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, 1998

     [ ] 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 6,203,942 shares of Class A Common Stock
held by non-affiliates of the Company as of April 20, 1998 is $51,958,014.

     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                      6,764,880
                     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 20, 1998.


<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.  These  trends  and  others  have
contributed  to the  increase in demand for  machinery,  software  and  services
provided by Hirsch.

     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, California,
Idaho, Montana,  Nevada, Oregon, Utah,  Washington,  Wyoming, and Hawaii, Hirsch
has semi-exclusive rights to distribute Tajima large machines.

     The  Company has a solid  relationship  with Tajima for 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 95 (TM) environment, 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 through the Company's
Embroidery Supply Warehouse Division ("ESW").

     On March 27, 1997, the Company acquired  substantially all of the assets of
Equipment Connection, Inc. ("ECI"), a Denver-based corporation which specialized
in purchasing,  refurbishing, selling and servicing used embroidery machines and
their related parts and accessories.  The Company believes that this transaction
will  enable  it to market  and sell the  increasing  number of used  embroidery
machines  it  acquires  on a  trade-in  basis as the  result  of the sale of new
embroidery machinery.

     The Company's  equipment and value-added  products are marketed and sold by
sales and  marketing  personnel,  whose  efforts are  augmented by trade journal
advertising,  informational  "open  house"  seminars  and  trade  shows.  Hirsch
believes  its  reputation,  knowledge  of  the  marketplace,   exclusive  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 twelve 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.

<PAGE>

     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.

     Pulse  Microsystem  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 95 (TM) environment
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  12,000  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 increased the number of its software
developers  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
ESW  division  offers a broad  range of  embroidery  supplies,  accessories  and
proprietary  products.  ESW is an integral part of the  Company's  single source
strategy.  The Company has expanded ESW's product line with the  introduction of
proprietary products. Moreover, the expansion of the Company's marketing efforts
is  directed  toward  telemarketing,  trade  publication,  advertising,  catalog
mailers and trade show participation.  ESW 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.

<PAGE>

     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 23 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.

     Growth Strategy

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

     Grow with  Embroidery  Equipment  Customers.  The continuing  growth of the
embroidery  industry and the increasing  number of embroidery  entrepreneurs who
sell customized  products into  specialized  niche markets  presents the Company
with the  opportunity  to grow 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,  California,  Idaho, Montana, Nevada, Oregon, Utah,
Washington,  Wyoming  and  Hawaii.  The  Company  invested  in  the  West  Coast
infrastructure   during  fiscal  1998.  This  expansion  included   establishing
additional sales offices,  hiring of technical service and support staff as well
as  investment  in demo  equipment  and  inventory.  With the  addition of large
machines to our  repertoire,  there will be  incremental  costs to support these
additional sales, however they are not expected to be significant.

<PAGE>

     Expand Sales of  Value-Added  Product and  Services.  Because of the higher
profit margins  realized through sales of Pulse, ESW and HAPL Leasing as opposed
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  supplies
and equipment through 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 ESW 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  ESW  warehouses  at the same
locations as certain  sales  offices.  In addition,  ESW's  product line also is
offered to all users of embroidery  equipment in the United States through trade
publications, print advertising, catalogue mailers 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's March 1997 acquisition of substantially all of the assets
of Equipment Connection, Inc. ("ECI") has greatly increased its ability to offer
a customer  value for its used  embroidery  equipment  by giving the Company the
ability to recondition and resell such used equipment in the open market.

     Assembly  Operations  Established.  During the third and fourth quarters of
fiscal 1998, the Company's  Tajima USA, Inc.  ("TUI")  subsidiary  significantly
increased  its  manufacturing  operations  at its assembly  facility  located in
Ronkonkoma,  New York which is located  near the  Company's  headquarters.  As a
result,  TUI's Net Sales  during the fiscal  year ended  January  31,  1998 were
approximately $10,900,000.

     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  expects that this  investment  in TUI will further
solidify its  relationship  with Tajima and will become a vital component in the
Company's future success.

<PAGE>

     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 also offers database  products and business  management  tools to its
customers,  including its Passport Embroidery Network which allows a single user
to  network  embroidery  machines  of any make or model.  Additionally,  it is a
production  management  system that  provides  users with the ability to monitor
production, diagnostic information and operator efficiency in real time.

     Pulse  recently  released  the newest  product in its  Passport  Embroidery
Network  product line.  The Passport  Librarian is a state of the art embroidery
design  database  software.  Among its  features  are the ability to  centralize
designs,  security  features to access levels,  internet  support and a powerful
search  engine.  These  tools offer the small and large  embroiderer  the latest
technology  to more  effectively  manage  their  design  database  software.  In
addition,  Pulse has  developed  a program to develop  customized  products  for
specific  customer needs.  This allows for creative  solutions to the customers'
unique problems.

<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  36.8% of the Company's  machine sales were financed  through
HAPL Leasing for the year ended January 31, 1998, compared to 34.8% for the year
ended  January 31, 1997.  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  continued  in  fiscal  1998.
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 recorded a reserve. The
Company has funded  approximately  $14.2  million  pursuant to the terms of this
agreement which represents approximately 25% of the fundings for fiscal 1998. We
anticipate  funding  between  20-25% of leases on a go forward  basis  under the
terms  of  this  agreement.  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 3-5 years.  As of January  31,  1998,  HAPL
Leasing had sold approximately 91% 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 is  continuing  to increase the number of funding  sources and
works with its funding  sources to develop new lease programs  attractive to the
embroidery industry.

Used Embroidery Machinery

     Although the Company has previously  accepted used embroidery machines from
customers  as a condition  to the sale of a new machine on a case by case basis,
the March 1997  acquisition  of the assets of ECI  enables  the  Company to more
readily  accommodate  such customers.  The Company  believes that its ability to
accept used  machines is an important  sales tool and  necessary  element in the
Company's  aggressive pricing strategy.  In addition,  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.

<PAGE>

Embroidery Supply Warehouse

     ESW 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, ESW develops embroidery products based on the recommendations
of  embroiderers.  ESW 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.

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

     Following the Company's  recent machine sales  expansion to the West Coast,
ESW has expanded the hours of its telemarketing operations, making it easier for
customers  across  the  United  States  to  place an  order.  In  addition,  ESW
frequently  updates its catalog to ensure customers have up-to-date  information
on its product lines.

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
growing sales staff is headed by Paul Levine,  Executive  Vice  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.

<PAGE>

     The Company  maintains an internal training center for its employees at its
Cleveland  training center.  The program educates employees about the embroidery
industry,  the history of embroidery and the Company,  embroidery techniques and
the operation of embroidery  machines.  Service technicians receive an intensive
training  program in  addition to the  aforementioned  program.  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.

     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
except that Tajima cannot  terminate the East  Coast/Midwest  Agreement prior to
February 20, 1998. 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.

     Each of the  agreements  may be  terminated if the Company fails to achieve
certain minimum purchase 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.

<PAGE>

     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 a 20 year  relationship  with Tajima 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. ESW obtains its supplies 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 7, 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.  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.

<PAGE>

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

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

     ESW  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 ESW 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"  and  "Method  for
Automatically  Generating  Chain Stitches and two 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  also has the  following  patents  pending  in the  Japanese  and
European Patent Offices:  "Method for Modifying Embroidery Design Programs," and
the following additional patents pending in the Japanese Patent office:  "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.

<PAGE>

Employees

     As of March 31,  1998,  the  Company  employed  approximately  450  persons
engaged in sales,  customer service and supplies,  product development,  finance
administration and management for the Company, ESW, Pulse, TUI and HAPL Leasing.
None of the Company's  employees is represented by unions.  The Company believes
its relationship with employees is good.

Risk Factors

Dependence on Tajima

     For the fiscal  year  ending  January 31,  1998,  approximately  80% of the
Company's  revenues  resulted  from the sale or  lease of  embroidery  equipment
supplied by Tajima and substantially all of the Company's 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 covers nine states and Hawaii 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  is the Company  fails to achieve  certain
minimum purchase 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.


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.


