company  will  write off
     certain  balance  sheet items  related to the sales  leaseback  transaction
     previously  recorded in connection with the  termination of the lease.  The
     remaining assets of  approximately  $1.2 million will be netted against the
     remaining  liabilities of approximately  $1.2 million.  In addition,  after
     payment  of  surrender  fees  of  approximately  $500,000,  related  to the
     termination  of the lease,  the Company will  recognize the remaining  $0.1
     million in deferred gain.

          Concurrent  with the  lease  termination,  on  February  23,  2006 the
     Company  entered into a new five year lease for its Corporate  headquarters
     also in Hauppauge, New York.

b)   On  April  13,  2006,  the  Company  filed a  report  on Form  8-K with the
     Securities and Exchange  Commission  announcing that the Board of Directors
     of the Company  determined to change the Company's fiscal year from a 52/53
     week  fiscal  year  ending on the last  Saturday  in the last month of each
     quarterly period in the year ended January to the period ending December 31
     in each year.  This change in fiscal year is effective for the period ended
     December 31, 2006.  The Company will file a transition  report on Form 10-K
     covering the 11-month period ended December 31, 2006.

c)   On April 21, 2006,  the Company  announced that it had reached an agreement
     in principal to terminate  the merger with Sheridan  Square  Entertainment.
     The parties are presently negotiating a formal termination agreement which,
     among other things,  presently  contemplates that the Company will maintain
     the equity  investment in Sheridan.  In conjunction with the termination of
     the  merger,  the  Company  expensed   approximately  $605,000  in  related
     transaction costs (See Note 8 to the Consolidated Financial Statements.