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

                                    FORM 10-K

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

     For the fiscal year ended January 31, 1999

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

                          Commission File No.: 0-23434

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

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

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

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

     Registrant's telephone number, including area code: (516) 436-7100

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

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

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

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

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

     The aggregate  market value of the 6,474,128 shares of Class A Common Stock
held by non-affiliates of the Company as of May 10, 1999 is $13,352,889.

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


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

                  Class A Common Stock                      6,724,880
                     par value $.01

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

     The  information  required by Part III of this Form 10-K is incorporated by
reference from the Registrant's  definitive proxy statement to be filed with the
Commission on or before May 30, 1999.


<PAGE>


                                     PART I

     Item 1. Business

     General

     Hirsch  International  Corp.  ("Hirsch"  or  the  "Company"),   a  Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic  computer-controlled  embroidery machinery and related value-added
products and services.  The Company  offers a complete  line of  technologically
advanced single- and multi-head  embroidery  machines,  proprietary  application
software,  a diverse line of embroidery  supplies,  accessories  and proprietary
embroidery  products,  and a range of equipment  financing options. In addition,
Hirsch  provides a comprehensive  customer  service  program,  user training and
software  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 application of new technologies has transformed the embroidery industry
from one which was labor-intensive,  utilizing machinery with limited production
capabilities to an industry where investment in electronic,  computer-controlled
machinery and related application  software has increased labor efficiencies and
production   capacities  while  expanding  the  flexibility  and  complexity  of
embroidery  designs.  These developments have not only resulted in the expansion
of  existing  markets  but have  also led to the  creation  of new  markets  for
embroidery.  Moreover, industry has benefited from the growth in consumer demand
for licensed products carrying the names,  logos and designs of professional and
collegiate sports teams,  entertainment companies and their characters,  as well
as branded  merchandise  and related  goods.  Until  recently,  these trends and
others have  contributed to the increase in demand for  machinery,  software and
services  provided by Hirsch.  However,  during fiscal 1999, the Company and the
embroidery  industry as a whole  experienced a decrease in overall demand driven
by a shift in the sales mix of embroidery  machines and the relocation  offshore
of large multi-head  equipment  customers.  As a result, the Company initiated a
restructuring  program  designed to address the market  shifts in the  industry,
including closing and consolidating certain divisions, reducing total employment
and  disposing  of  facilities  no longer  required to support its new  business
model.  (See  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations).

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

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

     The Company enjoys a solid  relationship  with Tajima,  having spanned more
than  20  years.  Hirsch  is  Tajima's  largest  distributor  in the  world  and
collaborates  with Tajima in the  development  of new  embroidery  equipment and
enhancements to existing  equipment.  Until recently,  all Tajima  equipment was
assembled  in  Japan.  Last  year,  Hirsch  announced  the  formation  of a  new
subsidiary,  Tajima USA, Inc ("TUI"),  which currently  assembles  two-four- and
six- head Tajima machines in the United States.  In December 1997, Hirsch sold a
forty-five  (45%) percent  interest in TUI to Tokai  Industrial  Sewing  Machine
Company, Ltd. ("Tokai"). The Company believes that the venture with Tokai, which
is Tajima's  manufacturing  arm, will act to further strengthen its relationship
with Tajima.

<PAGE>

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

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

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

     The Embroidery Industry

     The development of electronic  computer-controlled  embroidery machines has
led to new  embroidery  applications  and markets,  cost savings,  higher profit
margins and production  efficiencies and has transformed the embroidery industry
from being  extremely  labor-intensive  to an  industry  characterized  by rapid
growth and technological change. Recent innovations to embroidery machines offer
superior design  flexibility  and increased  speed and provide the  manufacturer
with the ability to  embroider  finished  products,  the ability to  efficiently
embroider up to fifteen colors at a time,  automatic thread trimming,  and other
labor-saving  improvements.  The  embroidery  industry also  benefited  from the
sudden growth,  beginning in the late 1980s, in the use of licensed  products by
apparel and other manufacturers.  Licensed names, logos and designs provided by,
among  other  sources,   professional  and  collegiate   sports  teams  and  the
entertainment  industry  appear on caps,  shirts,  outerwear,  luggage and other
softgoods  for sale at  affordable  prices.  In addition,  the  intricacy of the
designs capable of being embroidered and the availability of tandem applications
began to attract broad fashion  appeal and more recently  commercial  appeal for
special event promotional marketing.  Embroidery equipment may contain single or
multiple  sewing heads,  each sewing head consisting of a group of needles which
are fed by spools of thread attached to the equipment. The design and production
capabilities  of the sewing  heads are  enhanced  through  the  application  and
integration of computers and specialized software.

     Business Strategy

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

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

<PAGE>
     Pulse Microsystems  Software.  The Company's Pulse subsidiary offers a wide
range of  proprietary  application  software  which  enhances and simplifies the
embroidery process. A majority of the Company's proprietary application software
products are designed to operate in the Microsoft(R)  Windows(R) 95,  Windows(R)
98 and  Windows(R)  NT  environments  which the Company  believes  will  enhance
creativity,  ease of use and user flexibility.  It is the Company's  established
practice to aggressively market its software with embroidery equipment and as an
upgrade to its installed base of approximately 14,000 embroidery  machines.  The
Company  believes  that  these  products  have  broad  appeal to  purchasers  of
single-head and multi-head embroidery machines and present opportunities for the
Company to increase  sales of  embroidery  equipment and software as the Company
continues  to  emphasize  marketing  activities.  Pulse  intends to  continue to
automate the process of creating  embroidery  applications  in order to open new
markets, reduce costs and increase production efficiencies.  Pulse has bolstered
its software  development team and will continue to work closely with Hirsch and
Tajima to develop software that enhances new features in the embroidery machines
being introduced.

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

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

     The Company's  embroidery supplies and accessories  business had previously
operated as the Embroidery  Supply Warehouse  ("ESW"),  a division of Hirsch. At
the close of fiscal 1999,  as part of its  restructuring  strategy,  the Company
announced  it was  closing  ESW as a separate  division  and  consolidating  its
operations  with  those  of the  Company.  The  Company  believes  that  it will
experience  substantial  savings  because  of  this  consolidation  due  to  the
elimination of duplicate  operational  systems and a corresponding  reduction in
personnel.

     During fiscal 1999 the Company created its new "Building  Blocks" division,
specializing in the creation and sale of stock embroidery designs and associated
software products into the retail market.  The Company focused on developing the
"Building  Blocks"  product line and  infrastructure  during  fiscal  1999,  and
consequently, did not record any sales revenues for the Building Blocks division
during the fiscal year.

     Retail Embroidery  Services.  During fiscal 1999, the Company together with
Jacobs Management  Corporation formed Hometown Threads ("Hometown Threads") as a
joint venture for the purpose of providing  retail  embroidery  services  within
Wal-Mart  establishments.  The joint  venture is  currently  test-marketing  its
concept  at  a  Wal-Mart  location  in  Carrolton,  Texas  and,  if  successful,
anticipates   expanding   these   operations  to  additional   Wal-Mart   retail
establishments through the United States.

     Customer Support.  The Company provides  comprehensive  customer  training,
support and service for the embroidery  machines and software that it sells. The
Company's customer service department includes service technicians operating out
of its  headquarters  and 21 regional  offices.  After the  Company  delivers an
embroidery  machine  to  a  customer,   its  trained  personnel  assist  in  the
installation of the machine and with setup and operation.  The Company employs a
staff of service  representatives  who provide  assistance  to its  customers by
telephone.  Most customer problems or inquiries can be handled by telephone, but
when  necessary the Company  dispatches  one of its service  technicians  to the
customer. In addition,  the Company provides at its facilities  introductory and
advanced training  programs  developed by the Company to assist customers in the
use and operation of the embroidery machines it sells. During the last year, the
Company has undertaken a program to significantly  upgrade its technical support
staff and operations on the West Coast due to increasing  sales activity in this
area and resulting demand for technical support services.  This will continue as
the Company has been granted  semi-exclusive  rights to distribute  large Tajima
embroidery machines to the West Coast.

<PAGE>

     Growth Strategy

     The Company  has  developed a number of  complementary  growth  strategies,
including the following:

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

     Increase  Penetration  in  Recently  Acquired  New  Equipment  Distribution
Markets. The Company believes that it has excellent  opportunities for growth in
new  distribution   markets.  The  Company  anticipates  that  its  approach  to
marketing, customer training, support and service will allow further penetration
of the potential customer base in these markets.  In June and December 1996, the
Company  consummated two acquisitions  which expanded the territory in which the
Company  distributes  embroidery  machines to 50 states.  In January  1997,  the
Company  was  granted  the  exclusive  right to  distribute  Tajima one  through
six-head "FX" model  embroidery  machines in nine western states and Hawaii.  In
March 1998 Hirsch was granted  semi-exclusive  rights to distribute large Tajima
embroidery  machines,  six-head "DC" models through  thirty-head  models, to the
West Cost states of Arizona,  Idaho, Montana,  Nevada, Oregon, Utah, Washington,
Wyoming  and  Hawaii.  The  Company  has  continued  to invest in the West Coast
infrastructure   during  fiscal  1999.  This  expansion  included   establishing
additional sales offices,  hiring of technical service and support staff as well
as investment in demo equipment and inventory.

     Expand Sales of  Value-Added  Product and  Services.  Because of the higher
profit margins  realized  through sales of Pulse,  HAPL Leasing,  and embroidery
parts,  supplies and accessories as compared to new equipment sales, part of the
Company's growth strategy is to increase these sales. Once a relationship with a
customer is established  by the sale of a new or used  embroidery  machine,  the
Company seeks to increase its sales by supplying software developed by Pulse and
a broad  range  of  embroidery  parts,  supplies  and  accessories  through  the
consolidated  operations of what was formerly known as ESW. The leasing  options
offered  through HAPL leasing  also present the Company with  opportunities  for
increased  revenues not only for new  embroidery  equipment  sales,  but also of
value-added  products and services.  In those regions of the United States where
the Company has recently  expanded through  acquisitions and obtaining the right
to  distribute  small  Tajima  machines,  the  Company  believes  that it has an
additional opportunity to expand sales of its value-added products and services.
Historically,  the Company's sales of software products,  leasing activities and
sales of embroidery  supplies and related products have been concentrated in the
states where it has had the exclusive right to distribute  embroidery  machines.
The Company  believes  that the  expansion  of this area will allow it to better
market its value-added  products and services.  To facilitate  this growth,  the
Company  established  warehouses  for the  storage of  embroidery  supplies  and
related  products at the same locations as certain sales  offices.  In addition,
the Company's  embroidery  supplies and accessories product line also is offered
to all  users  of  embroidery  equipment  in the  United  States  through  trade
publications, print advertising and trade show participation.

     Ability to Accept Used Equipment on a Trade-In  Basis. As part of its sales
and marketing efforts,  the Company may accept used embroidery  equipment from a
customer to whom it is providing new machinery.  As a result of this trend,  the
industry as a whole has seen an  increase in the number of used  machines in the
market.  The Company  expects that the recent  termination  of the operations of
Hirsch Equipment  Connection,  Inc. ("HECI") and subsequent  absorption of these
operations   into  the  New  York  facility  will  provide  better  control  and
profitability of this activity.

     Assembly  Operations.  The Company's  Tajima USA, Inc.  ("TUI")  subsidiary
maintains  a  facility  located  in  Ronkonkoma,  New York,  near the  Company's
headquarters which assembles Tajima machines of up to six heads. TUI's Net sales
during the fiscal year ended January 31, 1999 were approximately $23,026,000.

<PAGE>

     In early January 1998, Tokai  Industries,  which is Tajima's  manufacturing
arm,  purchased a forty-five (45%) percent interest in TUI for $900,000 in cash.
The  Company's  initial  investment  in TUI was  $2,000,000  in June  1997.  The
purchase price was initially paid to TUI and then  subsequently  remitted to the
Company to bring the  Company's  net  contribution  to  $1,100,000 or fifty-five
(55%)  percent.  The  Company  believes  this  investment  in  TUI  has  further
solidified its relationship with Tajima and will become a vital component in the
Company's future success.

     Embroidery Equipment

     Embroidery  equipment  may contain  single or multiple  sewing  heads.  The
selling prices of these machines range from  approximately  $15,000 to $180,000.
Each  sewing  head  consists  of a group of  needles  which are fed by spools of
thread attached to the equipment.  The needles operate in conjunction  with each
other  to  embroider  the  thread  into  the  cloth  or  other  surface  in such
configuration as to produce the intended  design.  Thread flowing to each needle
can be of the same or  varying  colors.  Each head  creates  a design  and heads
operating  at the same time  create  the same size and shape  designs,  although
designs  created at the same time can differ in color.  Thus, a 30-head  machine
with all heads operating  simultaneously  creates an identical  design on thirty
surfaces.  The design and  production  capabilities  are  enhanced  through  the
integration of computers and specialized software applications.

     Recent Product Developments.  The Company often collaborates with Tajima in
the  development  of embroidery  products.  Over the past few years,  Tajima has
introduced the following embroidery products: (i) machines with faster operating
speeds and a wider variety of color selections; (ii) wide cap embroidery system,
which expands the small sewing field on finished caps to a 270 degree continuous
arc;  (iii)  the  multi-color   chenille  embroidery   machine,   which  enables
embroiderers  to create  more  elaborate  and  colorful  designs  with  chenille
stitches;  (iv)  single  head  chenille  embroidery  machine  which  enables the
embroidery  entrepreneur  the  opportunity  to  enhance  their  products  at  an
affordable  price;  (v) the tandem  chenille and embroidery  machine,  making it
possible to incorporate  both chenille and embroidery into the same design;  and
(vi) the Emblaser machine,  which  incorporates  embroidery and laser technology
into one system, reduces production time and increases production  efficiencies.
The Company believes that these machines will allow new applications for the use
of embroidery  machines which will impact the sportswear  market.  Additionally,
Tajima develops customized applications to address specific customers needs.

     Value Added Products

     Software

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

     Pulse  software  provides  users  with  the most  technologically  advanced
software  solutions  delivering  improved  productivity  and  quality  for their
operations.  In the near future, Pulse will be releasing a series of innovations
that will strengthen its position as the technological leader in the industry.

     While continuing to invest in research in its core embroidery technologies,
Pulse has also created specialized and targeted applications that are addressing
the particular needs of growing segments of the embroidery market such as retail
operations,  small  entrepreneurs  and  uniform  manufacturers.  Pulse  has also
designed,  as part of their new Powertools suite of applications,  products that
assist  customers  in  creating  an  Internet   presence  for  their  embroidery
creations.

     Pulse has  recently  expanded  its  distribution  network  by  establishing
relationships in several Asian  territories such as China,  Hong Kong, Japan and
India.  While the Company  expects that it will take some time before  achieving
significant  financial results from these territories,  the Company is confident
that these new  relationships  will  strengthen  Pulse's  position as the global
leader in embroidery software.

