SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
                                   (Mark One)

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

                   For the fiscal year ended January 29, 2005

                                       OR

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

             For the transition period from __________ to _________

                         Commission file number 0-23434


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

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

          200 Wireless Boulevard, Hauppauge, NY                 11788
    ---------------------------------------------       ------------------
    (Address of principal executive offices)                    (Zip Code)

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


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

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




<PAGE>




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

                          Common Stock, $.01 Par value

                                    (CLASS A)

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. [x]Yes [ ]No

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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes[ ] No [x]

     The aggregate market value of the voting and non-voting  common equity held
by  non-affiliates*  computed by reference to the closing price on July 31, 2004
(the last business day of the registrant's most recently completed second fiscal
quarter), was approximately $6,134,000.

     The number of shares  outstanding  of each of the  registrant's  classes of
common stock, as of April 18, 2005 were:


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

                Class A Common Stock                            7,902,010
                    Par Value $.01

                Class B Common Stock                              550,018
                    Par Value $.01

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


<PAGE>





                           Hirsch International Corp.
                                    Form 10-K
                   For the Fiscal Year ended January 29, 2005
                                Table of Contents


Part I                                                                     Page
                                                                           ----
Item 1.           Business                                                 4-12
Item 2.           Properties                                              12-13
Item 3.           Legal Proceedings                                          13
Item 4.           Submission of Matters to a Vote of Security Holders        13

Part II
Item 5.           Market for Common Equity and Related Stockholder
                  Matters                                                 13-14
Item 6.           Selected Financial Data                                 14-16
Item 7.           Management's Discussion and Analysis of
                  Financial Condition and Results of Operations           16-24
Item 7A.          Quantitative and Qualitative Disclosures
                  About Market Risk                                          24
Item 8.           Financial Statements and Supplementary Data             24-25
Item 9.           Changes in and Disagreements on Accounting
                  And Financial Disclosure                                   25
Item 9A.          Controls and Procedures                                    25
Item 9B.          Other Information                                          25

Part III
Item 10.          Directors and Executive Officers of the Registrant       26-28
Item 11.          Executive Compensation                                   29-36
Item 12.          Security Ownership of Certain Beneficial
                  Owners and Management and Related Stockholder
                  Matters                                                  37-38
Item 13.          Certain Relationships and Related Transactions           38-39
Item 14.          Principal Accountant Fees and Services                   39-40

Part IV
Item 15.          Exhibits and Financial Statement Schedules                  40
                  Exhibit Index                                            40-42
                  Signatures and Certifications                               42



<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  markets  itself under the brand "Tajima USA
Sales and Support by Hirsch  International  Corp." and offers a complete line of
technologically advanced single- and multi-head embroidery machines, proprietary
application software, a diverse line of embroidery parts, supplies,  accessories
and embroidery products.  In addition,  Hirsch provides a comprehensive  service
program,  and user training and support.  The Company believes its wide-range of
product offerings  together with its related  value-added  products and services
place it in a competitively advantageous position within its marketplace.

     The application of new technologies has transformed the embroidery industry
from one which was labor-intensive,  utilizing machinery with limited production
capabilities to an industry where investment in electronic,  computer-controlled
machinery and related application  software has increased labor efficiencies and
production   capacities  while  expanding  the  flexibility  and  complexity  of
embroidery  designs.  These developments have not only resulted in the expansion
of  existing  markets  but have  also led to the  creation  of new  markets  for
embroidery.  The industry on a world-wide  basis has  benefited in the past from
the growth in consumer demand for licensed  products  carrying the names,  logos
and designs of professional and collegiate sports teams, entertainment companies
and their characters,  as well as branded  merchandise and related goods.  Until
fiscal 1999,  these trends and others  contributed  to an increase in demand for
machinery,  software and services provided by Hirsch. However,  beginning in the
fiscal year ended  January 31, 2000  (fiscal  2000) and  continuing  through the
present day, the Company and the U.S. embroidery industry as a whole experienced
a  decrease  in  overall  demand  driven by the  relocation  offshore  of large,
multi-head  equipment  customers  that resulted in reduced  domestic  demand for
large  embroidery  machines.  As a result,  in the year ended  January  31, 2002
(fiscal 2002) the Company initiated a restructuring  program designed to address
the market shifts in the industry,  including closing and consolidating  certain
divisions,  reducing  total  employment  and  disposing of  facilities no longer
required to support its new  business  model (See  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations).

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

     Hirsch has certain  exclusive  United States rights to sell new  embroidery
machines   manufactured  by  Tajima  Industries  Ltd.   ("Tajima")  and  certain
non-exclusive  rights to  distribute  to US based  customers  who  expand  their
operating  facilities  into the  Caribbean  region.  Tajima,  located in Nagoya,
Japan, is one of the world's leading  manufacturers of embroidery machines,  and
is regarded as a technological innovator and producer of high quality,  reliable
and durable  embroidery  equipment.  The Company has certain exclusive rights to
distribute Tajima machines in the continental United States and Hawaii.

     The Company  enjoys a good  relationship  with Tajima,  having spanned more
than 25 years.  Hirsch is one of Tajima's largest  distributors in the world and
collaborates  with Tajima in the  development  of new  embroidery  equipment and
enhancements to existing equipment.  Until early 1997, all Tajima equipment sold
in the US was assembled in Japan. At that time,  Hirsch formed a new subsidiary,
Tajima USA,  Inc ("TUI"),  to assemble  two,  four,  six and  eight-head  Tajima
machines in the United States.  In December 1997, Hirsch sold a forty-five (45%)
percent  interest  in TUI to  Tokai  Industrial  Sewing  Machine  Company,  Ltd.
("Tokai"),  Tajima's parent company's manufacturing arm. As of January 31, 2004,
the Company sold its remaining  interest in TUI to Tajima  Industries,  Ltd. The
sale has been reflected in the financial statements as a discontinued  operation
for  all  periods  presented.   (See  Note  7  to  the  Consolidated   Financial
Statements).

     In  addition  to  offering  a  complete  line  of  technologically-advanced
embroidery machines and customer training,  support and service, Hirsch provides
an  array  of  value-added  products  to its  customers.  The  Company  is now a
distributor  in the United States of software  developed by its former  software
subsidiary,  Pulse  Microsystems Ltd.  ("Pulse") (See Note 7 to the Consolidated
Financial  Statements).  Pulse  develops  and supplies  proprietary  application
software programs which enhances and simplifies the embroidery  process, as well
as enables the customization of designs and reduction of production costs.

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

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

The Embroidery Industry

     The embroidery industry today uses electronic computer-controlled machinery
that,  on a world-wide  basis,  benefits  from the demand for licensed  products
distributed  by  apparel  and other  manufacturers.  Licensed  names,  logos and
designs  provided by, among other sources,  professional  and collegiate  sports
teams and the entertainment industry appear on caps, shirts, outerwear,  luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being  embroidered have attracted  commercial  appeal for
special event promotional marketing.  Embroidery equipment may contain single or
multiple sewing heads,  each sewing head consisting of one to a group of needles
that are fed by spools of thread  attached  to the  equipment.  The  design  and
production capabilities of the sewing heads are enhanced through the application
and integration of computers and specialized software.

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

Business Strategy

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

     Embroidery  Machines.  The Company believes that offering Tajima embroidery
equipment  provides it with a  competitive  advantage  because  Tajima  produces
technologically advanced embroidery machines that are of high quality,  reliable
and  durable.  The  Company  markets  and  distributes  over 80 models of Tajima
embroidery  machines,  ranging  in size from 1 head per  machine,  suitable  for
sampling and small production  runs, to 30 heads per machine,  suitable for high
production runs for embroidered patches and small piece goods which become parts
of garments and other soft goods.  Embroidery  equipment  may contain  single or
multiple  sewing  heads.  The  selling  prices  of  these  machines  range  from
approximately  $10,000 to  $150,000.  Each  sewing  head  consists of a group of
needles that are fed by spools of thread attached to the equipment.  The needles
operate in conjunction with each other to embroider the thread into the cloth or
other surface in such  configuration as to produce the intended  design.  Thread
flowing to each needle can be of the same or varying colors. Each head creates a
design  and  heads  operating  at the same time  create  the same size and shape
designs,  although designs created at the same time can differ in color. Thus, a
30-head  machine with all heads  operating  simultaneously  creates an identical
design on thirty surfaces.  The design and production  capabilities are enhanced
through the integration of computers and specialized software applications.

     Former Assembly  Operations.  The Company's former  subsidiary  Tajima USA,
Inc.  ("TUI")  maintains a facility  located in Ronkonkoma,  New York,  near the
Company's  headquarters.  Assembly  of Tajima  machines of up to eight heads are
completed at this location,  using both Tajima  supplied  sub-assembly  kits and
locally  supplied  components.  Shorter  lead times and  production  flexibility
enables the Company to be responsive to changing needs of the market.

     Pulse  Microsystems  Ltd.  Software.  Pulse,  a  former  subsidiary  of the
Company,  offers a wide range of proprietary  application  software  products to
enhance and simplify  the  embroidery  process.  Pulse's  computer-aided  design
software packages target the different functions performed by embroiderers,  and
are contained in an integrated  product line. A majority of Pulse's  proprietary
application  software  products  are  designed  to operate in the  Microsoft(R),
Windows(R) 98 and  Windows(R)  XP  environments  that the Company  believes will
enhance creativity,  ease of use and user flexibility.  All Tajima machines,  as
well as other manufacturers' embroidery machines, can be networked through Pulse
software.  It is the Company's  established practice to aggressively market this
software with  embroidery  equipment and as an upgrade to its installed  base of
over 20,000 embroidery  machines.  The Company believes that these products have
broad appeal to purchasers of single-head and multi-head embroidery machines and
present  opportunities for the Company to increase sales of embroidery equipment
and software as the Company continues to emphasize marketing activities.

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

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

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

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

<PAGE>

Discontinued Operations

     In the fourth quarter of fiscal 2002, the Company  determined that its HAPL
Leasing  subsidiary was not strategic to its ongoing objectives and discontinued
HAPL's  Leasing's  operations.   Accordingly,   the  Company  has  reported  its
discontinued  operations in  accordance  with SFAS No. 144  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  SFAS 144  addresses  financial
accounting and reporting for the impairment or disposal of long-lived assets and
provides  updated  guidance  concerning the  recognition  and  measurement of an
impairment  loss  for  certain  types of  long-lived  assets.  The  consolidated
financial  statements  have  segregated  the assets,  liabilities  and operating
results of these discontinued operations for all periods presented.

     Effective  October 31, 2002,  the Company  completed the sale of all of the
outstanding equity interests in its wholly-owned subsidiary,  Pulse Microsystems
Ltd.  ("Pulse"),  pursuant to the terms of the purchase agreement by and between
Hirsch and 2017146 Ontario Limited.  All periods presented have been restated to
reflect  the  discontinue  operations  of Pulse (See Note 7 to the  Consolidated
Financial Statements).

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

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

Marketing and Customer Support

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

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

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

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

Supplier Relationships with Tajima

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

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

     Each agreement may be terminated upon the failure by the Company to achieve
certain  minimum sales quotas.  During fiscal 2005,  the Company  failed to meet
these  minimum sales quotas;  however,  Tajima waived the Company's  failure for
fiscal 2005.  For fiscal 2004,  the minimum sales quotas were met.  Furthermore,
the  agreements  may be terminated  if (a) Henry  Arnberg is no longer  Chairman
and/or CEO of the Company or (b) if Tajima  determines  that a change in control
of the Company has occurred.

     Although  there  can be no  assurance  that  the  Company  will  be able to
maintain its relationship with Tajima,  management of the Company believes it is
unlikely that the Company would lose Tajima as a source of supply  because:  (i)
the Company has maintained a  relationship  with Tajima for over 25 years and is
one of Tajima's largest distributors; (ii) Tajima's success in the United States
is, in large part, attributable to the Company's knowledge of the marketplace as
well as the Company's  reputation  for customer  support;  and (iii) the Company
supports Tajima's development activities.

Other Supplier Relationships

     The  Company  obtains  its  inventory  for  its  embroidery   supplies  and
accessories  business from many  different  sources.  The Company  believes that
alternate sources of supply are readily available.

Customers

     The  Company's  customers  range from large  operators  utilizing  numerous
machines to individuals who customize  products on a single  machine.  Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers,  who use embroidery
to embellish their apparel, accessories,  towels, linens and other products with
decorative  appeal; and (iii) embroidery  entrepreneurs,  who produce customized
products  for   individuals,   sports   leagues,   school   systems,   fraternal
organizations,  promotional  advertisers  and other  groups.  There are no major
customers who exceed 10% of revenues.

Competition

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

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

     The Company's  success is  dependent,  in part, on the ability of Tajima to
continue  producing  products  that  are  technologically   superior  and  price
competitive with those of other manufacturers.  The failure of Tajima to produce
technologically  superior  products at a competitive price could have a material
adverse  effect of the Company's  business,  financial  condition and results of
operations.

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

Employees

     As of January 29, 2005, the Company  employed  approximately 97 persons who
are  engaged in sales,  service  and  supplies,  product  development,  finance,
administration and management for the Company.  None of the Company's  employees
are  represented  by unions.  The Company  believes  its  relationship  with its
employees is good.

Risk Factors

Dependence on Tajima

     For the fiscal year ended  January  29,  2005,  approximately  74.2% of the
Company's  revenues resulted from the sale of embroidery  equipment  supplied by
Tajima.  Two  separate  distributorship  agreements  (collectively,  the "Tajima
Agreements")  govern  the  Company's  rights  to  distribute  Tajima  embroidery
equipment in the United States and the Caribbean. The distributorship agreements
with  Tajima  collectively  provide  the Company  with the  exclusive  rights to
distribute  Tajima's complete line of standard  embroidery,  chenille embroidery
and certain  specialty  embroidery  machines in 50 states.  The Main  Agreement,
which now covers 39 states, is effective from February 21, 2004 through February
21, 2011.  The Main  Agreement may be terminated by Tajima and/or the Company on
not less than two years'  prior  notice.  Under the West Coast  Agreement  which
covers  nine  western  continental  states,  Alaska and  Hawaii,  the Company is
adistributor  of  Tajima's  complete  line  of  standard  embroidery,   chenille
embroidery and certain  specialty  embroidery.  The West Coast Agreement expired
February 20, 2005.  The Company is in the process of negotiating an extension of
the West Coast Agreement,  however,  there can be no assurance that an agreement
can be reached on terms acceptable to the Company. The failure of the Company to
obtain an  extension  of the West Coast  Agreement  on terms  acceptable  to the
Company could result in a loss of the Company's  right to distribute  embroidery
machines in the territories covered by the West Coast Agreement which could have
a material  adverse effect on the Company's  business,  operations and financial
condition.  Each of the agreements contains language that permits termination if
the Company fails to achieve certain minimum sales quotas or annual targets.  In
fiscal 2004,  the Company met its sales  quotas and in fiscal 2005,  the Company
obtained a waiver from Tajima for failure to meet its sales quotas. Furthermore,
the agreements may be terminated,  for any other reasons if (a) Henry Arnberg is
no longer Chairman and/or CEO of the Company or (b) if Tajima  determines that a
change in control of the Company has  occurred.  The  termination  of the Tajima
agreements  would  have a material  adverse  effect on the  Company's  business,
financial condition and results of operations.

