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

                                    FORM 10-K

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

         For the fiscal year ended January 31, 2002

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

         Commission File No.:  0-23434

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


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


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

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

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

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

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

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

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

     The  aggregate  market  value of the 6.1  million  shares of Class A Common
Stock  held by  non-affiliates  of the  Company  as of  April  19,  2002 is $3.2
million.

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

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

                  Class A Common Stock                      6,120,611
                     Par value $.01

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

     The  information  required by Part III of this Form 10-K is incorporated by
reference from the Registrant's  definitive proxy statement to be filed with the
Commission on or before May 30, 2002.


<PAGE>

                                     PART I

Item 1.  Business

General

     Hirsch  International  Corp.  ("Hirsch"  or  the  "Company"),   a  Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic  computer-controlled  embroidery machinery and related value-added
products and services.  The Company  offers a complete  line of  technologically
advanced single- and multi-head  embroidery  machines,  proprietary  application
software,  a  diverse  line  of  embroidery  parts,  supplies,  accessories  and
proprietary  embroidery products, and a range of equipment financing options. In
addition,  Hirsch provides a comprehensive  service  program,  user training and
software support. More recently,  through its Hometown Threads, LLC venture, the
Company has moved from test marketing its retail embroidery  services concept to
implementation  of a  national  franchise  program.  The  Company  believes  its
wide-range of product offerings together with its related  value-added  products
and  services  place it in a  competitively  advantageous  position  within  its
marketplace.

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

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

     Hirsch has certain  exclusive  United States rights to sell new  embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima").  Tajima,  located in
Nagoya,  Japan,  is one of  the  world's  leading  manufacturers  of  embroidery
machines,  and is regarded as a  technological  innovator  and  producer of high
quality,  reliable  and  durable  embroidery  equipment.  The  Company  has  the
exclusive right to distribute  Tajima machines in the continental  United States
and  Hawaii.   Beginning  in  fiscal  year  2000,   Tajima  granted  Hirsch  the
non-exclusive  right to distribute to US-based  customers who had expanded their
operating facilities into the Caribbean region.

     The Company enjoys a solid  relationship  with Tajima,  having spanned more
than 20 years.  Hirsch is 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 1997, all Tajima equipment sold in the
US was assembled in Japan. At that time, Hirsch formed a new subsidiary,  Tajima
USA, Inc ("TUI"), which currently assembles 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"), a subsidiary of Tajima.

     In  addition  to  offering  a  complete  line  of  technologically-advanced
embroidery machines and customer training,  support and service, Hirsch provides
an array of  value-added  products  to its  customers.  The  Company's  software
subsidiary, Pulse Microsystems Ltd. ("Pulse"), develops and supplies proprietary
application software programs which enhance and simplify the embroidery process,
as well as enable the  customization of designs and reduce production costs. The
majority of Pulse's  proprietary  application  software programs are designed to
operate in the  Microsoft(R)  Windows(R)  95,  Windows(R) 98,  Windows(R)  2000,
Windows(R)  Me,  Windows(R)  XP and Windows (R) NT  environments,  which  Hirsch
believes will further simplify usage and enhance user  flexibility.  The Company
believes that Pulse Signature(TM)  software is unique in the industry in that it
earned the right to use the Microsoft Windows(R) compliance trademark.

     The Company's leasing subsidiary,  HAPL Leasing Co., Inc. ("HAPL Leasing"),
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 Financial
Statements).  The  Company  will  continue to work with  customers  to help them
obtain  financing  through  independent  leasing  companies,  as  an  attractive
alternative for purchasers  looking to begin or expand  operations.  Hirsch also
sells  a  broad  range  of  embroidery  supplies,  accessories  and  proprietary
embroidery products.

     The Company's  equipment and value-added  products are marketed directly by
an  employee  sales  force,   whose  efforts  are  augmented  by  trade  journal
advertising,  informational "open house" seminars, 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.

     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  has  reported  its
discontinued  operations in accordance with APB 30. The  consolidated  financial
statements  have been  reclassified  to segregate the net assets for fiscal 2002
and operating results of these discontinued operations for all periods presented
(see Note 7 to the  Consolidated  Financial  Statements).  The Company  plans to
repurchase  the CIT Ultimate Net Loss  ("UNL")  portfolio  and remarket it along
with the existing internal portfolio to an outside financing source.

     In the fourth  quarter of the year ended  January  31,  2002,  the  Company
initiated a restructuring plan in connection with its continuing operations. The
plan was designed to meet the changing  needs of the Company's  customers and to
reduce its cost structure and improve efficiency.  The restructuring initiatives
involve the  consolidation  of the parts and supplies  operations  with existing
Hirsch  operations,  the provision  for the  downsizing of three of its existing
sales  offices  and  reduction  in the  overall  administrative  personnel.  The
reduction  in  personnel  represents  25% of its  workforce  and 56 people.  The
severance  payable at year-end is expected to paid by June 30. 2003. (See Note 8
to the Consolidated Financial Statements.)

     During the fourth  quarter of fiscal 2002 in view of the  overall  industry
decline in demand for embroidery  equipment and related products,  the resulting
decline in Company  revenue  delivered in the  territories  associated  with the
acquisition  of  SMX  Corporation  and  Sedeco  Corporation  and  the  Company's
impairment  evaluation,  the  Company  wrote-off  the balance of  $3,477,000  of
Goodwill as an impairment  charge to  operations.  During the fourth  quarter of
fiscal 2001,  the Company wrote off  approximately  $7,640,000 of goodwill as an
impairment charge to operations.  This write-off includes the remaining value of
goodwill  associated with its acquisition of the digitzing  embroidery  business
assets of All Pro  Punching,  Inc.  (see Note 16 to the  Consolidated  Financial
Statements).

The Embroidery Industry

     The development of electronic  computer-controlled  embroidery machines has
led to new  embroidery  applications  and markets,  cost savings,  higher profit
margins  for  users  and  production  efficiencies  which  has  transformed  the
embroidery  industry  from  being  extremely   labor-intensive  to  an  industry
characterized  by a high level of  automation.  Past  innovations  to embroidery
machines  offered  superior design  flexibility and increased speed and provided
the manufacturer with the ability to embroider finished products, the ability to
efficiently embroider up to fifteen colors at a time, automatic thread trimming,
and other labor-saving  improvements.  Innovations include a narrow cylinder arm
sewing head that permits embroidery on small diameter apparel,  such as pockets,
sleeves, pant legs and socks. The embroidery industry on a world-wide basis also
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 broad fashion and commercial appeal for special event
promotional  marketing.  Embroidery  equipment  may  contain  single or multiple
sewing heads,  each sewing head consisting of one to a group of needles that are
fed by spools of thread  attached to the  equipment.  The design and  production
capabilities  of the sewing  heads are  enhanced  through  the  application  and
integration of computers and specialized  software. In fiscal 2002, Pulse became
the exclusive  software supplier for Tajima embroidery  machines worldwide under
the name Tajima DG/ML by Pulse.

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)
assembles and sells a broad range of Tajima embroidery  machines,  (ii) develops
and supplies proprietary  application software programs for embroidery machines,
(iii) sells a broad range of embroidery  supplies,  accessories  and proprietary
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. In addition,  the Company,  through its Hometown
Threads,  LLC venture,  is  currently  marketing  its concept to provide  retail
embroidery services at Wal*Mart(R)  stores,  shopping center and mall locations.
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 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  $12,000 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.

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

     Pulse Microsystems Ltd. Software. The Company's Pulse subsidiary,  acquired
in 1994,  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 the  Company's
proprietary  application  software  products  are  designed  to  operate  in the
Microsoft(R)  Windows(R) 95,  Windows(R)  98,  Windows(R)  2000,  Windows(R) Me,
Windows(R) XP and  Windows(R)  NT  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 its
software with  embroidery  equipment and as an upgrade to its installed  base of
approximately  17,500  embroidery  machines.  The  Company  believes  that these
products  have  broad  appeal  to  purchasers  of  single-head   and  multi-head
embroidery machines and present  opportunities for the Company to increase sales
of  embroidery  equipment  and  software as the Company  continues  to emphasize
marketing  activities.  Pulse  continues  to  automate  the  process of creating
embroidery  applications in order to open new markets, reduce costs and increase
production  efficiencies.  Pulse has created  what the  Company  believes is the
first  Internet-compatible   design  software,  branded  "StitchPort(R)."  Pulse
continues  to work  closely  with  Hirsch and Tajima to  develop  software  that
enhances new features in the  embroidery  machines being  introduced.  In Fiscal
2002,  Pulse  became the  exclusive  software  supplier  for  Tajima  embroidery
machines worldwide under the name Tajima DG/ML by Pulse.

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

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

     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  from its  headquarters.  After  the  Company  delivers  an
embroidery  machine  to a  customer,  its  trained  personnel  may assist in the
installation, setup and operation of the machine. The Company employs a staff of
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 service technicians to the customer.
Software support is conducted by  telephone-based  software staff located at the
Company's Pulse Microsystems Ltd. subsidiary.  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.

     Retail  Embroidery  Services.  In fiscal 1999, the Company created a retail
embroidery  concept known as Hometown  Threads(TM)  for the purpose of providing
retail  embroidery   services  within   Wal*Mart(R)   establishments.   Hometown
Threads(TM) is expanding through a franchise  program in Wal*Mart(R)  stores and
other mall and shopping  center  locations  throughout the United States and has
six franchise  locations in addition to its own three company operated stores at
the end of Fiscal 2002.

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  has  reported  its
discontinued  operations in accordance with APB 30. The  consolidated  financial
statements  have been  reclassified  to segregate the net assets for fiscal 2002
and operating results of these discontinued operations for all periods presented
(see Note 7 to the  Consolidated  Financial  Statements).  The Company  plans to
repurchase  the UNL portfolio  and remarket it along with the existing  internal
portfolio to an outside financing source.

Marketing and Customer Support

     The Company has been selling  embroidery  equipment since 1976 and believes
it is the leading  distributor  of Tajima  equipment  in the world.  The Company
reinforces  recognition  of its name  through  trade  magazine  advertising  and
participation in seminars and over 20 trade shows annually.  The Company's sales
staff is headed by Paul Levine, President of the Company, and currently consists
of  salespeople  who  maintain  frequent  contact  with  customers  in  order to
understand  and satisfy  each  customer's  needs.  The  Company's  products  are
generally  considered by the industry the highest quality  embroidery  equipment
available,  and therefore the Company  attempts not 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  by lower  quality  manufacturers,  the
Company  attempts to maintain a balance  between market share and profit margins
to the best degree possible.  While in the short-term this may result in reduced
market  share,  the  Company  believes  that  this  strategy  presents  the most
promising way to sustain and grow its business over the long-term.

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

     The  Company  maintains  a  training  center  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 two-year warranty against
malfunctions  from defects in material or workmanship on the Tajima  machines it
distributes. The warranty covers specific classes of parts and labor for various
periods up to two years.  Tajima provides the Company with a six month warranty.
As a  consequence,  the  Company  absorbs  a  portion  of the cost of  providing
warranty service on Tajima products.