<PAGE>

Assembly Facility

     The Company  assembles  Tajima  embroidery  machines  in the United  States
through its subsidiary Tajima USA, initially in configuration of up to six heads
per machine.  Tajima provides the Company with technical assistance and support,
since  the  Company  has no  prior  experience  in the  assembly  of  embroidery
machines.   The  commencement  of  assembly   operations  could  require  longer
implementation   times  or  greater  start  up  and  other   expenditures   than
anticipated. Additional problems could be encountered and greater than projected
expenses.  Furthermore, there can be no assurances that the Company will be able
to establish profitable assembly operations in the long-term.

Expansion

     Since June 1996,  the Company has acquired four (4) companies  (the "Recent
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
the West Coast, 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
successfully  integrate  the  operations  of the  Recent  Acquisitions  with the
Company's  operations without  substantial costs, delays or problems or that the
Company will be able to profitably  sell equipment or the Company's  value-added
products in the new territories.

     The past  growth and  planned  expansion  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  expansion or attract and retain  qualified  personnel
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

Embroidery Industry

     The  Company's  growth has resulted in part from the increase in demand for
embroidered  products and the growth of the embroidery  industry.  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.

<PAGE>

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 the UNL Limited  Liability  Recourse  Agreement  reduces the  Company's
exposure, 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.

Inventory

     The Company  maintains  inventory of approximately one month's sales of new
Tajima embroidery  machines and its 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. To date,
the Company has been able to manage its inventory  effectively,  but any failure
to do so in the future 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.

     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 operations.


<PAGE>

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 the  Company's  Pulse  Microsystem  subsidiary  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,
President and Chief  Executive  Officer of the Company;  Paul Levine,  Executive
Vice  President,  Chief  Operating  Officer,  Secretary  and a  Director  of the
Company; and Kenneth Shifrin, Vice President-Finance and Chief Financial Officer
of the Company.  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;  and Ron Krasnitz,  Vice
President-Manufacturing  and a Director of the Company. Although the Company has
entered  into five year  employment  agreements  with Messrs.  Arnberg,  Levine,
Shifrin,  Tsonis,  and Krasnitz,  the loss of their  services 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.  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 23 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.

ITEM 3.  Legal Proceedings

     There are no material legal proceedings pending against the Company.

ITEM 4.  Submission of Matters to a Note 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.

Fiscal 1997                                          High              Low

First Quarter ended April 30, 1996.................$13 13/64        $11 13/64
Second Quarter ended July 31, 1996.................$16 51/64        $12 19/32
Third Quarter ended October 31, 1996...............$18 1/2           15  1/2
Fourth Quarter ended January 31, 1997........... ..$22 1/2          $17  1/2

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


     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.

     The bid prices have been  adjusted to reflect a 5-for-4 stock split paid in
the form of a 25% stock divided effected July 22, 1996.

     (b)  As  of  April  20,  1998,   the  Company   believes  that  there  were
approximately 4,188 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, 1998 and 1997 and for the fiscal years ended January 31, 1998,  1997
and  1996  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, 1996, 1995,
and 1994 and for the fiscal  years  ended  January 31, 1995 and 1994 are derived
from audited Consolidated Financial Statements not included herein.


<TABLE>
<CAPTION>
                                                                    Year Ended January 31,
                                                            (in thousands of dollars, except per share amounts)

Hirsch International Corp. and Subsidiaries                  1998      1997       1996     1995      1994
 
                                                        ----------------------------------------------------------------
<S>                                                       <C>        <C>        <C>       <C>      <C>
Statement of Income Data:
Net Sales ..........                                      $147,045   $122,195  $ 87,974  $ 70,709   $49,959
Interest income related to sales-type leases..........       5,432      3,243     3,022     1,617       571
Cost of goods sold....................................      96,099     80,820    58,836    47,881    35,452
Selling, general and administrative expenses..........      41,055     29,070    20,638    16,155    10,520
Income before income taxes............................      14,255     15,170    11,402     8,159     4,272
Income taxes..........................................       6,059      6,402     4,837     3,355     1,663(1)
Net income............................................       8,196      8,768     6,565     4,823     2,609(1)
Basic net income per share (2), (3)...................    $   0.92    $  1.13  $   1.10  $   0.66   $  0.49
Diluted net income per share (2), (3).................    $   0.89    $  1.10  $   1.09  $   0.66   $  0.49(1)
  net income per share (2), (3).......................       8,953      7,782     5,960     7,332     5,332
Shares used in the calculation of diluted
  net income per share (2), (3).......................       9,236      7,967     6,002     7,335     5.332

</TABLE>


     (1) Income taxes, net income and income per share for the fiscal year ended
January 31, 1994  reflect,  on a pro forma basis,  the federal and regular state
income taxes which would have been incurred if the Company had been taxed as a C
Corporation under the Code and applicable state statutes during such period.

     (2) 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.

     (3) Basic and diluted  net income per share  figures and shares used in the
calculation  of diluted net income per share for Fiscal  years 1994 through 1997
have been  retroactively  adjusted  to reflect  the  adoption  of SFAB No.  128,
"Earnings per Share".

<PAGE>

<TABLE>
<CAPTION>
                                                              January 31, 1998
                                                          (in thousands of dollars) 
                                            1998         1997         1996        1995         1994
                                         ------------------------------------------------------------
<S>                                     <C>             <C>         <C>         <C>          <C>

Balance Sheet Data:  
Working capital......................    $40,169(7)     $22,004     $16,847(5)  $10,363(4)  $ 1,674     
Total assets..........................   114,832(7)      83,696      47,872(5)   37,504(4)   21,349
Long-term  debt,  less current
maturities............................     1,421         13,194(6)    1,779       2,696         776

</TABLE>


     (4) 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).

     (5) 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).

     (6) 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.

     (7) 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).


<PAGE>



     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").

     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 (1-6 head) 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 exclusive right to distribute Tajima small
machines in the continental United States and Hawaii.  Hirsch also announced the
formation of its newest  subsidiary,  Tajima USA,  Inc.  ("TUI")  which has been
created for the purpose of assembling Tajima  embroidery  machines in the United
States.  Production at Tajima USA 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's  growth has been 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 multihead  embroidery  machines as the
entrepreneurs' operations expand.

     The Company's  revenues have increased at a compound  annual growth rate of
29.4% from  $90,966,000  in fiscal  1996 to  $152,477,000  in fiscal  year 1998.
Revenue growth from fiscal 1996 to fiscal 1998 has benefited from an increase in
revenue from the sale of embroidery machinery of approximately  $44,197,000 from
$76,363,000 in fiscal year 1996 to $120,560,000 in fiscal year 1998.






<PAGE>


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, 1998,
1997 and 1996.

<TABLE>
<CAPTION>
                                        1998                          1997                         1996
                                        ----                          ----                         ----
<S>                                   <C>                           <C>                         <C>    

Net sales                              96.4%                         97.4%                        96.7%

Interest  income  related               3.6%                          2.6%                         3.3%
                                        ------                       ------                        ----
to sales-type leases

Total revenue                          100.0%                        100.0%                       100.0%

Costs of goods sold                     63.0%                         64.4%                        64.7%

Selling, general and                    26.9%                         23.2%                        22.7%
administrative expenses

Interest expense, net                    0.6%                          0.7%                         0.4%

Other expense(income), net               0.1%                         (0.4%)                       (0.3%)
                                        -----                        -------                      ------
Income before minority                   9.4%                         12.1%                        12.5%
interest and income taxes

Minority interest                        0.0%                          0.0%                         0.0%
                                         ----                          ----                         ----
Income before income taxes               9.4%                         12.1%                        12.5%

Provision for income taxes               4.0%                          5.1%                         5.3%
                                         ----                          ----                         ----
Net income                               5.4%                          7.0%                         7.2%
                                         ====                          ====                         ====

</TABLE>


<PAGE>



     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.

     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 staff, and HAPL'S  consummation of a limited
liability  recourse  agreement  with third party  funding  source.  This limited
liability  recourse  agreement  provides  for  more  favorable  terms  than  the
non-recourse agreements.