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

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

Decline in Domestic Embroidery Industry

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

Foreign Currency Risks

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

Inventory

     The Company's  ordering cycle for new embroidery  machines is approximately
three to four  months  prior to  delivery  to the  Company.  Since  the  Company
generally  delivers new Tajima  embroidery  machines to its customers within one
week of receiving  orders,  it orders  inventory  based on past  experience  and
forecasted  demand. Due to the relatively long lead times of the ordering cycle,
any significant unanticipated downturn or upturn in equipment sales could result
in an increase in inventory levels or shortage of product,  respectively,  which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

Competition

     The Company competes with  distributors of embroidery  machines produced by
manufacturers  other than Tajima and with  manufacturers  who  distribute  their
embroidery  machines  directly  as well as with other  providers  of  embroidery
products and services.  The Company  believes that competition in the embroidery
industry  is  based  on  technological  capability  and  quality  of  embroidery
machines,  price and service. If other manufacturers develop embroidery machines
which are more  technologically  advanced  than  Tajima's  or if the  quality of
Tajima embroidery machines diminishes,  the Company would not be able to compete
as  effectively  which  could have a material  adverse  effect on its  business,
financial   condition  and  results  of  operations.   The  Company  also  faces
competition  in  selling   software,   embroidery   supplies,   accessories  and
proprietary  products  as well  as  providing  customer  training,  support  and
services.  Due to the decline in overall  demand in the industry  which occurred
during  the  last  several  years,   potential  customers  may  emphasize  price
differences over  value-added  services and support in purchasing new embroidery
machines.  Severe price  competition may impair the Company's ability to provide
its  customers  with  value-added  services  and  support.  Although the Company
attempts to compete on the basis of price, to the best degree  possible,  and to
maintain profit margins, there can be no assurance that the Company will be able
to do so. The Company's failure to compete effectively in these areas could have
a material  adverse effect on its business,  financial  condition and results of
operations.

Dependence on Existing Management

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

ITEM 2.  PROPERTIES

     The Company's corporate headquarters is in Hauppauge,  New York in a 50,000
square foot facility.  During fiscal 2002,  this facility was sold to Brandywine
Realty  Trust  and  approximately  24,500  square  feet  was  leased  back  in a
concurrent   transaction   (See  Note  10(B)  to  the   Consolidated   Financial
Statements).  During fiscal year 2003 the Company  leased back the 25,500 square
feet of the  building  that had  remained  empty  since  March  2001 in order to
consolidate  certain  operations  in  Hauppauge,  NY. This  property  houses the
Company's  executive offices,  the Northeast sales office,  technical  services,
machine and parts  warehousing,  order  fulfillment and used machine storage and
repair facilities.

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

ITEM 3.  LEGAL PROCEEDINGS

     There are no material legal proceedings pending against the Company.

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

     The Company 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  Small Cap  Market  under the symbol
     "HRSH".  The following table sets forth for each period  indicated the high
     and low closing bid prices for the Class A Common  Stock as reported by the
     NASDAQ Stock Market.  Trading began in the Class A Common Stock on February
     17, 1994. Class B stock is not publicly traded.

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

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

Fiscal 2004                                            High           Low
-----------                                            ----           ---

First Quarter ended April 30, 2003                    $0.75         $0.28
Second Quarter ended July 31, 2003                    $1.19         $0.65
Third Quarter ended October 31, 2003                  $1.25         $0.84
Fourth Quarter ended January 31, 2004                 $3.12         $1.01

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

(b)  As of August 04, 2004, the Company  believes that there were  approximately
     1,667 beneficial owners of its Class A Common Stock.

(c)  During the third and fourth  quarters of fiscal 2004, and the first quarter
     of fiscal 2005, the Company declared and paid a quarterly  dividend of $.01
     per share on its Common  Stock.  There were no  dividends  declared for the
     remaining  quarters of fiscal  2005.  The Class A Common  Stock and Class B
     Common Stock share ratably in any dividends  declared by the Company on its
     Common Stock. Any stock dividends on the Class A Common Stock and the Class
     B Common Stock will be paid in shares of Class A Common Stock.

(d)  Equity Compensation Plan Information
<TABLE>
<CAPTION>


                                                                                              (c) Number of securities
                                          (a) Number of                                           remaining
                                          securities                                              available for future
                                          to be issued                   (b)Weighted-average      issuance
           Plan category                 upon exercise of               exercise price of         under equity compensation plans
                                         outstanding options,           outstanding options,      [excluding securities reflected in
                                         warrants and rights            warrants and rights       column (a)]
                                         -------------------------      ----------------------    ---------------------------------
<S>                                             <C>                              <C>                            <C>
Equity compensation plans approved              1,153,000                        $0.55                          678,000
by security holders

Equity compensation plans not                    100,000                         $0.50                             0
approved by security holders
                                         -------------------------      ----------------------    ---------------------------------
TOTAL                                           1,253,000                        $0.54                          678,000
                                         -------------------------      ----------------------    ---------------------------------
</TABLE>


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

ITEM 6.  SELECTED FINANCIAL DATA

         The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated financial statement data as of
January 29, 2005 and January 31, 2004 and for the fiscal years ended January 29,
2005, January 31, 2004 and 2003 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,
2003, 2002 and 2001 and for the fiscal years ended January 31, 2002 and 2001 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             2005          2004          2003           2002            2001
-------------------------------------------------    ------------  ------------    ---------    ------------    --------

Statement of Operations Data:

<S>                                                  <C>            <C>            <C>            <C>            <C>
Net sales                                            $43,641        $46,449        $42,723        $50,156        $63,980

Cost of sales                                         29,574         31,120         29,490         36,876         44,992

Operating expenses (1)(2)                             15,874         17,488         16,793         24,925         34,378

Loss from continuing operations before income         (2,139)        (2,025)        (3,451)       (16,990)       (15,346)
tax provision (benefit)

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

Loss from continuing operations                       (2,148)        (2,050)        (2,947)       (11,109)       (15,346)

Income (loss) from discontinued operations               376          2,494         (2,603)        (7,216)          (323)


Net Income (loss) (1)                                $(1,772)          $444        $(5,550)      $(18,325)      $(15,669)

Basic and diluted net income (loss) per               $(0.26)        $(0.24)        $(0.34)        $(1.25)        $(1.68)
share from continuing operations

Basic and diluted net income (loss) per share         $(0.21)         $0.05         $(0.64)        $(0.81)        $(0.05)

Shares used in the calculation of basic and            8,351          8,571          8,789          8,894          9,112
diluted net income (loss) per share
<FN>

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

(2)  Fiscal  year 2002  operating  expenses  included a  write-down  of impaired
     goodwill of $3.5 million and restructuring costs of $2.7 million and Fiscal
     2001 includes a write-down of impaired goodwill of $7.6 million.

(3)  Fiscal years 2005,  2004, 2003, 2002 and 2001 have been restated to reflect
     the discontinued operations of HTT,TUI, HAPL and Pulse.

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

<TABLE>
<CAPTION>


     Hirsch International Corp. and Subsidiaries                (in thousands of dollars)
--------------------------------------------------    -------------------------------------------------------------------
                                                      January 29,                          January 31,
                                                        2005          2004          2003           2002           2001
                                                      ----------    ----------    ----------    -----------    -----------
Balance Sheet Data:
<S>                                                     <C>           <C>           <C>            <C>            <C>
    Working capital...........................          $13,269       $14,698       $14,616        $16,161        $18,136

Total assets..................................           26,626        30,346        39,796         33,430        50,002

Long-term debt, less current maturities.......            1,270         1,418         1,559          1,642             16

Stockholders' equity..........................          $14,055       $15,848       $16,065        $21,459        $40,278

Hirsch International Corp
Summarized Quarterly Data**

</TABLE>

<TABLE>
<CAPTION>

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

2005                                                                First          Second           Third          Fourth
----                                                                -----          ------           -----          ------
<S>                                                                   <C>            <C>             <C>             <C>
Net Sales.......................................                      $9,387         $10,617         $11,867         $11,770
Gross profit....................................                       3,082           3,567           3,881           3,537
Gain on sale of Hometown Threads...........                                0               0             943               0
Income (loss) from discontinued operations                              (83)           (110)           (374)               0
Net income (loss)...............................                     (1,107)           (650)             508           (523)
                                                                 ------------    ------------    ------------    ------------

Basic and diluted income (loss) per share.......                     ($0.13)         ($0.08)           $0.06         ($0.06)
                                                                 ============    ============    ============    ============

2004
----

Net Sales.......................................                     $11,951         $11,096         $11,892         $11,150
Gross profit....................................                       4,138           3,719           3,738           3,734
Restructuring costs (income)....................                        (497)           (200)              0             (19)
Income (loss) from discontinued operations                               (69)          1,592             765             206
Net income (loss)...............................                         105           1,151             (79)           (733)
                                                                 ------------    ------------    ------------    ------------

Basic and diluted income (loss) per share.......                       $0.01           $0.13         $(0.01)         $(0.08)
                                                                 ============    ============    ============    ============
</TABLE>

**Note:  The  quarterly  data has been  restated  to  reflect  the  discontinued
operations of Tajima USA, Inc and Hometown Threads, LLC.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion and analysis contains  forward-looking  statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company  or  its  management  are  intended  to  identify  such  forward-looking
statements.  The Company's  actual results,  performance or  achievements  could
differ   materially   from  the  results   expressed  in  or  implied  by  these
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  should be read in  conjunction  with,  and are  qualified  in their
entirety by, the  Company's  Consolidated  Financial  Statements,  including the
Notes thereto.  Historical  results are not necessarily  indicative of trends in
operating  results for any future  period.  As used  herein,  "fiscal  year" and
"fiscal"  refers  to  the  applicable  fiscal  year  ending  January  31 of  the
applicable calendar year. Fiscal year 2005 ended on January 29, 2005.

General

     The  Company  is  a  leading   single   source   supplier   of   electronic
computer-controlled  embroidery  machinery and related value-added  products and
services  to the  embroidery  industry.  The Company  offers a complete  line of
technologically advanced single- and multi-head embroidery machines, proprietary
application  software and a diverse line of embroidery supplies and accessories.
Hirsch believes its  comprehensive  customer  service,  user training,  software
support through Pulse and broad product  offerings  combine to place the Company
in a competitive  position within its marketplace.  The Company sells embroidery
machines manufactured by Tajima and TUI, as well as a wide variety of embroidery
supplies.

     In fiscal  1998  Hirsch  formed TUI for the  purpose of  assembling  Tajima
embroidery  machines in the United States.  Production at TUI consists of models
in  configurations  of up to eight  heads per  machine.  In  January  1998 Tokai
Industries (Tajima's  manufacturing arm) purchased a 45 percent interest in TUI.
In July 1999 Tajima granted to Hirsch the  non-exclusive  right to distribute to
its existing US customers who have expanded their  operations into the Caribbean
region. As of January 31, 2004, the Company sold its majority interest in TUI to
Tajima Industries.

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

     The market is affected  by  weakening  value in foreign  exchange of the US
dollar versus the Yen resulting in dollar price pressure for machine sales. Most
Japanese  equipment  based  competitors in the industry  (including the Company)
faced difficulty in meeting these new market demands. In fiscal 2002 the Company
initiated a restructuring  program to address the market shifts in the industry,
including  closing  and   consolidating   certain   divisions,   reducing  total
employment, and consolidating facilities that were no longer required to support
its  new  business  model  (See  Note  9  of  Notes  to  Consolidated  Financial
Statements). In fiscal 2004, the Company completed its plan of restructuring and
reversed, as a reduction of operating expenses,  $716,000 of restructuring costs
that  had  been  provided  for  facilities  and  severance   costs  due  to  the
re-negotiation of the office facility in Solon, Ohio.

Results of Operations

     The following table presents  certain income statement items expressed as a
percentage  of total  revenue for the fiscal  years  ended  January 29, 2005 and
January 31, 2004 and 2003.

<TABLE>
<CAPTION>

                                                                           2005            2004             2003
                                                                      ------------    ------------    -------------

<S>                                                                          <C>             <C>            <C>
Net sales...................................................                 100%            100%           100.0%

Cost of sales...............................................                67.8%             67%              69%

Operating expenses..........................................                36.4%           37.6%            39.3%

Interest expense, net.......................................                 0.4%            0.5%             0.6%

Other expense (income), net.................................                 0.3%           -0.8%            -0.9%
                                                                      ------------    ------------    -------------

  (Loss) from continuing operations before income taxes                     -4.9%          -4.45%            -8.1%

Income tax (benefit) provision..............................                0.02%            0.5%           -0.12%

  Income (loss) from discontinued operations, net of tax....                 0.9%            5.4%            -6.1%
                                                                      ------------    ------------    -------------

  Net Income (loss).........................................                -4.1%            1.0%           -13.0%
                                                                      ============    ============    =============
</TABLE>

Note: The results of operations  have been restated to reflect the  discontinued
operations of TUI, and Hometown Threads.

Use of Estimates and Critical Accounting Policies

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

Critical Accounting Policies

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

     Revenue Recognition - The Company distributes  embroidery equipment that it
offers for sale. Where  installation  and customer  acceptance are a substantive
part of the sale,  by its terms,  the Company has  deferred  recognition  of the
revenue until such customer  acceptance of installation has occurred.  In fiscal
years  2005,  2004  and  2003,  most  sales  of new  equipment  did not  require
installation  within the terms of the sales contract and  accordingly  sales are
booked when shipped. 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.  Sales of parts and supplies are  recognized
when shipped.