Supplier Relationships with Tajima

     The Company has four separate distributorship agreements with Tajima which,
collectively,  provide the Company the exclusive  right to  distribute  Tajima's
complete line of standard embroidery,  chenille embroidery and certain specialty
embroidery  machines in 39 States.  The main agreement (the "East  Coast/Midwest
Agreement")  which covers 33 States,  became  effective on February 21, 1991 and
has an initial term of 20 years. The East Coast/Midwest  Agreement is terminable
by Tajima  and/or  the  Company on not less than two years'  prior  notice.  The
second agreement (the "Southwest Agreement") covers six states, became effective
on February 21, 1997 and had a term of five years.  This  agreement was renewed.
Under the third distributorship  agreement, which covers nine western states and
Hawaii, the Company is the exclusive  distributor of Tajima's single,  two, four
and six-head model machines as well as chenille or chenille/standard  embroidery
machines  with less than four  heads or two  stations,  respectively  (the "West
Coast Agreement").  The West Coast Agreement,  which had an initial term of five
years, terminates on February 20, 2002; the first renewal terminates on February
20, 2003. The fourth agreement ("the Caribbean  Agreement")  which was effective
July 27,  1999  permits the Company to  distribute  Tajima  machines to US-based
customers who are operating expansion facilities in the Caribbean region. It has
continued without change from the initial trial period.

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

     Although there can be no assurance,  management of the Company  believes it
is unlikely  that the Company  would lose Tajima as a source of supply  because:
(i) the Company has maintained a relationship  with Tajima for over 20 years and
is 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;  (iii) the
Company and Pulse support Tajima's development activities and the Pulse software
enhances the Tajima  product  line;  (iv) the ownership by Tokai of a forty-five
(45%) percent interest in the TUI venture;  and (v) in Fiscal 2002, Pulse became
the exclusive  software supplier for Tajima embroidery  machines worldwide under
the name Tajima DG/ML by Pulse.

Other Supplier Relationships

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

Customers

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

Competition

     The  Company  competes  with  original  equipment  manufacturers,  such  as
Barudan,  Brother  International,  Melco  Industries  and  SWF,  who  distribute
products directly into the Company's markets.  The Company also competes against
local Tajima distributors in certain western US markets. The Company believes it
competes against these competitors on the basis of knowledge,  experience,  name
recognition,  customer  service and the quality of the  embroidery  equipment it
distributes.

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

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

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

     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,  development of  proprietary  products and the fact
that the Company is a single source provider.

Patents and Copyrights

     The Pulse  software has  copyright  protection  under  Canadian law and the
Berne  Convention that also affords it protection in the United States.  Certain
of  the  Pulse   software  has  also  been  granted   United  States   copyright
registrations.  The  following  patents have been granted in the United  States:
5,270,939:  "Method  For  Modifying  Embroidery  Design  Programs";   5,343,401:
"Embroidery  Design Systems";  5,430,658:  "Method For Creating  Self-Generating
Embroidery  Pattern";  5,510,994:  "Method for  Automatically  Generating  Chain
Stitches";  5,668,730:  "Method for  Automatically  Generating  Chain Stitches";
5,506,784:  "Method for Automatically  Generating A  Chenille-Filled  Embroidery
Stitch   Pattern";   5,541,847:   "Method   for   Automatically   Generating   A
Chenille-Filled   Embroidery   Stitch   Pattern.";    5,771,173:   "Method   for
Automatically   Generating  A   Chenille-Filled   Embroidery  Stitch  Pattern.";
5,809,921:  "Method for Generating a Continuously  Stitched Regional Carved Fill
Composite  Embroidery  Stitch Pattern";  6,196,146:  "Web Embroidery  System and
Method"; and 6,216,618: "Embroidery System Utilizing Windows CE based GUI".

     Pulse also has one other  patent  pending in the United  States  Patent and
Trademark  Office.  Pulse has been granted the following  patent in the European
Patent Office and the Japanese Patent Office:  "Method for Modifying  Embroidery
Design  Programs."  Pulse also has several of the above U.S  patents  pending in
some or all of the following  jurisdictions:  Europe,  Japan , Korea and Mexico.
Pulse believes these  protections are sufficient to prevent  unauthorized  third
party uses of such  property  rights.  Neither Pulse nor the Company is aware of
any patents or other  intellectual  property rights of third parties which would
prevent the use of Pulse's intellectual  property. The Company continues to seek
intellectual property protection for Pulse products.

Employees

     As of January 31,  2002,  the Company  employed  approximately  212 persons
engaged  in  sales,  service  and  supplies,   product   development,   finance,
administration  and  management  for the Company,  Pulse,  and TUI.  None of the
Company's  employees  are  represented  by  unions.  The  Company  believes  its
relationship with its employees is good.

Risk Factors

Dependence on Tajima

     For the fiscal year ending  January 31,  2002,  approximately  68.7% of the
Company's  revenues  resulted  from the sale or  lease of  embroidery  equipment
supplied by Tajima. Four separate distributorship agreements (collectively,  the
"Tajima Agreements") govern the Company's rights to distribute Tajima embroidery
equipment in the United  States and the  Caribbean.  Two of the  distributorship
agreements  with Tajima  collectively  provide the  Company  with the  exclusive
rights to distribute  Tajima's  complete line of standard  embroidery,  chenille
embroidery  and certain  specialty  embroidery  machines in 39 states.  The main
agreement  (the  "East  Coast/Midwest  Agreement"),  which now covers 33 states,
first became effective on February 21, 1991, has an initial term of 20 years and
contains a renewal  provision  which permits  successive five year renewals upon
mutual  agreement  of the  parties.  The  East  Coast/Midwest  Agreement  may be
terminated  by Tajima  and/or  the  Company  on not less than two  years'  prior
notice.  The second  agreement  (the  "Southwest  Agreement")  which  covers six
states, became effective on February 21, 1997, and has a term of five years. The
agreement  has been renewed.  Under the third  distributorship  agreement,  (the
"West Coast Agreement") which covers nine western continental states and Hawaii,
the Company is the exclusive  distributor of Tajima's small machines, as well as
chenille and tandem  chenille/standard  embroidery  machines with less than four
heads or two  stations,  respectively.  The West Coast  Agreement,  which has an
initial term of five years,  became  effective  on February 21, 1997.  The first
renewal  terminates on February 20, 2003. The fourth  Agreement (the  "Caribbean
Agreement")  was for a one-year  trial  period,  effective  July 27, 1999,  that
permitted the Company to distribute  Tajima  equipment to its existing  US-based
customers who establish expansion  facilities in the Caribbean region.  Activity
under the fourth agreement has continued without change from inception.  Each of
the first three Tajima Agreements  contains language that permits termination if
the Company fails to achieve certain minimum sales quotas or annual targets.  In
recognition of difficult  general  industry  conditions,  Tajima agreed to waive
meeting  these  specific  targets  in fiscal  year 2001.  Furthermore,  the East
Coast/Midwest  Agreement  may be terminated if Henry Arnberg and Paul Levine (or
in certain circumstances, their spouses and children) fail to maintain ownership
of a  sufficient  number of shares of voting  stock to elect a  majority  of the
Company's  Board of Directors  or in the event of the death,  physical or mental
disability  of a duration of six months or longer,  or  incapacity of both Henry
Arnberg and Paul  Levine.  The  Southwest  Agreement  may be  terminated  if the
Company fails to remain the sole shareholder of its subsidiary that is the party
to the Southwest  Agreement.  The West Coast Agreement may be terminated  should
any material  change  occur in the current  Class B  shareholders,  directors or
officers  of the  Company  or should  there  occur any  change in control of the
Company.  The termination of the Tajima Agreements would have a material adverse
effect on the Company's business, financial condition and results of operations.

     Importing  Tajima's  equipment  from Japan subjects the Company to risks of
engaging in business overseas,  including  international  political and economic
conditions,  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 one location in Japan.  The Company  could be materially
and adversely  affected should this facility be seriously damaged as a result of
a fire, natural disaster or otherwise.  Further, the Company could be materially
and adversely  affected should Tajima be subject to adverse market,  business or
financial conditions.

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

Embroidery Industry

     The  Company's  growth in past years has resulted in part from the increase
in demand for embroidered  products and the growth of the embroidery industry as
a whole. The embroidery industry is cyclical and has recently experienced; (i) a
decline in demand for large  embroidery  machines,  and; (ii) a trend toward the
relocation  of  manufacturing  facilities  to Mexico,  the  Caribbean  and South
America,  all of which  have had an  adverse  effect  on the  operations  of the
Company and its business.  A decrease in consumer  preferences  for  embroidered
products,  a general economic  downturn or other events having an adverse effect
on the embroidery industry would also have an adverse effect on the Company.

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 maintain  profitability.  The Company's Pulse  Microsystems  Ltd.  subsidiary
conducts  business through 75 distributors  throughout the world, and while most
transactions are conducted in US dollars,  there are some that are transacted in
major European currencies, including Euros and Japanese Yen. While an increasing
part of  Pulse's  business,  the  foreign  exchange  exposure  created  by these
transactions is not presently material to the consolidated results of the parent
Company, and they are not hedged through any derivative currency product. Should
they become material, there can be no assurance that the Company will be able to
effectively hedge against all currency fluctuations.

Assembly Facility

     The Company  assembles  Tajima  embroidery  machines  in the United  States
through its subsidiary TUI,  initially in  configurations of up to six heads per
machine and currently including eight head machines. Tajima provides the Company
with technical  assistance and support.  While TUI operations  were breakeven in
fiscal 2002,  the  throughput of the facility is largely  dependent on continued
demand for embroidery machines generated by the Hirsch sales organization.

Retail Embroidery Services

     The  Company's  Hometown  Threads  venture  was  created for the purpose of
establishing   retail  embroidery  service  centers  within  Wal-Mart(R)  retail
locations.  As of the end of fiscal 2001, Hometown Threads had concluded a pilot
test market at two  Wal-Mart(R)  centers  located in Texas and was authorized by
Wal-Mart(R)  to continue to an expansion  strategy of up to 25 units.  While the
relationship with Wal-Mart(R) is good, the Company is dependent on the continued
existence  of the  master  lease  with  Wal-Mart(R)  for  implementation  of its
franchise program of Hometown Threads within Wal-Mart(R) locations. There can be
no  assurance  that  locations  outside of  Wal-Mart(R)  will  provide  the same
opportunity for expansion of the franchise program as those within  Wal-Mart(R),
or that the  Wal-Mart(R)  locations will be available  concurrent with qualified
franchisees as those customers are developed.  As of the end of fiscal 2002, the
Company's net  investment in Hometown  Threads was  approximately  $1.7 million.
Although  the  Company  believes it will be able to access the market for retail
embroidery  services,  there is no guarantee that it will be successful in doing
so, or that it will be able to do so on a profitable basis.