<PAGE>

     Leasing

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

     Approximately  50.7% of the  Company's  new  machine  sales  were  financed
through HAPL Leasing for the year ended January 31, 1999,  compared to 36.9% for
the year ended  January 31, 1998.  Historically,  HAPL Leasing has minimized its
leasing risk by selling  substantially all of its sales-type leases to financial
institutions  on a  non-recourse  basis.  This trend  continued  in fiscal 1999.
Additionally,  during the third  quarter of fiscal  1998,  HAPL  entered into an
Ultimate  Net  Loss  ("UNL")  Limited  Liability   Recourse   Agreement  with  a
third-party financial institution. The maximum exposure is limited to 10% of the
minimum lease payments receivable,  for which the Company records a reserve. The
selling price of the leases to financial  institutions  generally will be a lump
sum equal to the sales price of the embroidery  equipment leased, plus a portion
of the finance charges paid by the lessee. In addition,  at the end of the lease
term, the residual value of the embroidery  equipment may revert to HAPL Leasing
or HAPL  Leasing  sells the  equipment to the lessee at terms agreed upon in the
original  lease  agreement.  Each lease  generally has a term of 5 years.  As of
January 31, 1999, HAPL Leasing had sold approximately 90.9% of its leases.

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

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

     Used Embroidery Machinery

     The Company accepts used embroidery  machines from customers as a condition
to the sale of a new machine on a case by case basis.  The Company's  ability to
accept used  machines is an important  sales tool and  necessary  element in the
Company's sales strategy. The Company believes that the market for reconditioned
and remanufactured  embroidery machines is steadily growing and will be a steady
source of revenue in the future.

     Embroidery Supplies and Accessories

     The Company offers a broad range of embroidery  supplies including threads,
needles,  thread  cone  winders,   embroidery  hoops,  embroidery  backings  and
embroiderable products such as caps, t-shirts, jackets, sweat suits, sweatshirts
and canvas bags. In addition,  the Company develops embroidery products based on
the recommendations of embroiderers.  The Company also distributes the Universal
Hooper,  a manual  hooping  device,  a machine thread rack upgrade called "Quick
Thread" and specially sized embroidering hoops for unusual applications.

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

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

<PAGE>
                                                     
     Following the  Company's  machine  sales  expansion to the West Coast,  the
Company expanded the hours of its telemarketing operations, making it easier for
customers  across the United States to place an order. The Company believes that
the elimination of ESW as a separate  division,  and the  consolidation of ESW's
operations  into the Company will enhance the Company's  competitiveness  in the
market for  embroidery  supplies and  accessories as well as help the Company to
realize increased efficiencies.

     Marketing and Customer Support

     The Company has been selling  embroidery  equipment since 1976 and believes
it is the leading  distributor  of Tajima  equipment  in the world.  The Company
reinforces  recognition  of its  name  through  trade  journal  advertising  and
participation in seminars and over 25 trade shows annually.  The Company's sales
staff is headed by Paul Levine, President of the Company, and currently consists
of  salespeople  who  maintain  frequent  contact  with  customers  in  order to
understand  each  customer's  needs.  Through its  reputation,  knowledge of the
marketplace,  investment in infrastructure  and experience in the industry,  the
Company  believes  it is  increasing  its market  share for both  machinery  and
value-added products and services.

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

     The Company  maintains an internal training center for its employees at its
Cleveland  training  center  primarily 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 customer  service.  The Company has taken steps to close the  Cleveland
facility during fiscal 2000 and to consolidate its operations at an existing but
undetermined location.

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

     The  Company  provides  its  customers  with a one  year  warranty  against
malfunctions  from defects in material or workmanship on the Tajima  machines it
distributes.  The warranty  covers parts and labor.  Tajima provides the Company
with a six month  warranty.  As a consequence,  the Company absorbs a portion of
the cost of providing warranty service on Tajima products.

     Supplier Relationships with Tajima

     The  Company  has three  separate  distributorship  agreements  with Tajima
which,  collectively,  provide  the Company the  exclusive  right to  distribute
Tajima's complete line of standard  embroidery,  chenille embroidery and certain
specialty  embroidery  machines  in 39  States.  The main  agreement  (the "East
Coast/Midwest  Agreement") which covers 33 States,  became effective on February
21,  1991  and has a term of 20  years.  The  East  Coast/Midwest  Agreement  is
terminable  by Tajima  and/or  the  Company  on not less than two  years'  prior
notice.  The second  agreement (the  "Southwest  Agreement")  covers six states,
became  effective on February  21, 1997 and has a term of five years.  Under the
third  distributorship  agreement,  which covers nine western states and Hawaii,
the Company is the  exclusive  distributor  of Tajima's  single,  two,  four and
six-head "FX" model machines as well as chenille or chenille/standard embroidery
machines  with less than four  heads or two  stations,  respectively  (the "West
Coast  Agreement").  The West  Coast  Agreement,  which has a term of five years
initially,  terminates  on February 20, 2002,  and contains a renewal  provision
which  permits  successive  five year  renewals  upon  mutual  agreement  of the
parties.

<PAGE>

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

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

     Other Supplier Relationships

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

     Customers

     The  Company's  customers  range from large  operators  utilizing  numerous
machines to individuals who customize  products on a single  machine.  Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers,  who use embroidery
to embellish their apparel, accessories,  towels, linens and other products with
decorative  appeal; and (iii) embroidery  entrepreneurs,  who produce customized
products  for   individuals,   sports   leagues,   school   systems,   fraternal
organizations, promotional advertisers and other groups. The Company's customers
include: Fruit of the Loom, Russell Licensed Products, Logo Athletic, Healthtex,
Five B's, Osh Kosh B'Gosh, Avanti Lines and William Carter Company.

     Competition

     The  Company  competes  with  distributors  such  as  Macpherson,  Inc.,  a
subsidiary  of  Willcox & Gibbs,  Inc.,  a  distributor  of  Barudan  multi-head
embroidery machines and Meistergram  single-head embroidery machines, as well as
with smaller  distributors.  On April 20, 1999,  Willcox & Gibbs,  Inc.  filed a
joint plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
U.S.  Bankruptcy  Court for the  District of Delaware.  The Company  believes it
competes against these distributors on the basis of knowledge,  experience, name
recognition,  customer  service and the quality of the  embroidery  equipment it
distributes.  The Company also competes with original  equipment  manufacturers,
such as Brother  International and Melco Industries,  which distribute  products
directly into the Company's markets.

     Further,  the Company's customers are subject to competition from importers
of embroidered products, which could affect the Company's operations.

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

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

<PAGE>

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

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

     Patents and Copyrights

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

     Employees

     As of March 31,  1999,  the  Company  employed  approximately  365  persons
engaged in sales,  customer service and supplies,  product development,  finance
administration and management for the Company, Pulse, TUI and HAPL Leasing. None
of the Company's  employees is represented by unions.  The Company  believes its
relationship with employees is good.

<PAGE>

     Risk Factors

     Dependence on Tajima

     For the fiscal year ending  January 31,  1999,  approximately  93.0% of the
Company's  revenues  resulted  from the sale or  lease of  embroidery  equipment
supplied by Tajima and  substantially all of the Company's machine sales were to
users of Tajima embroidery equipment.  Three separate distributorship agreements
(collectively,   the  "Tajima   Agreements")  govern  the  Company's  rights  to
distribute  Tajima  embroidery  equipment  in  the  United  States.  Two  of the
distributorship agreements with Tajima collectively provide the Company with the
exclusive rights to distribute  Tajima's  complete line of standard  embroidery,
chenille embroidery and certain specialty  embroidery machines in 39 states. The
main agreement (the "East Coast/Midwest Agreement"), which now covers 33 states,
first became effective on February 21, 1991, has a term of 20 years and contains
a renewal  provision  which  permits  successive  five year renewals upon mutual
agreement of the parties.  The East  Coast/Midwest  Agreement is  terminable  by
Tajima and/or the Company on not less than two years' prior  notice.  The second
agreement (the "Southwest  Agreement") which covers six states, became effective
on  February  21,  1997,  and  has  a  term  of  five  years.  Under  the  third
distributorship  agreement,  (the "West  Coast  Agreement")  which  covers  nine
western states and Hawaii, the Company is the exclusive  distributor of Tajima's
small  machines,  as well as chenille  and tandem  chenille/standard  embroidery
machines with less than four heads or two stations, respectively. The West Coast
Agreement,  which has a term of five years,  became  effective  on February  21,
1997,  and  contains a renewal  provision  which  permits  successive  five year
renewals upon mutual agreement of the parties. Each of the Tajima Agreements may
be  terminated  if the Company  fails to achieve  certain  minimum sales quotas.
Furthermore, the East Coast/Midwest Agreement may be terminated if Henry Arnberg
and Paul Levine (or in certain  circumstances,  their spouses and children) fail
to own a sufficient  number of shares of voting stock to elect a majority of the
Company's  Board of Directors  or in the event of the death,  physical or mental
disability  of a duration of six months or longer,  or  incapacity of both Henry
Arnberg and Paul  Levine.  The  Southwest  Agreement  may be  terminated  if the
Company fails to remain the sole shareholder of its subsidiary that is the party
to the Southwest  Agreement.  The West Coast Agreement may be terminated  should
any material  change  occur in the current  Class B  shareholders,  directors or
officers  of the  Company  or should  there  occur any  change in control of the
Company.  The termination of the Tajima Agreements would have a material adverse
effect on the Company's business, financial condition and results of operations.

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

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

<PAGE>

     Embroidery Industry

     The  Company's  growth in past years has resulted in part from the increase
in demand for embroidered  products and the growth of the embroidery industry as
a whole.  The embroidery  industry has recently  experienced a decline in demand
for large embroidery machines, which has had an adverse effect on the operations
of the  Company  and its  business.  A  decrease  in  consumer  preferences  for
embroidered  products,  a general  economic  downturn or other events  having an
adverse effect on the  embroidery  industry would also have an adverse effect on
the Company.

     In addition,  the  embroidery  industry  has seen a shift of  manufacturing
operations  toward  Mexico,  the Caribbean  basin and Latin America due to lower
labor and operating costs in these locations.  These areas are currently outside
of the Company's  distribution  territory for Tajima  embroidery  machines.  The
continued shifting of embroidery  operations by U.S. embroiderers to Mexico, the
Caribbean  basin  and  Latin  America  may  weaken  demand  in the U.S.  for new
embroidery machines and could have a material adverse effect on the business and
operations of the Company.

     Foreign Currency Risks

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

     Assembly Facility

     The Company  assembles  Tajima  embroidery  machines  in the United  States
through its subsidiary TUI,  initially in  configurations of up to six heads per
machine.  Tajima  provides the Company with  technical  assistance  and support.
While TUI  operations  were  profitable  in fiscal 1999,  the  throughput of the
facility is dependent on continued demand for embroidery  machines  generated by
the Hirsch sales organization.

     Expansion

     Since  June  1996,  the  Company  has  acquired  four  (4)  companies  (the
"Acquisitions").  These acquisitions (i) increased the area in which the Company
is the exclusive distributor of the complete line of Tajima embroidery equipment
from 26 states to 39 states; and (ii) increased the Company's ability to offer a
customer  value for its used  embroidery  equipment.  In  January  1997,  Tajima
granted  the  Company  the  exclusive  right to  distribute  small (one  through
six-head) Tajima embroidery machines in nine western states and Hawaii. In March
1998,  the  Company  was  granted  certain  rights to  distribute  large  Tajima
embroidery machines,  six-head "DC" models through thirty-head models throughout
certain West Coast states,  and the Company has invested  substantial  assets to
support the West Coast  expansion.  There can be no  assurance  that the Company
will be able to profitably sell equipment or the Company's  value-added products
in the new territories.

     During the fiscal year, the Company  announced the establishment of its new
Building  Blocks  division  for the purpose of creating and  distributing  stock
embroidery designs and associated  software products to the retail market. As of
the end of fiscal 1999,  Building Blocks had not commenced  operations,  nor was
the Company's  investment in Building Blocks material.  The Company  anticipates
the  commencement  of  operations  during  fiscal  2000  at  which  time  it may
experience  additional start-up costs.  Although the Company believes it will be
able to access the substantial home and retail  embroidery  market,  there is no
guaranty that it will be able to do so on a profitable basis.

<PAGE>
     In addition, the Company announced during the fiscal year the creation of a
joint venture with Jacobs  Management  Corporation  called  "Hometown  Threads".
Hometown Threads was created for the purpose of establishing  retail  embroidery
service centers within Wal-Mart retail locations.  As of the end of fiscal 1999,
Hometown Threads had commenced operations on a test-market basis at the Wal-Mart
center located in Carrollton, Texas. As of the end of fiscal 1999, the Company's
investment in Hometown  Threads was not material.  Although the Company believes
it will be able to access the market for retail embroidery services, there is no
guaranty that it will be able to do so on a profitable basis.

     The past growth and current  diversification of the Company's business have
resulted in new and increased  responsibilities  for  management and have placed
increased  demands  upon  the  Company's  operating,   financial  and  technical
resources.  The Company's  ability to  successfully  manage its  expansion  will
require continued  enhancement of its management and operational,  financial and
technical resources.  The Company will also need to attract and retain qualified
personnel to support the expansion of its operations.  The Company's  failure to
manage   successfully  its  diversification  or  attract  and  retain  qualified
personnel  could  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.

     Leasing Operations

     HAPL Leasing provides a range of equipment  financing  options to customers
wishing to finance equipment purchases. HAPL Leasing retains selected leases for
which it has not  obtained  a  purchase  commitment  from its  funding  sources.
Although HAPL Leasing has sold approximately  90.9% of the leases it has written
to date,  there can be no assurance that it will continue to be able to sell its
leases to third  party  funding  sources.  Unfunded  leases  create  the risk of
nonpayment by lessees,  including the risk that foreclosure could be hampered by
bankruptcy or other legal  proceedings,  and the risk that foreclosed  equipment
cannot be released or sold due to market conditions or the physical condition of
the equipment.  The operations of HAPL Leasing are interest rate  sensitive.  If
interest  rates rise,  there can be no  assurances  that  profit  margins can be
maintained, and, consequently, the operations of HAPL Leasing could be adversely
affected.

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

     Inventory

     The Company's  ordering cycle is approximately four to five months prior to
delivery  to the  Company.  Since the  Company  generally  delivers  new  Tajima
embroidery  machines to its customers  within one week of receiving  orders,  it
orders  inventory based on experience and forecasted  demand.  Due to lower than
forecasted demand, the Company has recently experienced an increase in inventory
levels  beyond the desired  supply  which has caused the  Company to  experience
higher then  projected  inventory  costs.  Any failure in the future to property
manage inventory levels could have an adverse effect on the Company's  business,
financial condition and results of operations.

     Competition

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

<PAGE>

     The Company also faces  competition  in its sales of  software,  embroidery
supplies,  accessories and proprietary  products as well as in providing leasing
and customer  training,  support and services.  The Company's failure to compete
effectively  in these  areas  could  have an  adverse  effect  on its  business,
financial condition and results of operation.