     Long lived Assets - The Company  reviews its long-lived  assets,  including
property,   plant  and  equipment,   identifiable   intangibles   and  purchased
technologies,  for  impairment  whenever  events  or  changes  in  circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine  recoverability  of its long-lived  assets,  the Company evaluates the
probability  that  future  undiscounted  net cash  flows  will be less  than the
carrying amount of the assets

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

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

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

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

Fiscal Year 2005 as Compared to Fiscal Year 2004

     Net sales. Net sales for fiscal year 2005 were $43.6 million, a decrease of
$2.8  million,  or 6.0%  compared to $46.4  million  for fiscal  year 2004.  The
Company believes that the reduction in the sales level for fiscal 2005 is mainly
attributable to an on-going  decrease in demand for large multi-head  embroidery
machines and greater  competition  in the small machine market which resulted in
lower prices for embroidery  machines.  There are no major  customers who exceed
10% of revenues.

     Cost of sales.  For fiscal year 2005,  cost of sales decreased $1.5 million
or 4.8%, to $29.6 million from $31.1 million for fiscal year 2004.  The decrease
was partially a result of the related decrease in net sales for fiscal year 2005
as compared to fiscal year 2004. The Company's gross margin  decreased  slightly
for fiscal year 2005 to 32.2%,  as  compared to 33.0% for fiscal year 2004.  The
recent  fluctuation  of the dollar  against the yen,  which is the  currency the
Company's  embroidery  machines  are priced in, has  adversely  affected  and is
likely to continue to  adversely  affect the  Company's  machine  sales  pricing
competitiveness.  Embroidery  machinery  prices have either been  maintained  or
risen in US dollars due to these  exchange rate  fluctuations.  As a result,  in
order for the  Company to maintain  various  product  margins  for its  imported
embroidery machines, its competitiveness has been adversely affected.  Some, but
not, all of the Company's competitors face similar circumstances.

     Operating  Expenses.  As reported for fiscal year 2005,  operating expenses
decreased  $1.6 million or 9.1%,  to $15.9 million from $17.5 million for fiscal
year 2004. The decrease in operating  expenses for the fiscal year ended January
29,  2005 is directly  related to the  Company's  continuing  efforts to control
operating costs in relation to the overall decline in sales revenues. During the
year ended January 31, 2004, the Company  reversed,  as a reduction of operating
expenses,  $716,000 of restructuring costs associated with the completion of the
restructuring plan.

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

     Other (Income)  Expense.  Other expense for fiscal 2005 was $147,000 versus
income of $349,000 for fiscal 2004.  In fiscal 2005,  other  expense  included a
$119,000 gain on sale of assets offset by $333,000 in currency losses. In fiscal
2004 other income included a $230,000 gain on sale of fixed assets,  $216,000 in
currency  loss and  $322,000 in interest  income on the refund of NOL  carryback
claims.

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

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

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

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

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

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

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

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

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

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

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

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

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

Fiscal Year 2004 as Compared to Fiscal Year 2003

     Net sales.  Net sales for fiscal year 2004 were $46.5 million,  an increase
of $3.8 million,  or 8.8%  compared to $ 42.7 million for fiscal year 2003.  The
Company  believes that the increase in the sales level for the fiscal year ended
January 31, 2004 is primarily attributable to an increased penetration of single
head and  small  machines  in the  market  as well as the  aggressive  marketing
campaign  targeting new and existing customers with the new value added packages
and renewed focus on growing parts and supply sales.

     Cost of sales.  For fiscal year 2004,  cost of sales increased $1.6 million
or 5.4%, to $31.1 million from $29.5 million for fiscal year 2003.  The increase
was a result  of the  related  increase  in net sales  for  fiscal  year 2004 as
compared to fiscal year 2003.  The  Company's  gross margin  improved for fiscal
year  2004 to 33.0%,  as  compared  to 31.0% for  fiscal  year  2003.  While the
fluctuation of the dollar against the yen has  historically had a minimal effect
on Tajima  equipment gross margins,  since currency  fluctuations  are generally
reflected in pricing  adjustments in order to maintain  consistent gross margins
on machine revenues, increased cost of sales reflects the continuing product mix
shift from larger equipment with higher gross margins to smaller  equipment with
lower gross margins.  The improvement in gross margin is mainly  attributable to
increased  margins  on  software  sales  pursuant  to the terms of the  purchase
agreement  with Pulse,  in addition to a reduction  in sales of older  inventory
carried at higher costs.

     Operating  Expenses.  As reported for fiscal year 2004,  operating expenses
increased  $0.7 million or 4.1%,  to $17.5 million from $16.8 million for fiscal
year 2003. Excluding the reversal of the non-recurring charges for restructuring
costs of $0.7 million,  operating  expenses were $18.2  million,  an increase of
$1.4  million or 8.3% from $16.8  million.  This  increase  was due to  expenses
associated with increased sales,  increased  advertising and marketing programs,
and increased professional fees.

     Interest Expense. Interest expense for fiscal year 2004 was $215,000 versus
interest expense of $259,000 for fiscal year 2003. Interest expense is primarily
associated with the sale/leaseback transaction of the corporate headquarters.

     Other (Income)  Expense.  Other income for fiscal 2004 was $349,000  versus
$368,000 for fiscal 2003. In fiscal 2004,  other income included a $234,000 gain
on sale of assets interest income of $334,000, primarily from the tax refund was
recognized  during fiscal 2004 offset by $219,000 in currency losses.  In fiscal
2003 other  income  included a $214,000  gain on sale of fixed  assets,  $55,000
currency gain and $94,000 in interest income.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective  tax benefit rate of  approximately  1.2% for the twelve  months ended
January 31,  2004 as compared to an income tax benefit  rate of 14.6% for fiscal
year 2003.  The benefit rate for the fiscal 2004 year is a direct  result of the
Job Creation and Worker  Assistance Act  temporarily  extending the carryback of
Net Operating  Losses from two years to five years.  This change has enabled the
Company to  carryback  its two most recent  years  losses and obtain a refund of
approximately $6 million. During fiscal 2004, the Company received the carryback
claim  refund  from the IRS along with  applicable  interest  through the refund
date. The difference of the above rate to the federal statutory rate for 2004 is
the  valuation  allowance  established  on deferred tax assets since the Company
cannot determine the future utilization of those assets.

     Income (Loss) from Discontinued Operations. In the fourth quarter of Fiscal
2002, the Company  determined that its HAPL Leasing subsidiary was not strategic
to the Company's ongoing objectives and discontinued operations. The Company has
made  provisions  for the cost of  winding  down the  operations  as well as the
potential  losses  that could be  incurred in  disposing  of its  minimum  lease
payments and residual  receivables.  The operating  loss in fiscal 2002 includes
$4.6 million  provision for the Ultimate Net Loss ("UNL") liability and the sale
of the residual receivable associated with it. The operating loss in fiscal 2003
includes an additional $4.0 million to account for expected additional losses in
liquidating the leasing  subsidiary's  remaining lease portfolio.  The Company's
Statements of  Operations  have been restated to reflect the results of the HAPL
Leasing  subsidiary  as a loss on  discontinued  operations  (See  Note 7 to the
Consolidated  Financial  Statements).  In July 2003, the Company  entered into a
transaction whereby the Company assigned its interest in the remaining UNL lease
portfolio from the CIT Group/Equipment Financing, Inc. ("CIT") to Beacon Funding
and  the  residual   receivables   associated   with  the  lease  portfolio  for
approximately   $375,000.   The  Company  reversed,   as  part  of  discontinued
operations, $2.0 million of reserves associated with the UNL Lease portfolio.

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

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

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

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

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

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

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

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

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

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

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

     Net Income  (Loss).  The net income for fiscal year 2004 was  $444,000,  an
increase of $5.1 million, compared to a net loss of $5.5 million for fiscal year
2003. This increase is attributable to the increase in net sales, an increase in
the cost of sales, an increase in operating expenses, reversals of restructuring
accruals,  and the change in income  (loss) on  discontinued  operations of $5.1
million.

Liquidity and Capital Resources

         The Company's working capital decreased $1.3 million or 8.9% to $13.3
million at January 29, 2005 from $14.7 million at January 31, 2004.

     During fiscal 2005,  The  Company's  cash  (exclusive  of restricted  cash)
decreased  $2.6  million or 29% to $6.4 million from $9.0 million at January 31,
2004. The majority of the decrease was cash used in financing activities of $2.8
million,  the  majority of which was $2.7  million  used to  collateralize  open
standby letters of credit, cash used in operating activities of $0.7 million and
net cash provided by investing activities of $0.9 million

     Investing  activities  provided  $0.9  million in cash during  fiscal 2005.
Investing  activities  during  fiscal  2005  included  $0.2  million  in capital
expenditures  for the  purchase of  additional  fixed  assets,  $1.1  million in
proceeds from the sale of Hometown Threads.

     Financing  activities used $2.8 million during fiscal 2005,  which included
$2.65  million in additional  collateral  to cover Standby  Letters of Credit at
Congress Financial,  $0.08 million in dividend payments during the first quarter
of fiscal 2005,  $0.15  million in long term debt  repayments  and cash of $0.06
million provided by stock options exercised.

Future Commitments

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

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

<S>                                             <C>                <C>              <C>             <C>               <C>
Capital lease obligations.................      $2,012             $306             $976            $701              $29

Operating lease obligations...............       1,935              598              883             436               18

Purchase commitments......................         800              800                0               0                0

Total                                           $4,747           $1,704           $1,859          $1,137              $47
                                            ===========    =============    =============    ============     ============
</TABLE>

Revolving Credit Facility and Borrowings

     The Company has a Loan and Security  Agreement  ("the Congress  Agreement")
with Congress Financial Corporation  ("Congress") for a three year term expiring
on November  26,  2005.  The  Congress  Agreement  as amended,  August 31, 2004,
provides for a credit  facility of $12 million for Hirsch and all  subsidiaries.
Advances made pursuant to the Congress  Agreement may be used by the Company and
its  subsidiaries  for working  capital  loans,  letters of credit and  deferred
payment  letters of credit.  The terms of the  Congress  Agreement  require  the
Company to maintain certain financial  covenants.  The Company was in compliance
with all  financial  covenants at January 29, 2005.  The Company has placed $5.7
million in restricted cash to support standby letters of credit of approximately
$4.5 million at January 29, 2005.

Future Capital Requirements

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

Backlog and Inventory

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

Inflation

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


Recent Accounting Pronouncements -

         See note 2(q) to the consolidated financial statements


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     The  Company  may from time to time enter  into  forward  foreign  exchange
contracts  principally  to  hedge  the  currency  fluctuations  in  transactions
denominated  in foreign  currencies,  thereby  limiting the Company's  risk that
would otherwise result from changes in exchange rates.

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


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information contained in pages F-1 through F-24 hereof.


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

         None.


ITEM 9A.  CONTROLS AND PROCEDURES

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

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

ITEM 9B.  OTHER INFORMATION.

         None.


<PAGE>


                                    PART III



ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


Information Regarding Executive Officers and Directors

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


Name                   Age       Position
----                   ---       --------
Henry Arnberg......... 62        Chairman of the Board of Directors
Paul Gallagher........ 55        Chief Executive Officer, Director and President
Marvin Broitman....... 66        Director
Mary Ann Domuracki ... 47        Director
Christopher Davino ... 39        Director
Beverly Eichel........ 47        Vice President - Finance and Administration,
                                 Chief Financial Officer and Secretary
Kristof Janowski...... 52        Executive Vice President - Sales and Marketing
Nicholas Paccione....  50        Vice President - Operations

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

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

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

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

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

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

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

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

Committees of the Board of Directors

     The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee.  Each member of the Audit Committee is an "independent
director"  as  defined  in  Rule  4200(a)(15)  of the  National  Association  of
Securities  Dealers listing  standards,  as applicable and as may be modified or
supplemented. MaryAnn Domuracki, Chairman of the Audit Committee, is a financial
expert within the meaning of Item 401(h)(2) of Regulation  S-K privileged  under
the Act. The audit committee has adopted a written audit committee charter.  The
Board  of  Directors  does  not  have  a  nominating  committee  or a  committee
performing the functions of a nominating committee.

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

Code of Ethics

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


Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and  directors  and persons who own more than ten percent of a class of
the  Company's  securities to file reports of ownership and changes in ownership
on Forms 3, 4 and 5 with the  Securities and Exchange  Commission.  In addition,
officers,  directors and greater than ten percent  stockholders  are required by
the  Securities  and Exchange  Commission  regulates to furnish the Company with
copies of all Section 16 forms they file.

     To the  Company's  knowledge,  based  solely on its review of the copies of
such forms received by it and  representations  from certain reporting  persons,
the Company  believes  that during the fiscal year ended  January 29, 2005,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than ten percent beneficial owners were satisfied.