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. The Company has reduced new machine inventories substantially
over the past two years, moving to "just in time" inventory management policies.
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 leasing and customer training, support
and  services.  Due to the recent  decline in  overall  demand in the  industry,
potential  customers may emphasize price  differences over value-added  services
and support in purchasing new embroidery machines.  Severe price competition may
impair  the  Company's  abilities  to provide  its  customers  with  value-added
services and support.  The  Company's  failure to compete  effectively  in these
areas could have a material adverse effect on its business,  financial condition
and results of operations.

Software

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

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

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

Dependence on Existing Management

     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 and Chief Executive  Officer of the Company;  Paul Levine,
President,  and a Director of the  Company;  and Paul  Gallagher,  its new Chief
Operating Officer. Pulse's continued success will depend to a significant extent
upon the  abilities and continued  efforts of Tas Tsonis,  Vice  President and a
Director of the Company and CEO of Pulse and Brian  Goldberg,  Vice President of
the Company and President of Pulse.  Effective as of February 24, 2002,  Messrs.
Tsonis and Goldberg elected to renew their respective  employment agreements for
an additional three (3) year term.  Messrs.  Arnberg and Levine are not bound by
any written employment agreement with the Company. Mr. Gallagher is bound by a 3
year agreement that commenced on September 11, 2001. The loss of the services of
Messrs. Arnberg,  Levine,  Gallagher,  Tsonis, Goldberg 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  this  fiscal  year,  this  facility  was sold to
Brandywine Realty Trust and approximately  24,500 square feet was leased back in
a concurrent transaction (see Note 9B to the Consolidated Financial Statements).
Subsequent  to year end, and as part of the Company's  restructuring  plans (see
Note 8 to the Consolidated  Financial  Statements),  the Company leased back the
25,500  square feet of the building  that had  remained  empty since March 2001.
This  property  houses the Company's  executive  offices,  the  Northeast  sales
office, technical service, and will house machine warehousing, order fulfillment
and used machine storage and repair facility.

     In March 1997,  the  Company  entered  into a five-year  lease for a 25,000
square foot factory  facility in  Ronkonkoma,  New York where  Tajima USA,  Inc.
("TUI"),  operates a machine assembly facility. The lease has been renewed until
April 30, 2007.

     In addition to the Company's  headquarters and assembly facilities occupied
by TUI, the Company leases 13 regional satellite offices,  as well as a location
in Mississauga, Ontario, Canada for Pulse headquarters. These offices consist of
regional  sales  offices,  training  centers,  repair  centers and warehouse and
showroom space. 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.



                                     PART II

ITEM 5.  Market For Common Equity and Related Stockholder Matters

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

Fiscal 2002                                               High              Low
-----------                                               ----              ---

First Quarter ended April 30, 2001........................$ 1.44          $ 0.90
Second Quarter ended July 31, 2001........................$ 1.24          $ 0.90
Third Quarter ended October 31, 2001......................$ 1.17          $ 0.56
Fourth Quarter ended January 31, 2002.....................$ 0.75          $ 0.40

Fiscal 2001                                               High             Low
-----------                                               ----             ---

First Quarter ended April 30, 2000........................$ 1.750        $ 0.750
Second Quarter ended July 31, 2000........................$ 1.500        $ 0.750
Third Quarter ended October 31, 2000......................$ 1.438        $ 0.938
Fourth Quarter ended January 31, 2001.....................$ 1.313        $ 0.688


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

(b)  As of April 01, 2002,  the Company  believes that there were  approximately
     1,795 beneficial owners of its Class A Common Stock.

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



                                    PART III

ITEM 6.  Selected Financial Data

     The  following  selected  consolidated  financial  data  should  be read in
conjunction  with the  Consolidated  Financial  Statements and the Notes thereto
included  elsewhere  herein.  The  consolidated  financial  statement data as of
January 31, 2002 and 2001 and for the fiscal years ended January 31, 2002, 2001,
and  2000  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, 2000, 1999
and 1998,  and for the fiscal years ended  January 31, 1999 and 1998 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              2002            2001            2000           1999          1998
------------------------------------------------------------------------------------------------------------------------------

<S>                                                   <C>             <C>             <C>             <C>          <C>
Statement of Operations Data:

Net sales .........................................   $  52,561       $  65,677       $  85,536       $ 118,889    $ 144,557

Cost of sales .....................................      35,774          43,374          57,364       8   0,804       93,634

Operating Expenses (2) ............................      34,047          38,469          36,665          41,370       39,182

(Loss) income before income tax (benefit) provision     (16,593)        (15,716)         (9,312)         (7,447)      10,616

Income tax (benefit) provision ....................     ( 5,954)           (224)            710          (2,400)       4,617

(Loss) Income before discontinued operations and
cumulative effect of accounting change ............     (10,639)        (15,601)        (10,316)         (5,438)       5,998

(Loss) Earnings on discontinued operations (3) ....      (7,686)        (    70)        ( 1,319)            830        2,198

Cumulative effect of accounting change ............          --              --         ( 2,187)             --           --

Net (loss) income (1) .............................     (18,325)        (15,671)        (13,822) (1)    (4 ,608)        8,196

Basic net (loss) income per share
from continuing operations ........................     $ (1.20)      $   (1.71)      $ (  1.11)      $ (  0.57)   $    0.67

Diluted net (loss) income per share
from continuing operations ........................     $ (1.20)      $   (1.71)      $ (  1.11)      $ (  0.57)   $    0.65

Basic net (loss) income per share .................     $ (2.06)      $   (1.72)      $ (  1.48)      $ (  0.49)   $    0.92

Diluted net (loss) income per share ...............     $ (2.06)      $   (1.72)      $ (  1.48)      $ (  0.49)   $    0.89

Shares used in the calculation of basic
  net (loss) income per share .....................       8,893           9,112           9,348           9,413        8,953

Shares used in the calculation of diluted
  net (loss) income per share .....................       8,893           9,112           9,348           9,436        9,236


<FN>
(1) Net of the cumulative effect of SAB 101 accounting change.

(2) Fiscal year 2002 SG&A  includes a  write-down  of impaired  goodwill of $3.6
million and  restructuring  costs of $2.7  million  and Fiscal  2001  includes a
write-down of impaired goodwill of $7.6 million

(3) Fiscal  year 2002  reflects  the  discontinued  operation  of the  Company's
leasing  company.  Fiscal year 2001,  2000,  1999 and 1998 have been restated to
reflect this change.
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                                                                    January 31,
                                                                              (in thousands of dollars)

Hirsch International Corp. and Subsidiaries            2002             2001           2000           1999                1998
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                   <C>             <C>             <C>             <C>          <C>
Balance Sheet Data:
  Working capital ................................   $21,495          $25,214         $29,627       $ 51,939       $    40,169 (4)

Total assets .....................................    38,279           54,030          80,216        106,935           114,832 (4)

Long-term debt, less current maturities ..........     2,608               79             989         15,640             1,421

Stockholders' equity .............................    21,459           40,278          56,253         70,207            75,623 (4)


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


Hirsch International Corp
Summarized Quarterly Data**

<TABLE>
<CAPTION>

$ in thousands, except for per share amounts                                   Fiscal Quarter
<S>                                                         <C>        <C>        <C>       <C>
2002                                                         First     Second      Third    Fourth
Revenue                                                     14,949     13,388     14,743      9,481
Gross Profit                                                 5,947      4,563      4,407      1,870
Impairment of Goodwill                                          --         --         --      3,477
Restructuring                                                   --         --         --      2,673
Income(Loss) On Discontinued Operations                        263        (27)       110     (8,032)
Net (Loss)                                                    (964)    (2,821)    (2,254)   (12,286)
                                                            ------     ------     ------    -------
Basic and Diluted (Loss) Per Share                           (0.11)    ( 0.32)    ( 0.25)   (  1.38)
                                                            ======     ======     ======    =======

2001                                                         First     Second      Third    Fourth
Revenue                                                     17,985     17,034     18,247     12,411
Gross Profit                                                 6,594      6,582      6,253      2,874
Impairment of Goodwill                                          --         --         --      7,640
Income (Loss) On Discontinued Operations                       202       (118)      (280)       126
Net (Loss)                                                    (969)    (1,705)    (1,035)   (11,960)
                                                            ------     ------     ------    -------
Basic and Diluted (Loss) Per Share                           (0.11)    (0.19)     ( 0.11)   (  1.31)
                                                            ======     ======     ======    =======

</TABLE>

**Note:  The  quarterly  data has been  restated  to  reflect  the  discontinued
operations


ITEM 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

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

General

     Hirsch  International Corp. ("Hirsch" or the "Company") is a leading single
source  supplier of  electronic  computer-controlled  embroidery  machinery  and
related  value-added  products  and  services to the  embroidery  industry.  The
Company  offers  a  complete  line  of  technologically   advanced  single-  and
multi-head embroidery machines,  proprietary  application software and a diverse
line of embroidery  supplies and accessories.  Hirsch believes its comprehensive
customer  service,  user training,  software support and broad product offerings
combine  to place the  Company  in a superior  competitive  position  within its
marketplace.  The  Company  sells  embroidery  machines  manufactured  by Tajima
Industries Ltd.  ("Tajima") and Tajima USA, Inc. ("TUI"), a subsidiary formed in
fiscal 1998,  as well as a wide variety of embroidery  supplies,  microcomputers
manufactured  by Dell  Computer  Corporation  and software  manufactured  by the
Company's wholly-owned subsidiary, Pulse Microsystems Ltd. ("Pulse").

     The  Company's  focus from 1995 through 1998 was on growth and expansion of
its installed  machine base and  increasing  the breadth of its offerings to the
embroidery  industry.  The  acquisitions of SMX and Sedeco increased the area in
which the Company is the exclusive  distributor of Tajima  embroidery  equipment
from 26 states to 39 states.  In January  1997,  Tajima  granted the Company the
exclusive  right to  distribute  small  (one  through  six-head  models)  Tajima
embroidery  machines in nine western  states and Hawaii.  With this expansion of
the Company's small machine territory to the West Coast, Hirsch gained the right
to distribute  Tajima  machines  throughout  the  continental  United States and
Hawaii.  In fiscal 1998 Hirsch formed TUI for the purpose of  assembling  Tajima
embroidery  machines in the United States.  Production at TUI consists of models
in  configurations  of up to eight  heads per  machine.  In  January  1998 Tokai
Industries (Tajima's  manufacturing arm) purchased a 45 percent interest in TUI.
This investment  reflects their continuing  confidence in this endeavor and will
be a contributing  factor in the  long-range  growth of TUI. In July 1999 Tajima
granted to Hirsch the  non-exclusive  right to  distribute  to its  existing  US
customers who have expanded their operations into the Caribbean region.