     Software

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

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

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

     Dependence on Existing Management

     The Company's  continued  success will depend to a significant  extent upon
the abilities and continued efforts of Henry Arnberg,  Chairman of the Board and
Chief Executive Officer of the Company; Paul Levine,  President,  and a Director
of the Company;  Ronald  Krasnitz,  Chief  Operating  Officer,  Secretary  and a
Director of the Company;  and Richard Richer,  who joined the Company during the
fourth quarter of fiscal 1999 as its Vice  President-Finance and Chief Financial
Officer.  Pulse's continued success will depend to a significant extent upon the
abilities and continued efforts of Tas Tsonis,  Vice President and a Director of
the Company and  President  of Pulse;  Brian  Goldberg,  Vice  President  of the
Company and Executive Vice President of Pulse. The Company has entered into five
year employment  agreements with Messrs.  Arnberg and Levine which expired as of
February 20, 1999 with their employment by the Company  continuing on an at-will
basis on  roughly  the same  terms and  conditions  contained  in their  expired
employment  agreements.  Effective as of February 24, 1999,  Messrs.  Tsonis and
Goldberg  elected  to  renew  their  respective  employment  agreements  for  an
additional  three (3) year term.  Mr. Richer is currently in the third year of a
five year  employment  agreement.  Mr. Richer does not currently  have a written
employment  agreement  with the  Company.  The loss of the  services  of Messrs.
Arnberg,  Levine,  Tsonis,  Goldberg  and  Richer or the  services  of other key
management  personnel  could have a material  adverse  effect upon the Company's
business, financial condition and results of operations.

<PAGE>

     ITEM 2. Properties

     The Company's corporate headquarters is in Hauppauge,  New York in a 50,000
square foot facility.  This property houses the Company's executive offices, the
Northeast sales office, customer service,  software support and warehouse space.
Additionally, both HAPL Leasing and ESW operate out of this facility. On October
27, 1994, the Company  entered into a ten year,  $2,295,000  Mortgage  agreement
with a bank for its new corporate headquarters. The Mortgage bears interest at a
fixed rate of 8.8% and is payable in equal  monthly  principal  installments  of
$19,125.  Effective  April 30, 1999, in conjunction  with a waiver and amendment
obtained by the Company relating to the violation of a covenant contained in its
Mortgage at January 31, 1999 and subsequent amendment thereof, the interest rate
on the Mortgage increased from 8.8% to 9.3% The Company's  obligations under the
Mortgage  are secured by a lien on the  premises  and the  related  improvements
thereon.

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

     In addition to the Company's  headquarters,  the Company leases 21 regional
satellite offices, as well as a location in Mississauga, Ontario, Canada for the
Pulse  headquarters.  These offices consist of regional sales offices,  training
centers,  repair  centers  and  warehouse  and  showroom  space.  As part of the
Company's efforts at restructuring and cost reduction, it is anticipated that as
yet an  undetermined  number of the  regional  satellite  offices will be closed
during fiscal 2000.

     ITEM 3. Legal Proceedings

     There are no material legal proceedings pending against the Company.

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

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


<PAGE>


                                     PART II

     ITEM 5. Market For Common Equity and Related Stockholder Matters

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

<TABLE>
<CAPTION>

Fiscal 1999                                                High            Low
<S>                                                       <C>            <C>  

First Quarter ended April 30, 1998........................$22 3/4        8 3/32
Second Quarter ended July 31, 1998........................$11 1/4        4 1/2
Third Quarter ended October 31, 1998......................$5 5/8         2
Fourth Quarter ended January 31, 1999.....................$5 1/2         2 3/4

Fiscal 1998

First Quarter ended April 30, 1997........................$22 3/4       $16 1/2
Second Quarter ended July 31, 1997........................$24 3/4       $16 1/2
Third Quarter ended October 31, 1997......................$26 1/4       $17 1/4
Fourth Quarter ended January 31, 1998.....................$22           $17

</TABLE>

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

     (b)  As  of  March  29,  1999,   the  Company   believes  that  there  were
approximately 3,769 beneficial owners of its Class A Common Stock.

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


<PAGE>



                                    PART III

     ITEM 6. Selected Financial Data

     The  following  selected  consolidated  financial  data  should  be read in
conjunction  with the  Consolidated  Financial  Statements and the Notes thereto
included  elsewhere  herein.  The  consolidated  financial  statement data as of
January 31, 1999 and 1998 and for the fiscal years ended January 31, 1999,  1998
and  1997  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, 1997, 1996,
and 1995 and for the fiscal  years  ended  January 31, 1996 and 1995 are derived
from audited Consolidated Financial Statements not included herein.

<TABLE>
<CAPTION>

                                                                                            Year Ended January 31, 1999
                                                                               (in thousands of dollars, except per share amounts)

Hirsch International Corp. and Subsidiaries                                        1999       1998       1997      1996     1995    
------------------------- ------------------------                                 ----       ----       ----      ----     ----
<S>                                                                             <C>         <C>       <C>        <C>       <C>  

Statement of Operations Data:
Net sales...............................................................         $127,546   $147,045   $122,195  $87,974   $70,709
Interest income related to sales-type leases............................            5,348      5,432      3,243    3,022     1,617
Cost of sales...........................................................           85,054     96,099     80,820   58,836    47,881
Selling, general and administrative expenses............................           44,381     41,055     29,070   20,638    16,155
(Loss) income before income tax (benefit) provision.....................           (6,066)    14,255     15,170   11,402     8,159
Income tax (benefit) provision..........................................           (1,848)     6,059      6,402    4,837     3,355
Net (loss) income.......................................................           (4,608)     8,196      8,768    6,565     4,823
Basic net (loss) income per share (1), (2)..............................        $ (  0.49)  $   0.92 $     1.13 $   1.10  $   0.66
Diluted net (loss) income per share (1), (2)............................        $ (  0.49)  $   0.89 $     1.10 $   1.09  $   0.66
Shares used in the calculation of basic
  net (loss) income per share (1), (2)..................................            9,413      8,953      7,782    5,960     7,332
Shares used in the calculation of diluted
  net (loss) income per share (1), (2)..................................            9,436      9,236      7,967    6,002     7,335

</TABLE>

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

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

<PAGE>

<TABLE>
<CAPTION>


                                                                                                          January 31, 1999
                                                                                                   (in thousands of dollars)

Hirsch International Corp. and Subsidiaries                                      1999     1998        1997       1996        1995
------------------------- ------------------------
<S>                                                                           <C>        <C>        <C>       <C>          <C>   

Balance Sheet Data:
Working capital.........................................................     $  51,939  $40,169(6)  $22,004   $16,847(4)  $10,363(3)
Total assets............................................................       106,935  114,832(6)   83,696    47,872(4)   37,504(3)
Long-term debt, less current maturities.................................        15,640    1,421      13,194(5)  1,779       2,696
Stockholders' equity....................................................        70,207   75,623(6)   41,682    29,134(4)   20,636(3)

</TABLE>

     (3) In February,  1994, in connection with its Initial Public Offering (the
"IPO"),  the Company  received net proceeds of approximately  $7,373,000  (after
deducting expenses of the IPO).

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

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

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

     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 is qualified in its entirety
by,  the  Company's  Consolidated  Financial  Statements,  including  the  Notes
thereto.  Historical  results  are  not  necessarily  indicative  of  trends  in
operating  results for any future  period.  As used  herein,  "fiscal  year" and
"fiscal"  refers  to  the  applicable  fiscal  year  ending  January  31 of  the
applicable calendar year.

     General

     Hirsch  International Corp. ("Hirsch" or the "Company") is a leading single
source  supplier of  electronic  computer-controlled  embroidery  machinery  and
related  value-added  products  and  services to the  embroidery  industry.  The
Company  offers  a  complete  line  of  technologically   advanced  single-  and
multi-head embroidery machines,  proprietary  application software and a diverse
line of embroidery  supplies and accessories.  Hirsch believes its comprehensive
customer  service,  user training,  software support and broad product offerings
combine  to place the  Company  in a superior  competitive  position  within its
marketplace.  The  Company  sells  embroidery  machines  manufactured  by Tajima
Industries Ltd.  ("Tajima") and Tajima USA, Inc. ("TUI"), a subsidiary formed in
fiscal 1999,  as well as a wide variety of embroidery  supplies,  microcomputers
manufactured  by Dell  Computer  Corporation  and software  manufactured  by the
Hirsch subsidiary, Pulse.

     The  Company's  focus during the past several  years has been on growth and
expansion.  The  acquisitions of SMX and Sedeco  increased the area in which the
Company is the exclusive  distributor  of Tajima  embroidery  equipment  from 26
states to 39 states.  In January 1997,  Tajima granted the Company the exclusive
right to distribute small (one through  six-head "FX" models) Tajima  embroidery
machines in nine western states and Hawaii. With this expansion of the Company's
small  machine  territory  to the  West  Coast,  Hirsch  now  has the  right  to
distribute Tajima machines  throughout the continental United States and Hawaii.
In fiscal 1998 Hirsch formed TUI for the purpose of assembling Tajima embroidery
machines  in  the  United  States.  Production  at TUI  consists  of  models  in
configurations of up to six heads per machine.  In January 1998 Tokai Industries
(Tajima's  manufacturing  arm)  purchased  a 45 percent  interest  in TUI.  This
investment  reflects their continuing  confidence in this endeavor and will be a
contributing factor in the long range growth of TUI.

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

     Fiscal 1999 was a year of retrenchment for the industry,  driven by a shift
in the  sales  mix of  embroidery  machines  and  relocation  offshore  of large
multi-head equipment customers.  It was further compounded by dramatic swings in
the US dollar / Yen exchange rate. All industry  competitors faced difficulty in
meeting these new market demands. The Company initiated a restructuring  program
to  address  the  market   shifts  in  the  industry,   including   closing  and
consolidating  certain  divisions,  reducing total employment,  and disposing of
facilities no longer  required to support its new business  model (See Note 7 of
Notes  to  Consolidated   Financial   Statements).   The  Company  believes  the
implementation  of the  restructuring  program  will  position  it to  return to
profitable operations at revenue levels reflecting today's market realities.

     Results of Operations

     The following table presents  certain income statement items expressed as a
percentage of total  revenue for the fiscal years ended  January 31, 1999,  1998
and 1997.

<TABLE>
<CAPTION>

                                                  1999            1998             1997
                                                  ----            ----             ----
<S>                                             <C>            <C>               <C>       

Net sales                                         95.8%          96.4%             97.4%

Interest income related to sale-type leases        4.2%           3.6%              2.6%
                                                  -----          -----             -----

Total revenue                                    100.0%         100.0%            100.0%

Cost of sales                                     66.7%          63.0%             64.4%

Operating expenses                                36.7%          26.9%             23.2%

Interest expense, net                              1.2%           0.6%              0.7%

Other expense (income), net                        0.2%           0.1%             (0.4%)
                                                  -----          -----             ------     

(Loss) income before income
     taxes and minority interest                  -4.8%           9.4%              12.1%

Income tax (benefit) provision                    -1.5%           4.0%               5.1%

Minority interest                                  0.3%           0.0%               0.0%
                                                  -----          -----              -----

Net (loss) income                                 -3.6%           5.4%               7.0%
                                                  =====          =====              =====
</TABLE>


<PAGE>

                Fiscal Year 1999 as Compared to Fiscal Year 1998

     Net sales. Net sales for fiscal year 1999 were $122,198,000,  a decrease of
$24,847,000,  or 16.9%,  compared  to  $147,045,000  for fiscal  year 1998.  The
Company believes that the reduction in the sales level for the fiscal year ended
January  31,  1999 is  attributable  to a  softening  of  demand  for new  large
(six-head "DC" models through  thirty-head  models) machines.  In addition,  the
reduction in sales revenue during fiscal year 1999 is also attributable to lower
average  machine  selling prices as compared to fiscal year 1998. This reduction
in average selling price was mainly the result of the strong dollar/yen exchange
rate.

     The sale of new embroidery machinery represented approximately $96,491,000,
or 79.0% and $120,560,000,  or 82.0%, of net sales for the fiscal years 1999 and
1998, respectively. Small embroidery machines (one through six-head "FX" models)
and large embroidery  machines (six-head "DC" models through thirty-head models)
represented approximately  $49,281,000,  or 51.1%, and $47,210,000,  or 48.9% of
total new  embroidery  machine  sales  during  fiscal  year 1999 as  compared to
approximately $51,376,000, or 42.6%, and $69,184,000, or 57.4%, respectively for
fiscal year 1998.

     Revenue from the sale of the Company's used machines, computer hardware and
software,  parts,  service,  application  software and  embroidery  supplies for
fiscal year 1999 was approximately  $25,707,000,  as compared to $26,485,000 for
fiscal year 1998.

     Interest  income  related to  sales-type  leases.  HAPL's  interest  income
decreased  1.6% to  $5,348,000  for  fiscal  year 1999 from  $5,432,000  for the
comparable  period of the prior year.  This small  decrease  in HAPL's  interest
income as compared to the decrease in new  embroidery  machine sales is a result
of the  continued  expansion of HAPL's  operations.  Their  diversified  leasing
programs have resulted in a 37.4% increase in the number of new equipment  sales
which are leased to 50.7% of total new equipment sales for fiscal year 1999 from
36.9% for fiscal year 1998. This is primarily  attributable to HAPL's  continued
penetration  into the  small  machine  market,  which  represented  51.1% of new
machine sales in fiscal 1999 as compared to 42.6% of new machine sales in fiscal
1998.

     Cost of sales.  For fiscal year 1999, cost of sales decreased  $11,045,000,
or 11.5%, to $85,054,000 from $96,099,000 for fiscal year 1998. The decrease was
a result of the  related  decrease  in net sales for fiscal  1999 as compared to
fiscal 1998, offset by the inventory write-down of $3,450,000 recorded in fiscal
1999. The inventory  write-down relates to the Company's  restructuring plan and
includes the write-down of used machine and ESW inventories (See Note 7 of Notes
to Consolidated Financial Statements). The fluctuation of the dollar against the
yen has  historically  had a minimal  effect on Tajima  equipment  gross margins
since currency  fluctuations are generally  reflected in pricing  adjustments in
order to maintain consistent gross margins on machine revenues. Exclusive of the
inventory  write-down recorded in fiscal 1999, there was a small decrease in the
Company's  gross  margin for fiscal  year 1999 to 36.0% as compared to 37.0% for
fiscal year 1998. This is primarily attributable to an increase in sales of used
embroidery  machines,  which  typically  yields  lower gross  margins than those
obtained in the sale of new embroidery machines.