     Cost of Goods  Sold.  For fiscal  year 1998,  cost of goods sold  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.

<PAGE>

     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 its 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.

     Provision  for income taxes.  The  provision for income taxes  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 permanent  difference  since it is not deductible
for tax  purposes.  The principle  components of the deferred  income tax assets
result 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.


<PAGE>

     Fiscal Year 1997 as Compared to Fiscal Year 1996

     Net Sales. Net sales for fiscal year 1997 were $122,195,000, an increase of
$34,221,000,   or  38.9%,   compared  to  $87,974,000   for  fiscal  year  1996.
Approximately  $25,347,000,  or  74.1% of such  increase  was due to the sale of
embroidery  machinery  for fiscal year 1997.  The sale of  embroidery  machinery
represented approximately  $101,710,000 or 83.2%, and $76,363,000,  or 86.8%, of
net sales for fiscal  years 1997 and 1996,  respectively.  The Company  believes
that this increase is the result of the continued  strong demand for embroidered
products,  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.

     The  Company's  revenues  have also  grown in large part as a result in the
growth in sales of the single-head  embroidery machine.  Single-head  embroidery
machines  and  multi-head  embroidery  machines  represented  45.6%  and  54.4%,
respectively,  of the number of embroidery machines sold during fiscal year 1997
as compared to 39.8% and 60.2% for fiscal year 1996, respectively.

     The Company had previously sold embroidery machines manufactured by Brother
Industries  Ltd.   ("Brother")  and,  through  the  acquisition  of  SMX,  Melco
Embroidery Systems ("Melco").  However,  effective October 16, 1996, the Company
discontinued the distribution of Brother embroidery machines.  In addition,  the
Company came to a mutual  agreement  with Melco  effective  December 31, 1996 in
which the Company exited the Melco product line.

     Revenue from the sale of the Company's  proprietary  application  software,
embroidery  supplies,  accessories and proprietary  embroidery products and used
machines  for  fiscal  year 1997  aggregated  approximately  $20,485,000,  which
represents an increase of  approximately  76.4% as compared to  $11,611,000  for
fiscal year 1996.  This  increase is primarily  attributable  to the increase in
revenues from sale of embroidery machines.

     Interest  income  related to sales-type  leases.  HAPL  Leasing's  interest
income increased 7.3% to $3,243,000 for fiscal year 1997 from $3,022,000 for the
comparable  period of the prior year. This increase is a result of the continued
expansion  of HAPL Leasing  operations  and staff.  In order to increase  market
share,  HAPL reduced its rates in certain  instances,  which  resulted in growth
that was not proportionate to the growth in revenues from the sale of embroidery
machines.

<PAGE>

     Cost of Goods  Sold.  For fiscal  year 1997,  cost of goods sold  increased
$21,984,000, or 37.4%, to $80,820,000 from $58,836,000 for fiscal year 1996. 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 all currency  fluctuations  have been  generally
reflected in pricing  adjustments in order to maintain  consistent gross margins
on machine revenues.

     Selling, General and Administrative ("SG&A") Expenses. For fiscal year 1997
SG&A increased $8,432,000,  or 40.9%, to $29,070,000 from $20,638,000 for fiscal
year 1996.  SG&A  expenses  increased as a percentage  of revenues to 23.2% from
22.7%.  This  increase in SG&A Expenses as a percentage of revenues is primarily
attributable to the following factors:

     The Company  made a  significant  investment  in its  infrastructure  as it
relates to its growth strategy and the West Coast Expansion.  Additional  sales,
marketing,  training,  administrative and technical support personnel were hired
to support  this  growth.  The Company  also entered into leases for several new
sales  offices and incurred  start up costs related to these  offices,  and also
increased expenditures for participation in trade shows, and

     The incremental  expenses  incurred in connection with the  acquisitions of
SMX and Sedeco.

     Interest Expense. Interest expense for fiscal year 1997 increased $435,000,
or 109.7%,  from  $397,000  in fiscal year 1996 to $832,000 in fiscal year 1997.
This increase is directly  attributable to the increased  interest costs related
to the additional debt incurred in connection with the recent acquisitions.

     Provision  for income taxes.  The  provision for income taxes  reflected an
effective  tax rate of  approximately  42.2% for fiscal year 1997 as compared to
42.4%  for  fiscal  year  1996.  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 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
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 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.

<PAGE>

     Net Income. Net Income for fiscal year 1997 increased $2,203,000, or 33.6%,
to $8,768,000  from $6,565,000 for fiscal year 1996. This increase is due to the
continued  growth in machine sales in addition to the contribution to net income
from the sale of the Company's value added products. The net margin decreased to
7.0% in fiscal year 1997 from 7.2% in fiscal year 1996. This decrease in the net
margin is attributable to the increase in SG&A expenses.



     Liquidity and Capital Resources

     Operating Activities and Cash Flows

     The  Company's  working  capital  was  $40,169,000  at  January  31,  1998,
increasing  $18,165,000  or 82.6%,  from  $22,004,000  at January 31, 1997.  The
Company has financed its  operations  principally  through cash  generated  from
operations, long-term financing of certain capital expenditures and the proceeds
from Secondary  Offerings completed in June 1997 and January 1996 (See Note 1 of
Notes to Consolidated Financial Statements). The acquisition of SMX was financed
through a term loan agreement with a bank.  The  acquisitions  of Sedeco and ECI
were financed through borrowings against the Company's Revolving Credit Facility
(See Note 8E of Notes to  Consolidated  Financial  Statements)  although  all of
these  aforementioned  borrowings  were repaid in June 1997 with the proceeds of
the June 1997 Secondary Offering.

     During  fiscal  year 1998,  the  Company's  cash and cash  equivalents  and
short-term investments available-for-sale decreased by $7,505,000 to $2,956,000.
Net cash of $16,974,000  was used in the Company's  operating  activities.  Cash
provided by increases in the balance of trade  acceptances  payable and accounts
payable and accrued expenses aggregating approximately $10,208,000 was offset by
cash  used  to  increase  inventory,  accounts  receivable,  net  investment  in
sales-type leases and other assets aggregating  approximately  $37,973,000 and a
decrease  in income  taxes  payable of  approximately  $807,000.  These  changes
resulted from expansion of the Company's  business and the  acquisitions  during
fiscal year 1998.

     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).

<PAGE>

     Revolving Credit Facility and Borrowings

     In September 1997 the Company's  Revolving Credit Facility (the "Facility")
was amended to increase the borrowing level from  $30,000,000 to $60,000,000 for
Hirsch  and  provide a  $10,000,000  Revolving  Credit  Facility  for HAPL.  The
Facility,  which now  includes a third bank,  is to be 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.  The  Facility  also  provides a  $20,000,000  sub-limit  to finance
acquisitions (as defined therein).  This Facility has also been used for letters
of credit  and  deferred  payment  letters of credit  aggregating  approximately
$15,286,000  at January 31, 1998.  During the fourth  quarter  ended January 31,
1998,  the Company  borrowed  $5,500,000  as working  capital  loans against the
Facility. There were no working capital or acquisition loans outstanding against
this Facility at January 31, 1998.

     On June 10, 1996,  the Company  entered into a term loan  agreement  with a
bank (the "Term Loan  Agreement")  pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan was repayable in twenty equal  quarterly  installments of principal and
interest (as defined in the Term Loan Agreement)  commencing September 30, 1996.
The loan was  guaranteed  by Hirsch,  Pulse and SMX and  required the Company to
maintain,  among others,  certain minimum tangible net worth,  quick asset ratio
and fixed charge  coverage  ratio levels,  as defined.  In June 1997 the Company
paid the total outstanding  balance of the loan with proceeds from the June 1997
Secondary Offering (See Note 1 of Notes to Consolidated Financial Statements).

     HAPL sells  substantially all of its leases to financial  institutions on a
non-recourse  basis  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 $143,089,000 in lease agreements
as of January 31, 1998. To date,  approximately  $136,063,000,  or 90.8%, 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.