<PAGE>


ITEM 11.  EXECUTIVE COMPENSATION

     The  following  table sets forth the  compensation  earned during the three
fiscal  years  ended  January  29,  2005 and  January  31,  2004 and 2003 by the
Company's  Chairman  of the  Board and by the four most  highly  paid  Company's
Executive  Officers whose total  compensation for such periods exceeded $100,000
(the "Named Executives"):

Summary Compensation Table
<TABLE>
<CAPTION>

                                                                                    Long-term compensation
                                               Annual compensation                  Awards                  Payouts
                                               -------------------                  ------                  -------


Name and Principal Position  Fiscal       Salary         Bonus         Other     Restricted    Securities                 All
                                                                      Annual                     Underly-                  Other
                                                                      Compen-    Stock         Ing           LTIP        Compen-
                                                                      Sation     Awards(s)     Options/      Payouts     Sation
                              Year          ($)           ($)           ($)         ($)        SARs (#)      ($)            ($)
---------------------------  --------    ----------     ---------    ----------  ----------    ----------    ----------  --------

Henry Arnberg
   Chairman of the Board
<S>                           <C>        <C>                <C>           <C>        <C>           <C>           <C>          <C>
   of Directors               2005       $218,000          -             -           -             -                      $2,919
                              2004       $250,000          -             -           -             -             -        $2,060
                              2003       $279,166          -             -           -             -             -        $2,060

Paul Gallagher                2005       $310,000          -             -           -          150,000          -        $4,187
  Chief Executive Officer
                              2004       $300,000       $150,000  2      -           -             -             -        $3,675
                              2003       $300,000       $75,000   1      -           -          300,000          -        $3,675
                                                                                                                   -
Beverly Eichel                                                                                                     -
  Vice President-Finance
  and Chief Financial
  Officer and Secretary       2005       $265,000          -             -           -          40,000                       -
                              2004       $250,000       $87,500   2      -           -             -             -           -
                              2003       $235,000       $35,250   1      -           -          218,000          -           -

Kristof Janowski                                                                                                   -
  Executive Vice President
- Sales and Marketing         2005       $250,000          -             -           -             -                         -
                              2004       $289,000       $50,000   2      -           -             -             -           -
                              2003       $200,000       $54,000   1      -           -          80,600           -           -

Nicholas Paccione                                                                                                  -
  Vice President -
Operations                    2005       $155,000                        -           -             -                         -
                              2004        $82,500       $21,500          -           -          20,000           -           -
                              2003           -             -             -           -             -             -           -
<FN>

1 Bonuses were earned in fiscal 2003 but paid in fiscal 2004
2 Bonuses were earned in fiscal 2004 but paid in fiscal 2005
</FN>
</TABLE>


     The following table sets forth the individual  grants of stock options made
during the fiscal year ended January 29, 2005 by the  Company's  Chairman of the
Board and the named executive officers:

Options/SAR Grants Table
<TABLE>
<CAPTION>

                                               Percent of
                            Number of            total
                            Securities        Options/SARs       Excise
                            Underlying         Granted to        of base
                           Options/SARs       Employees in        Price       Expiration         5%             10%
    Name                   Granted (#)        fiscal year        ($/Sh)          date            ($)            ($)
    ----                   -----------        -----------        ------          ----            ---            ---
        <S>                     <C>             <C>              <C>              <C>            <C>            <C>
  Henry Arnberg                 -                  -                -             -               -              -
  Paul Gallagher             150,000              79%           $168,000      12/1/2009        $214,000       $225,000
  Beverly Eichel              40,000              21%            $44,800      12/1/2009         $57,000        $60,000
  Kristof Janowski              -                  -                -             -               -              -
  Nicholas Paccione             -                  -                -             -               -              -
</TABLE>

Option Exercises and Holdings

     The following table sets forth information concerning the exercise of stock
options by the Named  Executives  during the Company's fiscal year ended January
29, 2005 the number of options  owned by the Named  Executives  and the value of
any in-the-money unexercised stock options as of January 29, 2005.

           Aggregated Option Exercises in Last Fiscal Year and Fiscal
                             Year End Option Values
            -------------------------------------------------------
<TABLE>
<CAPTION>

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

<S>                         <C>                  <C>                       <C>                                <C>    <C>
Henry Arnberg               0                    $0                        0/0                                $    0/0
Paul Gallagher              0                    $0                  358,000/192,000                       $ 0/115,500
Beverly Eichel              0                    $0                  173,000/85,000                         $ 0/40,040
Kris Janowski               0                    $0                   54,000/27,000                          $ 0/7,290
Nicholas Paccione           0                    $0                   7,000/13,000                          $ 0/11,180
</TABLE>

         In connection with the execution of their respective employment
agreements, Mr. Gallagher received options to purchase 150,0000 shares and Ms.
Eichel received options to purchase 40,000 shares of the Company's Class A
Common Stock.

Employment Agreements

Paul Gallagher

     On of September 11, 2004, Mr. Gallagher entered into a two-year  employment
agreement to serve as the Company's  President,  Chief  Operating  Officer and a
director.  Effective  December 1, 2004, Mr.  Gallagher  agreed to serve as Chief
Exectuive Officer of the Company.

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

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

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

     Mr. Gallagher also received, pursuant to the agreement, options to purchase
150,0000 shares of the Company's Class A Common Stock.

Beverly Eichel

     As of February  1, 2004,  Ms.  Eichel  entered  into a two-year  employment
agreement to serve as the Company's  Vice-President-Finance  and Administration,
Chief Financial Officer and Secretary

     Ms.  Eichel's  employment  agreement  provides for the payment of an annual
salary  of  $265,000  per  year.  The  agreement  also  entitles  Ms.  Eichel to
participate in and receive a bonus under the Company's annual incentive plan for
key employees with a possible  maximum bonus of 70% of Ms.  Eichel's annual base
salary.  In  addition,  Ms.  Eichel's  employment  agreement  provides  for  the
reimbursement  of business  expenses  including an automobile and cellular phone
allowance, the provision of health insurance and related benefits.

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

     In addition,  in connection with the execution of the employment agreement,
Ms.  Eichel also  received  options to purchase  40,000 shares of Class A Common
Stock.


Director's Compensation

     Directors who are employees of the Company or its  subsidiaries  receive no
compensation,  as  such,  for  service  as  members  of  the  Board  other  than
reimbursement of expenses incurred in attending meetings.  Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or  stockholder's  meeting attended and $1,000
for each  meeting  of an  executive  committee  of the Board  attended,  and are
reimbursed for expenses  incurred in attending such meetings.  In addition,  all
non-employee  directors  participate in the Company's 2004 Non-Employee Director
Stock Option Plan.  In fiscal  2002,  the Board  approved the issuance of 50,000
warrants  to one of the  independent  directors  for  services  rendered  to the
Company.  The director was also granted certain  registration  rights associated
with the warrants.  The warrants had an exercise price of $.50 per share,  which
was the fair market value on the date of grant. In fiscal 2004, each independent
director was issued 10,000 options under the Company's 2004  Non-Employee  Stock
Option Plan. The options have an exercise price of $1.01-$1.02 per share,  which
was the fair market value as of the date of the grant.

     Compensation Committee Interlocks and Insider Participation in Compensation
Decisions

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

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

Compensation Committee Report

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

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

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

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

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

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

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

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

Base Salary

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

Short-Term Incentives

     Short-term  incentives are paid primarily to recognize  specific  operating
performance  achieved within the last fiscal year. Since such incentive payments
are related to a specific  year's  performance,  the Committee  understands  and
accepts that such payments may vary  considerably from one year to the next. The
Company's bonus program generally ties executive  compensation  directly back to
the annual performance of both the individual executive and the Company overall.
Those  executives  not signatory to an  employment  agreement are able to earn a
percentage of their base salary as a  performance-related  bonus. Where there is
an  employment  agreement,  an  executive  may earn a  percentage  of their base
salary,   pursuant   to  the   Company's   annual   incentive   program,   as  a
performance-related  bonus.  The bonuses paid during  fiscal 2004 relate to such
employment  agreements,  as amended,  with Paul  Gallagher the  Company's  Chief
Executive  Officer  and  Beverly  Eichel,  its  Vice  President  -  Finance  and
Administration, Chief Financial Officer and Secretary.

Long-Term Incentives

     In  order  to  align  long-term   executive   compensation  with  long-term
stockholder  value  improvements,  the  Committee  has from time to time awarded
stock option grants to executives of the Company in  recognition of the value of
these grants in motivating  long-term  strategic  decision making. The Company's
long-term  performance  ultimately  determines  compensation  from stock options
because stock option value is entirely  dependent on the long-term growth of the
Company's  Common  Stock price.  During the fiscal year ended  January 29, 2005,
190,000 stock options were granted to the Company's senior  executive  officers.
During the fiscal year ended  January 31, 2004, no stock options were granted to
the Company's senior executive officers.

Chief Executive Officer

     Mr.  Gallagher's  base  salary  and  long-term  incentive  compensation  as
described  in his  employment  agreement  were  determined  by the  Compensation
Committee  with input and guidance from an outside  compensation  consultant and
are based upon the same factors as those used by the Compensation  Committee for
executives in general.

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

<PAGE>

                             COMPENSATION COMMITTEE:

                          Marvin Broitman (Chairperson)
                               Mary Ann Domuracki
                                  Chris Davino
Stock Option Plans

     The Company  maintains two stock option plans  pursuant to which options to
purchase  an  aggregate  of  1,984,375  shares  of Class A Common  Stock  may be
granted.

     1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the Board
of  Directors  in  December  1993 and was  approved by the  stockholders  of the
Company in July 1994 (the "1993 Plan"). The 1993 Plan, as amended, currently has
1,750,000  shares of Class A Common Stock reserved for issuance upon exercise of
options  designated as either (i) incentive  stock  options  ("ISOs")  under the
Internal  Revenue Code of 1986, as amended (the "Code"),  or (ii)  non-qualified
options.  ISOs may be granted  under the 1993 Plan to employees  and officers of
the  Company.  Non-qualified  options may be granted to  consultants,  directors
(whether or not they are employees), employees or officers of the Company.

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

     1994  Non-Employee  Director  Stock  Option  Plan.  The  1994  Non-Employee
Director Stock Option Plan, as amended,  (the  "Directors  Plan") was adopted by
the Board of Directors in September 1994 and was approved by the stockholders of
the  Company in June 1995.  The  Directors  Plan has  234,375  shares of Class A
Common  Stock  reserved  for  issuance.  Pursuant  to the  current  terms of the
Directors Plan, each independent  unaffiliated  Director shall  automatically be
granted,  subject to  availability,  without any further  action by the Board of
Directors or the Stock Option Committee:  (i) a non-qualified option to purchase
10,000  shares  of Class A Common  Stock  upon  their  election  to the Board of
Directors;  and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders  following their
election to the Board of  Directors.  The  exercise  price of each option is the
fair market  value of the  Company's  Class A Common Stock on the date of grant.
Each option  expires five years from the date of grant and vests in three annual
installments of 33 1/3% each on the first,  second and third  anniversary of the
date of grant.  Options  granted  under the  Directors  Plan are  generally  not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and  distribution.  In the event an optionee ceases to
be a  member  of the  Board  of  Directors  (other  than by  reason  of death or
disability),  then the non-vested portion of the option  immediately  terminates
and  becomes  void and any vested but  unexercised  portion of the option may be
exercised  for a period  of 180 days from the date the  optionee  ceased to be a
member of the Board of Directors.  In the event of death or permanent disability
of an optionee, all options accelerate and become immediately  exercisable until
the scheduled expiration date of the option. The plan expired in September 2004.

     Voluntary  Stock Option  Cancellation  Program.  The price of the Company's
Class A Common  Stock has been  depressed  for some  time.  As  compared  to the
exercise  price  on most  incentive  stock  options,  the  market  price  of the
Company's  Common Stock is and has been for some time  significantly  lower than
the exercise  price of most  incentive  stock options issued to employees of the
Company.  To restore the incentive  value for which the  Company's  stock option
plans were  established,  the Board of Directors  during  fiscal 2002 approved a
limited stock option voluntary cancellation program (the "Program"). The Program
afforded the opportunity for employees,  officers and directors  holding options
to turn them into the  Company  for  cancellation.  At the time the  program was
implemented, no new options were issued to employees who turned their options in
for  cancellation.  The Company  intends to evaluate the option  holdings by its
employees as a whole on an on-going  basis and decide whether new options to its
employees who have turned in their current options at the then fair market value
of the  Company's  Class A common  stock are  warranted  (or 110% of fair market
value in the case of  persons  holding  10% or more of the  voting  stock of the
Company).

     2003 Stock Option Plan. The 2003 Plan was adopted by the Board of Directors
in May 2003 and was  approved  by the  stockholders  of the Company in July 2003
(the "2003 Plan").  The 2003 Plan  currently has 750,000  shares of Common Stock
reserved for  issuance  upon the  exercise of options  designated  as either (i)
incentive  stock options  ("ISOs")  under the Code or (ii)  non-qualified  stock
options.  ISOs may be granted  under the 2003 Plan to employees  and officers of
the  Company.  Non-qualified  options may be granted to  consultants,  directors
(whether or not they are  employees),  employees or officers of the Company.  In
certain circumstances,  the exercise of stock options may have an adverse effect
on the market price of the Company's Common Stock.

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

     2004 Non-Employee  Director Stock Option Plan. The 2004 Plan was adopted by
the Board of Directors in August 2004. The 2004 Plan reserves  148,042 shares of
Class A Common Stock for issuance to the Company's  independent and unaffiliated
directors.  Pursuant to the terms of the 2004 Plan, as proposed each independent
and  unaffiliated   director  shall   automatically   be  granted,   subject  to
availability,  without any further action by the Board of Directors or the Stock
Option Committee:  (i) a non-qualified option to purchase 10,000 shares of Class
A Common  Stock upon  their  initial  election  or  appointment  to the Board of
Directors;  and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders  following their
election or  appointment  to the Board of Directors.  The exercise price of each
option is the fair market  value of the  Company's  Class A Common  Stock on the
date of grant.  Each option  expires five years from the date of grant and vests
in three  annual  installments  of 33 1/3% each on the  first,  second and third
anniversary  of the date of grant.  Options  granted  under the 2004 Plan  would
generally  not be  transferable  during  an  optionee's  lifetime  but  would be
transferable at death by will or by the laws of descent and distribution. In the
event an optionee ceases to be a member of the Board of Directors (other than by
reason of death or disability),  then the non-vested portion of the option would
immediately  terminate and become void and any vested but unexercised portion of
the option may be exercised  for a period of 180 days from the date the optionee
ceased  to be a member  of the  Board  of  Directors.  In the  event of death or
permanent  disability  of  an  optionee,   all  options  accelerate  and  become
immediately exercisable until the scheduled expiration date of the option.