<PAGE>

     Selling, general and administrative ("SG&A") expenses. For fiscal year 1999
SG&A increased  $3,326,000,  or 8.1%, to $44,381,000 from $41,055,000 for fiscal
year 1998.  SG&A  expenses  increased as a percentage  of revenues to 34.8% from
26.9%.  The increase in SG&A as a percentage of revenues for fiscal year 1999 as
compared to fiscal 1998 is primarily attributable to the Company's investment in
its   infrastructure   to  support   anticipated   sales  levels.  In  addition,
approximately  $300,000  of  SG&A  expenses  were  incurred  in  fiscal  1999 in
connection with the formation of the Hometown  Threads joint venture with Jacobs
Management  Corporation  and the Company's  creation of its new Building  Blocks
division.  Based upon the  decrease  in net sales in fiscal  1999 as compared to
fiscal 1998, the Company has developed and  implemented a cost  reduction  plan.
The  purpose of the plan is to reduce  costs  through the  consolidation  of our
support and back office infrastructure and reduction of our overhead.  This will
bring the Company's expenses in line with revised sales projections.

     Interest expense. Interest expense for fiscal year 1999 increased $633,000,
or 67.8%,  from  $934,000 in fiscal year 1998 to $1,567,000 in fiscal year 1999.
This  increase in interest  expense is the result of increased  working  capital
borrowings  outstanding  against the Company's  Revolving Credit Facility during
fiscal year 1999 as compared to fiscal year 1998.

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

     Net (loss)  income.  The net loss for fiscal  year 1999 was  $4,608,000,  a
decrease  in income of  $12,804,000,  or 156.2%,  as  compared  to net income of
$8,196,000  for fiscal year 1998.  The net margin  decreased  to -3.6% in fiscal
year  1999  from  5.4% in  fiscal  year  1998.  These  decreases  are  primarily
attributable to the  restructuring  costs and inventory  write-down  recorded in
connection  with  the  Company's  restructuring  plan  (See  Note 7 of  Notes to
Consolidated Financial Statements), as well as an increase in SG&A expenses.

     Fiscal Year 1998 as Compared to Fiscal Year 1997

     Net sales. Net sales for fiscal year 1998 were $147,045,000, an increase of
$24,850,000,   or  20.3%,   compared  to  $122,195,000  for  fiscal  year  1997.
Approximately  $18,850,000  of such  increase was due to the sale of  embroidery
machinery  for fiscal year 1998.  The sale of embroidery  machinery  represented
approximately  $120,560,000 or 82.0%, and  $101,710,000,  or 83.2%, of net sales
for fiscal years 1998 and 1997,  respectively.  The Company  believes  that this
increase is the result of the continued strong demand for embroidered  products,
the growth in unit sales of the single-head  embroidery  machine,  the expansion
into new  territories  acquired  through  acquisitions  (See  Note 3 of Notes to
Consolidated Financial Statements),  the creation of new embroidery applications
and  markets  and the  continued  strength of  "embroidery  entrepreneurs"  as a
growing segment of the  marketplace.  Additionally,  technological  advances and
innovations in embroidery equipment have opened up new marketing opportunities.

     Revenue from the sale of the  Company's  computer  hardware  and  software,
parts, service, used machines,  application software and embroidery supplies for
fiscal  year  1998  aggregated   approximately   $26,485,000,   as  compared  to
$20,485,000 for fiscal year 1997,  which represents an increase of approximately
29.3%.  This  increase  is  directly  attributable  to the  increase  in machine
revenues.

     Small  embroidery  machines  (one through  six-head  "FX" models) and large
embroidery   machines   (six-head  "DC"  models  through   thirty-head   models)
represented  approximately  $51,376,000 and  $69,184,000,  respectively of total
embroidery  machine sales during  fiscal year 1998 as compared to  approximately
$33,749,000 and $67,961,000 for fiscal year 1997, respectively.

<PAGE>

     Interest  income  related to  sales-type  leases.  HAPL's  interest  income
increased  67.5% to  $5,432,000  for fiscal  year 1998 from  $3,243,000  for the
comparable  period of the prior year. This increase is a result of the continued
expansion of HAPL's  operations and HAPL's  consummation of a limited  liability
recourse  agreement with a third party funding  source.  This limited  liability
recourse agreement provides HAPL with more favorable terms than the non-recourse
agreements.

     Cost of sales.  For fiscal year 1998, cost of sales increased  $15,279,000,
or 18.9%, to $96,099,000 from $80,820,000 for fiscal year 1997. The increase was
in direct proportion to the Company's increased sales volume. The fluctuation of
the  dollar  against  the yen has a minimal  effect on  Tajima  equipment  gross
margins  since  currency   fluctuations  are  generally   reflected  in  pricing
adjustments in order to maintain  consistent gross margins on machine  revenues.
The  increase in  Company's  gross  margin for fiscal 1998 as compared to fiscal
1997 is  attributable  to  increases  in  sales  of the  Company's  value  added
products.  Gross  margins for the Company's  value-added  products  (i.e.,  ESW,
Pulse,  and  HAPL)  are  generally  higher  than  gross  margins  on the sale of
embroidery  machinery.  For fiscal year 1998,  the revenue  contribution  of the
Company's  value-added  products was  approximately  12.5% of total revenue,  an
increase of 45.4% as compared to 8.56% for fiscal 1997.

     Selling, general and administrative ("SG&A") expenses. For fiscal year 1998
SG&A increased $11,985,000, or 41.2%, to $41,055,000 from $29,070,000 for fiscal
year 1997.  SG&A  expenses  increased as a percentage  of revenues to 26.9% from
23.2%.  This increase in SG&A as a percentage of revenues is attributable to the
Company's  investment in its  infrastructure to support expanding  operations as
well as start-up  costs  incurred in  connection  with the  commencement  of the
assembly operation at TUI.

     Interest expense. Interest expense for fiscal year 1998 increased $102,000,
or 12.3%,  from  $832,000  in fiscal  year 1997 to $934,000 in fiscal year 1998.
This increase is directly  attributable to the increased  interest costs related
to the additional debt assumed for the SMX, Sedeco and ECI acquisitions.

     Income tax provision.  The income tax provision  reflected an effective tax
rate of approximately 42.5% for fiscal year 1998 as compared to 42.2% for fiscal
year 1997.  Differences from the federal  statutory rate consisted  primarily of
provisions  for state income  taxes net of Federal tax benefit.  The increase in
the tax rate for fiscal  year 1998 is  attributable  to changes in the sales mix
which resulted in increased sales to states and other taxing  jurisdictions with
higher  effective tax rates.  Additionally,  the goodwill  related to the Sedeco
acquisition,  which was  accounted  for as a stock  purchase  for tax  purposes,
resulted in a permanent  difference since it is not deductible for tax purposes.
The  principle  components  of the  deferred  income  tax assets  resulted  from
allowances and accruals which are not currently  deductible for tax purposes and
differences in  amortization  periods  between book and tax bases.  There was no
effect on deferred taxes as a result of the SMX acquisition, which was accounted
for as an asset  purchase  for tax  purposes.  The  goodwill  related to the SMX
acquisition is being amortized over 15 years for both book and tax purposes. The
Company has not established any valuation  allowances against these deferred tax
assets as  management  believes it is more likely than not that the Company will
realize  these  assets  in the  future  based  upon  the  historical  profitable
operations of the Company.

     Net income. Net Income for fiscal year 1998 decreased $572,000, or 6.5%, to
$8,196,000  from  $8,768,000 for fiscal year 1997.  The net margin  decreased to
5.4% in fiscal  year 1998 from 7.0% in fiscal  year 1997.  These  decreases  are
attributable to the increase in SG&A expenses.

     Liquidity and Capital Resources

     Operating Activities and Cash Flows

     The  Company's  working  capital  was  $51,939,000  at  January  31,  1999,
increasing  $11,770,000,  or 29.3%,  from  $40,169,000  at January 31, 1998. The
Company has financed its operations  principally  through long-term financing of
certain capital expenditures, the proceeds from Secondary Offerings completed in
June 1997 (See Note 1 of Notes to Consolidated Financial Statements) and working
capital borrowings under its Revolving Line of Credit Agreement. The acquisition
of ECI was financed through  borrowings  against the Company's  Revolving Credit
Facility (See Note 3 of Notes to  Consolidated  Financial  Statements)  although
this  borrowing  was  repaid  in June 1997  with the  proceeds  of the June 1997
Secondary Offering.

<PAGE>

     During fiscal year 1999, the Company's cash and cash equivalents  increased
by $122,000 to  $3,078,000.  Net cash of  $11,996,000  was used in the Company's
operating  activities.  Cash  provided by  decreases  in the balance of accounts
receivable,  net  investment in sales-type  leases and other assets  aggregating
approximately  $11,425,000  was offset by cash used to  increase  inventory  and
prepaid  taxes  aggregating  approximately  $5,253,000  and a decrease  in trade
acceptances  payable,  accounts  payable and accrued  expenses  and income taxes
payable aggregating approximately $17,232,000.

     Cash  generated  from  operations  was  partially  used for the purchase of
approximately  90,000  shares of the  Company's  stock in the open market during
fiscal year 1999, at an average cost of approximately $9.20 per share.

     The Company  purchases foreign currency futures contracts to hedge specific
purchase  commitments.  Substantially all foreign currency purchases commitments
are matched with specific foreign currency futures contracts.  Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to  outstanding  trade  acceptances  payable.  The  cost of such  contracts  are
included  in the cost of  inventory  (See  Note  11b of  Notes  to  Consolidated
Financial Statements).

     Revolving Credit Facility and Borrowings

     In February 1999 the Company amended its existing Revolving Credit Facility
(the  "Facility")  to,  among other  things,  reduce the total  commitment  from
$60,000,000  to  $40,000,000  for Hirsch and from  $10,000,000 to $6,500,000 for
HAPL and to provide a security  interest in  substantially  all of the assets of
the  Company and its  subsidiaries.  The  Facility  is used for working  capital
loans,  letters  of credit  and  deferred  payment  letters  of credit  and bear
interest  as  defined  in the  Facility.  The  terms  of the  Facility  restrict
additional borrowings by the Company and require the Company to maintain certain
minimum tangible net worth,  quick asset ratio and fixed charge coverage levels,
as defined  therein.  This Facility has also been used for letters of credit and
deferred  payment  letters of credit  aggregating  approximately  $2,164,000  at
January 31, 1999.  During fiscal year 1999 the Company  borrowed  $26,000,000 as
working capital loans against the Facility, of which $14,500,000 was outstanding
at January 31, 1999. The Company was in default of certain  financial  covenants
at year end and has received waivers from the banks.

     HAPL  sells  most of its  leases  to  financial  institutions  on  either a
non-recourse basis or a limited-liability  basis within several months after the
commencement of the lease term thereby reducing its financing requirements. HAPL
Leasing,  which  was  fully  activated  in May 1993,  has  closed  approximately
$192,180,000  in lease  agreements  through  January 31, 1999. As of January 31,
1999, approximately $174,777,000, or 90.9%, of the leases written have been sold
to third-party financial institutions.

     On January 27, 1994,  Hirsch entered into a ten year,  $2,295,000  Mortgage
agreement with a bank (the "Mortgage") for its new corporate  headquarters.  The
Mortgage  bears interest at a fixed rate of 8.8% and is payable in equal monthly
principal  installments of $19,125. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements  thereon. The Company was
in default of the  Mortgage  financial  covenant at year end and has  received a
waiver from the bank.  In  connection  with the waiver,  the bank  Mortgage  was
amended to provide for, among other things,  an increase in the annual  interest
rate to 9.3% effective April 30, 1999.

<PAGE>
     Future Capital Requirements

     The  Company  believes  that its  existing  cash and funds  generated  from
operations,  together  with its  existing  revolving  credit  facility,  will be
sufficient to meet its working capital and capital expenditure  requirements and
to finance planned growth.

     Year 2000 Compliance

     The Year 2000 issue exists because many computer  systems and  applications
use  two-digit  date  fields to  designate a year.  As the  century  date change
occurs, date sensitive systems may not be able to recognize the year 2000 or may
do so  incorrectly  as the year 1900.  This  inability  to recognize or properly
interpret the year 2000 may result in the incorrect  processing of financial and
operational information.

     The Company  has  established  a steering  committee  to address  Year 2000
issues,  including  senior  members of the  management  team,  which will report
regularly to the Board of  Directors.  The  committee has initiated a program to
upgrade its  internal  information  systems to address any Year 2000  compliance
issues.  This program includes a focus on internal policies,  methods and tools,
as well as inquiries of and coordination with customers and suppliers.

     The  Company  expects  its Year 2000  program to be  completed  on a timely
basis,   and  is  currently   implementing   new  computer   systems  that  will
substantially  insure that the  Company's  operating  systems are not subject to
Year 2000  transition  problems.  To the extent current systems that will not be
replaced have been determined to be  non-compliant,  the Company is working with
the suppliers of such systems to obtain upgrades  and/or  enhancements to insure
Year 2000 compliance.

     The Company has made a thorough review of its proprietary software products
and  believes  that its current  products are Year 2000  compliant.  Many of the
Company's  customers may be,  however,  using earlier  versions of the Company's
software  products,  which  may not be Year  2000  compliant.  The  Company  has
initiated  programs to proactively notify such customers of the risks associated
with using these products and to actively encourage such customers to migrate to
the Company's current software products.

     Based upon the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program will aggregate approximately $300,000.  These costs are
expected to be  incurred  primarily  in fiscal  year 2000 and consist  mainly of
remediation of and/or  upgrades to existing  computer  hardware and software and
telecommunication  systems.  Such costs do not include internal  management time
and the deferral of other projects,  the effects of which are not expected to be
material to the Company's results of operations or financial condition.

     The Company's total Year 2000 project costs include the estimated costs and
time  associated  with the  impact  of third  party  Year 2000  issues  based on
presently available  information.  The Company has initiated a vendor compliance
program and has inquired  with its key vendors as to the status of such vendors'
Year 2000 compliance.  Based on the responses to date, the Company believes that
its key vendors either currently are Year 2000 compliant, or will complete their
Year 2000 programs on a timely basis.  However,  there can be no guarantee  that
such vendors upon which the Company  relies will be able to timely address their
Year 2000 compliance issues. A reasonable worst case Year 2000 scenario would be
the failure of key vendors  and/or  suppliers to have  corrected  their own Year
2000 issues  which could  cause  disruption  of the  Company's  operations,  the
effects  of  which  may have an  adverse  impact  on the  Company's  results  of
operations.  The impact of such disruption  cannot be estimated at this time. In
the event the Company  believes that any of its key suppliers are unlikely to be
able to resolve their Year 2000 issues, it will obtain an alternative  source of
supply.

<PAGE>

     Backlog and Inventory

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

     Inflation

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


     Recent Pronouncements of the Financial Accounting Standards Board

     In fiscal 1999,  the Company  adopted  Statement  of  Financial  Accounting
Standards No. 130, "Reporting  Comprehensive Income" ("SFAS 130"),  Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of an
Enterprise  and Related  Information"  ("SFAS  131") and  Statement of Financial
Accounting  Standards No. 132,  "Employers'  Disclosure about Pensions and Other
Post-Retirement  Benefits - an amendment to FASB  Statement  No. 87, 88 and 106"
("SFAS 132").  Each of these statements  required  additional  disclosure in the
Company's  consolidated  financial statements but did not have a material effect
on the Company's consolidated financial position or results of operations.