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

     Fiscal 2002 continued the trend begun in the industry in fiscal 1999,  with
retrenchment driven by the relocation and continued investment offshore of large
multi-head  equipment  customers.   While  growth  of  small  machine  customers
stabilized in the domestic market,  the market continued to experience a decline
in large  machine  sales,  continuing  the change in the sales mix of embroidery
machines  and an  overall  decline  in  demand.  It was  further  compounded  by
weakening value in foreign  exchange of the Yen versus the US dollar,  resulting
in dollar  price  pressure  for machine  sales.  All  Japanese  equipment  based
competitors  in the  industry  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 we no
longer  required.  to support  its new  business  model (See Note 19 of Notes to
Consolidated   Financial   Statements).   The  Company  believes  the  continued
implementation of the cost reduction program coupled with its  reorganization of
operational  functions will allow it to position  itself to return to profitable
operations.

Results of Operations

     The following table presents  certain income statement items expressed as a
percentage of total  revenue for the fiscal years ended  January 31, 2002,  2001
and 2000..


<TABLE>
<CAPTION>
                                                        2002                     2001                    2000
                                                        ----                     ----                    ----

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

              Cost of sales                              68.1%                    66.0%                   65.9%

              Operating expenses                         64.8%                    58.6%                   42.9%

              Interest expense, net                       0.6%                     0.6%                    1.5%

              Other expense (income), net                -1.9%                    -1.3%                   -0.5%
                                                   ------------            -------------            ------------

              (Loss) income before income
                taxes and minority interest             -31.6%                   -23.9%                  -10.9%

              Income tax (benefit) provision            -11.3%                    -0.3%                    0.8%

              Loss on Discontinued Operations           -14.6%                    -.01%                   -1.5%

              Cumulative Effect of Accounting
               Change                                     0.0%                     0.0%                   -2.6%

              Minority Interest                           0.0%                     0.2%                    0.3%
                                                   ------------            -------------            ------------

              Net (loss) income                         -34.9%                   -23.9%                  -16.2%
                                                   ============            =============            ============
</TABLE>

Critical Accounting Policies
----------------------------

     The  Company  considers  certain  accounting  policies  related  to revenue
recognition,  impairment  of long lived  assets and  valuation  of deferred  tax
assets to be critical policies due to the estimation involved in each.

     Revenue Recognition - The Company distributes  embroidery equipment that it
offers  for  sale or  lease.  Prior  to the  issuance  by the  SEC of the  Staff
Accounting  Bulletin  No.  101  ("SAB  101"),  revenue  related  to the  sale of
equipment  was  recorded  at the time of  shipment.  The Company has adopted the
recommendation  of SAB 101 effective with reporting for fiscal year 2000.  Where
installation and customer  acceptance are a substantive part of the sale, by its
terms,  the Company has deferred  recognition of the revenue until such customer
acceptance of installation  has occurred.  Comparisons of financial  performance
have been  retroactively  adjusted  to  reflect  the  impact  of this  change in
accounting  method (See Note 14 to the Consolidated  Financial  Statements).  In
fiscal  year  2002  and  2001,  most  sales  of new  equipment  did not  require
installation within the terms of the sales contract.  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.

     Impairment of Long-Lived Assets - In accordance with Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for  Long-Lived  Assets to be Disposed Of" ("SFAS 121"),  the Company
reviews  its  long-lived  assets,   including  property,  plant  and  equipment,
identifiable  intangibles (goodwill) 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.
During the fourth quarter of fiscal 2001, $7,640,000 of goodwill associated with
the  acquisitions of SMX Corporation,  Sedeco  Corporation and All Pro Punching,
Inc. was written off in accordance  with SFAS121.  During the fourth  quarter of
Fiscal 2002, the remaining balance of $3,477,000 of goodwill associated with the
acquisitions  of SMX  Corporation  and Sedeco  Corporation was written off. (See
Note 16 to the Consolidated Financial Statements.)

     Excess of cost over net assets  acquired  (Goodwill) - Goodwill  represents
the  difference  between the  purchase  price and the fair  market  value of net
assets  acquired  in business  combinations  treated as  purchases.  Goodwill is
amortized on a straight-line basis. Management has reassessed the useful life of
goodwill for these acquisitions and the remaining balance was written off in the
fourth quarter of 2002 as an impairment charge.

     Income Taxes - The Company  accounts for income taxes pursuant to Statement
of Financial  Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No.  109").  SFAS No.  109  requires  recognition  of  deferred  tax  assets and
liabilities  for the expected  future tax  consequences of events that have been
included in the  Company's  consolidated  financial  statements  or tax returns.
Under this method,  deferred tax assets and liabilities are determined  based on
the  differences  between the financial  accounting  and tax bases of assets and
liabilities  using  enacted  tax  rates in  effect  for the  year in  which  the
differences are expected to reverse.  Valuation  allowances are established when
the Company  cannot  determine the future  utilization of some portion or all of
the deferred tax asset.


Fiscal Year 2002 as Compared to Fiscal Year 2001
------------------------------------------------

     Net sales. Net sales for fiscal year 2002 were $52.6 million, a decrease of
$13.1  million,  or 19.9%  compared to $ 65.7 million for fiscal year 2001.  The
Company believes that the reduction in the sales level for the fiscal year ended
January 31, 2002 is primarily  attributable  to a decrease in overall demand for
new multi-head  embroidery machines,  as well as increased pricing pressure from
the  marketplace.  Sales of the Company's used machines,  computer  hardware and
software,  parts and service,  application  software and embroidery supplies for
fiscal year 2002  aggregated  approximately  $16.1  million as compared to $25.8
million for fiscal year 2001, a decrease of $9.7 million or 37.6%.

     Cost of sales.  For fiscal year 2002,  cost of sales decreased $7.6 million
or 17.5%, to $35.8 million from $43.4 million for fiscal year 2001. The decrease
was a result  of the  related  decrease  in net sales  for  fiscal  year 2002 as
compared to fiscal year 2001.  The  Company's  gross margin  declined for fiscal
year 2002 to 31.9%, as compared to 34.0% for fiscal year 2001.  Included in cost
of sales was a writedown of inventory of approximately  $1.8 million (see Note 4
to the Consolidated Financial  Statements).  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 lower gross  margins also reflect the  aggressive  pricing used to
meet market demand.

     Operating  Expenses.  As reported for fiscal year 2002,  operating expenses
decreased $4.5 million or 11.7%,  to $34.0 million from $38.5 million for fiscal
year 2001.  Excluding  the non  recurring  charges for goodwill  impairment  and
restructuring  costs,  operating  expenses were $27.9 million, a decline of $2.9
million or 9% from $30.8  million.  During the fourth quarter of fiscal 2001, in
view of the overall  industry  decline in demand for  embroidery  equipment  and
related  products,  the resulting  decline in Company  revenue  delivered in the
territories  associated  with the  acquisition  of SMX  Corporation  and  Sedeco
Corporation  and the  Company's  impairment  evaluation,  the Company  wrote-off
approximately  $7.6 million of goodwill as an impairment  charge to  operations.
This  write-off  includes the remaining  value of goodwill  associated  with its
acquisition of the digitizing  embroidery  business  assets of All Pro Punching,
Inc.  of  approximately  $0.2  million,   reflecting   discontinuance  of  those
operations.  The goodwill  write-off  represented a per-share net loss of $ 0.84
both on a basic and diluted  basis for fiscal year 2001.  The Company  performed
another  impairment  evaluation  during the  fourth  quarter of 2002 for the SMX
Corporation  and Sedeco  Corporation  territories  and as a result wrote off the
balance  of the  goodwill  associated  with  these  acquisitions.  The  goodwill
write-off represented a per-share net loss of $ 0.39 both on a basic and diluted
basis for fiscal  year  2002.  Operating  expenses  also  include  restructuring
charges  reflecting the Company's plan to reduce operating costs relative to the
anticipated sales volume.  Included in this non-recurring charge are $.6 million
in employee  severance  costs and $2.1 million in facilities  combinations/lease
restructures (see Note 19 to the Consolidated Financial Statements). The Company
also continued to incur  development  costs associated with the Hometown Threads
business  initiative,  which  were  partially  offset,  by the sale of its first
franchises.

     Interest  Expense.  Interest  expense for fiscal year 2002 was $0.3 million
versus  interest  expense of $0.4  million  for fiscal  year 2001.  The  Company
continued its aggressive  inventory  reduction  program in fiscal year 2002. The
results of this program  directly  reflect  increased  liquidity  and  decreased
interest expense as a result of reduced working capital  borrowings  outstanding
against the Company's Revolving Credit Agreements during fiscal 2002 as compared
to fiscal 2001. The sale of the corporate headquarters also reduced the need for
working capital borrowings.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective  tax benefit rate of  approximately  35.9% for the twelve months ended
January 31,  2002 as  compared to an income tax benefit  rate of 1.4% for fiscal
year 2001.  The benefit rate for the fiscal 2002 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.  The  difference  of the above  rate to the  federal
statutory rate for 2001 is the valuation  allowance  established on deferred tax
assets  since the  Company  cannot  determine  the future  utilization  of those
assets.

     Loss on 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  UNL  liability  and the  sale  of the  residual  receivable
associated with it; $2.6 million increase in the MLPR provision; as well as $1.1
million in other costs.  The prior  year's  Statement  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.)

     Net  (Loss).  The net loss for  fiscal  year  2002 was  $18.3  million,  an
increase of $2.6  million,  compared  to a net loss of $15.7  million for fiscal
year 2001.  This  increase is  attributable  to the  decrease  in net sales,  an
increase in the cost of sales, an increase  operating  expenses  associated with
the restructuring  charge of $2.7 million and a loss on discontinued  operations
of $7.7  million.  These  charges  were  offset  by the  reduction  in  goodwill
impairment  charge  of  $4.2  million,  a  reduction  in  selling,  general  and
administrative  expenses of $2.9  million and an increase in tax benefit of $5.7
million.


Fiscal Year 2001 as Compared to Fiscal Year 2000
------------------------------------------------

     Net sales. Net sales for fiscal year 2001 were $65.7 million, a decrease of
$19.8  million,  or 23.2%,  compared to $ 85.5 million for fiscal year 2000. The
Company believes that the reduction in the sales level for the fiscal year ended
January  31,  2001 is  attributable  to a  decrease  in  overall  demand for new
multi-head  embroidery  machines,  stability  in  demand  for  small  embroidery
machines,  coupled with increased  competition and a weakened Yen exchange rate,
resulting in downward pressure in US dollar pricing.

     Sales of new embroidery machinery represented approximately 66.4% and 72.8%
of net sales for fiscal  year's 2001 and 2000,  respectively.  Small  embroidery
machines (one through six-head "FX" models)  represented  approximately 66.5% of
total new  embroidery  machine  sales for fiscal year 2001 as compared to 57.7%,
for fiscal year 2000.  Large embroidery  machines  (six-head "DC" models through
thirty-head  models)  represented  approximately  33.5% of total new  embroidery
machine  sales during  fiscal year 2001 as compared to  approximately  42.3% for
fiscal year 2000.

     Revenue from the sale of the Company's used machines, computer hardware and
software,  parts and service,  application  software and embroidery supplies for
fiscal year 2001  aggregated  approximately  $25.8  million as compared to $23.6
million for fiscal year 2000.