     Future Capital Requirements

     The Company  believes  that the net proceeds  from the June 1997  Secondary
Offering (See Note 1 of Notes to Consolidated Financial Statements) its existing
cash and funds generated from operations,  together with its existing  revolving
credit  facility,  will be  sufficient  to meet its working  capital and capital
expenditure requirements and to finance planned growth.


     Backlog and Inventory

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

<PAGE>

     Year 2000 Date Conversion

     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 recognize the year 2000 as 1900, or not at
all.  This inability to recognize or properly  treat the year 2000  may cause
systems to process financial and operational information incorrectly.

     Management  had initiated a  company-wide  program to prepare the Company's
computer  systems and  applications  for the year 2000.  The program  includes a
focus on internal  policies,  methods and tools,  as well as  coordination  with
customers and suppliers.

     The  Company  expects  its year 2000  program to be  completed  on a timely
basis. Management does not anticipate that the year 2000 program will materially
impact operations or operation results.

     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

     Earnings  Per Share and Capital  Structure.  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
("SFAS") No. 129, "Disclosure of Information about Capital Structure" ("SFAS No.
129") and SFAS No. 128,  "Earnings Per Share" ("SFAS No. 128"). SFAS No. 129 and
128 specify  guidelines as to the method of computation as well as  presentation
and disclosure  requirements  for earnings per share  ("EPS").  The objective of
these  statements is to simplify the calculation  and to make the U.S.  standard
for computing EPS more  compatible with the EPS standards of other countries and
with that of the International Accounting Standards Committee.  These statements
are  effective  for fiscal  years  ending  after  December  15, 1997 and earlier
application is not permitted. The effects thereof, which were not material, have
been reflected in the Consolidated Financial Statements and related Footnotes.

     Reporting  Comprehensive  Income.  SFAS No. 130,  "Reporting  Comprehensive
Income" ("SFAS No. 130") is effective for fiscal years  beginning after December
15,  1997.  This  statement  requires  that all items  that are  required  to be
recognized under accounting  standards as components of comprehensive  income be
reported in the financial  statements and that comprehensive income be displayed
with the same  prominence as net income.  Additionally,  the statement  requires
disclosure  of the related  tax effects  allocated  to each  component  of other
comprehensive  income as well as the accumulated  balances of the each component
of  other  comprehensive  income.  When  comparative  financial  statements  are
provided for earlier periods,  those financial  statements shall be reclassified
to reflect the  provisions  of this  statement.  SFAS No. 130 does not require a
specific  format for the display of  comprehensive  income  within the financial
statements,  but does require that an amount  representing  total  comprehensive
income for the period be displayed within the financial statements. Although the
Company does not expect SFAS 130 to have a material  impact on the  Consolidated
Financial Statements, management cannot estimate the effects of adoption at this
time.

<PAGE>

     Disclosures  about  Segments of an Enterprise.  SFAS No. 131,  "Disclosures
about  Segments of an  Enterprise  and  Related  Information"  ("SFAS No.  131")
requires that public enterprises disclose financial and descriptive  information
about segments of their operations that meet certain quantitative  thresholds as
defined  therein.   The  required   disclosures   involve  reporting   financial
information  on the basis used  internally  by  management  to evaluate  segment
performance and decide how resources are allocated to segments. This information
is required  for  complete  sets of  financial  statements  as well as condensed
financial statements of interim periods issued to shareholders.  SFAS No. 131 is
effective  for fiscal years  beginning  after  December  15,  1997.  The Company
intends  to comply  with the  disclosure  requirements  of SFAS 131 and does not
expect  SFAS  131 to  have a  material  impact  on  the  Consolidated  Financial
Statements.

     Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
No. 132")  revises  employers'  disclosure  requirements  for pensions and other
postretirement   benefit  plans.  The  statement   standardizes  the  disclosure
requirements  for  pensions  and other  postretirement  benefits  to the  extent
practicable,   requires  additional   information  on  changes  in  the  benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis,   and  eliminates   certain   disclosures  deemed  no  longer  useful.
Additionally,  the  statement  suggests  combined  formats for  presentation  of
pension and other postretirement benefit disclosures.  SFAS No. 132 is effective
for fiscal years  beginning  after  December 15,  1997.  The Company  intends to
comply with the disclosure requirements of SFAS 132 and does not expect SFAS 132
to have a material impact on the Consolidated Financial Statements.

     ITEM 8. FINANCIAL STATEMENTS IN SUPPLEMENTARY DATA

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

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

     None

<PAGE>
                                                      PART IV

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

<TABLE>
<CAPTION>

(a)(1)   CONSOLIDATED FINANCIAL STATEMENTS                                                          PAGE(S)
<S>                                                                                                <C>    

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

Independent Auditors' 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-23


(a)(2)  FINANCIAL STATEMENT SCHEDULE

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

(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. and Fleet Bank, N.A.

     **10.2 $2,295,000 Mortgage Note from Hirsch International Corp. to Chemical
Bank

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

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

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

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

     *10.7 Employment Agreement between Henry Arnberg and the Registrant

     *10.8 Employment Agreement between Paul Levine and the Registrant

<PAGE>

     *10.9 Employment Agreement between Kenneth Shifrin and the Registrant

     *10.10  Employment  Agreement  between Tas Tsonis and Pulse  Microsystems,
Ltd.

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

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

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

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

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

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

     10.17  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")

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

     @10.19  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.

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

     %10.21 Stock Option Plan, as Amended

     #10.22 1994 Non-Employee Director Stock Option Plan

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

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

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

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

     10.27  Agreement  dated as of December 20, 1997 between the  Registrant and
Tokai Industrial Sewing Machine Company, Ltd. for sale of a forty-five (45%) per
cent interest in Tajima USA, Inc.

     21.1 List of Subsidiaries of the Registrant

     23   Consent of Auditors

     27.1 Financial Data Schedule

<PAGE>

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

     %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.


<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, President

Dated:  April 30, 1998

     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, President and         April 30, 1998
-----------------------------          Chief Executive Officer (Principal Executive
Henry Arnberg                          Officer)

\s\ Paul Levine                        Executive Vice President, Chief Operating Officer         April 30, 1998
-----------------------------          and Secretary (Principal Operating Officer)
Paul Levine

s\s Tas Tsonis                         Vice President and Director                               April 30, 1998
-----------------------------
Tas Tsonis

s/s Kenneth Shifrin                    Vice President-Finance and Chief Financial Officer        April 30, 1998
-----------------------------         (Principal Accounting and Financial Officer)
Kenneth Shifrin

s/s Ronald Krasnitz                    Vice President and Director                               April 30, 1998
-----------------------------
Ronald Krasnitz

s/s Marvin Broitman                    Director                                                 April 30, 1998
-----------------------------
Marvin Broitman

s/s Herbert M. Gardner                 Director                                                 April 30, 1998
-----------------------------
Herbert M. Gardner

s\s Douglas Schenendorf                Director                                                  April 30, 1998
-----------------------------
Douglas Schenendorf

</TABLE>


<PAGE>


                   Hirsch International Corp. and Subsidiaries

                    Consolidated Financial Statements for the
                   Years Ended January 31, 1998 and 1997, and
                          Independent Auditors' Report





<PAGE>


                  HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES


                               TABLE OF CONTENTS


                                                                     Page

     INDEPENDENT AUDITORS' REPORT                                      1

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

     Consolidated Balance Sheets                                     2-3

     Consolidated Statements of Income                                 4

     Consolidated Statements of Stockholders' Equity                   5

     Consolidated Statements of Cash Flows                             6

     Notes to Consolidated Financial Statements                     7-22



<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, 1998 and 1997, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for  each of the  three  years in the  period  ended  January  31,  1998.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial  statements.  An audit also include
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, 1998 and 1997, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended  January 31, 1998 in conformity  with  generally
accepted accounting principles.