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

     Market Risk Sensitivity

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

     The Company enters into forward foreign exchange  contracts  principally to
hedge  the  currency   fluctuations  in  transactions   denominated  in  foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates. During fiscal 1999, the principal transactions hedged
were purchases of machinery from the Company's  major  supplier.  The periods of
the forward foreign exchange  contracts  correspond to the periods of the hedged
transactions.  The cost of such contracts is included in the cost of the related
machinery in  inventory.  A 5%  strengthening  or  weakening of the U.S.  dollar
against purchases denominated in foreign currencies could have had approximately
a $3,031,000  million impact on the net pre-tax  operations of the Company.  The
Company does not use foreign exchange contracts to hedge expected earnings.

     All  of  the  Company  debt  is  U.S.  dollar  denominated.   At  year-end,
approximately   91.2%  of  this  indebtedness  to  third  parties  was  floating
rate-based.  Although the Company has exposure to rising and falling rates, a 1%
rise in rates on the average outstanding  floating rate-based  borrowings during
the fiscal year would have had  approximately  a $127,000  adverse impact on net
pre-tax  operations.  The Company  does not use  interest  rate  derivatives  to
protect its exposure to interest rate market movements.

     ITEM 8. FINANCIAL STATEMENTS IN SUPPLEMENTARY DATA

     The information contained in pages F-1 through F-25 hereof.

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

     None

<PAGE>

                                     PART IV

     ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)

Index to Consolidated Financial Statements...............................F-1

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

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

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

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

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

Notes to Consolidated Financial Statements........................F-8 - F-25


(a)(2)  FINANCIAL STATEMENT SCHEDULE.....................................S-1

(a)(3)  EXHIBITS

     %3.1 Restated Certificate of Incorporation of the Registrant

     ^3.2 Amended and Restated By-Laws of the Registrant

     *4.1 Specimen of Class A Common Stock Certificate

     *4.2 Specimen of Class B Common Stock Certificate

     ^10.1 $60,000,000 Revolving Credit Facility and $10,000,000 Credit Facility
Dated as of September 26, 1997 among Hirsch  International  Corp.,  HAPL Leasing
Co., Inc.,  Sewing Machine Exchange,  Inc., Pulse  Microsystems,  Ltd.,  Sedeco,
Inc., The Bank of New York, Mellon Bank, N.A., Fleet Bank, N.A., and The Bank of
New York, as agent.

     10.2 Second Amendment to Loan Agreement among Hirsch  International  Corp.,
HAPL Leasing Co., Inc., Sewing Machine Exchange,  Inc., Pulse Microsystems Ltd.,
Sedeco,  Inc.,  Hirsch Equipment  Connection,  Inc., The Bank of New York, Fleet
Bank, N.A., Mellon Bank N.A., and The Bank of New York, as agent.

     10.3 Waiver Agreement among Hirsch  International  Corp., HAPL Leasing Co.,
Inc., Sewing Machine Exchange,  Inc., Pulse  Microsystems  Ltd.,  Sedeco,  Inc.,
Hirsch  Equipment  Connection,  Inc.,  The Bank of New York,  Fleet Bank,  N.A.,
Mellon Bank N.A., and The Bank of New York, as agent.

     **10.4 $2,295,000 Mortgage Note from Hirsch International Corp. to Chemical
Bank

     **10.5 Mortgage between Hirsch International Corp. and Chemical Bank

     **10.6 Guaranty of Payment of HAPL Leasing Co, Inc. and Pulse  Microsystems
Ltd. to Chemical Bank

     10.7 Waiver and First  Amendment to Mortgage  between Hirsch  International
Corp. and The Chase Manhattan Bank, dated as of April 30, 1999.

     10.8 Agreement of Modification of Note between Hirsch  International  Corp.
and The Chase Manhattan Bank dated as of April 30, 1999.

     10.9  Joinder  by   Guarantors   among  HAPL  Leasing  Co.,   Inc.,   Pulse
Microsystems, Ltd. and The Chase Manhattan Bank.

<PAGE>

     ****10.10 Stock Purchase Agreement,  dated June 7, 1996 by and among Hirsch
International Corp. and Ronald H. Krasnitz and Martin Krasnitz

     *****10.11 Stock Purchase Agreement, Dated December 20, 1996 by and between
Hirsch International Corp. and Jimmy L. Yates.

     *10.12 Employment Agreement between Henry Arnberg and the Registrant

     *10.13 Employment Agreement between Paul Levine and the Registrant

     *10.14  Employment  Agreement  between Tas Tsnosis and Pulse  Microsystems,
Ltd.

     *10.15 Employment  Agreement between Brian Goldberg and Pulse Microsystems,
Ltd.

     ***10.16 Employment Agreement between Ronald H. Krasnitz and Sewing Machine
Exchange, Inc.

     ***10.17  Employment  Agreement  between Martin Krasnitz and Sewing Machine
Exchange, Inc.

     @10.18 Employment Agreement between Jimmy L. Yates and Sedeco, Inc.

     +10.19  Amendment  to  Employment  Agreement  between  Tas Tsonis and Pulse
Microsystems, Ltd.

     +10.20 Amendment to Employment  Agreement  between Brian Goldberg and Pulse
Microsystems, Ltd.

     *10.21  Distributorship  Agreement  Dated  February 21, 1991  together with
Supplements  and  Amendments  thereto,  among Tajima  Industries,  Ltd.,  Nomura
Trading Co. Ltd., Nomura (America) Corp. and Hirsch International Corp. ("Hirsch
Distributorship Agreement")

     @10.22 Amendment Number Two to Hirsch Distributorship Agreement, Dated June
7, 1996

     @10.23  Distributorship  Agreement,  Dated February 21, 1991, together with
Supplement  Dated  February 21,  1996,  among Tajima  Industries,  Ltd.,  Nomura
Trading Co. Ltd., Nomura (America) Corp., and Sedeco, Inc.

     @10.24 West Coast Distributorship Agreement, Dated February 21, 1997, among
Tajima Industries, Ltd., Nomura Trading Co. Ltd. and Nomura (America) Corp., and
Hirsch International Corp.

     %10.25 Stock Option Plan, as Amended

     #10.26 1994 Non-Employee Director Stock Option Plan

     @10.27  Registration  Rights  Agreement,  Dated December 20, 1996,  between
Hirsch International Corp. and Jimmy L. Yates

     @10.28  Non-Qualified  Stock Option Agreement between Hirsch  International
Corp. and Jimmy L. Yates, Dated December 6, 1996

     @10.29  Non-Qualified  Stock Option Agreement between Hirsch  International
Corp. and Ronald H. Krasnitz, Dated June 7, 1996

<PAGE>

     @10.30  Non-Qualified  Stock Option Agreement between Hirsch  International
Corp. and Martin Krasnitz, Dated June 7, 1996

     +10.31  Agreement  dated as of December 20, 1997 between the Registrant and
Tokai Industrial Sewing Machine Company, Ltd. for sale of a forty (40%) per cent
interest in Tajima USA, Inc. 21.1 List of Subsidiaries of the Registrant

     21.1 List of Subsidiaries of Registrant

     23.1 Consent of Auditors

     27.1 Financial Data Schedule

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

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

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

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

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

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

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

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

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

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




<PAGE>


                                   SIGNATURES

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

                                         HIRSCH INTERNATIONAL CORP.           
                                         Registrant

                                     By: /s/Henry Arnberg      
                                         ----------------------------------
                                         Henry Arnberg, Chief Executive Officer

Dated:  May 17, 1999

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

<TABLE>
<CAPTION>

             Signature                                        Title                                   Date
             ---------                                        -----                                   ----
<S>                                  <C>                                                        <C>   

/s/Henry Arnberg                      Chairman of the Board of Directors and Chief                May 17, 1999
---------------------------           Executive Officer (Principal Executive Officer)
Henry Arnberg                         


/s/Paul Levine                        President and Director                                      May 17, 1999
------------------------------
Paul Levine

/s/ Tas Tsonis                         Vice President and Director                                May 17, 1999
------------------------------
Tas Tsonis

/s/ Richard M. Richer                  Vice President-Finance and Chief Financial Officer         May 17, 1999
------------------------------        (Principal Accounting and Financial Officer)
Richard M. Richer

/s/ Ronald Krasnitz                    Chief Operating Officer, Secretary and                     May 17, 1999
------------------------------         Director
Ronald Krasnitz

/s/ Marvin Broitman                    Director                                                   May 17, 1999
------------------------------
Marvin Broitman

s/s Herbert M. Gardner                 Director                                                   May 17, 1999
------------------------------
Herbert M. Gardner

/s/Douglas Schenendorf                Director                                                    May 17, 1999
------------------------------
Douglas Schenendorf
</TABLE>

<PAGE>



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

TABLE OF CONTENTS
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
   
                                                                                       Page
<S>                                                                                   <C>  


INDEPENDENT AUDITORS' REPORT                                                              1

     CONSOLIDATED  FINANCIAL  STATEMENTS  FOR THE YEARS ENDED  JANUARY 31, 1999,
1998 AND 1997:

   Consolidated Balance Sheets                                                          2-3

   Consolidated Statements of Operations                                                  4

   Consolidated Statements of Stockholders' Equity                                        5

   Consolidated Statements of Cash Flows                                                  6

   Notes to Consolidated Financial Statements                                          7-24

</TABLE>


<PAGE>


INDEPENDENT AUDITORS' REPORT


Board of Directors
Hirsch International Corp.
Hauppauge, New York

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

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

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



DELOITTE & TOUCHE LLP
Jericho, New York

April 22, 1999



<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 AND 1998
-----------------------------------------------------------------------------

<TABLE>
<CAPTION>

ASSETS                                                                           1999                  1998
<S>                                                                        <C>                     <C>   


CURRENT ASSETS:
  Cash and cash equivalents                                                $   3,078,000         $   2,956,000
                                                                               
  Accounts receivable, net of an allowance for
    doubtful accounts of approximately $4,033,000
    and $3,160,000, respectively                                               22,956,000           34,427,000
                                                                               
  Net investment in sales-type leases -
    current portion (Note 5)                                                    2,254,000            2,180,000
                                                                               
  Inventories, net (Notes 4 and 11)                                            36,335,000           34,166,000
                                                                              
  Prepaid income taxes (Note 9)                                                1,786,000                  -

  Other current assets (Note 9)                                                5,284,000             3,284,000
                                                                               ---------           -----------

           Total current assets                                               71,693,000            77,013,000
                                                                               
NET INVESTMENT IN SALES-TYPE LEASES - Noncurrent
  portion (Note 5)                                                            11,256,000            12,055,000
                                                                               
EXCESS OF COST OVER NET ASSETS  ACQUIRED - Net of accumulated  amortization
of approximately $2,686,000 and $1,581,000, respectively (Notes 3 and 7)      14,139,000            15,979,000
                                                                               

PURCHASED TECHNOLOGIES - Net of accumulated
  amortization of approximately $940,000 and $749,000,
  respectively                                                                   399,000               590,000

PROPERTY, PLANT AND EQUIPMENT - Net of accumulated
  depreciation and amortization (Notes 6 and 8)                                7,602,000             7,193,000
                                                                               

OTHER ASSETS (Note 9)                                                          1,846,000             2,002,000
                                                                               ---------           -----------
TOTAL ASSETS                                                              $  106,935,000        $  114,832,000
                                                                             ===========           ===========
</TABLE>


     See notes to consolidated financial statements.
                                                                    (Continued)



<PAGE>





HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 AND 1998
------------------------------------------------------------------------------
<TABLE>
<CAPTION>


LIABILITIES AND STOCKHOLDERS' EQUITY                                                  1999                            1998
<S>                                                                               <C>                             <C>   

CURRENT LIABILITIES:
  Trade acceptances payable (Note 11)                                            $2,164,000                   $    15,286,000
                                                                               
  Accounts payable and accrued expenses (Note 7)                                 17,338,000                        20,592,000
                                                                               
  Current maturities of long-term debt (Note 8)                                     252,000                           231,000
 
  Income taxes payable (Note 9)                                                        -                              735,000 
                                                                                 ----------                       -----------

           Total current liabilities                                             19,754,000                        36,844,000
                                                                              

LONG-TERM DEBT - Less current maturities (Note 8)                                15,640,000                         1,421,000
                                                                                 ----------                       -----------
                                                                              
           Total liabilities                                                     35,394,000                        38,265,000
                                                                               

MINORITY INTEREST (Note 1)                                                        1,334,000                           944,000
                                                                                -----------                        ----------

COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)

STOCKHOLDERS' EQUITY (Notes 1 and 10):
  Preferred stock, $.01 par value; authorized;
    1,000,000 shares; issued:  none                                                     -                               -        
                                                                           
  Class A common stock, $.01 par value;
    authorized:  20,000,000 shares, outstanding,
    6,815,000 and 6,811,000 shares, respectively                                     68,000                            68,000

  Class B common stock, $.01 par value;
    authorized:  3,000,000 shares, outstanding:
    2,668,000 shares                                                                 27,000                            27,000
  
Additional paid-in capital                                                       41,397,000                        41,377,000
                                                                               
  Retained earnings                                                              29,543,000                        34,151,000
                                                                               ------------                        ----------
                                                                                                                         
                                                                                 71,035,000                        75,623,000
  Less:  Treasury stock at cost, 90,300 shares                                      828,000                             -
                                                                               ------------                        ----------

           Total stockholders' equity                                            70,207,000                        75,623,000
                                                                               ------------                        ----------
                                                                               

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $  106,935,000                   $   114,832,000
                                                                               ============                      ============
</TABLE>



See notes to consolidated financial statements.
                                   (Concluded)

<PAGE>



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>



                                                                     1999               1998               1997
<S>                                                                <C>              <C>                <C> 

REVENUES:
  Net sales                                                      $122,198,000      $147,045,000       $122,195,000
  Interest income related to sales-type leases                      5,348,000         5,432,000          3,243,000
                                                                  -----------       -----------        -----------

           Total revenue                                          127,546,000       152,477,000        125,438,000
                                                                  -----------       -----------        -----------

COST OF SALES:
  Cost of sales                                                   81,604,000         96,099,000         80,820,000
  Inventory write-down (Notes 4 and 7)                             3,450,000              -                  -
                                                                 -----------        -----------         ----------

           Total cost of sales                                    85,054,000         96,099,000         80,820,000
                                                                 -----------        -----------         ----------
GROSS PROFIT                                                      42,492,000         56,378,000         44,618,000
                                                                 -----------        -----------         ----------
                                                              

OPERATING EXPENSES:
  Selling, general and administrative expenses                    44,381,000         41,055,000         29,070,000
  Restructuring costs (Note 7)                                     2,377,000              -                  -
                                                                 -----------        -----------         ----------

           Total operating expenses                               46,758,000         41,055,000         29,070,000
                                                                 -----------        -----------         ----------
                                                               

OPERATING (LOSS) INCOME                                           (4,266,000)         15,323,000         15,548,000
                                                                 -----------        -----------         ----------
                                                               

OTHER EXPENSE (INCOME)
  Interest expense (Note 8)                                        1,567,000            934,000            832,000
  Other                                                              233,000             90,000           (454,000)            
                                                                 -----------         ----------          ---------

           Total other expense                                     1,800,000          1,024,000            378,000              
                                                                 -----------         ----------          ---------
                                                              

(LOSS) INCOME BEFORE INCOME TAX
  (BENEFIT) PROVISION AND MINORITY
  INTEREST IN NET EARNINGS OF
  CONSOLIDATED SUBSIDIARY                                        (6,066,000)         14,299,000         15,170,000
                                                               

INCOME TAX (BENEFIT) PROVISION (Note 9)                          (1,848,000)          6,059,000          6,402,000

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

NET (LOSS) INCOME                                             $  (4,608,000)    $     8,196,000     $    8,768,000
                                                                 ==========          ==========         ==========

(LOSS) EARNINGS PER SHARE:
  Basic                                                       $       (0.49)               0.92               1.13
                                                                 ==========          ==========         ==========

  Diluted                                                     $       (0.49)    $          0.89       $       1.10
                                                                 ==========          ==========         ==========
                                                                              

WEIGHTED AVERAGE NUMBER OF SHARES
  IN THE CALCULATION OF (LOSS)
  EARNINGS PER SHARE (Note 12)
  Basic                                                           9,413,000           8,953,000          7,782,000
                                                                ===========          ==========         ==========

  Diluted                                                         9,436,000           9,236,000          7,967,000
                                                                ===========          ==========         ==========
</TABLE>

See notes to consolidated financial statements.