Stock Performance Graph/Table

     The  Company  believes  that  it is  the  only  publicly-held  firm  in the
embroidery  equipment  industry,  and  therefore  does not  believe  that it can
reasonably  identify an embroidery  industry-based  peer group.  The Company has
elected to define a peer group based on a group of five industrial distributors,
trading in similar SIC Codes,  with relatively low market  capitalization  for a
benchmark.  The following  graph and table compares the change in the cumulative
total stockholder return for the five-year period beginning on January 31, 2001,
and ending on January 31,  2005,  based upon the market  price of the  Company's
Class A Common Stock,  with the cumulative  total return of the NASDAQ Composite
Index  and the  defined  Peer  Group.  The Peer  Group  includes  the  following
companies:  Lancer Corp.; Quipp Inc.; Paul Mueller Company; Oilgear Company; and
Key Technology  Inc. The graph assumes a $100  investment on January 31, 2001 in
each of the  indices and the  reinvestment  of any and all  dividends.  [GRAPHIC
OMITTED][GRAPHIC OMITTED]

<PAGE>

<TABLE>
<CAPTION>

Comparison of Five-Year Cumulative Total Return Among
Hirsch International Corp., NASDAQ Composite Index and an
Industry-based Market Capitalization-Based Peer Group
-------------------------------------------------------


                                              1/31/01         1/31/02         1/31/03         1/31/04        1/31/05
                                              -------         -------         -------         -------        -------

<S>                                             <C>             <C>             <C>            <C>             <C>
Hirsch International Corp.                      $100            $49             $42            $225            $99
NASDAQ Composite Index                          100             70              48              75             74
Peer Group                                      100             75              79              106            90
</TABLE>

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

The following table sets forth the beneficial ownership of shares of Class A
Common Stock and Class B Common Stock as of April 22, 2005, by (i) each person
who owns more than 5% of the outstanding shares of Class A and Class B Common
Stock; (ii) each executive officer and director of the Company; and (iii) all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>

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

<S>                                               <C>                                <C>                            <C>
Henry Arnberg.................                   Class A                         981,658                        12.4%
                                                 Class B                         500,018 (3)                      91%

Paul Levine......................                Class A                       1,074,621(4)                     13.6%
                                                 Class B                            -                             -

Paul Gallagher.................                  Class A                         653,332(8)                      8.3%
                                                 Class B                            -                             -

Marvin Broitman..............                    Class A                          81,498 (5)                     1.0%
                                                 Class B                            -                             -

Mary Ann Domuracki........                       Class A                          23,333 (6)                      *
                                                 Class B                            -                             -

Christopher Davino.....                          Class A                           3,333 (7)                      *
                                                 Class B                            -                             -

Beverly Eichel.......                            Class A                         202,166 (9)                     2.6%
                                                 Class B                            -                             -

All Officers and Directors as a group            Class A                       3,019,941                        38.2%
(six persons)                                    Class B                         500,018                          91%

<FN>

*    Less than one percent

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

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

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

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

(5)  Includes  options to purchase  10,000  shares of Class A Common Stock at an
     exercise  price of  $0.96,  11,499  shares  of  Class A Common  Stock at an
     exercise  price of  $0.27,  6,666  shares  of  Class A  Common  Stock at an
     exercise  price of $0.92 per share and options to purchase  3,333 shares of
     Class A Common Stock at an exercise price of $1.02 per share. Also includes
     warrants to  purchase  50,000  shares of Class A Common  Stock at $0.50 per
     share.  Does not include  options to purchase  834 shares of Class A Common
     Stock at an exercise  price of $0.27,  options to purchase  3,334 shares of
     Class A Common Stock at an exercise  price of $0.92 per share and option to
     purchase 6,667 shares of Class A Common Stock at an exercise price of $1.02
     per share.

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

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

(8)  Includes options to purchase 100,000,  183,332 and 75,000 shares of Class A
     Common  Stock at an  exercise  price of  $0.95,  $0.27  and $1.12 per share
     respectively.  Does not  include  options to  purchase  116,668  and 75,000
     shares of Class A Common Stock at an exercise  price of $0.27 and $1.12 per
     share, respectively.

(9)  Includes options to purchase  50,000,  102,166 and 20,000 shares of Class A
     Common  Stock at an  exercise  price of  $0.52,  $0.27  and $1.12 per share
     respectively. Does not include options to purchase 65,334 and 20,000 shares
     of Class A Common Stock at an exercise  price of $0.27 and $1.12 per share,
     respectively.
</FN>
</TABLE>

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     Effective  October 31, 2002,  the Company  completed the sale of all of the
outstanding equity interests in its wholly-owned subsidiary,  Pulse Microsystems
Ltd.  ("Pulse"),  pursuant to the terms of the purchase agreement by and between
Hirsch and 2017146 Ontario Limited.  All periods presented have been restated to
reflect  the  discontinue  operations  of Pulse (See Note 7 to the  Consolidated
Financial Statements).

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

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

     Prior to January 2003, the Company had advanced  approximately $496,000 for
premiums  on split  dollar  life  insurance  for Henry  Arnberg,  the  Company's
Chairman and Paul Levine,  the former  Vice-Chairman of the Board. The spouse of
each  Messrs.  Arnberg  and Levine  are the  beneficiaries  of these  respective
policies.  These advances are  collateralized by the cash surrender value of the
policies,  which totaled in the aggregate  approximately $555,000 at January 29,
2005 for both policies. The premiums for these policies are currently being paid
out of the accumulated dividends for the policies.

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

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

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

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  following  table  sets  forth  the fees paid to BDO  Seidman,  LLP for
professional  services for each of the two fiscal  years ended  January 29, 2005
and January 31, 2004:

                                           2005                   2004
                                           ----                   ----
                                     ------------------     ------------------
Audit Fees...........................    $172,500               $175,000
Audit-Related Fees...................     26,000                 29,000
Tax Fees.............................     33,000                 55,000
                                     ------------------     ------------------
                                        $231,500               $259,000
                                     ==================     ==================

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

         Audit-Related Fees include fees billed for (a) consultation on
accounting matters and (b) the audit of an employee benefit plan.

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

     The Audit  Committee  negotiates  the annual  audit fee  directly  with the
Company's  independent  registered  Public Accounting firm. The Audit Committee
has also established  pre-approved  services for which the Company's  management
can engage the Company's independent registered Public Accounting firm. Any work
in addition to these  pre-approved  services in a quarter  requires  the advance
approval  of the Audit  Committee.  The Audit  Committee  considers  whether the
provision of permitted  non-audit  services is compatible  with  maintaining BDO
Seidman, LLP's independence. PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


The following documents are filed as part of this report:

 (a)(1) All financial statements                           Page(s)
 -------------------------------                           -------

 Index to Consolidated Financial
 Statements..................................................F-1
 Report of Independent Registered Public Accounting
 Firm....................................................... F-2
 Consolidated Balance
 Sheets......................................................F-3 to F-4
 Consolidated Statements of
 Income......................................................F-5
 Consolidated Statements of Stockholders'
 Equity......................................................F-6
 Consolidated Statements of Cash
 Flows.......................................................F-7
 Notes to Consolidated Financial
 Statements..................................................F-8 to F-26
 Exhibits....................................................F-27 to F-32

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

                                                             EXHIBIT INDEX
                                                             -------------

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

  %3.1    Restated Certificate of Incorporation of the Registrant

  ^3.2    Amended and Restated By-Laws of the Registrant

  *4.1    Specimen of Class A Common Stock Certificate

  *4.2    Specimen of Class B Common Stock Certificate

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

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

+++10.3   1993 Stock Option Plan, as amended

***10.4   2003 Stock Option Plan

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

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

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

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

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

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

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

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

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

21.1      List of Subsidiaries of the Registrant

23.1      Independent Registered Public Accounting Firm Consent

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

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

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

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

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

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

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

         @ Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended July 31, 2004.

         + Incorporated by reference from Registrant's Form 10-K filed for the
year ended January 31, 2004.

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

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

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

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

       *** Incorporated by reference from Registrant's definitive proxy
statement filed with the Commission on June 2, 2003.

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

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

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

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


                                   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/Paul Gallagher
                                       ----------------------
                                       Paul Gallagher, President
                                       Chief Executive Officer and Chief
                                       Operating Officer
Dated:  April 29, 2005

         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.

Signature               Title
---------               -----

/s/ Henry Arnberg       Chairman of the Board of Directors
Henry Arnberg

/s/ Paul Gallagher      President, Chief Executive Officer (Principal
Paul Gallagher          Executive Officer), Chief Operating Officer and
                        Director

/s/ Beverly Eichel     Vice President-Finance and Administration, and Chief
 Beverly Eichel         Financial Officer (Principal Accounting and Financial
                        Officer), Secretary

/s/ Daniel Vasquez      Corporate Controller
Daniel Vasquez

/s/ Marvin Broitman     Director
Marvin Broitman

/s/ Mary Ann Domuracki  Director
Mary Ann Domuracki

/s/ Christopher Davino  Director
Christopher Davino


<PAGE>


                          INDEX TO FINANCIAL STATEMENTS
                           HIRSCH INTERNATIONAL CORP.


Report of Independent Registered Public Accounting Firm                 F-2

Consolidated Financial Statements

         Balance Sheets as of January 29, 2005 and January 31, 2004     F-3-F-4

         Statements of Operations for the years ended
                  January 29, 2005, January 31, 2004 and 2003           F-5

         Statements of Stockholders' Equity for the years ended
                  January 29, 2005, January 31, 2004 and 2003           F-6

         Statements of Cash Flows for the years ended
                  January 29, 2005, January 31, 2004 and 2003           F-7

         Notes to the Consolidated Financial Statements                 F-8-F-26




<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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


     We have  audited the  accompanying  consolidated  balance  sheets of Hirsch
International  Corp.  and  subsidiaries  as of January  29, 2005 and January 31,
2004,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three  years in the period  ended  January
29, 2005.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of Hirsch
International  Corp.  and  subsidiaries  as of January  29, 2005 and January 31,
2004,  and the results of their  operations and their cash flows for each of the
three years in the period ended January 29, 2005, in conformity  with accounting
principles generally accepted in the United States of America.




/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Melville, New York
April 15, 2005, except for Note 16 which is as of April 20, 2005


<PAGE>



                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


                                                                                JANUARY 29,                       JANUARY 31,
ASSETS                                                                               2005                             2004
                                                                          ----------------------------     -------------------------

CURRENT ASSETS:
<S>                                                                               <C>                               <C>
   Cash and cash equivalents                                                      $6,398,000                        $8,963,000
   Restricted cash (Note 2c)                                                       5,650,000                         3,000,000

   Accounts receivable, net of an allowance for possible losses of
   $630,000 and $680,000, respectively (Notes 4 and 15c)                           4,914,000                         6,562,000
   Inventories, net (Notes 3, 4 and 15c)                                           5,776,000                         6,922,000
   Other current assets                                                              393,000                           264,000
   Assets of discontinued operations (Note 7)                                        831,000                         1,339,000
                                                                          ----------------------------     -------------------------
                          Total current assets                                    23,962,000                        27,050,000
                                                                          ----------------------------     -------------------------

PROPERTY, PLANT AND EQUIPMENT, Net (Note 6)                                        1,949,000                         2,397,000
ASSETS OF DISCONTINUED OPERATIONS (Note 7)                                                 -                             22,000
OTHER ASSETS (Note 8)                                                                715,000                           877,000
                                                                          ----------------------------     -------------------------
                              TOTAL ASSETS                                       $26,626,000                       $30,346,000
                                                                          ============================     =========================
</TABLE>


See notes to consolidated financial statements.


<PAGE>



                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                JANUARY 29,                    JANUARY 31,
LIABILITIES AND STOCKHOLDERS' EQUITY                                               2005                            2004
                                                                            ---------------------         ---------------------

CURRENT LIABILITIES:

<S>                                                                                     <C>                            <C>
   Trade acceptances payable (Note 15(d))                                                    $0                   $ 1,324,000
   Accounts payable and accrued expenses (Note 9)                                     8,346,000                     8,150,000
   Capitalized Lease Obligation - short term (Note 10)                                  148,000                       123,000
   Deferred Gain - short term (Note 10)                                                 119,000                       119,000
   Customer deposits and other                                                          585,000                       383,000
   Liabilities of discontinued operations (Note 7)                                    1,495,000                     2,253,000
                                                                            ---------------------         ---------------------
                  Total current liabilities                                          10,693,000                    12,352,000

CAPITALIZED LEASE OBLIGATIONS - Less current maturities (Note 10)                     1,270,000                     1,418,000
DEFERRED GAIN - (Note 10)                                                               608,000                       728,000
                                                                            ---------------------         ---------------------
                                                                                     12,571,000                    14,498,000
   Total liabilities
                                                                            ---------------------         ---------------------
COMMITMENTS AND CONTINGENCIES (Note 15)

STOCKHOLDERS' EQUITY (Note 12): Preferred stock, $.01 par value; authorized:
   1,000,000 shares; issued: none                                                             -                             -
   Class A common stock, $.01 par value; authorized: 20,000,000 shares;
   issued and outstanding; 9,002,149 and 6,827,000 shares respectively                   90,000                        68,000
   Class B common stock, $.01 par value; authorized: 3,000,000 shares,
   outstanding: 600,018 and 2,668,000 shares, respectively                                6,000                        27,000
   Additional paid-in capital                                                        41,465,000                    41,408,000
   Accumulated deficit                                                               (25,489,000)                (23,638,000)
                                                                            ---------------------         ---------------------
                                                                                     16,072,000                    17,865,000
   Less: Treasury Class A Common stock at cost 1,164,000 shares (Note 13)             2,017,000                     2,017,000
                                                                            ---------------------         ---------------------
        Total stockholders' equity                                                   14,055,000                    15,848,000
                                                                            ---------------------         ---------------------
                                                                                    $26,626,000                   $30,346,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                            =====================         =====================

See notes to consolidated financial statements.
</TABLE>


<PAGE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                                          Years Ended
                                                                    January 29,        January 31,        January 31,
                                                                        2005               2004              2003
                                                                        ----               ----              ----
<S>                                                                   <C>               <C>               <C>
NET SALES                                                             $43,641,000       $46,449,000       $42,723,000

COST OF SALES (Note 15d)                                               29,574,000        31,120,000        29,490,000
                                                                   ----------------    --------------    --------------
                                                                       14,067,000        15,329,000        13,233,000
GROSS PROFIT
                                                                   ----------------    --------------    --------------

OPERATING EXPENSES
    Selling, general and administrative expenses                       15,874,000        18,204,000        16,793,000
    Restructuring costs (income) (Note 9)                                       -         (716,000)                 -
                                                                   ----------------    --------------    --------------
                  Total operating expenses                             15,874,000        17,488,000        16,793,000
                                                                   ----------------    --------------    --------------

OPERATING LOSS                                                        (1,807,000)       (2,159,000)       (3,560,000)
                                                                   ----------------    --------------    --------------

OTHER INCOME  (EXPENSE)
    Interest expense                                                    (185,000)         (215,000)         (259,000)
    Other income (expense) - net                                        (147,000)           349,000           368,000
                                                                   ----------------    --------------    --------------
                  Total other income (expense)                          (332,000)           134,000           109,000
                                                                   ----------------    --------------    --------------
                                                                      (2,139,000)       (2,025,000)       (3,451,000)
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES, AND DISCONTINUED OPERATIONS