     Cost of sales.  For fiscal year 2001, cost of sales decreased $14.0 million
or 24.4%, to $43.4 million from $57.4 million for fiscal year 2000. The decrease
was a result  of the  related  decrease  in net sales  for  fiscal  year 2001 as
compared to fiscal year 2000. The  fluctuation of the dollar against the yen has
historically  had a minimal  effect  on Tajima  equipment  gross  margins  since
currency fluctuations are generally reflected in pricing adjustments in order to
maintain  consistent  gross margins on machine  revenues.  The  Company's  gross
margin  increased for fiscal year 2001 to 34.0%, as compared to 32.9% for fiscal
year 2000.  The  increase in gross margin is mainly  attributable  to changes in
overall sales mix.

     Operating  Expenses.  As reported for fiscal year 2001,  operating expenses
increased  $1.8 million or 4.9%,  to $38.5 million from $36.7 million for fiscal
year 2000. Operating expenses increased as a percentage of revenues to 58.6% for
fiscal year 2001, from 42.9% for fiscal year 2000.  During the fourth quarter of
fiscal 2001 in view of the  overall  industry  decline in demand for  embroidery
equipment  and  related  products,  the  resulting  decline in  Company  revenue
delivered in the territories  associated with the acquisition of SMX Corporation
and Sedeco  Corporation  and the Company's  impairment  evaluation,  the Company
wrote-off  approximately  $7.6  million of goodwill as an  impairment  charge to
operations.  This write-off includes the remaining value of goodwill  associated
with its  acquisition of the digitizing  embroidery  business  assets of All Pro
Punching, Inc. of approximately $0.2 million, reflecting discontinuance of those
operations.  The goodwill  write-off  represented a per-share net loss of $ 0.84
both on a basic and  diluted  basis for  fiscal  year  2001.  The  Company  also
continued  to incur  development  costs  associated  with the  Hometown  Threads
business initiative. While operating expenses continue to decline as a result of
the Company's cost reduction  programs,  of the percentage increase in operating
expenses versus revenues for fiscal 2000, a significant  portion is attributable
to these  non-recurring and developmental  expenses.  Based upon the decrease in
net sales,  the Company  continues to implement  its cost  reduction  plan.  The
Company anticipates that actions taken in accordance with the plan will continue
to  reduce  costs  through  the   consolidation   of  support  and  back  office
infrastructure  and  reduction of overhead.  The Company  anticipates  this will
bring operating expenses in line with revised sales projections.

     Interest  Expense.  Interest  expense for fiscal year 2001 was $0.4 million
versus  interest  expense of $1.3  million  for fiscal  year 2000.  The  Company
continued its aggressive  inventory  reduction  program in fiscal year 2001. The
results of this program  directly  reflect  increased  liquidity  and  decreased
interest expense as a result of reduced working capital  borrowings  outstanding
against the Company's Revolving Credit Agreements during fiscal 2001 as compared
to fiscal 2000.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective  tax benefit rate of  approximately  0.3% for the twelve  months ended
January 31, 2001 as compared to an income tax rate of 9.6% for fiscal year 2000.
The difference of the above rates to the federal statutory rate is the valuation
allowance  established on deferred tax assets since the company cannot determine
the future utilization of those assets.

     Loss on Discontinued Operations. The loss pertains to the operations of the
HAPL Leasing  subsidiary.  The prior year's  Statements of Operations  have been
restated  to reflect  the results of the HAPL  Leasing  subsidiary  as a loss on
discontinued operations.

     Net  (Loss).  The net loss for  fiscal  year  2001 was  $15.7  million,  an
increase of $1.9  million,  compared  to a net loss of $13.8  million for fiscal
year 2000. The net margin  declined to (22.2%) for fiscal year 2001 from (15.2%)
for fiscal year 2000.  These  declines are  attributable  to the decrease in net
sales,  an increase in  operating  expenses as a percentage  of revenues,  and a
goodwill  impairment  charge of $7.6 million.  The reported loss for fiscal year
2000 included a cumulative effect for accounting change of $2.2 million; without
that change the  difference  between fiscal year 2001 and fiscal year 2000 would
have been $2.2 million greater.


Liquidity and Capital Resources
-------------------------------

     Operating Activities and Cash Flows

     The  Company's  working  capital  was $21.5  million at January  31,  2002,
decreasing  $1.9 million or 7.5%,  from $25.2 million,  at January 31, 2001. The
decrease in working capital was principally due to continued reductions in cash,
inventory  and  accounts  receivable  reflecting  a  reduced  level of  business
activity  and  funding  of  operating  losses.  The  Company  has  financed  its
operations   principally   through   long-term   financing  of  certain  capital
expenditures   and  working  capital   borrowings  under  its  revolving  credit
facilities, and by the sale of its corporate headquarters.

     During fiscal year 2002,  the Company's  cash  decreased by $4.4 million to
$3.1  million.  Net cash of $7.6  million  was used by the  Company's  operating
activities and was largely driven by the net loss in fiscal 2002, offset in part
by increases in accounts payable and accrued expenses.

     During fiscal 2002 the Company sold its corporate headquarters in Hauppauge
to  Brandywine  Realty  Services and leased back the front half of the building.
The proceeds from the sale were approximately $4.2 million.

     Cash  generated  from  investing  activities  of $250,000  was used for the
purchase of 232,600  shares of the  Company's  stock in the open  market  during
fiscal year 2002, at an average cost of approximately $1.07 per share.

Future Commitments
------------------

     The following table shows the Company's contractual  obligations related to
long-term  obligations  (See  Notes  9 and  15  to  the  Consolidated  Financial
Statements).

<TABLE>
<CAPTION>
                      Payments due by period (in thousands)

                                        Total       Less than 1 year       1 - 3 years         4-5 years         More than 5 years
                                        -----       ----------------       -----------         ---------         -----------------

Contractual Obligations
-----------------------

<S>                                     <C>             <C>                   <C>               <C>                     <C>
Capital lease obligations.........      $1,724          $   82                $  224            $  324                  $1,094

Operating Lease obligations......        5,003           1,092                 1,677             1,232                   1,002
                                        ------          ------                ------             -----                  ------
Total                                   $6,727          $1,174                $1,901            $1,556                  $2,096
                                        ======          ======                ======            ======                  ======
</TABLE>


Revolving Credit Facility and Borrowings

     Effective as of September 30, 1999 the Company  entered a Revolving  Credit
and Security  Agreement (the "Agreement") with PNC Bank. The Agreement  provides
for a commitment of $20.0 million for Hirsch and all wholly-owned  subsidiaries.
The Agreement is used for working capital loans,  letters of credit and deferred
payment  letters of credit and bears interest as defined in the  Agreement.  The
terms of the  Agreement,  as  amended,  restrict  additional  borrowings  by the
Company and require the Company to maintain  certain  interest  expense coverage
ratios, as defined therein. There were no outstanding working capital borrowings
against the  Agreement at January 31, 2002.  The  Agreement  was used to support
trade  acceptances  payable of approximately  $2.2 million as of that date. This
agreement expires September 17, 2002 and the Company expects to renew it at that
time.

     Future Capital Requirements

     Subsequent to the close of the year, 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 should provide approximately
$6.0  million in cash  available  for  operations.  The Company  believes  these
proceeds,  with its existing cash and funds generated from operations,  together
with its existing  revolving  credit  facility,  will be  sufficient to meet its
working  capital and capital  expenditure  requirements  and to finance  planned
growth.

     Backlog and Inventory

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

     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

     In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) 141, Business Combinations,  and SFAS 142,
Goodwill and Other Intangible  Assets.  SFAS 141 requires business  combinations
initiated  after June 30, 2001 to be accounted for using the purchase  method of
accounting.  It also specifies the types to acquired  intangible assets that are
required to be recognized and reported  separately from goodwill.  SFAS 142 will
require  that  goodwill  and certain  intangibles  no longer be  amortized,  but
instead  tested for  impairment  at least  annually.  SFAS 142 is required to be
applied starting with fiscal years beginning after December 15, 2001, with early
application  permitted in certain  circumstances.  The Company is reviewing  the
provisions  of this  standard.  Its  adoption is not expected to have a material
effect of the financial statements.

     In  August  2001,  the FASB  issued  FASB No.  143,  "Accounting  for Asset
Retirement Obligations." SFAS No. 143 provides accounting and reporting guidance
for legal  obligations  associated with the retirement of long-lived assets that
result from the  acquisition,  construction  or normal  operation of  long-lived
asset.  The standard is effective  January 1, 2003. The company is reviewing the
provisions  of this  standard.  Its  adoption is not expected to have a material
effect on the financial statements.

     In  August  2001,  the  FASB  issued  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.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived  Assets to Be Disposed Of" and provides  updated  guidance
concerning the  recognition  and  measurement of an impairment  loss for certain
types of long-lived assets. This Statement is effective for financial statements
issued for fiscal years  beginning  after December 15, 2001, and interim periods
within those fiscal years. The Company will adopt this pronouncement on February
1, 2002,  and does not  believe  that there will be any  material  impact on its
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 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. 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 IN SUPPLEMENTARY DATA

     The information contained in pages F-1 through F-34 hereof.

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

     None



                                    PART III

                      Documents Incorporated by Reference:

Portions of the Registrant's  definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year (January
31, 2002) are incorporated by reference in Part III, Items 10-13 hereof.

ITEM 10. Directors and Executive Officers of the Registrant

ITEM 11. Executive Compensation

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

ITEM 13. Certain Relationships and Related Transactions



                                     PART IV

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

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

Index to Consolidated Financial Statements...........................  21-25

Signature Page.......................................................    26

Independent Auditors' Report..........................................  F-1

Consolidated Balance Sheets...........................................F-2 to F-3

Consolidated Statements of Income.....................................F-4 to 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-25