<PAGE>


HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                                                
                                                                                              Accumulated other
                                                                                              Comprehensive
                                                 Class A          Class B                     Income
                                               Common Stock     Common Stock                  ------------
                                              (Note 10)        (Note 10)      Additional      Unrealized            
                                           ----------------  -----------------   Paid-In      Holdings   Retained Treasury
                                            Shares   Amount  Shares      Amount   Capital     (Loss)Gain  Earnings  Stock   Total
<S>                                        <C>       <C>      <C>       <C>      <C>         <C>         <C>       <C>       <C> 

BALANCE, FEBRUARY 1, 1996                  3,288,000 $33,000 2,869,000   $28,000 $11,886,000 $(715,000)$17,202,000 $ -  $ 29,134,000
                                                                                                                               

  Issuance of shares in connection
    with acquisitions (Note 3)               143,000   2,000     -        -        2,636,000     -       -          -     2,638,000
  Transfer of Class B stock to
    Class A stockholder                      137,000   1,000  (137,000)   (1,000)      -         -       -          -       -
  Stock dividend (25%) (Note 10d)          1,542,000  15,000     -          -          -         -    (15,000)      -       -
  Exercise of stock options and warrants     203,000   2,000     -          -      1,104,000     -       -          -     1,106,000
  Comprehensive income:
    Unrealized holding gain (Note 2o)           -        -       -          -          -       36,000    -          -        -
    Net income                                  -        -       -          -          -         -      8,768,000   -        -
  Total comprehensive income:                                                                                             8,804,000
                                             --------  ------   -------   -------   --------   -------  ------- ------   ---------

BALANCE, JANUARY 31, 1997                  5,313,000  53,000  2,732,000   27,000  15,626,000   21,000  25,955,000   -    41,682,000
                                                                                                                               

  Proceeds from public offering
    of common stock, net (Note 1)          1,333,000  13,000      -          -    24,289,000     -       -         -     24,302,000
  Issuance of shares in connection
    with acquisitions (Note 3)                20,000     -       -          -        392,000     -       -         -        392,000
  Issuance of Class A stock                   49,000   1,000     -          -        819,000     -       -         -        820,000
  Transfer of Class B stock to
    Class A stockholder                       64,000     -      (64,000)    -          -         -       -         -        -
  Exercise of stock options and warrants      32,000   1,000     -          -        251,000     -       -         -        252,000
  Comprehensive income:
    Unrealized holding loss (Note 2o)           -        -       -          -          -     (21,000)    -         -        -
    Net income                                  -        -       -          -          -         -    8,196,000    -        -   
  Total comprehensive income:                                                                                             8,175,000
                                           --------  ------   -------   -------   --------   -------  -------   ------    ---------

BALANCE, JANUARY 31, 1998                  6,811,000  68,000  2,668,000  27,000  41,377,000     -   34,151,000    -      75,623,000
                                                                                                                                

  Exercise of stock options                    4,000     -       -          -         20,000     -      -          -         20,000
  Purchase of treasury shares (Note 10e)        -        -       -          -          -         -      -      (828,000)   (828,000)
  Comprehensive income:
    Net loss                                    -        -       -          -          -         -  (4,608,000)    -         -
  Total comprehensive income:                                                                                            (4,608,000)
                                            --------  ------- ---------- ------- ----------- ------- ---------- -------- ----------

BALANCE, JANUARY 31, 1999                  6,815,000  $68,000  2,668,000 $27,000 $41,397,000  $ - $29,543,000  $(828,000)$70,207,000
                                           =========  ======= ========== ======= =========== ===== ============ ======== ===========

                                                                                                                              
</TABLE>

See notes to consolidated financial statements.









<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                        1999              1998              1997
<S>                                                                    <C>                <C>              <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                                 $ (4,608,000)     $  8,196,000      $  8,768,000
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
    Depreciation and amortization                                      3,754,000         3,214,000         1,763,000
    Provisions for reserves                                            1,643,000           807,000           663,000
    Deferred income taxes                                             (2,826,000)         (621,000)         (193,000)
    Gain on disposal of assets                                             -               (42,000)           18,000
    Minority interest                                                    390,000            44,000              -
    Write-off of goodwill                                                711,000              -                 -
    Changes in assets and liabilities:
      Accounts receivable                                             10,598,000       (14,382,000)       (5,012,000)
      Net investments in sales-type leases                               213,000        (3,591,000)       (2,287,000)
      Inventories                                                     (3,467,000)      (18,749,000)       (2,778,000)
      Other current assets and other assets                              614,000        (1,251,000)         (808,000)
      Trade acceptances payable                                      (13,122,000)        1,954,000         4,676,000
      Accounts payable and accrued expenses                           (3,375,000)        8,254,000        (1,797,000)
      Prepaid income taxes and income taxes payable                   (2,521,000)         (807,000)          409,000  
                                                                     -----------       -----------         ---------
                                                              
           Net cash (used in) provided by
             operating activities                                    (11,996,000)      (16,974,000)        3,422,000
                                                                     -----------       -----------         ---------
                                                                         
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                (1,314,000)       (2,096,000)       (1,447,000)
  Acquisition of Sewing Machine Exchange, Inc.                            -                  -            (4,973,000)              
  Acquisition of Sedeco, Inc.                                             -                  -            (4,153,000)
  Acquisition of Equipment Connection, Inc.                               -               (553,000)             -
  Sales (purchases) of short-term investments                             -              2,570,000          (392,000)
                                                                      ----------        ----------        ----------
           Net cash used in
             investing activities                                     (1,314,000)          (79,000)       (10,965,000)
                                                                  ---------------      -----------        ----------
                                                                                          
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds of bank financing                                          26,021,000        17,260,000        11,946,000
  Repayments of long-term debt                                       (11,781,000)      (31,390,000)       (4,209,000)
  Proceeds from public offering                                                         24,302,000            -               
  Proceeds from issuance of stock and
    exercise of stock options and warrants                                20,000         1,072,000         1,106,000
  Purchase of treasury shares                                           (828,000)           -                 -
  Contributions from minority interest                                      -              900,000            -
                                                                  ---------------       ----------         ---------
           Net cash provided by financing
             activities                                               13,432,000        12,144,000         8,843,000    
                                                                  ---------------       ----------         ---------

INCREASE  (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                            122,000        (4,909,000)        1,300,000

CASH AND CASH EQUIVALENTS, BEGINNING
  OF PERIOD                                                            2,956,000         7,865,000         6,565,000
                                                                  --------------        ----------         ---------
                                                                                                     

CASH AND CASH EQUIVALENTS, END OF PERIOD                            $  3,078,000      $  2,956,000      $  7,865,000
                                                                  ==============        ==========         =========

SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW INFORMATION:
  Interest paid                                                    $   1,483,000      $    966,000     $     796,000
                                                                  ================      ==========         =========

  Income taxes paid                                                $   3,537,000      $  7,621,000      $  5,788,000
                                                                  ================       ===========       =========
</TABLE>

See notes to consolidated financial statements.

<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
-----------------------------------------------------------------------------


     1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION

     The accompanying  consolidated financial statements include the accounts of
Hirsch International Corp.  ("Hirsch"),  HAPL Leasing Co., Inc. ("HAPL" or "HAPL
Leasing"),  Pulse  Microsystems Ltd.  ("Pulse"),  Sewing Machine Exchange,  Inc.
("SMX"),  Sedeco, Inc. ("Sedeco"),  Hirsch Equipment Connection,  Inc. ("HECI"),
and Tajima USA, Inc. ("TUI")  (collectively,  the "Company").  The operations of
SMX,  Sedeco,  and HECI are  included  in  consolidated  operations  since their
acquisitions  on  June  7,  1996,   December  20,  1996,  and  March  26,  1997,
respectively  (Note 3). The operations of TUI have been included in consolidated
operations since inception in June 1997.

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

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

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

     2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

<PAGE>

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

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

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

     e. Inventories - Inventories consisting of machines and parts are stated at
the lower of cost or  market.  Cost for  machinery  is  determined  by  specific
identification and for all other items on a first-in,  first-out basis. Reserves
are established to record  provisions for slow moving  inventories in the period
in which it becomes  reasonably  evidence that the product is not salable or the
market value is less than cost (see Note 4).

     f. Foreign  Operations - The functional  currency of the Company's  foreign
subsidiary is the U.S. dollar.  Assets and liabilities of the foreign subsidiary
are  translated at year-end  exchange  rates and the results of  operations  are
translated using the average exchange rate prevailing throughout the year. Gains
and losses from foreign currency transactions are included in net income and are
not significant.

     The Company makes only limited use of derivative financial  instruments and
does  not  use  them  for  trading  purposes.   Trade  acceptances  payable  are
denominated  by Japanese yen and are related to the  purchase of equipment  from
the Company's major supplier.  The Company  purchases  foreign  currency forward
contracts (which are usually  approximately six months in duration) to hedge the
risk associated with  fluctuations in foreign currency  exchange rates (see Note
11b).  The  cost of such  contracts  are  included  in the  cost of the  related
machinery in inventory.

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

                    Asset Category                Lives in Years

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

     h. Software  Development  Costs - The development of new software  products
and   enhancements   to  existing   products  are  expensed  as  incurred  until
technological feasibility has been established.  After technological feasibility
is  established,  any additional  costs would be capitalized in accordance  with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer  Software  to Be Sold,  Leased,  or  Otherwise  Marketed."  Capitalized
software costs are amortized on a straight-line  basis over the estimated useful
product lives (normally three years)  commencing in the month following  product
release.   Such  costs  are  included  in  other  assets  on  the   accompanying
consolidated  balance sheets.  Amortization  expense for the years ended January
31,  1999,  1998 and 1997 was  approximately  $205,000,  $205,000  and  $84,000,
respectively.

<PAGE>

     i.  Impairment  of  Long-Lived  Assets - In  accordance  with  Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the
Company reviews its long-lived assets,  including property, plant and equipment,
identifiable  intangibles and purchased  technologies,  for impairment  whenever
events or changes in  circumstances  indicate  that the  carrying  amount of the
assets  may  not  be  fully  recoverable.  To  determine  recoverability  of its
long-lived   assets,   the  Company   evaluates  the  probability   that  future
undiscounted  net cash flows,  without interest  charges,  will be less than the
carrying amount of the assets. Impairment is measured at fair value.

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

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

     l.  Income  Taxes - The  Company  accounts  for income  taxes  pursuant  to
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes"  ("SFAS No.  109").  SFAS No. 109  requires  recognition  of deferred tax
assets and liabilities  for the expected future tax  consequences of events that
have been included in the  Company's  consolidated  financial  statements or tax
returns.  Under this method,  deferred tax assets and liabilities are determined
based on the  differences  between  the  financial  accounting  and tax bases of
assets and  liabilities  using enacted tax rates in effect for the year in which
the differences are expected to reverse.

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

     Basic earnings per share are based on the weighted average number of shares
of common stock  outstanding  during the period.  Diluted earnings per share are
based on the weighted  average number of shares of common stock and common stock
equivalents  (options and warrants)  outstanding during the period,  computed in
accordance with the treasury stock method.

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

<PAGE>

     o. Comprehensive  Income - In fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130. "Reporting  Comprehensive Income" ("SFAS
130"). This statement  established rules for reporting  comprehensive income and
its  components.  Comprehensive  income  consists  of net income and  unrealized
holding  gains and losses on short term  investments  available  for sale and is
presented in the  consolidated  statements of  stockholders  equity.  Prior year
financial  statements  have  been  reclassified  to  conform  to  the  SFAS  130
requirements.

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

     q. Fair Value of  Financial  Instruments  - Financial  instruments  consist
primarily of investments in cash, cash equivalents,  trade account  receivables,
accounts  payable and debt  obligations.  At January 31, 1999 and 1998, the fair
value of the Company's  financial  instruments  approximated  the carrying value
(Note 2c).

     r. Reclassifications - Certain prior year amounts have been reclassified to
conform with current year presentations.

3.    ACQUISITIONS

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

     On the basis of a pro forma  consolidation  of the results of operations as
if the  acquisition  of ECI had taken  place at the  beginning  of fiscal  1997,
management believes that the acquisition would not have had a material effect on
the reported  amounts.  Such pro forma amount is not  necessarily  indicative of
what the actual consolidated results might have been if the acquisition had been
effective at the beginning of fiscal 1997.

     In the fourth quarter of fiscal 1999, the Company commenced a restructuring
plan in connection with certain of its operations, including the closing of ECI.
In connection with the closing of ECI, the ECI goodwill was written off (Notes 4
and 7).

     b.  Acquisition  of Sewing  Machine  Exchange - On June 7, 1996 the Company
acquired  all of the  outstanding  capital  stock of SMX.  The  acquisition  was
accounted  for as a purchase in  accordance  with APB 16 and,  accordingly,  the
acquired  assets and assumed  liabilities  have been recorded at their estimated
fair market values at the date of acquisition.  The cost in excess of fair value
of SMX is being amortized over a 15-year period.