INCOME TAX PROVISION (BENEFIT) (Note 11)                                    9,000            25,000         (504,000)
                                                                   ----------------    --------------    --------------

LOSS FROM CONTINUING OPERATIONS                                       (2,148,000)       (2,050,000)       (2,947,000)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS - NET (Note 7)
(Includes $943,000 gain on
sale of Hometown Threads for fiscal 2005)                                376,000         2,494,000       (2,603,000)
                                                                   ----------------    --------------    --------------
                                                                     $(1,772,000)          $444,000      ($5,550,000)
NET INCOME (LOSS)
                                                                   ================    ==============    ==============

LOSS PER SHARE:
    Basic and diluted:
    Loss from continuing operations                                       ($0.26)           ($0.24)           ($0.34)

    Income (loss) from discontinued operations                               0.05              0.29            (0.30)
                                                                   ----------------    --------------    --------------
                                                                          ($0.21)             $0.05           ($0.64)
    Net income (loss)
                                                                   ================    ==============    ==============

WEIGHTED AVERAGE NUMBER OF SHARES IN THE CALCULATION OF
INCOME (LOSS) PER SHARE
    Basic and diluted                                                   8,351,000         8,571,000         8,789,000
                                                                   ================    ==============    ==============

See notes to consolidated financial statements.
</TABLE>


<PAGE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             YEARS ENDED JANUARY 29, 2005, JANUARY 31, 2004 AND 2003
<TABLE>
<CAPTION>

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

<S>                                          <C>                   <C>             <C>               <C>              <C>
BALANCE, JANUARY 31, 2002                     6,815,000             $68,000         2,668,000         $27,000          $41,397,000
  Comprehensive income:                              --                  --                --              --                   --
    Gain on foreign currency translation             --                  --                --              --                   --
    Net loss                                         --                  --                --              --                   --
  Total comprehensive income                         --                  --                --              --                   --
                                        ---------------    ----------------   ---------------    --------------    ----------------
BALANCE, JANUARY 31, 2003                     6,815,000              68,000         2,668,000          27,000           41,397,000
   Exercise of stock options & warrants          12,000                  --                --              --               11,000
   Dividends                                         --                  --                --              --                   --
  Purchase of treasury shares (Note 13)              --                  --                --              --                   --
    Net income                                       --                  --                --              --                   --
                                        ---------------    ----------------   ---------------    --------------    ----------------
BALANCE, JANUARY 31, 2004                     6,827,000              68,000         2,668,000          27,000           41,408,000
   Exercise of stock options & warrants         107,000               1,000                --              --               57,000
   Dividends                                         --                  --                --              --                   --
  Transfers                                   2,068,000              21,000       (2,068,000)        (21,000)                   --
    Net loss                                         --                  --                --              --                   --
                                        ---------------    ----------------   ---------------    --------------    ----------------
BALANCE, JANUARY 29, 2005                     9,002,000              90,000           600,000           6,000           41,465,000
                                        ===============    ================   ===============    ==============    ================
</TABLE>

<TABLE>
<CAPTION>


                                                  Accumulated       Accumulated Deficit        Treasury             Total
                                                     other
                                                 Comprehensive                                   Stock
                                                 Income (Loss)                                 (Note 13)
                                                       (Note 2n)
                                                       --------          --------               --------           --------

<S>                                                       <C>                 <C>                 <C>                 <C>
BALANCE, JANUARY 31, 2002                            $(156,000)          $(18,275,000)       $(1,602,000)        $21,459,000
     Gain on foreign currency translation               156,000                     --                 --            156,000
     Net loss                                                --            (5,550,000)                 --        (5,550,000)
  Total comprehensive income                                 --                     --                 --        (5,394,000)
                                                                                                               ---------------

BALANCE, JANUARY 31, 2003                                    --           (23,825,000)        (1,602,000)        $16,065,000
                                               -----------------    --------------------    ---------------    ---------------
    Exercise of stock options & warrants                     --                     --                 --             11,000
    Purchase of treasury shares (Note 13)                    --                     --          (415,000)          (415,000)
    Dividends                                                --              (257,000)                 --          (257,000)
                                                                                                               ---------------

     Net income                                              --                444,000                 --           $444,000
                                               -----------------    --------------------    ---------------    ---------------
BALANCE, JANUARY 31, 2004                                    --           (23,638,000)        (2,017,000)        $15,848,000
    Exercise of stock options & warrants                     --                     --                 --             58,000
    Dividends                                                --               (79,000)                 --           (79,000)
     Net loss                                                --            (1,772,000)                 --        (1,772,000)
                                               -----------------    --------------------    ---------------    ---------------
BALANCE, JANUARY 29, 2005                                    --          $(25,489,000)       $(2,017,000)        $14,055,000
                                               =================    ====================    ===============    ===============
</TABLE>

See notes to consolidated financial statements.

<PAGE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               YEARS ENDED JANUARY
<TABLE>
<CAPTION>


                                                                    January 29,         January 31,          January 31,
                                                                        2005                2004                 2003
                                                                        ----                ----                 ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>                      <C>              <C>
   Net income (loss)                                                 $(1,772,000)             $444,000         $(5,550,000)
   Adjustments to reconcile net income (loss) to net
        cash provided by (used
   in) operating activities:
   Depreciation and amortization                                          786,000              887,000              809,000
   Gain on sale of assets                                                                     (50,000)
   Recognized gain on sale of building                                  (119,000)            (119,000)            (119,000)
   Provision for reserves                                               (200,000)            (140,000)              410,000
   Deferred income taxes                                                        -                    -            (130,000)
   Minority interest                                                            -              235,000              196,000
   Reversal of restructuring accrual reserves                                   -            (716,000)                    -
   Reversal of lease reserves                                                   -          (2,000,000)                    -
   Gain on sale of subsidiary                                           (943,000)                    -                    -

CHANGES IN ASSETS AND LIABILITIES:
   Accounts receivable                                                  1,838,000          (2,493,000)            4,675,000
   Net investments of sales type leases                                  (85,000)              553,000            5,365,000
   Inventories                                                          1,142,000            1,431,000            2,910,000
   Other current assets and other assets                                (315,000)              453,000          (1,431,000)
   Trade acceptances payable                                          (1,324,000)              355,000          (1,216,000)
   Accounts payable and accrued expenses                                  280,000            1,994,000          (3,718,000)
   Prepaid income taxes and income taxes payable                          (8,000)            3,176,000            3,742,000
                                                                   ---------------    -----------------    -----------------
     Net cash provided by (used in) operating activities                (720,000)            4,010,000            5,943,000
                                                                   ---------------    -----------------    -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                 (166,000)            (552,000)            (547,000)
   Proceeds from sale of fixed assets                                           -              100,000                    -
   Proceeds from sale of subsidiary                                     1,139,000              500,000              530,000
                                                                   ---------------    -----------------    -----------------
     Net cash provided by (used in) investing activities                  973,000               48,000             (17,000)
                                                                   ---------------    -----------------    -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Restricted cash                                                    (2,650,000)          (2,100,000)            (900,000)
   Repayments of long-term debt                                         (147,000)            (123,000)             (83,000)
   Payment of deferred financing costs                                          -                    -            (518,000)
   Exercise of stock options                                               58,000               11,000                    -
   Payment of dividends                                                  (79,000)            (170,000)                    -
   Purchase of treasury shares                                                  -            (415,000)                    -
                                                                   ---------------    -----------------    -----------------
     Net cash used in financing activities                            (2,818,000)          (2,797,000)          (1,501,000)
                                                                   ---------------    -----------------    -----------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                         -                    -              156,000
                                                                   ---------------    -----------------    -----------------
                                                                      (2,565,000)            1,261,000            4,581,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            8,963,000            7,702,000            3,121,000
                                                                   ---------------    -----------------    -----------------
                                                                       $6,398,000           $8,963,000           $7,702,000
CASH AND CASH EQUIVALENTS, END OF YEAR
                                                                   ===============    =================    =================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest and bank fees paid                                           $566,000             $584,000             $515,000
                                                                   ===============    =================    =================
   Income taxes paid                                                      $50,000             $350,000               $9,000
                                                                   ===============    =================    =================
</TABLE>

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

See notes to consolidated financial statements.

<PAGE>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             YEARS ENDED JANUARY 29, 2005, JANUARY 31, 2004 AND 2003

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. through October 31, 2002 (Pulse),  Hirsch
Business Concepts LLC ("HBC"), Hometown Threads LLC ("Hometown") through October
22, 2004, and Tajima USA, Inc.  ("TUI") through January 31, 2004  (collectively,
the "Company").

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

         On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai"),
an affiliate of Tajima, the Company's major supplier, purchased a 45 percent
interest in TUI for $900,000. For financial reporting purposes, the assets,
liabilities and earnings of TUI are consolidated in the Company's financial
statements. Tokai's 45 percent interest in TUI has been reported as minority
interest in the Company's Consolidated Balance Sheet as of January 31, 2003 and
Tokai's share of the earnings had been reported as minority interest in the
Company's Consolidated Statements of Operations for the years ended January 31,
2004 and 2003. As of January 31, 2004 the Company sold its majority position in
TUI to Tajima Industries and its earnings have been reported as discontinued
operations.

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a.       Principles of Consolidation - The consolidated financial
                  statements include the accounts of the Company and its
                  wholly-owned subsidiaries. All material inter-company balances
                  and transactions have been eliminated in consolidation.

         b.       Revenue Recognition - The Company distributes embroidery
                  equipment. Where installation and customer acceptance are a
                  substantive part of the sale, by its terms, the Company has
                  deferred recognition of the revenue until such customer
                  acceptance of installation has occurred. In fiscal years 2005,
                  2004 and 2003, most sales of new equipment did not require
                  installation within the terms of the sales contract; these
                  sales were recorded at the time of shipment, at which time
                  title is transferred to the customer.

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

         c.       Cash Equivalents - Cash equivalents consist of money market
                  accounts with initial maturities of three months or less. As
                  of January 29, 2005, the Company had $5.7 million in
                  restricted cash which was used to collateralize outstanding
                  standby letters of credit. As of January 31, 2004 the Company
                  had $3.0 million in restricted cash which is being used to
                  collateralize outstanding letters of credit due in 90 days.

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

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

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

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

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


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

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

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

k.                Income Taxes - The Company records deferred tax assets and
                  liabilities for the expected future tax consequences of events
                  that have been included in the Company's consolidated
                  financial statements or tax returns. Under this method,
                  deferred tax assets and liabilities are determined based on
                  the differences between the financial accounting and tax bases
                  of assets and liabilities using enacted tax rates in effect
                  for the year in which the differences are expected to reverse.
                  Valuation allowances are established when the Company cannot
                  determine the future utilization of some portion or all of the
                  deferred tax asset.

l.                Income (Loss) Per Share - Basic earnings per share are based
                  on the weighted average number of shares of common stock
                  outstanding during the period. Diluted earnings per share are
                  based on the weighted average number of shares of common stock
                  and dilutive common stock equivalents (options and warrants)
                  outstanding during the period, computed in accordance with the
                  treasury stock method. Outstanding options and warrants of
                  1,253,000, 1,258,000 and 1,218,000 were anti-dilutive for the
                  fiscal years ended January 29, 2005 and January 31, 2004 and
                  2003, respectively.

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

                  The Company follows Statement of Financial Accounting
                  Standards No. 123, "Accounting for Stock-Based compensation,"
                  ("SFAS 123") which requires the disclosure of pro forma net
                  income (loss) and earnings (loss) per share. Under SFAS 123,
                  the fair value of stock-based awards to employees is
                  calculated through the use of option pricing models, even
                  though such models were developed to estimate the fair value
                  of freely tradable, fully transferable options without vesting
                  restrictions, which significantly differ from the Company's
                  stock option awards. These models also require subjective
                  assumptions, including future stock price volatility and
                  expected time to exercise, which greatly affect the calculated
                  values. The Company's calculations were made at the date of
                  the grant using the Black-Scholes option pricing model with
                  the following weighted average assumptions: Fiscal 2005:
                  dividend yield of 0.00%, volatility of 67% and risk free
                  interest rate of 3.72% for grants on 12/1/2004, 77% volatility
                  and 3.40% risk free interest rate for grants on 9/8/2004 and
                  77% volatility and 3.35% risk free rate for grants on
                  9/17/2004. Fiscal 2004: dividend yield of 4.00%, volatility of
                  72%, risk-free interest rate of 2.37% for grants on
                  06/02/2003, 2.14% for grants on 06/16/2003 and 2.63% for
                  grants on 07/09/2003 and an expected life of 5 years; Fiscal
                  2003: dividend yield of 0%, volatility of 79%, risk-free
                  interest rate of 4.48% for employees and 4.07% for
                  non-employees and and expected life of 5 years. The Company's
                  calculations are based on a multiple option valuation approach
                  and forfeitures are recognized as they occur. The weighted
                  average fair value of the options granted during 2005, 2004
                  and 2003 was $1.11, $0.84 and $0.16, respectively.

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


<PAGE>

<TABLE>
<CAPTION>


                                                                    Year Ended
                                                                    ----------
                                           January 29                           January 31
                                           ----------                           ----------
                                              2005                     2004                    2003
                                              ----                     ----                    ----

Net income (loss):
<S>                                       <C>                        <C>                   <C>
  Net income (loss) as reported           $(1,772,000)               $444,000              $(5,550,000)

Deduct Total stock-based employee
compensation expense determined
under fair value method                      103,000                  70,000                  82,000
                                       --------------------     --------------------    --------------------
  Pro forma net income (loss)             $(1,875,000)               $374,000              $(5,632,000)
                                       ====================     ====================    ====================
Basic and diluted net income (loss) per share:
  As reported                                $(0.21)                   $0.05                  $(0.63)
  Pro forma                                  $(0.22)                   $0.04                  $(0.64)
</TABLE>

         n.       Comprehensive Income - Statement of Financial Accounting
                  Standards No. 130. "Reporting Comprehensive Income" ("SFAS
                  130"). This statement established rules for reporting
                  comprehensive income and its components. Comprehensive income
                  consists of net income (loss) and, in fiscal 2003 only,
                  foreign exchange translation adjustments related to Pulse
                  Canada and is presented in the consolidated statements of
                  stockholders' equity.