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

<S>           <C>
%3.1          Restated Certificate of Incorporation of the Registrant
^3.2          Amended and Restated By-Laws of the Registrant
*4.1          Specimen of Class A Common Stock Certificate
*4.2          Specimen of Class B Common Stock Certificate
*10.1         Employment Agreement between Tas Tsonis and Pulse Microsystems, Ltd.
*10.2         Employment Agreement between Brian Goldberg and Pulse Microsystems, Ltd.
+10.3         Amendment to Employment Agreement between Tas Tsonis and Pulse Microsystems, Ltd.
+10.4         Amendment to Employment Agreement between Brian Goldberg and Pulse Microsystems, Ltd.
*10.5         Distributorship Agreement Dated February 21, 1991 together with Supplements and Amendments
              thereto, among Tajima Industries, Ltd., Nomura Trading Co. Ltd., Nomura (America) Corp. and
              Hirsch International Corp. ("Hirsch Distributorship Agreement")
@10.6         Amendment Number Two to Hirsch Distributorship Agreement, Dated June 7, 1996
@10.7         Distributorship Agreement, Dated February 21, 1991, together with Supplement Dated February 21,
              1996, among Tajima Industries, Ltd., Nomura Trading Co. Ltd., Nomura (America) Corp., and Sedeco,
              Inc.
@10.8         West Coast Distributorship Agreement, Dated February 21, 1997, among Tajima Industries, Ltd.,
              Nomura Trading Co. Ltd. and Nomura (America) Corp., and Hirsch International Corp.
%10.9         Stock Option Plan, as Amended
#10.10        1994 Non-Employee Director Stock Option Plan
++10.11       Employment Agreement between Hirsch International Corp. and Paul Gallagher
**10.12       Lease Agreement dated March 8, 2001 between the Company and Brandywine Operating Partnership, L.P.
10.13         First Amendment to Lease dated December 2001 between the Company and Brandywine Operating Partnership, L.P.
+++10.14      Memorandum of Request for Business with Mexico, Latin American and Caribbean Countries among
              Hirsch International Corp., Tajima Industries Ltd. and TM Trading Co., Ltd. dated as of July 27,
              1999
+++10.15      Loan Agreement among Hirsch International Corp., HAPL Leasing Co., Inc., Sewing Machine Exchange,
              Inc., Pulse Microsystems Ltd., Sedeco, Inc., Hirsch Equipment Connection, Inc., Hometown Threads,
              LLC, HJ Grassroots, LLC and PNC Bank, NA dated September 30, 1999
10.16         Waiver and Amendment to Loan Agreement among Hirsch International Corp., HAPL Leasing Co., Inc.,
              Sewing Machine Exchange, Inc., Pulse Microsystems Ltd., Sedeco, Inc., Hirsch Equipment
              Connection, Inc., Hometown Threads, LLC, HJ Grassroots, LLC and PNC Bank, NA dated October 30,
              2000
21.1          List of Subsidiaries of the Registrant
23.1          Independent Auditor's Consent

</TABLE>

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

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

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

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

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

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

     ++  Incorporated  by reference  from  Registrant's  Form 10-Q filed for the
quarter ended September 30, 2001.

     +++  Incorporated  by reference from  Registrant's  Form 10-Q filed for the
quarter ended October 31, 1999.

     ++++  Incorporated by reference from  Registrant's  Form 10-K filed for the
fiscal year ended January 31, 2001.

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

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

<PAGE>

                                   SIGNATURES

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

HIRSCH INTERNATIONAL CORP.
--------------------------
       Registrant

                                     By:  \s\Henry Arnberg
                                          --------------------------------------
                                          Henry Arnberg, Chief Executive Officer
Dated:  May 1, 2002

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

<TABLE>
<CAPTION>

             Signature                                        Title                                   Date
             ---------                                        -----                                   ----

<S>                                    <C>                                                       <C>
\s\ Henry Arnberg                      Chairman of the Board of Directors and Chief               May 1, 2002
------------------------------
Henry Arnberg                          Executive Officer (Principal Executive Officer)


\s\ Paul Levine                        President and Director                                     May 1, 2002
------------------------------
Paul Levine


\s\ Paul Gallagher                     Chief Operating Officer                                    May 1, 2002
------------------------------
Paul Gallagher


\s\ Tas Tsonis                         Vice President and Director                                May 1, 2002
------------------------------
Tas Tsonis


\s\ Beverly Eichel                     Vice President-Finance and Administration, and             May 1, 2002
------------------------------
Beverly Eichel                         Chief Financial Officer (Principal Accounting and
                                       Financial Officer)


\s\ Ronald Krasnitz                    President TUI, Secretary and Director                      May 1, 2002
------------------------------
Ronald Krasnitz


\s\ Marvin Broitman                    Director                                                   May 1, 2002
------------------------------
Marvin Broitman


\s\ Mary Ann Domuracki                 Director                                                   May 1, 2002
------------------------------
Mary Ann Domuracki


\s\ Herbert M. Gardner                 Director                                                   May 1, 2002
------------------------------
Herbert M. Gardner


</TABLE>

<PAGE>

Independent Auditors' Report


Board of Directors
Hirsch International Corp.
Hauppauge, New York


We  have  audited  the  accompanying   consolidated  balance  sheets  of  Hirsch
International  Corp. and  subsidiaries  as of January 31, 2002 and 2001, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  January 31,  2002.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion of these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Hirsch International
Corp. and  subsidiaries as of January 31, 2002 and 2001 and the results of their
operations  and their cash flows for each of the three years in the period ended
January 31, 2002 in conformity with accounting  principles generally accepted in
the United State of America.




By: /s/ BDO Seidman, LLP
   ----------------------------
   BDO Seidman, LLP
   Melville, New York
   April 19, 2002

                                       F-1

<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 AND 2001
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


<S>                                                     <C>                 <C>
ASSETS                                                     2002               2001

CURRENT ASSETS:

  Cash and cash equivalents                             $3,121,000          $7,544,000
  Accounts receivable, net of an allowance for
  possible losses of approximately $2,893,000
  and $2,570,000, respectively (Notes 4 and 15)          7,509,000           9,840,000
  Net investment in sales-type leases -
   current portion (Note 5)                                      0           2,576,000
  Inventories, net (Notes 3 and 4)                      12,664,000          15,154,000
  Prepaid and refundable income taxes                    6,932,000           1,762,000
  Other current assets                                     324,000             274,000
  Net assets of discontinued operations (Note 7)         3,420,000                   0
                                                        ----------          ----------
          Total current assets                          33,970,000          37,150,000
                                                        ----------          ----------

NET INVESTMENT IN SALES - TYPE LEASES - Noncurrent
  portion (Note 5)                                               0           6,110,000

GOODWILL - Net of accumulated amortization of
  $0 and $12,656,000, respectively (Note 16)                     0           4,169,000

PURCHASED TECHNOLOGIES - Net of accumulated
  amortization of $1,339,000 and
  $1,323,000, respectively                                       0              16,000

PROPERTY, PLANT AND EQUIPMENT - Net of accumulated
  depreciation and amortization (Note 6)                 3,515,000           5,447,000

OTHER ASSETS                                               794,000           1,138,000
                                                        ----------           ---------
TOTAL ASSETS                                           $38,279,000         $54,030,000
                                                       ===========         ===========

</TABLE>

See notes to consolidated financial statements.

                                                                     (Continued)


                                       F-2


<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 AND 2001
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


<S>                                                    <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY                       2002               2001

CURRENT LIABILITIES:

  Trade acceptances payable                            $ 2,185,000          $3,974,000
  Accounts payable and accrued expenses (Note 8)        10,088,000           7,924,000
  Current maturities of long term debt (Note 9)            202,000              38,000
                                                        ----------          ----------
          Total current liabilities                     12,475,000          11,936,000

CAPITALIZED LEASE OBLIGATIONS - Less current
  maturities (Note 9)                                    1,642,000              79,000
DEFERRED GAIN - Less current maturities (Note 9)           966,00                    -
                                                        ----------          ----------
     Total liabilities                                  15,083,000          12,015,000
                                                        ----------          ----------
MINORITY INTEREST (Note 1)                               1,737,000           1,737,000
                                                        ----------          ----------
COMMITMENTS AND CONTINGENCIES (Note 15)

STOCKHOLDERS' EQUITY (Note 11):
   Preferred stock, $.01 par value; authorized:
   1,000,000 shares; issued: none                                -                   -

  Class A common stock, $.01 par value;
   authorized: 20,000,000 shares; issued and outstanding;
   6,815,000 and 6,120,000 shares, respectively,
   at January 31, 2002;and 6,815,000 and 6,353,000
   shares, respectively at January 31, 2001;                68,000              68,000
  Class B common stock, $.01 par value;
   authorized: 3,000,000 shares, outstanding:
   2,668,000 shares                                         27,000              27,000
  Additional paid-in capital                            41,397,000          41,397,000
  Retained earnings (deficit)                          (18,275,000)             50,000
  Accumulated other comprehensive income (loss)           (156,000)             88,000
                                                        -----------         ----------
                                                        23,061,000          41,630,000
  Less: Treasury Class A Common stock at cost,
        695,000 and 462,000 shares, respectively         1,602,000           1,352,000
                                                        ----------          ----------
        Total stockholders' equity                      21,459,000          40,278,000
                                                        ----------          ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $38,279,000        $ 54,030,000
                                                      ============        ============
</TABLE>

See notes to consolidated financial statements.


                                       F-3

<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF OPERATIONS

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

                                                           2002                 2001              2000
                                                           ----                 ----              ----

NET SALES                                              $52,561,000          $65,677,000       $85,536,000

COST OF SALES                                           35,774,000           43,374,000        57,364,000
                                                        ----------           ----------        ----------

GROSS PROFIT                                            16,787,000           22,303,000        28,172,000
                                                        ----------           ----------        ----------

OPERATING EXPENSES
    Selling, general and administrative                 27,897,000           30,829,000        36,665,000
    expenses
    Impairment of Goodwill (Note 16)                     3,477,000            7,640,000                 -
    Restructuring costs (Note 8)                         2,673,000                -                -
                                                         ---------           ----------        ----------
            Total operating expenses                    34,047,000           38,469,000        36,665,000
                                                        ----------           ----------        ----------

OPERATING LOSS                                         (17,260,000)         (16,166,000)       (8,493,000)
                                                        ----------           ----------         ---------

OTHER EXPENSE (INCOME)
    Interest expense                                       317,000              378,000         1,274,000
    Other expense (income) - net                          (984,000)            (828,000)         (455,000)
                                                        ----------           ----------         ---------
            Total other expense (income)                  (667,000)            (450,000)         819,000
                                                        ----------           ----------         ---------

LOSS BEFORE PROVISION FOR INCOME TAXES,
    MINORITY INTEREST IN NET EARNINGS OF
    CONSOLIDATED SUBSIDIARY, DISCONTINUED
    OPERATIONS AND CUMULATIVE EFFECT OF
    ACCOUNTING CHANGE                                  (16,593,000)         (15,716,000)       (9,312,000)

INCOME TAX (BENEFIT) PROVISION (Note 10)                (5,954,000)            (224,000)           710,000

MINORITY INTEREST IN NET EARNINGS
    OF CONSOLIDATED SUBSIDIARY (Note 1)                          0              109,000           294,000
                                                        ----------           ----------         ---------

LOSS BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE             (10,639,000)        (15,601,000)      (10,316,000)

LOSS ON DISCONTINUED OPERATIONS - NET OF TAX
    EXPENSE (BENEFIT) OF $(863,000), $0 AND
    $262,000 RESPECTIVELY (NOTE 7)                      (7,686,000)            (70,000)       (1,319,000)

CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (NOTES 2 and 14)                                          0                   0        (2,187,000)
                                                       -----------          ----------       ------------

NET LOSS                                              ($18,325,000)       ($15,671,000)     ($13,822,000)
                                                      =============       =============     =============

LOSS PER SHARE:
    Basic and diluted:
      Loss before discontinued operations
      and cumulative effect of accounting
      change                                               ($1.20)             ($1.71)           ($1.11)



                                       F-4


<PAGE>

    Loss on Discontinued operations                        ($0.86)             ($0.01)           ($0.14)

      Cumulative effect of accounting
      change                                                    -                   -            ($0.23)
                                                       ----------           ----------         ---------

    Basic and diluted                                      ($2.06)             ($1.72)           ($1.48)
                                                           =======             =======           =======

WEIGHTED AVERAGE NUMBER OF SHARES
    IN THE CALCULATION OF LOSS

      Basic and diluted                                 8,892,900            9,112,200         9,348,500
                                                        =========            =========         =========

</TABLE>

See notes to consolidated financial statements.