     The purchase  price was $8,690,000  paid in the form of promissory  note in
the principal amount of $4,250,000 to each of the two former shareholders of SMX
and by delivery of an aggregate of 9,375 shares of the Company's  Class A Common
Stock.  Concurrent  with the  acquisition,  the Company  entered into  five-year
employment  contracts  with SMX's  former  shareholders  pursuant  to which they
received  approximately  331,000  options to purchase  shares of Hirsch  Class A
Common  Stock (Note 10b).  The options  were issued at fair market  value at the
date of acquisition  and vest in four annual  installments of 25 percent each on
the first, second, third, and fourth anniversary of the date of grant and expire
five years from the date thereof.

<PAGE>

     c.  Acquisition of Sedeco - On December 20, 1996, the Company  acquired all
of the outstanding capital stock of Sedeco. The acquisition was accounted for as
a purchase in accordance  with APB 16 and  accordingly,  the acquired assets and
assumed  liabilities  have been recorded at their estimated fair market value at
the date of  acquisition.  the costs in excess of fair  value of Sedeco is being
amortized over a 15-year period.

     The purchase price was  $6,565,000,  paid in the form of $4,165,000 in cash
and  $2,400,000  in the  Company's  Class A Common  Stock.  Concurrent  with the
acquisition,  the Company  entered  into a five-year  employment  contract  with
Sedeco's former shareholder  pursuant to which  approximately  60,000 options to
purchase  shares of Hirsch  Class A Common  Stock  (Note 10b) were  issued.  The
options were issued at fair market value at the date of acquisition  and vest in
four annual  installments of 25 percent each on the first,  second,  third,  and
fourth  anniversary  of the date of grant and expire five years from the date of
grant.

     4. INVENTORIES
<TABLE>
<CAPTION>

                                                                                                January 31,
                                                                                          1999               1998
<S>                                                                                 <C>                   <C>    

          Machines                                                                   $  32,465,000      $  29,613,000
          Parts and accessories                                                          6,383,000          6,808,000              
          Less:  Reserve for slow-moving inventory                                      (2,513,000)        (2,255,000)
                                                                                   ----------------   ---------------

          Total                                                                      $  36,335,000      $  34,166,000
                                                                                   ================   ===============
</TABLE>

     In  connection  with the  Company's  restructuring  (Note 7),  the  Company
wrote-down  used machine and ESW inventories by $3,450,000 in the fourth quarter
of fiscal 1999. Such write-down is included in cost of sales on the accompanying
statements of operations.





<PAGE>


     5. NET INVESTMENT IN SALES-TYPE LEASES

<TABLE>
<CAPTION>

                                                                                              January 31,
                                                                                        1999                1998
<S>                                                                                  <C>                    <C>

         Total minimum lease payments receivable                                   $    9,944,000      $  12,681,000
         Estimated residual value of leased property (unguaranteed)                     7,360,000          5,594,000
         Reserve for estimated uncollectible lease payments                            (1,100,000)          (588,000)
         Less:  Unearned income                                                        (2,694,000)        (3,452,000)
                                                                                      -----------         ----------

         Net investment                                                                13,510,000         14,235,000
         Less:  Current portion                                                         2,254,000          2,180,000
                                                                                      ------------        ----------    

         Non-current portion                                                       $   11,256,000       $ 12,055,000
                                                                                      ============       ===========
</TABLE>


     At January 31, 1999 future  annual  lease  payments  receivable  (including
estimated residual values) under sales-type leases are as follows:

           Fiscal Year
              Ending
           January 31,

               2000                          $    3,266,000
               2001                               3,299,000
               2002                               3,300,000
               2003                               3,523,000
               2004                               3,361,000
            Thereafter                              555,000
                                                  ---------
                                              $  17,304,000
                                                 ==========

     6. PROPERTY, PLANT AND EQUIPMENT

        <TABLE>
<CAPTION>
                                                                                               January 31,
                                                                                         1999               1998
<S>                                                                             <C>                          <C>   

         Land and building                                                        $   3,288,000     $  3,288,000

         Machinery and equipment                                                      5,131,000        4,296,000

         Furniture and fixtures                                                       1,930,000        1,865,000

         Rental equipment                                                             1,195,000             -

         Automobiles                                                                    338,000          450,000

         Leasehold improvements                                                       1,798,000        1,579,000
                                                                                 --------------     ------------

         Total at cost                                                              13,680,000        11,478,000
         Less:  Accumulated depreciation and amortization                           (6,078,000)       (4,285,000)
                                                                                 --------------     ------------

         Property, plant and equipment, net                                     $    7,602,000     $   7,193,000
                                                                                  =============     ============

</TABLE>



<PAGE>


     7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
                                                                              January 31,
                                                                        1999               1998
<S>                                                                  <C>             <C>    



       Accounts payable                                          $   11,684,000     $ 14,310,000
       Accrued restructuring costs                                    1,544,000           -
       Accrued commissions payable                                    1,091,000        1,519,000
       Accrued payroll costs                                            316,000          693,000
       Accrued warranty and installation costs                          922,000          626,000
       Customer deposits payable                                        634,000          598,000
       Other accrued expenses                                         1,147,000        2,846,000
                                                                      ---------        ---------
       Total accounts payable and accrued expenses               $   17,338,000     $ 20,592,000
                                                                     ==========       ==========
</TABLE>

                                                                          
                                                             

     In the fourth quarter of fiscal 1999, the Company initiated a restructuring
plan in  connection  with  certain of its  operations.  The plan was designed to
eliminate  certain operating  divisions,  enhance the interface of operations to
meet the  changing  needs of the  Company's  customers  and to improve  its cost
structure and efficiency.  The restructuring  initiatives involve the closing of
the ECI operations, the consolidation of the ESW operations with existing Hirsch
operations and the closing of four decentralized sales and training offices. The
restructuring  costs of  $2,377,000  primarily  relate to severance  and related
benefits ($454,000), lease termination costs ($1,012,000), the write down of ECI
Goodwill ($711,000) and other costs ($200,000). As of January 31, 1999, payments
of  $122,000  have been made for  these  costs.  The  company  anticipates  that
substantially  all of the remaining  restructuring  costs will be paid in fiscal
2000.

     As an additional part of the plan,  which is recorded as cost of sales, the
Company  wrote-down to net realizable  value used machine and ESW inventories by
$3,450,000.

     8. LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                                               January 31,
                                                                                     1999                  1998
<S>                                                                             <C>                        <C>  

          Revolving Credit Facility (A)                                         $14,500,000         $       -
          Mortgage (B)                                                            1,320,000             1,549,000
          Other                                                                      72,000               103,000
                                                                                 ----------             ---------

          Total                                                                  15,892,000             1,652,000
          Less:  Current maturities                                                 252,000               231,000
                                                                                 ----------             ---------
          Long-term maturities                                                 $ 15,640,000         $   1,421,000
                                                                                 ==========             =========
</TABLE>
   

     (A) In February  1999 the Company  amended its  existing  Revolving  Credit
Facility (the  "Facility") to, among other things,  reduce the total  commitment
from  $60,000,000 to $40,000,000  for Hirsch and from  $10,000,000 to $6,500,000
for HAPL. The Facility is used for working capital loans, letters of credit, and
deferred payment letters of credit and bear interest as defined in the Facility.
The terms of the Facility, among other things, restrict additional borrowings by
the Company and require the Company to maintain  certain  minimum  tangible  net
worth,  quick asset  ratio and fixed  charge  coverage  levels,  as defined.  In
addition to the working capital  borrowings  described above,  this Facility has
been  used for  letters  of  credit  and  deferred  payment  letters  of  credit
aggregating  approximately  $2,164,000  at January 31, 1999.  The Company was in
default of certain financial covenants at year end and has received waivers from
the banks.

<PAGE>

     (B) On  October  27,  1994,  Hirsch  entered  into a  ten-year,  $2,295,000
mortgage   agreement  with  a  bank  (the  "Mortgage")  for  its  new  corporate
headquarters.  The Mortgage bears interest at a fixed rate of 8.8 percent and is
payable in equal monthly principal  installments of approximately  $19,000.  The
terms of the Mortgage, among other things, restrict additional borrowings by the
Company, and require the Company to maintain certain debt service coverage ratio
levels, as defined in the Mortgage. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements  thereon. The Company was
in default of the financial  covenant at year end and has received a waiver from
the bank. In connection with the waiver, the bank also amended the Mortgage such
that, effective April 30, 1999, it bears interest at 9.3 percent.

            Long-term debt  (including  capitalized  lease  obligations)  of the
Company at January 31, 1999 matures as follows:

                Ending
             January 31,

                 2000                        $      252,000
                 2001                            14,748,000
                 2002                               248,000
                 2003                               242,000
                 2004                               230,000
              Thereafter                            172,000
                                                  ---------
                                              $  15,892,000
                                                 ========== 

     9. INCOME TAXES

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

<TABLE>
<CAPTION>



                                                                                       January 31, 

                                                                            1999               1998              1997
<S>                                                                     <C>                 <C>               <C>  

         Current:
            Federal                                                 $      456,000        $  4,978,000      $  4,842,000
            State and foreign                                              522,000           1,702,000         1,753,000
                                                                         --------            ---------         ---------           

          Total current                                                    978,000           6,680,000         6,595,000
                                                                         ---------           ---------         ---------          

          Deferred:
            Federal                                                     (2,491,000)           (527,000)         (100,000)
            State and foreign                                             (335,000)            (94,000)          (93,000)        
                                                                         ---------           ---------         ---------
                                                                                        
          Total deferred                                                (2,826,000)           (621,000)        (193,000)
                                                                         ---------           ---------         ---------

          Total income tax (benefit) provision                      $   (1,848,000)      $   6,059,000      $  6,402,000
                                                                      =============        ===========       ===========

</TABLE>

<PAGE>


     The tax effects of temporary  differences that give rise to deferred income
tax assets at January 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>


                                                                 January 31, 1999                 January 31, 1998
                                                                 Net              Net            Net             Net
                                                               Current         Long-Term       Current        Long-Term
                                                              Deferred         Deferred        Deferred       Deferred
                                                             Tax Assets       Tax Assets      Tax Assets     Tax Assets
<S>                                                         <C>                <C>             <C>          <C>   


         Accounts receivable                               $    1,147,000      $   -         $   782,000   $     -
         Inventories                                              790,000          -             703,000         -
         Accrued warranty costs                                   264,000          -             143,000         -
         Other accrued expenses                                   582,000          -              69,000         -
         Purchased technologies and goodwill                        -           234,000             -        180,000
         Net operating loss                                     1,400,000          -                -            -
         Net investments in sales-type leases
           (allowance for doubtful accounts)                        -           439,000             -        237,000
         Capitalized software development
           Costs                                                    -           (40,000)            -       (124,000)
                                                               ---------      ---------         --------   ---------
                                                           $   4,183,000    $   633,000      $ 1,697,000   $ 293,000
                                                               =========      =========        =========   =========
</TABLE>


     Valuation allowances for such deferred tax assets have not been established
as it is more likely than not that the Company will realize  these assets in the
future based upon the historical  profitable and future  anticipated  profitable
operations of the Company.

     The Company had a net  operating  loss from the year ended January 31, 1999
amounting to approximately $3,800,000 which expires in 2019.

     Net current and long-term deferred tax assets are included in other current
assets and other assets, respectively,  on the accompanying consolidated balance
sheets.

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

<TABLE>
<CAPTION>

                                                                                              Year Ended January 31,
                                                                                          1999        1998        1997
<S>                                                                                    <C>          <C>           <C>  


         Federal statutory income tax rate                                              (34.0)%       34.0%       34.0%
         State income taxes, net of Federal benefit                                       5.0          7.9         8.4
         Permanent differences                                                           (1.5)         0.5        (0.2)
                                                                                        ------      -------       -----

         Effective income tax rate                                                      (30.5)%      42.4 %       42.2 %
                                                                                        =======     =======      ======
</TABLE>

<PAGE>

     10. STOCKHOLDERS' EQUITY

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

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

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

     Stock option transactions during the years ended January 31, 1999, 1998 and
1997 for the 1993 Plan are summarized below:

<TABLE>
<CAPTION>

                                                                    Shares           Price Range        Average Price
<S>                                                               <C>              <C>                   <C>   

             Options outstanding - January 31, 1996                  63,000          $4.88 - $10.04      $  6.21

             Options granted                                        256,000         $10.20 - $17.05      $ 14.94
             Options exercised                                       (5,000)            $4.88            $  4.88
             Options canceled                                        (6,000)           $14.50            $ 14.50
                                                                    -------          --------------      --------  
                                                          
                                                          
             Options outstanding - January 31, 1997                 308,000          $4.88 - $17.05      $ 13.23

             Options granted                                        332,000         $17.00 - $24.20      $ 17.10
             Options exercised                                      (14,000)         $4.88 - $14.50      $ 11.70
             Options canceled                                       (11,000)        $14.50 - $17.00      $ 15.05
                                                                    -------          --------------      -------
             Options outstanding - January 31, 1998                 615,000          $4.88 - $24.20      $ 13.74

             Options exercised                                       (2,000)             $4.88           $  4.88
             Options canceled                                       (78,000)         $4.88 - $17.00      $ 15.66
                                                                    -------          --------------      -------

             Options outstanding - January 31, 1999                 535,000          $4.88 - $24.20      $ 15.53
                                                                ===========        ================     ========

             Options exercisable at January 31, 1999                283,000          $4.88 - $24.20      $ 14.26
                                                                ===========        ================    =========

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                            Options Outstanding            Options Exercisable
                                                        Weighted Avg.      Weighted                     Weighted
                                                          Remaining         Average                      Average
                       Range of            Number        Contractual       Exercise        Number       Exercise
                    Exercise Prices     Outstanding       Life (yrs)         Price      Exercisable       Price
<S>                  <C>              <C>              <C>                    <C>          <C>           <C>

                     $4.88 - $5.89      41,000              0.5            $   5.60        41,000       $  5.60                     
                     $9.12 - $10.20     15,000              1.5            $   9.83        15,000       $  9.83
                    $14.50 - $17.00    402,000              2.5            $  16.01       201,000       $ 15.68
                        $18.70          67,000              2.5            $  18.70        23,000       $ 18.70
                    $22.00 - $24.20     10,000              3.5            $  23.10         3,000       $ 23.10
                                       -------                                            -------
                                       535,000                                            283,000
                                      ========                                            =======
</TABLE>

     All  options  granted  for the  fiscal  year  ended  January  31,  1995 are
exercisable  one year from the date of grant and expire five years from the date
of grant.  All options  issued  subsequent  to the fiscal year ended January 31,
1995 vest in three  annual  installments  of 33-1/3  percent  each on the first,
second,  and third  anniversary  of the date of grant.  There are  approximately
361,000  shares  available for future grants under the 1993 Plan.  Approximately
95,000 options have been canceled under this plan.