March 11, 1998


<PAGE>



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

CONSOLIDATED BALANCE SHEETS - JANUARY 31, 1998 AND 1997
---------------------------------------------------------------------------------------------------------------------

ASSETS                                                                                      1998                   1997

<S>                                                                                      <C>                  <C>

CURRENT ASSETS:
  Cash and cash equivalents                                                        $      2,956,000      $      7,865,000
  Short-term investments available-for-sale                                                       -             2,596,000
  Accounts receivable, net of an allowance for
    doubtful accounts of approximately $3,160,000
    and $2,578,000, respectively                                                         34,427,000            20,806,000
  Net investment in sales-type leases -
    current portion (Note 5)                                                              2,180,000             1,715,000
  Inventories, net (Notes 4 and 11)                                                      34,166,000            15,769,000
  Other current assets (Note 9)                                                           3,284,000             2,073,000
                                                                               --------------------       ---------------

           Total current assets                                                          77,013,000            50,824,000
                                                                               --------------------       ---------------

NET INVESTMENT IN SALES-TYPE LEASES, Noncurrent
  portion (Note 5)                                                                       12,055,000             9,180,000

EXCESS OF COST OVER NET ASSETS ACQUIRED, Net
  of accumulated amortization of approximately
  $1,581,000 and $383,000, respectively (Note 3)                                         15,979,000            14,998,000

PURCHASED TECHNOLOGIES, Net of accumulated
  amortization of approximately $749,000 and $559,000,
  respectively                                                                              590,000               781,000

PROPERTY, PLANT AND EQUIPMENT, Net of accumulated
  depreciation and amortization (Notes 6 and 8)                                           7,193,000             6,242,000

OTHER ASSETS (Note 9)                                                                     2,002,000             1,671,000
                                                                               --------------------        --------------

TOTAL ASSETS                                                                       $    114,832,000         $  83,696,000
                                                                                 ==================         =============

</TABLE>

See notes to consolidated financial statements.              (Continued)


                                      - 2 -



<PAGE>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - JANUARY 31, 1998 AND 1997

<TABLE>
<CAPTION>

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

LIABILITIES AND STOCKHOLDERS' EQUITY                                                      1998                   1997
<S>                                                                                     <C>                   <C> 

CURRENT LIABILITIES:
  Trade acceptances payable (Note 11)                                               $    15,286,000       $    13,332,000
  Accounts payable and accrued expenses (Note 7)                                         20,592,000            11,517,000
  Current maturities of long-term debt (Note 8)                                             231,000             2,430,000
  Income taxes payable (Note 9)                                                             735,000             1,541,000
                                                                               ---------------------       --------------

           Total current liabilities                                                     36,844,000            28,820,000

LONG-TERM DEBT, Less current maturities (Note 8)                                          1,421,000            13,194,000
                                                                               --------------------        --------------

           Total liabilities                                                             38,265,000            42,014,000
                                                                               --------------------        --------------

MINORITY INTEREST (Note 1)                                                                  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,
    6,811,000 and 5,313,000 shares, respectively                                             68,000                53,000
  Class B common stock, $.01 par value;
    authorized:  3,000,000 shares, outstanding:
    2,668,000 and 2,732,000 shares, respectively                                             27,000                27,000
  Additional paid-in capital                                                             41,377,000            15,626,000
  Unrealized holding gain (loss) on short-term
    investments available-for-sale                                                                -                21,000
  Retained earnings                                                                      34,151,000            25,955,000
                                                                               --------------------         -------------

           Total stockholders' equity                                                    75,623,000            41,682,000
                                                                               --------------------         -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                         $    114,832,000         $  83,696,000
                                                                                 ==================         =============

</TABLE>

See notes to consolidated financial statements.                  (Concluded)





                                      - 5 -

<PAGE>



                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF INCOME - THREE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------------------------------------------------

                                                                      1998                 1997                  1996
<S>                                                               <C>                 <C>                      <C> 

REVENUES:
  Net sales                                                      $  147,045,000       $  122,195,000      $    87,974,000
  Interest income related to sales-type leases                        5,432,000            3,243,000            3,022,000
                                                            -------------------     ----------------      ---------------
  
           Total revenue                                            152,477,000          125,438,000           90,996,000
                                                            -------------------     ----------------      ---------------

EXPENSES:
  Cost of goods sold (note 11)                                       96,099,000           80,820,000           58,836,000
  Selling, general and administrative
    expenses                                                         41,055,000           29,070,000           20,638,000
  Interest expense (note 8)                                             934,000              832,000              397,000
  Other expenses                                                         90,000             (454,000)            (277,000)
                                                            -------------------     ----------------       --------------

           Total expenses                                           138,178,000          110,268,000           79,594,000
                                                            -------------------     ----------------       --------------

INCOME BEFORE MINORITY INTEREST IN
  NET EARNINGS OF CONSOLIDATED
  SUBSIDIARY AND PROVISION FOR
  INCOME TAXES                                                       14,299,000           15,170,000           11,402,000

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

INCOME BEFORE PROVISION FOR
  INCOME TAXES                                                       14,255,000           15,170,000           11,402,000

PROVISION FOR INCOME TAXES (Note 9)                                   6,059,000            6,402,000            4,837,000
                                                           --------------------     ----------------       --------------

NET INCOME                                                   $        8,196,000       $    8,768,000     $      6,565,000
                                                           ====================      ===============       ==============


BASIC EARNINGS PER SHARE:
  Net income                                                              $0.92                $1.13                $1.10
                                                                          =====                =====                =====

DILUTED EARNINGS PER SHARE:
  Net income                                                              $0.89                $1.10                $1.09
                                                                          =====                =====                =====
 
WEIGHTED AVERAGE NUMBER OF SHARES
 IN THE CALCULATION OF BASIC NET
 INCOME PER SHARE (Note 12)                                           8,953,000            7,782,000            5,960,000
                                                           ====================       ==============        =============
WEIGHTED AVERAGE NUMBER OF SHARES
 IN THE CALCULATION OF DILUTED NET
 INCOME PER SHARE (Note 12)                                           9,236,000            7,967,000            6,002,000
                                                           ====================       ==============        =============

</TABLE>


See notes to consolidated financial statements.


                                      - 6 -
<PAGE>
 

                  HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - THREE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
----------------------------------------------------------------------------------------------------------------------------------

                                                 Class A           Class B
                                              Common Stock       Common Stock       Additional   Unrealized
                                                (Note 10)          (Note 10)        Paid-In      Holding      Retained
                                           -----------------    ---------------     Capital      Gain (Loss)  Earnings     Total
                                             Shares   Amount    Shares   Amount             
<S>                                        <C>        <C>       <C>      <C>        <C>         <C>          <C>           <C>


Balance, February 1, 1995                  1,831,000  $18,000  2,934,000  $29,000  $ 9,972,000  $(32,000)  $10,649,000  $20,636,000

  Proceeds from public offering of
    common stock, net (Note 1)               265,000    3,000    (65,000)  (1,000)   1,906,000          -            -    1,908,000
  Stock dividend (25%) (Note 10D)          1,191,000   12,000          -        -            -          -      (12,000)           -
  Exercise of stock options                    1,000        -          -        -        8,000          -            -        8,000
  Unrealized holding gain (Note 2C)                -        -          -        -            -     17,000            -       17,000
  Net income                                       -        -          -        -            -          -     6,565,000   6,565,000
                                          ----------  -------   --------   -------  ----------   --------    ----------  ----------

Balance, January 31, 1996                  3,288,000   33,000  2,869,000   28,000   11,886,000    (15,000)   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
  Unrealized holding gain (Note 2C)                -        -          -        -            -     36,000             -      36,000
  Net income                                       -        -          -        -            -          -     8,768,000   8,768,000
                                           ---------   ------    --------  ------    ---------    -------     ---------   ---------

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

  Proceedings 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
  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
  Unrealized holding loss (Note 2C)                -        -           -       -            -    (21,000)            -     (21,000)
  Issuance of Class A stock                   49,000    1,000           -       -      819,000          -             -     820,000
  Net income                                       -        -           -       -            -          -     8,196,000   8,196,000
                                           ---------   ------    -------- -------    ---------    -------    ----------  ----------

Balance, Janauary 31, 1998                 6,811,000 $ 68,000   2,668,000 $27,000  $41,377,000  $       -   $34,151,000 $75,623,000
                                           =========  =======   ========= =======  ===========   ========    ==========  ==========

</TABLE>

See notes to consolidated financial statements.