                                       F-5

<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                    Class A                       Class B
                                                  Common Stock                   Common Stock
                                                    (Note 11)                     (Note 11)
                                             ---------------------        ------------------------
                                                                                                         Additional
                                                                                                          Paid-In
                                             Shares        Amount         Shares            Amount        Capital
                                             ------        ------         ------            ------        -------

<S>                                         <C>               <C>         <C>                <C>        <C>
BALANCE, JANUARY 31, 1999                   6,815,000         68,000      2,668,000          27,000     41,397,000

  Purchase of treasury shares (Note 12)          --             --             --              --             --
Comprehensive income:
    Gain on Foreign Currency Translation         --             --             --              --             --
    Net loss                                                    --             --              --             --
Total comprehensive income                       --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------
BALANCE, JANUARY 31, 2000                   6,815,000         68,000      2,668,000          27,000     41,397,000

  Purchase of treasury shares (Note 12)          --             --             --              --             --
Comprehensive income:
    Gain on Foreign Currency Translation         --             --             --              --             --
    Net loss                                                    --             --              --             --
Total comprehensive income                       --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------
BALANCE, JANUARY 31, 2001                   6,815,000   $     68,000      2,668,000    $     27,000   $ 41,397,000

Purchase of treasury shares (Note 12)            --             --             --              --             --
Comprehensive income:
    Gain on Foreign Currency Translation         --             --             --              --             --
    Net loss                                                    --             --              --             --
Total comprehensive income                       --             --             --              --             --
                                          ------------   ------------   ------------    ------------   ------------
BALANCE, JANUARY 31, 2002                   6,815,000   $     68,000      2,668,000    $     27,000   $ 41,397,000
                                          ============   ============   ============    ============   ============

</TABLE>


<TABLE>
<CAPTION>
                                             Accumulated
                                                other         Retained
                                            Comprehensive     Earnings         Treasury
                                            Income (Loss)     (Deficit)         Stock           Total
                                            ------------      --------          -----           -----
                                                (Note 2)

<S>                                         <C>              <C>               <C>           <C>
BALANCE, JANUARY 31, 1999                          --        29,543,000        (828,000)     70,207,000

  Purchase of treasury shares (Note 12)            --              --          (353,000)       (353,000)
Comprehensive income:
    Gain on Foreign Currency Translation         221,000           --              --
    Net loss                                       --       (13,822,000)           --
Total comprehensive income                         --              --              --       (13,601,000)
                                            ------------    ------------    ------------    ------------
BALANCE, JANUARY 31, 2000                        221,000      15,721,000    (  1,181,000)     56,253,000

Purchase of treasury shares (Note 12)              --              --         (  171,000)       (171,000)
Comprehensive income:
    Loss on Foreign Currency Translation        (133,000)          --              --
    Net loss                                       --        (15,671,000)          --
Total comprehensive income                         --              --              --        (15,804,000)
                                            ------------    ------------    ------------    ------------
BALANCE, JANUARY 31, 2001                   $     88,000     $    50,000    ($ 1,352,000)   $ 40,278,000

Purchase of treasury shares (Note 12)              --              --         (  250,000)       (250,000)
Comprehensive income:
    Loss on Foreign Currency Translation        (244,000)          --              --
    Net loss                                       --        (18,325,000)          --
Total comprehensive income                         --              --              --        (18,569,000)
                                            ------------    ------------    ------------    ------------
BALANCE, JANUARY 31, 2002                   $   (156,000)   ($18,275,000)   ($ 1,602,000)   $ 21,459,000
                                            ============    ============    ============    ============

</TABLE>


     See notes to consolidated financial statements.

                                       F-6

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                2002              2001               2000
                                                                ----              ----               ----

<S>                                                        <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net (loss)                                                $(18,325,000)      $(15,671,000)      $(13,822,000)
 Adjustments to reconcile net loss to net cash
  (used in) provided by operating activities:
  Depreciation and amortization                               2,186,000          3,425,000          3,920,000
  Recognized gain on sale of assets                            (170,000)                 0                  0
  Provisions for reserves                                     3,275,000            436,000          5,151,000
  Deferred income taxes                                               0            130,000          4,542,000
  Minority interest                                                   0            108,000            294,000
  Write-off of goodwill                                       3,477,000          7,640,000                  -

  Changes in assets and liabilities:
   Accounts receivable                                        1,461,000          5,836,000          1,630,000
   Net investments in sales-type leases                      (2,897,000)         2,104,000          2,870,000
   Inventories                                                 (466,000)        11,738,000          9,506,000
   Other current assets and other assets                        160,000            197,000            228,000
   Trade acceptances payable                                 (1,790,000)        (2,225,000)         4,035,000
   Accounts payable and accrued expenses                     10,634,000         (4,879,000)        (4,533,000)
   Prepaid income taxes and income taxes payable             (5,124,000)         1,781,000         (1,887,000)
                                                            -----------         ----------        -----------
      Net cash (used in) provided by operating activities    (7,579,000)        10,620,000         11,934,000
                                                             -----------        ----------         ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                          (533,000)          (848,000)        (1,029,000)
 Proceeds from sale of assets                                 4,236,000               -                  -
                                                            -----------         ----------       ------------
      Net cash (used in) provided by investing activities     3,703,000           (848,000)        (1,029,000)
                                                            -----------         ----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds of bank financing                                           -                  -          6,952,000
 Repayments of long-term debt                                   (53,000)        (3,214,000)       (19,513,000)
 Purchase of treasury shares                                   (250,000)          (171,000)          (353,000)
                                                            -----------         ----------         ----------
Net cash provided by (used in) financing activities            (303,000)        (3,385,000)       (12,914,000)
                                                            -----------         ----------        -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                        (244,000)          (133,000)           221,000
                                                            -----------         ----------        -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS             (4,423,000)         6,254,000         (1,788,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                  7,544,000          1,290,000          3,078,000
                                                            -----------         ----------        -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                     $  3,121,000       $  7,544,000       $  1,290,000
                                                            ===========         ==========       ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest and bank fees paid                              $    419,000       $   389,000        $  1,308,000
                                                            ===========        ==========        ============
  Income taxes paid                                        $      7,000       $   400,000        $    527,000
                                                            ===========        ==========        ============

</TABLE>

See notes to consolidated financial statements.

                                       F-7

<PAGE>

HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
--------------------------------------------------------------------------------

1.   BUSINESS ORGANIZATION AND BASIS OF PRESENTATION

     The accompanying  consolidated financial statements include the accounts of
     Hirsch  International Corp.  ("Hirsch"),  HAPL Leasing Co., Inc. ("HAPL" or
     "HAPL  Leasing"),   Pulse  Microsystems  Ltd.  ("Pulse"),   Sewing  Machine
     Exchange,   Inc.  ("SMX"),   Sedeco,  Inc.  ("Sedeco"),   Hirsch  Equipment
     Connection,  Inc. ("HECI"),  Hirsch Business Concepts LLC ("HBC"), Hometown
     Threads LLC ("Hometown"),  and Tajima USA, Inc. ("TUI") (collectively,  the
     "Company").

     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 and Tokai's
     share of the  earnings  has  been  reported  as  minority  interest  in the
     Company's Consolidated Statements of Operations.

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

     Due to the discontinuation of the leasing services subsidiary,  the Company
     only operates in a single reportable segment.

     See  Note 7 to  the  Consolidated  Financial  Statements  for  discontinued
     operations of the leasing subsidiary in Fiscal 2002.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     b.   Revenue  Recognition - The Company  distributes  embroidery  equipment
          that it offers for sale or lease.  Prior to the issuance by the SEC of
          the Staff Accounting Bulletin No. 101 ("SAB 101"),  revenue related to
          the  sale of  equipment  was  recorded  at the time of  shipment.  The
          Company has adopted the provisions of SAB 101 effective with reporting
          for fiscal year 2000. Where installation and customer acceptance are a
          substantive  part of the sale, by its terms,  the Company has deferred
          recognition   of  the  revenue  until  such  customer   acceptance  of
          installation has occurred.  Comparisons of financial  performance have
          been  retroactively  adjusted  to reflect the impact of this change in
          accounting method (see Note 14 to Consolidated  Financial Statements).
          In fiscal  year 2002 and 2001,  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.

          Lease  contracts  which meet the  criteria of  Statement  of Financial
          Accounting Standards No. 13, "Accounting for Leases" are accounted for
          as sales-type  leases.  Under this method,  revenue is recognized as a
          sale at the later of the time of shipment or  acceptance by the lessee
          in an amount equal to the present value of the rental payments and the
          present value is amortized over the term of the lease so as to produce
          a constant periodic rate of return on the net investment in the lease.
          The operating  method of  accounting  for leases is followed for lease
          contracts  not  meeting  the  above  criteria.  Under  this  method of
          accounting, aggregate rental revenue would be recognized over the term
          of the lease.  During the fourth  quarter of fiscal 2002,  the Company
          discontinued  the operations of its leasing  subsidiary (see Note 7 to
          the Consolidated Financial Statements).

          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.

                                       F-8

<PAGE>

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

     e.   Inventories - Inventories  consisting of machines and parts are stated
          at the lower of cost or market.  Cost for  machinery is  determined by
          specific  identification  and  for  all  other  items  on a  first-in,
          first-out  basis.  Reserves are  established to record  provisions for
          slow moving  inventories in the period in which it becomes  reasonably
          evident  that the product is not  salable or the market  value is less
          than  cost  (see  Note  4).  Used  equipment  is  valued  based  on an
          assessment of age, condition,  model type,  accessories,  capabilities
          and demand in the used machine market.

     f.   Foreign Operations - The functional  currency of the Company's foreign
          subsidiary  is the  Canadian  dollar.  Assets and  liabilities  of the
          Company's  foreign  subsidiary  are  translated  at year-end  exchange
          rates. Results of operations are translated using the average exchange
          rate prevailing  throughout the year.  Gains or losses  resulting from
          translation    adjustments   are   included   in   accumulated   other
          comprehensive  income (loss) in  stockholders'  equity.  The financial
          position and results of operations of the Canadian  subsidiary are not
          material to the financial statements and disclosures.

          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
          net income and are not significant.