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

<PAGE>

     Stock option transactions during the years ended January 31, 1999, 1998 and
1997 for the Directors Plan are summarized below:
<TABLE>
<CAPTION>

                                                                                                          Weighted
                                                                      Shares          Price Range       Average Price
<S>                                                                 <C>              <C>                 <C> 

              Options outstanding - February 1, 1996                  47,000         $5.36 - $9.12        $   6.30

              Options granted                                          9,000         $    15.50              15.50
                                                                     -------          ------------        --------

              Options outstanding - January 31, 1997                  56,000        $  5.36 - $15.50      $   7.83

                Options granted                                        8,000        $    22.00            $  22.00

                Options exercised                                    (17,000)       $     5.36            $   5.36
                                                                     -------          -------------       --------
                                                                    
              Options outstanding - January 31, 1998                  47,000        $  5.36 - $22.00      $  11.09

                Options exercised                                     (2,000)       $     5.36            $   5.36
                                                                     -------          --------------       -------

              Options outstanding - January 31, 1999                  45,000           5.36 - $22.00      $  11.35
                                                                  ==============    ================      ========

              Options exercisable at January 31, 1999                 37,000        $  5.36 - $22.00      $   9.57
                                                                  ==============    ================      ========

</TABLE>


<TABLE>
<CAPTION>

                                                   Options Outstanding         Options Exercisable
                                              Weighted Avg.     Weighted                     Weighted
                                               Remaining         Average                     Average
                    Exercise       Number     Contractual       Exercise      Number         Exercise
                     Prices     Outstanding    Life (yrs)         Price    Exercisable        Price
<S>                  <C>         <C>            <C>            <C>            <C>           <C>

                     $5.36           16,000     0.5           $    5.36        16,000          $  5.36
                     $9.12           12,000     1.5           $    9.12        12,000          $  9.12
                     $15.50           9,000     2.5           $   15.50         6,000          $ 15.50
                     $22.00           8,000     3.5           $   22.00         3,000          $ 22.00
                                   ========                                   =======
                                     45,000                                    37,000
                                   ========                                   =======
</TABLE>

<PAGE>

     There are  approximately  182,000 shares  available for future grants under
the Directors Plan. No options have been cancelled under this plan.

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

<TABLE>
<CAPTION>

                                                                                                           Weighted
                                                                           Shares       Price Range        Average
                                                                                                           Price
<S>                                     <C>                              <C>            <C>               <C>
               Options outstanding - Pulse acquisition                     36,000       $  4.88            $  4.88
                                                                          --------       -------              ----

               Options outstanding - January 31, 1995 and 1996             36,000       $  4.88            $  4.88

                 Options granted - SMX and Sedeco
                   acquisitions                                           391,000   $16.20 - $18.25        $  16.52
                                                                          --------  ---------------          ------
               Options outstanding - January 31, 1997                     427,000   $4.88 - $18.25         $  15.54

                 Options granted - ECI acquisition                         26,000       $ 18.25            $  18.25
                                                                          --------  ----------------         ------
               Options outstanding - January 31, 1998 and 1999             453,000  $4.88 - $18.25         $  15.69
                                                                         =========  ================         ======   
               Options exercisable at January 31, 1999                     239,000  $4.88 - $18.25         $  14.82
                                                                         =========  ================         ======

</TABLE>




<TABLE>
<CAPTION>

                                                 Weighted Avg.      Weighted                   Weighted
                                                 Remaining          Average                    Average
                  Exercise         Number       Contractual         Exercise      Number       Exercise
                   Prices        Outstanding    Life (yrs)           Price      Exercisable     Price
<S>               <C>           <C>             <C>                 <C>         <C>            <C>

                    $4.88         36,000         0.5                $4.88       36,000          $4.88
                   $16.20        331,000         2.5               $16.20      166,000         $16.20
                   $18.25         86,000         2.6               $18.25       37,000         $18.25
                                 -------                                       -------
                                 453,000                                       239,000
                                 =======                                       =======
</TABLE>

     The options issued in connection with the Pulse acquisition are exercisable
and have a life of five years.  The options  issued in connection  with the SMX,
Sedeco and ECI acquisitions vest in four annual  installments of 25 percent each
in the first,  second,  third,  and fourth  anniversary of the date of grant and
expire five years from the date of grant.  The options issued in connection with
the Pulse  acquisition  expired in February 1999. No options have been exercised
or canceled.

     In addition,  pursuant to the IPO, the  underwriters  received  warrants to
purchase from the Company  205,080 shares of Class A Common Stock.  The warrants
are exercisable for a period of four years commencing one year after the date of
the IPO at  exercise  prices  ranging  from 107  percent  to 128  percent of the
initial public offering price. During the fiscal year ended January 31, 1998 and
1997,  2,700 and 198,300  warrants,  respectively,  were exercised at a price of
$5.56 per share.  No warrants were exercised  during 1999.  Approximately  4,080
were  exercisable  at a price of $5.90 per  share.  These  warrants  expired  in
February 1999.

<PAGE>

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

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and earnings  per share had the Company  adopted the fair value method as
of the beginning of fiscal 1997.  Under SFAS 123, the fair value of  stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable  options without vesting  restrictions,  which  significantly
differ from the  Company's  stock  option  awards.  These  models  also  require
subjective  assumptions,  including  future stock price  volatility and expected
time to exercise,  which greatly  affect the  calculated  values.  The Company's
calculations  were made using the  Black-Scholes  option  pricing model with the
following weighted average  assumptions for 1999, 1998 and 1997:  expected life,
five years  following  vesting;  stock  volatility,  128.5  percent in 1999,  54
percent in 1998 and 28 percent in 1997,  risk free  interest rate of 5.0 percent
in 1999, 5.5 percent in 1998 and 6.0 percent in 1997 and no dividends during the
expected  term.  The  Company's  calculations  are  based on a  multiple  option
valuation approach and forfeitures are recognized as they occur.

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


<TABLE>
<CAPTION>
                                                                                  Year Ended January 31,
                                                                          1999              1998              1997
<S>                                                                     <C>                <C>             <C>   

                Net (loss) income:
                  As reported                                        $  (4,608,000)     $  8,196,000      $  8,768,000
                  Pro forma                                          $  (5,757,000)     $  7,597,000      $  8,464,000

                Basic (loss) earnings per share
                  As reported                                        $       (0.49)     $    0.92         $     1.13
                  Pro forma                                          $       (0.61)     $    0.85         $     1.09

                Diluted (loss) earnings per share:
                  As reported                                        $       (0.49)    $     0.89         $     1.10
                  Pro forma                                          $       (0.61)    $     0.82         $     1.07
</TABLE>

     d. Stock Dividend - On June 25, 1996, the Company  declared a five-for-four
stock split  effected in the form of a 25 percent stock  dividend which was paid
on July 22, 1996 to stockholders of record on July 8, 1996. The par value of the
shares remains unchanged at $.01 per share.

     Unless otherwise  noted,  all numbers of shares,  per share amounts and per
share prices in the  consolidated  financial  statements  and notes thereto have
been adjusted to reflect the stock dividends and splits.

     e. Treasury  Stock - Treasury stock is comprised of 90,300 shares of common
stock  purchased  in  open  market  transactions  for a total  cost of  $828,000
pursuant to a stock repurchase  program  authorized by the Board of Directors in
fiscal 1999.

     f. 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 a matching  contribution  for the fiscal year ended  January
31, 1999.  The Company  contributed  approximately  $148,000 and $78,000 for the
years  ended  January  31, 1998 and 1997,  respectively.  The Company  funds all
amounts when due.

<PAGE>

11.   COMMITMENTS AND CONTINGENCIES

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

               Fiscal Year
                 Ending
               January 31,

                  2000                                     $     907,000
                  2001                                           584,000
                  2002                                           416,000
                  2003                                            95,000
                  2004                                             7,000
                                                            ------------
                                                            $  2,009,000
                                                            ============


     Rent expense was approximately $1,360,000,  $1,292,000 and $617,000 for the
years ended January 31, 1999, 1998 and 1997, respectively.

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

     At January 31, 1999,  the Company held foreign  currency  contracts for the
purchase of Japanese yen amounting to approximately $14,222,000.

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

     d.  Employment   Agreements  -  The  Company  had  entered  into  five-year
employment  agreements with the Company's  current Chief  Executive  Officer and
President,  which  expired by their terms on February 17, 1999.  The  agreements
provided that each executive  receive  minimum annual  compensation  of $350,000
(adjusted annually based upon the CPI). In addition,  each employment  agreement
provided  for an annual  bonus equal to five  percent of pre-tax  profits of the
Company.  No bonus was paid to either executive relating to the Company's fiscal
1999 financial  results.  Each executive is currently employed by the Company on
an at-will basis on  substantially  the same terms and  conditions  contained in
their expired employment  agreements.  It is anticipated that in fiscal 2000 the
Board of Directors will approve an increase in the minimum  compensation to each
executive consistent with prior practice.  The Company is currently in the third
year of a five-year  employment  agreement  with the Company's  Chief  Operating
Officer. The agreement provides for annual compensation of $300,000. The Company
also entered into employment  agreements  with the former  shareholders of Pulse
for an initial term of five years. Effective February 24, 1999, these employment
agreements  were renewed at the  election of each  executive  for an  additional
three-year  term.  The  agreements  provide  each with an annual  base salary of
$300,000  (adjusted  annually  based upon the CPI) and an annual  bonus based on
annual pre-tax profits of Pulse.

     e.  Dependency  Upon Major Supplier - During the fiscal years ended January
31,  1999,   1998  and  1997,  the  Company  made  purchases  of   approximately
$68,255,000,  $90,300,000 and $69,000,000,  respectively, from Tajima Industries
Ltd. ("Tajima"),  the manufacturer of the embroidery machines the Company sells.
This  amounted to  approximately  84, 80 and 83 percent of the  Company's  total
purchases for the years ended January 31, 1999, 1998 and 1997, respectively.

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


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

     The minimum  quantity of  embroidery  machines to be sold for 1998 was met.
The  minimum  quantity  to be sold in 1999 is  approximately  1,800  machines in
various designations, as defined.

     There  are  several   manufacturers  of  embroidery   equipment.   Although
management of the Company  believes that the likelihood of the loss of Tajima as
a supply  source  is  remote,  if  Tajima  terminated  the  current  distributor
relationship  with the Company,  management  believes that it could  establish a
similar arrangement with another manufacturer of embroidery equipment.

     12. RECONCILIATION OF BASIC EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

                                                             For the Year Ended January 31,
                                        1999                              1998                             1997
                         ----------------------------------  -------------------------------  --------------------------------
                            Loss       Shares    Per Share     Income    Shares   Per Share     Income    Shares   Per Share
                                                             (In Thousands, Except Per Share Amounts)
<S>                        <C>        <C>        <C>           <C>        <C>       <C>         <C>        <C>      <C>        

          Basic EPS:
            Income
            available to
            common
            stockholders   $(4,608)    9,413     $  (0.49)   $   8,196   8,953   $  0.92     $   8,768   7,782    $   1.13

          Effect of
            dilutive
            securities:
            options/
            warrants          -           23          -           -        283     (0.03)      -           185       (0.03)
                         --------    -------     --------    --------   ------     -------     --------   -----     ------

          Diluted EPS:
            Income
            available to
            common
            stockholders
            plus assumed
            exercises     $(4,608)     9,436     $ (0.49)    $  8,196     9,236  $  0.89     $  8,768    7,967    $   1.10
                         ========    =======     =======     =======    =======   ======      =======    =====      ======
</TABLE>

<PAGE>

     13. INDUSTRY SEGMENTS

     In 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information,"  which
established  standards for the way in which public business  enterprises  report
information about operating segments in annual financial statements.

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

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


<PAGE>
<TABLE>
<CAPTION>

                                                           Embroidery         Leasing       Corporate     Consolidated
Year Ended January 31, 1999
---------------------------                               ------------     ------------   ------------   -------------
<S>                                                       <C>              <C>           <C>            <C>    

Sales to unaffiliated customers                           $ 118,889,000    $  8,657,000  $      -       $ 127,546,000
Transfers between segments                                   37,478,000          -        (37,478,000)          -        
                                                           ------------    ------------   ------------    -----------

Total revenues                                            $ 156,367,000    $  8,657,000  $(37,478,000)  $ 127,546,000
                                                           ============    ============   ============    ===========

Interest expense                                          $   1,550,000    $     17,000         -       $   1,567,000
                                                           ============    ============   ============    ===========

Depreciation and amortization expense                     $   1,910,000     $   332,000  $   1,512,000  $   3,754,000
                                                           ============    ============   ============    ===========

(Loss) income before income tax
 (benefit) provision                                      $  (6,951,000)    $ 1,381,000  $   (496,000)   $ (6,066,000)
                                                           ============    ============   ============    ===========
Income tax (benefit) provision                            $  (2,400,000)    $   552,000  $       -       $ (1,848,000)
                                                           ============    ============   ============    ===========
Identifiable assets                                       $  71,862,000     $17,667,000  $ 17,406,000    $106,935,000
                                                           ============    ============   ============    ===========

Year Ended January 31, 1998
---------------------------

Sales to unaffiliated customers                           $ 144,557,000     $ 7,920,000  $      -       $152,477,000
Transfers between segments                                   22,386,000          -         (22,386,000)        -  
                                                           ------------     -----------    -----------    ----------
Total revenues                                            $ 166,943,000     $ 7,920,000  $ (22,386,000) $152,477,000
                                                           ============     ===========    ============  ===========
                                                                           
Interest expense                                          $     930,000     $     4,000  $      -       $    934,000
                                                           ============     ===========    ============  ===========

Depreciation and amortization expense                     $   1,736,000     $    24,000  $  1,454,000  $  3,214,000
                                                           ============     ===========    ============  ===========

Income before income tax provision                        $  11,136,000     $ 3,640,000  $    (477,000) $ 14,299,000
                                                           ============     ===========    ============  ===========

Income tax provision                                      $   4,617,000     $ 1,442,000  $        -     $  6,059,000
                                                           ============     ===========    ============  ===========

Identifiable assets                                       $  79,049,000     $16,275,000  $  19,508,000  $114,832,000
                                                           ============     ===========    ============  ===========

Year Ended January 31, 1997
---------------------------

Sales to unaffiliated customers                           $ 121,882,000     $ 3,556,000  $      -       $125,438,000
Transfers between segments                                    6,997,000           -         (6,997,000)        -
                                                           ------------      ----------    -----------   -----------
Total revenues                                            $ 128,879,000     $ 3,556,000  $  (6,997,000) $125,438,000           
                                                           ============      ==========    ===========   ===========
                                                                              
Interest expense                                          $     826,000     $     6,000  $      -       $    832,000
                                                           ============     ===========    ===========  ============
Depreciation and amortization expense                     $   1,102,000     $    26,000  $     635,000  $  1,763,000
                                                           ============     ===========    ===========  ============

Income before income tax provision                        $  12,410,000     $ 2,339,000  $    421,000  $ 15,170,000
                                                           ============     ===========    ===========  ============

Income tax provision                                      $   5,421,000     $   981,000  $       -     $  6,402,000
                                                           ============     ===========    ===========  ============

Identifiable assets                                       $  52,385,000     $12,380,000  $ 18,931,000   $ 83,696,000
                                                           ============     ===========    ===========  ============

</TABLE>