                                      - 8 -

<PAGE>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                1998                  1997                1996
<S>                                                                           <C>                  <C>                 <C>   

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                            $    8,196,000       $     8,768,000       $    6,565,000
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
    Depreciation and amortization                                            3,214,000             1,763,000            1,142,000
    Provisions for reserves                                                    807,000               663,000              998,000
    Deferred income taxes                                                     (621,000)             (193,000)            (289,000)
    Gain on disposal of assets                                                 (42,000)               18,000               62,000
    Minority interest                                                           44,000                     -                    -
    Changes in assets and liabilities:
      Accounts receivable                                                  (14,382,000)           (5,012,000)          (5,593,000)
      Net investments in sales-type leases                                  (3,591,000)           (2,287,000)          (1,900,000)
      Inventories                                                          (18,749,000)           (2,778,000)          (1,244,000)
      Other assets                                                          (1,251,000)             (808,000)            (517,000)
      Trade acceptances payable                                              1,954,000             4,676,000            1,347,000
      Accounts payable and accrued expenses                                  8,254,000            (1,797,000)           1,106,000
      Income taxes payable                                                    (807,000)              409,000               16,000
                                                                    -------------------        --------------        ------------

           Net cash (used in) provided by
             operating activities                                          (16,974,000)            3,422,000            1,693,000
                                                                    -------------------        --------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                      (2,096,000)           (1,447,000)          (1,123,000)
  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)           1,227,000
                                                                   --------------------        --------------        ------------

           Net cash (used in) provided by
             investing activities                                              (79,000)          (10,965,000)             104,000
                                                                  ----------------------       --------------        ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds of bank financing                                                17,260,000            11,946,000                    -
  Repayments of long-term debt                                             (31,390,000)           (4,209,000)            (312,000)
  Proceeds from public offering                                             24,302,000                    -             2,325,000
  Proceeds from issuance of stock and
    exercise of stock options and warrants                                   1,072,000             1,106,000                8,000
  Contributions from minority interest                                         900,000                    -                    -
                                                                  ---------------------        --------------        ------------

           Net cash provided by financing
             activities                                                     12,144,000             8,843,000            2,021,000
                                                                    -------------------        --------------        ------------

(DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                                          (4,909,000)            1,300,000            3,818,000

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                        7,865,000             6,565,000            2,747,000
                                                                   --------------------        -------------         ------------

CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                      $       2,956,000       $     7,865,000       $    6,565,000
                                                                   ====================        ==============         ===========
SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW INFORMATION:
  Interest paid                                                      $         966,000       $       796,000       $      387,000
                                                                   ====================       ==============         ============

  Income taxes paid                                                  $       7,621,000       $     5,788,000       $    4,843,000
                                                                    ===================       ==============        =============

</TABLE>

See notes to consolidated financial statements.

                                      - 9 -
                        
<PAGE>

                  HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES


     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     YEARS ENDED JANUARY 31, 1998, 1997 AND 1996


     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  (see  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
from January 6, 1998 to January 31, 1998 have been reported as minority interest
in the Company's Consolidated Statements of Income.

     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.

     On January 24, 1996, the Company consummated a secondary public offering of
Class A common stock (the "Second Offering"). The Company sold 200,000 shares at
$12.375 per share.  Another 800,000 shares were sold by certain of the Company's
officers. Net proceeds of approximately $1,906,000 were received by the Company.

     On February 15,  1996,  the  underwriters  exercised  their  over-allotment
option to purchase an  additional  150,000  shares from certain of the Company's
officers.

     Amounts of shares and per share amounts in this note have not been adjusted
to reflect stock dividends or stock splits (see Note 10D).

<PAGE>

     2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A. Principles of  Consolidation  - The  consolidated  financial  statements
include the accounts of the Company and its wholly-owned subsidiaries, and since
January 1998, the majority  interest in the operations of TUI. All  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. To date, all leases issued by
the Company and HAPL Leasing have been sales-type  leases.  The operating method
of accounting  for leases would be followed for lease  contracts not meeting the
above criteria. Under this method of accounting,  aggregate rental revenue would
be recognized over the term of the lease.

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

     C. Cash Equivalents and Short-Term  Investments  Available-For-Sale  - Cash
equivalents  consist of money market  accounts with initial  maturities of three
months or less. Short-term investments consist primarily of tax-exempt bonds. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity  Securities",  the Company has stated
short-term investments available-for-sale at market value.

     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.

     F. Foreign  Operations - Assets and  liabilities  of the Company's  foreign
subsidiary are translated at year-end exchange rates.  Results of operations are
translated using the average exchange rate prevailing throughout the year. Gains
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.

<PAGE>

     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 lifes:

         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-lin  basis over the estimated  useful
product lives (normally three years)  commencing in the month following  product
release.  During  the year ended  January  31,  1997,  the  Company  capitalized
approximately $364,000 of software development costs. Such costs are included in
other  assets on the  accompanying  consolidated  balance  sheets.  Amortization
expense for the years ended  January 31, 1998,  1997 and 1996 was  approximately
$205,000, $84,000, and $21,000, respectively.

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

     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.

<PAGE>

     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").

     O. 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.

     P. Fair Value of  Financial  Instruments  - Financial  instruments  consist
primarily  of  investments  in  cash,  short-term  investments,   trade  account
receivables,  accounts  payable  and debt  obligations.  At January 31, 1998 and
1997, the fair value of the Company's  financial  instruments  approximated  the
carrying value (see No. 2C).

     Q.  Reclassifications  -  Certain  reclassifications  have been made to the
prior  year  consolidated  financial  statements  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 (pending final purchase price  allocation) at
the  date of  acquisition.  The  cost in  excess  of fair  value of ECI is being
amortized over a 10-year  period.  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 principles.

     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.

<PAGE>

     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
(see Note 8B) 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 (see 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.

     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 (see 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.

     On the basis of a pro forma  consolidation  of the results of operations as
if the  acquisitions  of ECI, SMX and Sedeco had taken place at the beginning of
fiscal 1997 for ECI and fiscal 1996 for SMX and Sedeco, management believes that
the acquisitions  would not have had a material effect on the reported  amounts.
Such pro  forma  amounts  are not  necessarily  indicative  of what  the  actual
consolidated  results might have been if the  acquisitions had been effective at
the beginning of the respective fiscal year.

     4. INVENTORIES

<TABLE>
<CAPTION>

                                                                                       January 31,
                                                                                 1998              1997
<S>                                                                         <C>                  <C>    

Machines                                                                 $  29,613,000     $  12,245,000
Parts and accessories                                                        6,808,000         5,527,000
Less:  Reserve for slow moving inventory                                    (2,255,000)       (2,003,000)
                                                                           ------------      ------------

Total                                                                    $  34,166,000     $  15,769,000
                                                                           ============      ===========



     5. NET INVESTMENT IN SALES-TYPE LEASES


                                                                                      January 31,
                                                                                 1998               1997

Total minimum lease payments receivable                                  $  13,051,000      $  11,142,000
Estimated residual value of leased property (unguaranteed)                   5,224,000          3,059,000
Reserve for estimated uncollectible lease payments                            (588,000)         (338,000)
Less:  Unearned income                                                      (3,452,000)        (2,968,000)
                                                                       -----------------     ------------
Net investment                                                              14,235,000         10,895,000
Less:  Current portion                                                       2,180,000          1,715,000
                                                                       -----------------     ------------

Non-current portion                                                      $  12,055,000       $  9,180,000
                                                                       =================     ============

</TABLE>



     At January 31, 1998 future  annual  lease  payments  receivable  (including
estimated residual values) under sales-type leases are as follows:


Fiscal Year Ending January 31,

1999                                                 $    3,954,000
2000                                                      3,772,000
2001                                                      3,958,000
2002                                                      4,263,000
2003                                                      2,158,000
Thereafter                                                  170,000
                                                      -----------------