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

         p.       Fair Value of Financial Instruments - Financial instruments
                  consist primarily of investments in cash, cash equivalents,
                  trade account receivables, accounts payable and debt
                  obligations. Where quoted market prices are not available,
                  fair values are estimated based on assumptions concerning the
                  amount and timing of estimated future cash flow and assumed
                  discount rates reflecting varying degrees of credit risk, at
                  January 29, 2005 and January 31, 2004, the fair value of the
                  Company's financial instruments approximated the carrying
                  value.

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

                  In December 2004, the FASB issued SFAS 123R, "Share-Based
                  Payment." This statement is a revision of SFAS 123,
                  "Accounting for Stock-Based Compensation" and supercedes APB
                  25, "Accounting for Stock Issued to Employees," and is
                  effective beginning the first annual or interim period after
                  December 15, 2005. SFAS 123R establishes standards on
                  accounting for transactions in which an entity obtains
                  employee services in share-based payment transactions. This
                  statement measurement of the cost of employee services
                  received in exchange for an award of equity instruments based
                  on the grant-date fair value of the award. The cost will be
                  recognized over the period during which an employee is
                  required to provide service in exchange for the award, which
                  is usually the vesting period. SFAS 123R also addresses
                  transactions in which an entity incurs liabilities in exchange
                  for goods or services that are based on the fair value of the
                  entity's equity instruments or that may be settled by the
                  issuance of those equity instruments. The adoption of this
                  statement is not expected to have a material effect on our
                  financial position or results of operations. We intend to
                  implement this statement in the first quarter of fiscal 2006.

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

         r.       Reclassifications - As a result of discontinued operations,
                  certain reclassifications have been applied to prior year
                  amounts to conform to current year presentation.

         s.       Shipping and handling expenses - The Company records shipping
                  and handling expenses in operating expenses on the statement
                  of operations. These expenses were approximately; $934,000,
                  $974,000 and $1,012,000 during the years ended January 29,
                  2005, January 31, 2004, and 2003, respectively. Amounts billed
                  to customers were immaterial for all periods presented.

         t.       Advertising expenses - The Company expenses advertising as
                  incurred. These expenses were approximately; $673,000,
                  $608,000 and $455,000 during the years ended January 29, 2005,
                  January 31, 2004, and 2003, respectively

3.       INVENTORIES

                                       January 29,           January 31,
                                          2005                 2004
                                       ---------------  -------------------

New machines                               $3,824,000           $5,194,000
Used machines                                 566,000              344,000
Parts and accessories                       2,979,000            2,966,000
Less reserve for slow-moving inventory    (1,593,000)          (1,582,000)
                                       ---------------  -------------------
Total                                      $5,776,000           $6,922,000
                                       ---------------  -------------------


4. CHANGES IN RESERVES

Allowance for Doubtful Accounts:
<TABLE>
<CAPTION>

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

<S>                                     <C>             <C>               <C>              <C>              <C>
     Year ended January 29, 2005    $  680,000      $        0        $     0        $  (50,000)      $  630,000

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

     Year ended January 31, 2003    $2,893,000       $151,000       $(1,593,000)          0           $1,451,000


     Inventory Reserve

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

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

     Year ended January 31, 2003    $2,185,000       $259,000       $  (498,000)     $   0            $1,946,000

     Warranty Reserve

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

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

     Year ended January 31, 2003    $ 543,000        $245,749       $    0           $  (245,749)     $  543,000
</TABLE>



During fiscal 2005, the Company reversed $200,000 in Accounts Receivable
reserves that were no longer necessary. During fiscal 2004, the Company reversed
$444,000 in inventory reserves that were no longer necessary.


<PAGE>


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

                                                                  January 29,             January 31,
                                                               -------------------- -------------------
                                                                      2005                2004
                                                               -------------------- -------------------
<S>                                                                      <C>                <C>
Total minimum lease payments receivable                                  $228,000           $ 423,000
Estimated residual value of leased property (unguaranteed) (A)            461,000             853,000
Reserve for estimated uncollectible lease payments                        (50,000)             (94,000)
Less: Unearned income                                                     (56,000)             (79,000)
                                                               -------------------- -------------------
Net investment - Included in Assets of discontinued operations           $583,000          $1,103,000
(See Note 7)
                                                               ==================== ===================
</TABLE>


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


6. PROPERTY, PLANT AND EQUIPMENT

                                          January 29,           January 31,
                                            2005                   2004
                                         ---------------- -- -----------------
Property Under Capital Lease Obligation       $1,786,000           $1,786,000
Software                                         614,000              576,000
Machinery and equipment                        5,239,000            5,182,000
Furniture and fixtures                         2,042,000            1,986,000
Automobiles                                       35,000              294,000
Leasehold improvements                           594,000              583,000
                                         ----------------    -----------------
Total                                         10,310,000           10,407,000
Less: Accumulated depreciation
 and amortization                             (8,361,000)          (8,010,000)
                                         ----------------    -----------------
Property, plant and equipment, net            $1,949,000           $2,397,000
                                         ================    =================


7. DISCONTINUED OPERATIONS

         In the fourth quarter of Fiscal 2002, the Company determined that its
HAPL Leasing subsidiary was not strategic to the Company's ongoing objectives
and discontinued its operations. Accordingly, the Company reported its
discontinued operations in accordance with SFAS 144. The consolidated financial
statements have segregated the assets, liabilities and operating results of
these discontinued operations for all periods presented. Management intends to
sell the net assets by January 2006.


         The operating loss in fiscal 2003 includes a reserve of $4 million as
an additional provision for the liquidation of the lease portfolio. In July
2003, the Company entered into a transaction whereby the Company assigned its
interest in the remaining Ultimate net loss lease portfolios from the CIT Group
to Beacon Funding. As part of this transaction, the Company sold to Beacon
Funding Corporation the residual receivables associated with the lease portfolio
for approximately $375,000. The Company reversed as part of discontinued
operations, $2.0 million of reserves recorded in fiscal 2002 associated with the
UNL lease portfolio. The transaction closed in September 2003.

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

                                                              For the year ended,
                                                       January 29,             January 31,
                                                           2005                   2004
                                                    -------------------      ----------------

Assets:
<S>                                                         <C>                      <C>
Accounts receivable                                         $   92                   $    0
Minimum lease payments receivable and
residuals (Note 5)                                             583                    1,103
Inventory                                                        0                       23
Prepaid taxes and other assets                                   8                       11
                                               -------------------         ----------------
Total Assets                                                $  683                   $1,137
                                               ===================         ================

Liabilities:
Accounts payable and accrued expenses                       $1,009                   $1,548
Income taxes payable                                            87                       87
                                               -------------------         ----------------
Total Liabilities                                           $1,096                   $1,635
                                               ===================         ================
</TABLE>
<PAGE>


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

                                                              For the year ended
                                 January 29,       January 31,      January 31,
                                     2005             2004              2003
                                     ----             ----              ----
Revenue .........................     $107             $ 619            $1,554
Gross profit.....................       85               278               128
Income (loss) from discontinued
operations.......                     $ 0             $2,000           $(4,000)

         Effective October 31, 2002, Hirsch International Corp. ("Hirsch")
completed the sale of all of the outstanding equity interests in its
wholly-owned subsidiary, Pulse Microsystems Ltd. ("Pulse"), pursuant to the
terms of the purchase agreement by and between Hirsch and 2017146 Ontario
Limited ("Purchaser") dated as of October 31, 2002 (the "Agreement").

         Pursuant to the Agreement, Hirsch sold all of its equity interests in
Pulse to the Purchaser for an aggregate consideration of $5.0 million which was
paid as follows: (a) $0.5 million cash, (b) a $0.5 million note payable in 11
quarterly installments beginning April 30, 2003 and including interest accruing
on the principal balance at the rate of US Prime +1% per annum, which note was
paid in full in March 2003 and (c) the assumption of $4.0 million of Hirsch
obligations. The sale price was at Pulse's book value so there was no gain or
loss recorded on the sale. All periods presented reflect the discontinued
operations of Pulse.

Summary operating results of the discontinued operations of Pulse Microsystems,
Ltd are as follows (in thousands):

                                          For the year ended January 31,
                                             2003
                                             ----
Revenue...................................   $3,731
Gross profit..............................    2,510
Income (loss) from discontinued operations   $  328

         In November 2003, the Company was notified by Tajima that it had an
interest to purchase the Company's interest in TUI effective January 31, 2004.
Effective January 31, 2004, the Company executed an agreement with Tajima
Industries, Ltd. ("Tajima") pursuant to which the Company sold all of the common
stock (the "Shares") constituting a 55% equity interest of its TUI subsidiary
owned by it to Tajima, upon the terms and conditions set forth in a certain
Purchase and Sale Agreement by and among the Company, Tajima and TUI (the
"Agreement"). Upon the consummation of the sale, Tajima owned 100% of TUI and
the Company no longer had an influence over the operations of TUI. TUI is
reflected as discontinued operations in the financial statements.

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

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

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

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

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

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


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

                                                   For the year ended
                                              January 31,     January 31,
                                                  2004            2003
                                              -------------- ---------------
    Revenue                                       $13,228        $12,433
    Gross profit                                    1,812          1,506
    Income (Loss) from Discontinued Operations       $965         $1,068

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

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

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

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

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

                                               January 29,        January 31,
                                                   2005               2004
                                             -----------------  ----------------
    Assets:
    Accounts receivable                               148                26
    Property, Plant & Equipment                        -                 22
    other Assets                                       -                176
                                             -----------------  ----------------
    Total Assets                                    $ 148             $ 224
                                             =================  ================

    Liabilities:
    Accounts payable and accrued expenses           $ 399              $ 618
                                             -----------------  ----------------
    Total Liabilities                               $ 399              $ 618
                                             =================  ================

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

                                                        For the year ended
                                     January 29     January 31,     January 31,
                                        2005            2004            2003
                                     ------------- ---------------- ------------
                                         $1,425           $1,693        $1,571
    Gross profit                            646              867           874
    Gain on Sale                            943                0             0
    Income (Loss) from Discontinued       $(567)           $(471)           $ 1
        Operations



8. OTHER ASSETS

                                             January 29,         January 31,
                                                2005                2004
                                           ----------------    ----------------
 Deferred financing costs (1)                     $527,000          $1,162,000
 Officers Loans Receivable (2)                     496,000             496,000
 Other                                              61,000              47,000
                                           ----------------    ----------------
 Total other assets                             $1,084,000          $1,705,000

 Accumulated amortization of Long Term
 Other Assets                                  $ (369,000)         $ (828,000)
                                           ----------------    ----------------

 Other Assets, net                               $ 715,000            $877,000
                                           ================    ================

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

                 (2) Related to split dollar life insurance policy on 2 officers
                     of the Company. The Company no longer pays the premiums on
                     the policies which are collateralized by the cash surrender
                     value of the policies of $555,000 at January 29, 2005.
<PAGE>

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                January 29,         January 31,
                                                    2005              2004
                                               ---------------    --------------
Other accrued expenses                              $ 516,000        $1,276,000
Accounts payable                                    6,887,000         1,002,000
Accounts payable to TUI                                     0         4,482,000
Accrued payroll costs                                 400,000           812,000
Accrued warranty                                      543,000           543,000
Accrued commissions payable                                 0            35,000
                                               ---------------    --------------
Total accounts payable and accrued expenses        $8,346,000        $8,150,000
                                               ===============    ==============

                  In the fourth quarter of the year ended January 31, 2002, the
          Company initiated a restructuring plan in connection with its
          continuing operations. During the year ended January 31, 2004, the
          Company reversed, as a reduction of operating expenses, $716,000 of
          restructuring costs associated with the completion of the
          restructuring plan.

10. LONG TERM OBLIGATIONS

                                        January 29,             January 31,
                                            2005                    2004
                                        -----------------    -------------------
                                              $1,418,000             $1,541,000
Obligation Under Capital Lease (A)
Deferred Gain on Sale of Building (B)            727,000                847,000
                                        -----------------    -------------------

    Total                                      2,145,000              2,388,000
Less: Current maturities                       (267,000)              (242,000)
                                        -----------------    -------------------
                                              $1,878,000             $2,146,000
Long-term maturities
                                        =================    ===================

(A) Obligation Under Capital Lease of the Company at January 29, 2005 matures as
follows:


Fiscal Year Ending January 29,
2006                                              $ 306,000
2007                                                316,000
2008                                                325,000
2009                                                335,000
2010                                                345,000
2011 and thereafter                                 385,000
                                              -------------
Total Minimum Lease Payments                     $2,012,000

Less:  Amount representing interest               (594,000)
                                              -------------
                                                  1,418,000
Present value of net minimum lease payments

Less current portion                                148,000
                                              -------------
                                                 $1,270,000
Long term lease obligations
                                              =============

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

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

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


11. INCOME TAXES

         The provision (benefit) for income taxes is based on income (loss)
         before taxes on income and discontinued operations as follows:
<TABLE>
<CAPTION>

                                                                          Years ended
                                                                          -----------
                                              January 29, 2005          January 31, 2004          January 31, 2003
                                              ----------------          ----------------          ----------------

<S>                                             <C>                       <C>                      <C>
Domestic.................................       $(2,139,000)              $(2,025,000)             $(3,451,000)
Foreign - included in discontinued
operations (See Note 7)                                   0                         0                  536,000
                                         ----------------------    ----------------------    ---------------------
                                                 $(2,139,000)              $(2,025,000)             $(2,915,000)
Total...................................
                                         ======================    ======================    =====================
</TABLE>

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

<TABLE>
<CAPTION>

                                                  January 29,            January 31,            January 31,
                                                      2005                  2004                    2003
                                                -----------------     ------------------     -----------------
 Current:
<S>                                                      <C>                    <C>                <C>
   Federal                                               $ -                    $ -                $(504,000)
   State                                                   9,000                 25,000                     -
                                                -----------------     ------------------     -----------------
                                                           9,000                 25,000             (504,000)
Total current
                                                -----------------     ------------------     -----------------

Deferred:
   Federal                                                     -                      -                     -
   State and foreign                                           -                      -                     -
                                                -----------------     ------------------     -----------------
                                                               -                      -                     -
Total deferred:
                                                -----------------     ------------------     -----------------
                                                          $9,000                $25,000            $(504,000)
Total income tax (benefit) provision
                                                =================     ==================     =================
</TABLE>

Tax expense (benefit) of $0, $348,000 and $(381,000), related to discontinued
operations for the years ended January 29, 2005 and January 31, 2004, and 2003,
respectively.