                                                      $  18,275,000

<PAGE>

     6. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>

                                                                                         January 31,
                                                                                 1998                  1997
<S>                                                                           <C>                   <C> 

Land and building                                                          $    3,288,000        $   3,288,000
Machinery and equipment                                                         4,296,000            3,040,000
Furniture and fixtures                                                          1,865,000            1,374,000
Automobiles                                                                       450,000              670,000
Leasehold improvements                                                          1,579,000            1,369,000
                                                                           --------------          -----------

Total at cost                                                                  11,478,000            9,741,000
Less:  Accumulated depreciation and amortization                               (4,285,000)          (3,238,000)
Reserve for assets held for sale                                                   -                  (261,000)
                                                                           --------------         ------------

Property, plant and equipment, net                                       $      7,193,000          $ 6,242,000

                                                                          ===============         ============
</TABLE>






     7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>

                                                                                         January 31,
                                                                                  1998                   1997
<S>                                                                            <C>                   <C>    

Accounts payable                                                            $  14,310,000        $    4,641,000
Accrued commissions payable                                                     1,519,000               819,000
Accrued payroll costs                                                             693,000               832,000




Accrued warranty costs                                                            626,000               626,000
Customer deposits payable                                                         598,000             1,357,000
Other accrued expenses                                                          2,846,000             3,242,000
                                                                          ---------------          ------------

Total accounts payable and accrued expenses                                 $  20,592,000         $  11,517,000
                                                                          ===============          ============
</TABLE>

8.    LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                                           January 31,
                                                                                   1998                  1997
<S>                                                                        <C>                   <C>    

Term Note (A)                                                               $            -        $    6,750,000
Promissory Notes (B)                                                                     -             2,542,000
Acquisitions (C)                                                                         -             4,446,000
Mortgage (D)                                                                     1,549,000             1,779,000
Other                                                                              103,000               107,000
                                                                         -----------------        --------------

Total (E)                                                                        1,652,000            15,624,000
Less:  Current maturities                                                          231,000             2,430,000
                                                                         -----------------        --------------
 
Long-term maturities                                                        $    1,421,000         $  13,194,000
                                                                         =================        ==============
</TABLE>


<PAGE>

     (A) On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan  Agreement")  pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
In June 1997 the  Company  paid the total  outstanding  balance of the loan with
proceeds from the June 1997 Secondary Offering (see Note 1).

     (B) In connection  with the  acquisition  of SMX (see Note 3B), the Company
issued promissory notes in the principal amount of $4,250,000 to each of the two
former  shareholders  of SMX.  In June of 1997 the  Company  paid the  remaining
outstanding  balances of the notes with  proceeds  from the June 1997  Secondary
Offering (see Note 1).

     (C) In  connection  with the  acquisitions  of ECI and Sedeco,  the Company
borrowed  approximately  $761,000  and  $4,446,000,  respectively,  to fund  the
acquisitions  and repay existing  credit  facilities.  The amounts were borrowed
under the provisions of the Revolving  Credit Facility (see E) and bore interest
as defined therein. In June 1997, the Company paid the total outstanding balance
of the ECI and Sedeco debt with proceeds from the June 1997  Secondary  offering
(see Note 1).

     (D) 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.

     (E) In September  1997 the Company  amended its existing  Revolving  Credit
Facility to provide for a $60,000,000 Revolving Credit Facility for Hirsch and a
$10,000,000 Revolving Credit Facility for HAPL (the "Facility"). The Facility is
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.  The Facility  also  provides a
$20,000,000  sub-limit  to  finance  acquisitions  (as  defined  therein).  This
Facility  has been used for letters of credit and  deferred  payment  letters of
credit aggregating approximately $15,286,000 at January 31, 1998.

     Long-term debt (including  capitalized lease obligations) of the Company at
January 31, 1998 matures as follows:


Fiscal Year Ending January 31,

1999                                                   $      231,000
2000                                                          272,000
2001                                                          265,000
2002                                                          253,000
2003                                                          230,000
Thereafter                                                    401,000
                                                      ---------------

                                                       $    1,652,000


<PAGE>

     9. INCOME TAXES

     The provision for income taxes for each of the periods  presented herein is
as follows:

<TABLE>
<CAPTION>

                                                                               January 31,
                                                                   1998               1997              1996
<S>                                                             <C>                    <C>                  <C>

Current:
  Federal                                                    $    4,978,000     $    4,842,000    $    3,855,000
  State                                                           1,702,000          1,753,000         1,271,000
                                                          -----------------     --------------      ------------

Total current                                                    6,680,000           6,595,000         5,126,000
                                                          ------------------    --------------      ------------
Deferred:
  Federal                                                         (527,000)          (100,000)         (224,000)
  State                                                            (94,000)           (93,000)          (65,000)
                                                          ------------------    --------------      ------------

Total deferred                                                    (621,000)          (193,000)         (289,000)
                                                          ------------------    --------------      ------------

Total provision for income taxes                           $    6,059,000       $    6,402,000    $    4,837,000
                                                          ==================    ==============      ============


</TABLE>


                                      - 2 -



<PAGE>





     The tax effects of temporary  differences that give rise to deferred income
tax assets at January 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                          January 31, 1998                January 31, 1997
                                                        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                                   $ 782,000     $     -     $   589,000          $        -
Inventories                                             703,000           -         487,000                   -
Accrued warranty costs                                  143,000           -         152,000                   -
Other accrued expenses                                   69,000           -          70,000                   -
Purchased technologies                                        -       180,000             -             132,000
Net investments in sales-type leases
  (allowance for doubtful accounts)                           -       237,000             -             140,000
Capitalized software development
  costs                                                       -      (124,000)            -            (201,000)
                                                    ------------   -----------     ---------         ----------

  Total                                              $1,697,000    $  293,000   $ 1,298,000         $    71,000
                                                    ============   ===========    ==========         ==========
</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  operations  of the
Company.

      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,

                                                                          1998          1997          1996
<S>                                                                    <C>            <C>           <C>    


Federal statutory income tax rate                                        34.0%          34.0%          34.0%
State income taxes, net of Federal benefit                                7.9            8.4            7.5
Permanent differences                                                     0.6           (0.2)           0.9
                                                                       --------       -------        -------

Effective income tax rate                                               42.5 %         42.2 %        42.4 %
                                                                       ========       =======        ======= 


</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 was  adopted  by the  Board of  Directors  in
December  1993 and was approved by the  stockholders  of the Company on July 28,
1994 (the "1993 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, 1998, 1997 and
1996 for the 1993 Plan are summarized below:

<TABLE>
<CAPTION>
<S>                                                            <C>              <C>                 <C>    

  Options outstanding - February 1, 1995                          53,000        $4.88-$5.89          $       5.43
  Options granted                                                 12,000        $9.12 - $10.04       $       9.73
  Options exercised                                               (2,000)           $4.88            $       4.88
                                                            -------------       --------------       -------------
  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                                                328,000       $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                         611,000        $4.88 - $24.20       $     13.74
                                                            ============       ===============       ============

  Options exercisable at January 31, 1998                        134,000        $4.88 - $17.05       $     16.35
                                                            ============       ===============       ============

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                       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>
$  4.88 - $  5.89     43,000           1.5               $  5.56             43,000            $ 5.56
$  9.12 - $10.20      12,000           2.5               $  9.73              8,000            $ 9.73
$14.50 - $17.05      551,000           3.5               $ 16.12             83,000            $22.59
     $24.20            5,000           4.5               $ 24.20                -                  -
                  ----------                                             ----------

                     611,000                                                134,000
                  ==========                                             ==========

</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
17,000 options have been canceled under this plan.

     The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") was
adopted by the Board of  Directors in  September  1994,  and was approved by the
Stockholders  of the Company in June 1995. The Directors Plan has  approximately
234,000 shares of Common Stock  reserved for issuance.  Pursuant to the terms of
the Directors Plan, each independent  unaffiliated  Director shall automatically
be granted, subject to availability,  without any further action by the Board of
Directors or the Stock Option Committee:  (i) a non-qualified option to purchase
7,500 shares of Common Stock upon their election to the Board of Directors;  and
(ii) a non-qualified option to purchase 2,500 shares of Common Stock on the date
of each annual meeting of stockholders  following their election to the Board of
Directors.  The exercise price under each option is the fair market value of the
Company's  Common Stock on the date of grant.  Each option has a five-year  term
and vests in three  annual  installments  of 33-1/3  percent  each on the first,
second,  and third  anniversary of the date of grant.  Options granted under the
Directors Plan are generally not transferable  during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution. In
the event an  optionee  ceases to be a member of the Board of  Directors  (other
than by reason  of death or  disability),  then the  non-vested  portion  of the
option  immediately  terminates and becomes void and any vested but  unexercised
portion of the option  may be  exercised  for a period of 180 days from the date
the optionee  ceased to be a member of the Board of  Directors.  In the event of
death or permanent disability of an optionee,  all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.

     Stock option transactions during the years ended January 31, 1998, 1997 and
1996 for the Directors Plan are summarized below:

<TABLE>
<CAPTION>

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


       Options outstanding - February 1, 1995             35,000           $5.36            $  5.36
       Options granted                                    12,000          $ 9.12            $  9.12
                                                       ---------     -----------------    ---------
       Options outstanding - January 31, 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 exercisable at January 31, 1998           29,000        $5.36 - $15.50        $ 5.60
                                                       ========      ==================   =========

</TABLE>                                     

<PAGE>

<TABLE>
<CAPTION>

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


             $  5.36                     18,000            1.5             $  5.36               18,000           $5.36
             $  9.12                     12,000            2.5             $  9.12                8,000           $9.12
             $ 15.50                      9,000            3.5             $ 15.50                3,000         $ 15.50
             $ 22.00                      8,000            4.5             $ 22.00                   -               -
                                      -----------                                              ----------

                                           47,000                                                  29,000
                                      ===========                                              ==========

</TABLE>


     There are 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>   


                Options granted - 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            453,000    $  4.88 - $18.25        $15.69
                                                                ==========    =================    ========
                Options exercisable at January 31, 1998           134,000     $  4.88 - $18.25       $13.39
                                                                ==========    =================    ========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

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

                  $  4.88                  36,000            1.5              $  4.88              36,000       $4.88
                  $ 16.20                 331,000            3.5               $16.20              83,000      $16.20
                  $ 18.25                  86,000            3.6               $18.25              15,000      $18.25
                                      -----------                                              ----------
                                          453,000                                                 134,000
                                      ===========                                              ==========
</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.  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.  Approximately  4,080 are  exercisable  at a price of $5.90 per
share.

     (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 1996.  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 1998, 1997 and 1996:  expected life,
five  years  following  vesting;  stock  volatility,  54  percent in 1998 and 28
percent in 1997 and 1996, risk free interest rate of 5.5 percent in 1998 and 6.0
percent  in 1997  and  1996 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
income and  earnings per share would have been the pro forma  amounts  indicated
above:

<PAGE>

<TABLE>
<CAPTION>


                                                                          Year Ended January 31,
                                                                 1998               1997              1996
<S>                                                           <C>                  <C>                <C>   


Net income:
  As reported                                                $  8,196,000     $  8,768,000      $  6,565,000
  Pro forma                                                  $  7,597,000     $  8,494,000      $  6,565,000

Basic earnings per share:
  As reported                                                $     0.92       $      1.13       $      1.10
  Pro forma                                                  $     0.85       $      1.09       $      1.10

Diluted earnings per share:
  As reported                                                $     0.89       $      1.10       $      1.09
  Pro forma                                                  $     0.82       $      1.07       $      1.09

</TABLE>




     However,  the impact of outstanding  non-vested stock options granted prior
to  February  1,  1995  has  been  excluded  from  the  pro  forma  calculation;
accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of
future  period pro forma  adjustments,  when the  calculation  will apply to all
applicable stock options.

     (D)  Stock  Dividend  - On June 25,  1996 and June 23,  1995,  the  Company
declared  five-for-four  stock splits  effected in the form of 25 percent  stock
dividends  which were paid on July 22, 1996 and July 24, 1995 to stockholders of
record on July 8,  1996 and July 10,  1995,  respectively.  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) 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  matching  contribution  by the  Company  up to a maximum  of two
percent of an eligible employee's annual  compensation.  The Company contributed
approximately  $148,000,  $78,000 and $59,000,  for the years ended  January 31,
1998, 1997 and 1996, respectively. The Company funds all amounts when due.

     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,

1999                                                        $ 1,432,000
2000                                                          1,327,000
2001                                                            980,000
2002                                                            828,000
2003                                                            400,000
Thereafter                                                    1,276,000
                                                        ---------------

Total                                                     $   6,243,000
                                                        ===============

<PAGE>

     Rent expense was  approximately  $1,292,000,  $617,000 and $264,000 for the
years ended January 31, 1998, 1997 and 1996, 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, 1998,  the Company held foreign  currency  contracts for the
purchase of Japanese yen amounting to approximately $33,000,000.

     (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 has five-year employment agreements
with the Company's senior executives.  These employment agreements provided that
each  executive  receive  minimum  annual  compensation  of  $350,000  (adjusted
annually  based upon the CPI) for the  remainder  of the term of the  employment
agreement.  In addition,  each employment agreement provides for an annual bonus
equal to five  percent  of pre-tax  profits of the  Company.  The  Company  also
entered  into a  five-year  employment  agreement  with  another  officer of the
Company,  who will receive annual  compensation of $100,000  (adjusted  annually
based upon the CPI) with a bonus equal to two percent of pre-tax  profits of the
Company.  The Company also has five-year  employment  agreements with the former
shareholders of Pulse, providing each with an annual base salary of $300,000 and
an annual bonus based on annual pre-tax profits of Pulse.

     (E) Dependency  Upon Major Supplier - During the fiscal years ended January
31,  1998,   1997  and  1996,  the  Company  made  purchases  of   approximately
$90,000,000,  $69,000,000 and $47,000,000,  respectively, from Tajima Industries
Ltd. ("Tajima"),  the manufacturer of the embroidery machines the Company sells.
This  amounted to  approximately  80, 83 and 86 percent of the  Company's  total
purchases for the years ended January 31, 1998, 1997 and 1996, respectively.

     The Company has two separate distributorship  agreements with Tajima which,
collectively,  provide the Company the exclusive  right to  distribute  Tajima's
complete line of embroidery machines in 39 states. The main agreement (the "East
Coast / Midwest  Agreement")  which  covers 33 states,  including  the  original
Hirsch territory and the additional states acquired in the SMX territory, became
effective  on  February  21,  1991 and has a term of 20 years.  The East Coast /
Midwest  Agreement is  terminable  by Tajima and/or the Company on not less than
two years' prior notice  except that Tajima  cannot  terminate  the East Coast /
Midwest  Agreement  prior to  February  20,  1998.  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.

<PAGE>

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

     The minimum  quantity of  embroidery  machines to be sold for 1997 was met.
The  minimum  quantity  to be sold in 1998 is  approximately  1,700  machines in
various designations as defined.

     There are several manufacturers of multihead 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, 1998                     January 31, 1997                    January 31, 1996
                                                              (In Thousands, Except Per Share Amounts)
                                  Income  Shares  Per Share     Income      Shares     Per Share        Income  Shares   Per Share
<S>                                <C>       <C>    <C>        <C>        <C>         <C>              <C>       <C>        <C>  

Basic EPS:
  Income available to common
    stockholders                 $ 8,196  8,953     0.92       $ 8,768      7,782       1.13         $  6,565   5,960        1.10

Effect of dilutive
  securities:
  Options/warrants                    -     283    (0.03)            -        185      (0.03)               -      42       (0.01)
                               --------------------------       -----------------------------        -----------------------------

Diluted EPS:
  Income available to
    common stockholders
    plus assumed exercises       $ 8,196   9,236   0.89         $ 8,768        7,9$7    1.10         $  6,565   6,002        1.09
                               ========== ======= =====         ========      =======   ====           ======   =====        ====

</TABLE>