<PAGE>

The tax effects of temporary differences that give rise to deferred income tax
assets and liabilities at January 29, 2005 and January 31,2004 are as follows:
<TABLE>
<CAPTION>

                                                     January 29, 2005                           January 31, 2004
                                                     ----------------                           ----------------
                                                                                       Net Current
                                             Net Current          Net Long-              Deferred              Net Long-
                                            Deferred Tax        Term Deferred              Tax               Term Deferred
                                               Assets             Tax Assets              Assets              Tax Assets
                                           ----------------    -----------------    -------------------    ------------------
<S>                                                <C>                         <C>             <C>                          <C>
Accounts receivable                               $231,000                    $0              $271,000                     $0
Inventories                                        681,000                     0               683,000                      0
Accrued warranty costs                             217,000                     0               217,000                      0
Other accrued expenses                              10,000                     0                10,000                      0
Deferred franchise revenue                               0                     0               169,000                      0
Purchased technologies and goodwill                      0            $1,958,000                     0              2,259,000
Net operating loss                                                   $10,079,000                     0              6,905,000
Reserves for discontinued operations              $377,000                     0               658,000                      0
Gain on sale of building                                 0              $291,000                     0                338,000
                                           ----------------    -----------------     -----------------      -----------------
                                                 1,516,000            12,328,000             2,008,000              9,502,000
Less valuation allowance                       (1,516,000)          (12,328,000)           (2,008,000)            (9,502,000)
                                           ----------------    -----------------    -------------------    ------------------
                                                        $0                    $0                    $0                     $0
                                           ================    =================    ===================    ==================
</TABLE>

A full valuation allowance for such deferred tax assets has been established at
January 29, 2005 and January 31, 2004, since the Company cannot determine the
future utilization of those assets.

Net operating loss carry-forwards expire through 2024.

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

                                                                 Year Ended
                                             January 29,         January 31,          January 31,
                                           ----------------    -----------------    ----------------
                                                2005                 2004                2003
                                           ----------------    -----------------    ----------------
<S>                                           <C>                  <C>                  <C>
Federal statutory income tax rate             (34.0)%              (34.0)%              (34.0)%
State income taxes, net of Federal benefit        -                  1.0                     -
Permanent differences                          (45.0)                 27.3               35.4
Valuation Allowance                              79                  6.9                (16.0)
                                           ----------------    -----------------    ----------------
Effective income tax rate                        0%                   1.2%                (14.6)%
                                           ================    =================    ================
</TABLE>

<PAGE>



12. STOCKHOLDERS' EQUITY

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

b.   Stock  Option Plans - The Company  maintains  two active stock option plans
     pursuant to which an aggregate of  approximately  898,000  shares of Common
     Stock may be granted.

The 1993 Stock Option Plan (the "1993 Plan") has 1,750,000 shares of Common
Stock reserved for issuance upon the exercise of options designated as either
(i) incentive stock options ("ISOs") under the 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 29, 2005, January 31,
2004 and 2003 for the 1993 Plan are summarized below:
<TABLE>
<CAPTION>

                                                        Shares                Exercise              Weighted Average
                                                                             Price Range             Exercise Price
                                                    -----------------    ---------------------    ----------------------
<S>                                                          <C>                 <C>                      <C>
Options outstanding - January 31, 2002                      278,000             $0.95-$17.00                $1.71

   Options canceled                                        (98,000)             $1.00-$17.00                $3.99
   Options issued                                           878,000              $0.27-$0.52                $0.29
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 31, 2003                    1,058,000              $0.27-$1.00                $0.50

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

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

Options exercisable at January 29, 2005                     594,000              $0.27-$2.72                $0.43
                                                    =================    =====================    ======================

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                          Options Outstanding                Options Exercisable

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

<S>                                  <C>                   <C>               <C>                <C>               <C>
       $0.91-$2.72                  5,000                 1.0               $1.81              5,000             $1.81
          $0.95                    100,000                2.0               $0.95             100,000            $0.95
       $0.27-$0.52                 728,000                3.0               $0.29             476,000            $0.30
       $0.72-$0.86                  40,000                4.0               $0.79             13,000             $0.79
                                ----------------                                          ----------------
                                   873,000                                                    594,000
</TABLE>

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

The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") has
approximately 234,000 shares of Common Stock reserved for issuance. Pursuant to
the terms of the Directors Plan, each independent unaffiliated Director shall
automatically be granted, subject to availability, without any further action by
the Board of Directors or the Stock Option Committee: (i) a non-qualified option
to purchase 10,000 shares of Common Stock upon their election to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Common
Stock on the date of each annual meeting of stockholders following their
election to the Board of Directors. The exercise price under each option is the
fair market value of the Company's Common Stock on the date of grant. Each
option has a five-year term and vests in three annual installments of 33-1/3
percent each on the first, second, and third anniversary of the date of grant.
Options granted under the Directors Plan are generally not transferable during
an optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution. In the event an optionee ceases to be a member of the
Board of Directors (other than by reason of death or disability), then the
non-vested portion of the option immediately terminates and becomes void and any
vested but unexercised portion of the option may be exercised for a period of
180 days from the date the optionee ceased to be a member of the Board of
Directors. In the event of death or permanent disability of an optionee, all
options accelerate and become immediately exercisable until the scheduled
expiration date of the option.

Stock option transactions during the years ended January 29, 2005, January 31,
2004 and 2003 for the Directors' Plan are summarized below:
<TABLE>
<CAPTION>

                                                                           Exercise           Weighted Average
                                                        Shares           Price Range           Exercise Price
                                                    ---------------    -----------------    ----------------------
<S>                                                    <C>               <C>                     <C>
Options & Warrants outstanding -                       120,000           $0.50-$0.96                $0.58
January 31, 2002
                                                    ---------------    -----------------    ----------------------
     Options cancelled                                    0                   0                       0
Options issued                                          40,000           $0.27-$0.89                $0.43
                                                    ---------------    -----------------    ----------------------
Options & Warrants outstanding -                       160,000           $0.27-$0.96                $0.54
January 31, 2003
                                                    ---------------    -----------------    ----------------------
Options issued                                          30,000              $0.92                   $0.92
                                                    ---------------    -----------------    ----------------------
Options & Warrants outstanding -
January 31, 2004                                       190,000           $0.27-$0.96                $0.68
                                                    ---------------    -----------------    ----------------------
Options exercised                                      (6,000)              $0.91                   $0.91
Options cancelled                                      (24,000)          $0.27-$0.96                $0.82
                                                    ---------------    -----------------    ----------------------
Options & Warrants outstanding -
January 29, 2005                                       160,000           $0.27-$0.96                $0.54
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 29, 2005                    60,000           $0.27-$0.96                $0.60
                                                    ===============    =================    ======================
Warrants exercisable-January 29, 2005                  100,000              $0.50                   $0.50
                                                    ===============    =================    ======================
</TABLE>

         This plan expired in September 2004.


<PAGE>

<TABLE>
<CAPTION>

                                                          Options Outstanding                   Options Exercisable

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

----------------------------    ----------------    -----------------    -------------    ----------------      --------
<S>                                      <C>                <C>               <C>               <C>                <C>
       $0.89-$0.96                  20,000                2.0               $.093             20,000             $.093
          $0.27                     20,000                3.0               $0.27             20,000             $0.27
          $0.92                     20,000                4.0               $0.92             20,000             $0.92
                                ----------------                                          ----------------
                                    60,000                                                    60,000
</TABLE>

The 2003 Stock Option Plan (the "2003 Plan") has 750,000 shares of Common Stock
reserved for issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Code, or (ii) non-qualified options.
ISOs may be granted under the 2003 Plan to employees and officers of the
Company. Non-qualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company. In certain
circumstances, the exercise price of stock options may have an adverse effect on
the market price of the Company's Common Stock.

Stock option transactions during the year ended January 29, 2005 for the 2003
Plan are summarized below:
<TABLE>
<CAPTION>

                                                                              Exercise              Weighted Average
                                                        Shares               Price Range             Exercise Price
                                                    -----------------    ---------------------    ----------------------
<S>                                                         <C>                      <C>                  <C>
Options outstanding - January 31, 2004                            0                        0                    0
   Options issued                                           190,000             $1.12                       $1.12
                                                    -----------------    ---------------------    ----------------------
Options outstanding - January 29, 2005                      190,000             $1.12                       $1.12

Options exercisable at January 29, 2005                      95,000             $1.12                       $1.12
                                                    =================    =====================    ======================
</TABLE>



Most options issued vest in three annual installments of 33-1/3 percent each on
the first, second, and third anniversary of the date of grant except for 190,000
issued in 2004 50% of which vested December 31, 2004, and 50% of which will vest
December 31, 2005. There are approximately 560,000 shares available for future
grants under the 2003 Plan.

The 2004 Non-Employee Director Stock Option Plan (the "Directors Plan") The 2004
Plan was adopted by the Board of Directors in August 2004. The 2004 Plan
reserves 148,042 shares of Class A Common Stock for issuance to the Company's
independent and unaffiliated directors. Pursuant to the terms of the 2004 Plan,
as proposed each independent and unaffiliated director shall automatically be
granted, subject to availability, without any further action by the Board of
Directors or the Stock Option Committee: (i) a non-qualified option to purchase
10,000 shares of Class A Common Stock upon their initial election or appointment
to the Board of Directors; and (ii) a non-qualified option to purchase 10,000
shares of Class A Common Stock on the date of each annual meeting of
stockholders following their election or appointment to the Board of Directors.
The exercise price of each option is the fair market value of the Company's
Class A Common Stock on the date of grant. Each option expires five years from
the date of grant and vests in three annual installments of 33 1/3% each on the
first, second and third anniversary of the date of grant. Options granted under
the 2004 Plan would generally not be transferable during an optionee's lifetime
but would be transferable at death by will or by the laws of descent and
distribution. In the event an optionee ceases to be a member of the Board of
Directors (other than by reason of death or disability), then the non-vested
portion of the option would immediately terminate and become void and any vested
but unexercised portion of the option may be exercised for a period of 180 days
from the date the optionee ceased to be a member of the Board of Directors. In
the event of death or permanent disability of an optionee, all options
accelerate and become immediately exercisable until the scheduled expiration
date of the option.
<PAGE>

Stock option transactions during the years ended January 29, 2005, January 31,
2004 and 2003 for the Directors' Plan are summarized below:
<TABLE>
<CAPTION>

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

There are  approximately  118,000  shares  available for future grants under the
Directors' Plan

13. TREASURY STOCK

         Treasury stock at January 29, 2005 and January 31, 2004 consists of
1,164,000 shares of Class A common stock purchased in open market transactions
for a total cost of approximately $2,017,000 pursuant to a stock repurchase
program authorized by the Board of Directors in fiscal year 1999.

14. PROFIT SHARING PLAN

         Profit Sharing Plan - The Company has a voluntary contribution profit
sharing plan (the "Plan"), which complies with Section 401(k) of the Internal
Revenue Code. Employees who have attained the age of 21 and have one year of
continuous service are eligible to participate in the Plan. The Plan permits
employees to make a voluntary contribution of pre-tax dollars to a pension
trust, with a discretionary matching contribution by the Company up to a maximum
of two percent of an eligible employee's annual compensation. The Company
elected not to make matching contributions for fiscal years ended January 29,
2005 and January 31, 2004 and 2003.

<PAGE>

15.      COMMITMENTS AND CONTINGENCIES

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

             Fiscal Year Ending
                 January 31,

                    2006                    $598,000
                    2007                     396,000
                    2008                     267,000
                    2009                     220,000
                    2010                     215,000
               2011 and after                239,000
                                        ------------------

                                           $1,935,000
                                        ==================

         Rent expense was approximately $473,000, $584,000 and $574,000 for the
         years ended January 29, 2005, January 31, 2004 and 2003, respectively.
         The decline from previous years is the result of termination of various
         facility leases.


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

c.   The Company has a Loan and Security  Agreement  ("the Congress  Agreement")
     with Congress Financial  Corporation  ("Congress") for three years expiring
     on November 26, 2005. The Congress  Agreement,  as amended August 31, 2004,
     provides  for  a  credit  facility  of  $12  million  for  Hirsch  and  all
     subsidiaries  and is  collateralized  by eligible  accounts  receivable and
     inventory  as defined  in the  agreement.  Advances  made  pursuant  to the
     Congress  Agreement  may be used by the  Company and its  subsidiaries  for
     working  capital loans,  letters of credit and deferred  payment letters of
     credit. The terms of the Congress Agreement require the Company to maintain
     certain  financial  covenants.  The  Company  was in  compliance  with  all
     financial covenants at fiscal 2005 year-end. The Agreement was also used to
     support  letters of credit and bankers  acceptances of  approximately  $4.5
     million as of January 29, 2005.

d.   Dependency  Upon Major Supplier - During the fiscal years ended January 29,
     2005  and  January  31,  2004 and  2003;  the  Company  made  purchases  of
     $22,067,000,   $21,115,000,  and  $27,789,000  respectively,   from  Tajima
     Industries Ltd. ("Tajima"), the manufacturer of the embroidery machines the
     Company sells. This amounted to approximately 73, 74, and 85 percent of the
     Company's  total purchases for the years ended January 29, 2005 and January
     31, 2004 and 2003, respectively.  Purchases from Tajima are purchases under
     letters of credit. Outstanding letters of credit as of January 31, 2004 are
     reflected in trade acceptances payable on the balance sheet.

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

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

e.   Purchase  Commitments  - The  Company  entered  into a three  year  minimum
     purchase  commitment  with Pulse under which the  Company is  obligated  to
     purchase  $100,000 of software  each month.  The  commitment  was effective
     November 1, 2002 and runs until  October 31,  2005.  As of January 29, 2005
     there was $800,000 remaining under this commitment.

16.      SUBSEQUENT EVENT

     On  April  20,  2005,  the  Company  filed a  report  on Form  8-K with the
Securities  and  Exchange  Commission  announcing  a  non-binding  agreement  in
principle  with Sheridan  Square  Entertainment,  Inc.  concerning  the proposed
merger of the two companies. The agreement in principle contemplates an exchange
of newly  issued  Hirsch  Common  Stock (of which  there  would then be only one
class) for the outstanding capital stock of Sheridan Square  Entertainment.  The
terms of the  non-binding  agreement in principle are subject to the negotiation
and execution of definitive written agreements,  finalization of economic terms,
and the  approval  of the Board of  Directors  and  Stockholders  of each of the
companies.

<PAGE>