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

                    Asset Category                          Lives in Years

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

     h.   Software  Development Costs - The development of new software products
          and  enhancements to existing  products are expensed as incurred until
          technological  feasibility has been established.  After  technological
          feasibility is established,  any additional costs would be capitalized
          in accordance with Statement of Financial Accounting Standards No. 86,
          "Accounting for the Costs of Computer Software to Be Sold,  Leased, or
          Otherwise  Marketed."  Capitalized  software  costs are amortized on a
          straight-line  basis over the estimated useful product lives (normally
          three years) commencing in the month following  product release.  Such
          costs are  included in other assets on the  accompanying  consolidated
          balance sheets.  Amortization  expense for the years ended January 31,
          2002, 2001 and 2000 was approximately $16,000, $191,000, and $100,000,
          respectively.

                                       F-9

<PAGE>

     i.   Impairment of  Long-Lived  Assets - In  accordance  with  Statement of
          Financial Accounting Standards No. 121, "Accounting for the Impairment
          of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of"
          ("SFAS 121"),  the Company  reviews its long-lived  assets,  including
          property, plant and equipment, identifiable intangibles (goodwill) 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.
          During  the fourth  quarter of fiscal  2001,  $7,640,000  of  goodwill
          associated   with  the   acquisitions  of  SMX   Corporation,   Sedeco
          Corporation  and All Pro Punching,  Inc. was written off in accordance
          with SFAS121.  During the fourth quarter of Fiscal 2002, the remaining
          balance of $3,477,000 of goodwill  associated with the acquisitions of
          SMX Corporation and Sedeco Corporation was written off.(See Note 18).

     j.   Purchased  Technologies - Purchased technologies represent the cost in
          the  excess  of the fair  value of the  assets of Pulse at the date of
          acquisition. Purchased technologies were fully amortized as of January
          31, 2002.

     k.   Excess  of  cost  over  net  assets  acquired  (Goodwill)  -  Goodwill
          represents  the  difference  between the  purchase  price and the fair
          market value of net assets acquired in business  combinations  treated
          as  purchases.  Goodwill  was  amortized  on  a  straight-line  basis.
          Management  has  reassessed  the value and the  remaining  balance was
          written off in the fourth quarter of 2002 as an impairment charge.

     l.   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.

     m.   Income  Taxes - The  Company  accounts  for income  taxes  pursuant to
          Statement of Financial  Accounting  Standards No. 109, "Accounting for
          Income Taxes" ("SFAS No. 109").  SFAS No. 109 requires  recognition of
          deferred  tax  assets  and  liabilities  for the  expected  future tax
          consequences  of  events  that  have been  included  in the  Company's
          consolidated  financial statements or tax returns.  Under this method,
          deferred  tax  assets  and  liabilities  are  determined  based on the
          differences  between the financial  accounting and tax bases of assets
          and  liabilities  using  enacted  tax rates in effect  for the year in
          which the  differences are expected to reverse.  Valuation  allowances
          are  established   when  the  Company  cannot   determine  the  future
          utilization of some portion or all of the deferred tax asset.

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

          Basic  earnings per share are based on the weighted  average number of
          shares of common stock outstanding during the period. Diluted earnings
          per share are based on the weighted average number of shares of common
          stock and common stock equivalents (options and warrants)  outstanding
          during the period,  computed in  accordance  with the  treasury  stock
          method.  Outstanding  options and warrants were  anti-dilutive for the
          fiscal years ended January 31, 2002, 2001 and 2000.

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


                                      F-10

<PAGE>

     p.   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, holding gains
          and losses on short term  investments  available for sale, and foreign
          exchange translation  adjustments and is presented in the consolidated
          statements of stockholders' equity.

     q.   Use  of  Estimates  -  The  preparation  of  financial  statements  in
          conformity with accounting principles generally accepted in the United
          States  of  America   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.

     r.   Fair Value of Financial  Instruments - Financial  instruments  consist
          primarily of  investments  in cash,  cash  equivalents,  trade account
          receivables,   leasing   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 31, 2002 and 2001, the fair
          value of the Company's financial instruments approximated the carrying
          value.

     s.   Recent  Accounting  Pronouncements  -  In  June  2001,  the  Financial
          Accounting  Standards Board issued Statements of Financial  Accounting
          Standards (SFAS) 141,  Business  Combinations,  and SFAS 142, Goodwill
          and Other Intangible Assets.  SFAS 141 requires business  combinations
          initiated  after June 30, 2001 to be accounted  for using the purchase
          method  of  accounting.  It  also  specifies  the  types  of  acquired
          intangible  assets that are  required to be  recognized  and  reported
          separately  from  goodwill.  SFAS 142 will require  that  goodwill and
          certain  intangibles  no longer be amortized,  but instead  tested for
          impairment  at least  annually.  SFAS 142 is  required  to be  applied
          starting with fiscal years  beginning  after  December 15, 2001,  with
          early application permitted in certain  circumstances.  The company is
          reviewing  the  provisions  of  this  standard.  Its  adoption  is not
          expected to have a material effect on the financial statements.

          In August 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset
          Retirement   Obligations."  SFAS  No.  143  provides   accounting  and
          reporting   guidance  for  legal   obligations   assocaited  with  the
          retirement  of  long-lived  assets that  result from the  acquisition,
          construction or normal  operation of a long-lived  asset. The standard
          is effective  January 1, 2003. The company is reviewing the provisions
          of this  standard.  Its  adoption  is not  expected to have a material
          effect on the financial statements.

          In August  2001,  the FASB issued 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. SFAS No. 144 replaces SFAS No. 121, "Accounting for
          the  Impairment  of  Long-Lived  Assets  and  Long-Lived  Assets to Be
          Disposed Of" and provides updated guidance  concerning the recognition
          and  measurement of an impairment loss for certain types of long-lived
          assets.  This Statement is effective for financial  statements  issued
          for fiscal  years  beginning  after  December  15,  2001,  and interim
          periods  within  those  fiscal  years.  The  Company  will  adopt this
          pronouncement  on  February 1, 2002,  and does not believe  that there
          will be any material impact on its consolidated financial statements.

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

     u.   Shipping  and  handling  expenses - The Company  records  shipping and
          handling expenses in operating expenses on the income statement. These
          expenses were  approximately  $1,194,000,  $1,297,000  and  $2,350,000
          during the years ended January 31, 2002, 2001 and 2000,  respectively.
          Amounts billed to customers are immaterial.

                                      F-11

<PAGE>

3.   INVENTORIES

                                                          January 31,
                                                        2002         2001
                                                    -------------------------

          New machines                              $11,398,000    9,732,000
          Used machines                                 935,000    2,567,000
          Parts and accessories                       2,516,000    5,305,000
          Less reserve for slow-moving inventory     (2,185,000)  (2,450,000)
                                                    -----------    ---------
          Total                                     $12,664,000  $15,154,000


                                      F-12

<PAGE>

4.   CHANGES IN RESERVES


<TABLE>
<CAPTION>
Allowance for Possible Losses:
------------------------------
                                       Opening                                          Ending
                                       Balance        Additions      Write Offs         Balance
                                       -------        ---------      ----------         -------

<S>                                  <C>           <C>              <C>             <C>
Year ended January 31, 2002          $ 2,570,000   $   870,000      $   (547,000)   $ 2,893,000

Year ended January 31, 2001          $ 5,632,000   $   274,000      $(3,336,000)    $ 2,570,000

Year ended January 31, 2000          $ 4,033,000   $ 1,615,000      $   (16,000)    $ 5,632,000



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

Year ended January 31, 2002          $ 2,450,000    $ 2,405,000      $(2,670,000)     $2,185,000

Year ended January 31, 2001          $ 3,631,000    $   162,000      $(1,343,000)     $2,450,000

Year ended January 31, 2000          $ 2,513,000    $ 1,437,000      $  (319,000)     $3,631,000

</TABLE>


5.   NET INVESTMENT IN SALES-TYPE LEASES

<TABLE>
<CAPTION>
                                                                                   January 31,
                                                                               2002           2001
                                                                            --------------------------

<S>                                                                         <C>             <C>
     Total minimum lease payments receivable                                $9,032,000      $6,267,000
     Estimated residual value of leased property (unguaranteed) (A)          5,648,000       5,251,000
     Reserve for estimated uncollectible lease payments                     (2,965,000)    (1,100,000)
 Less: Unearned income                                                      (1,997,000)    (1,732,000)
                                                                            ----------      ----------
     Net investment                                                          9,718,000       8,686,000
     Less: Current portion                                                                   2,576,000
                                                                                            ----------
     Non-current portion                                                                    $6,110,000
                                                                                             =========
     Less: Amount in Net Assets of Discontinued Operations                  (9,718,000)
                                                                            ----------
Balance per Balance Sheet                                                   $        0
                                                                            ==========

</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.


                                      F-13

<PAGE>

6.   PROPERTY, PLANT AND EQUIPMENT

                                                        January 31,
                                                  2002             2001
                                                  ---------------------

     Property Under Capital Lease Obligation    $1,786,000      $         0
     Land and building                                   0        2,767,000
     Machinery and equipment                     6,636,000        6,903,000
     Furniture and fixtures                      1,968,000        2,038,000
     Rental equipment                                    0          722,000
     Automobiles                                   294,000          296,000
     Leasehold improvements                        487,000        1,705,000
                                                 ---------        ---------
     Total                                      11,171,000       14,431,000
     Less: Accumulated depreciation and
           amortization                         (7,656,000)      (8,984,000)
                                                ----------       ----------
     Property, plant and equipment, net        $ 3,515,000      $ 5,447,000
                                                ==========       ==========


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 APB 30. The
          consolidated  financial statements have been reclassified to segregate
          the net  assets at January  31,  2002 and  operating  results of these
          discontinued operations for all periods presented.  Management intends
          to sell the net assets by June 2002.

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


                                          For the year ended January 31,
                                            2002       2001      2000
                                            ----       ----      ----

        Revenue ..............            $ 3,488     $4,590    $5,285
        Gross profit .........              1,575      1,653     2,804
        Loss from discontinued
        Operations ...........             (7,686)       (70)   (1,319)


          The operating loss in fiscal 2002 includes $4.6 million  provision for
          the  CIT/UNL  liability  and  the  sale  of the  residual  receivables
          associated with it; $2.6 million increase in the MLPR provision;  $0.6
          million employee  severance costs; and $0.5 million in asset write off
          and provision for future losses until  termination.  The UNL (Ultimate
          Net Loss) represents the Company's  liablity of up to approximaely 10%
          of all  contracts  purchased by CIT. The increase in the MLPR (Minimum
          Lease Payments Receivable) provision was to reserve against a probable
          loss on the sale of the remaining portfolio.

Assets and Liabilities of discontinued operations (in thousands) are as follows:

                                      For the year ended January 31,
                                           2002          2001
                                           ----          ----

        Assets:
          MLPR and residuals...........  $11,519       $8,573
          Property, Plant & Equipment..      260          541
          Inventory....................      214          804
          Prepaid Taxes................       40          702
                                          ------       ------

        Total Assets............          12,033       10,620
                                          ------       ------

        Liabilities:
          Accounts Payable & Accruals.    (8,159)        (28)
          Customer Deposits Payable...      (312)       (326)
          Long Term Debt..............       (55)        (93)
          Income Taxes Payable........       (87)          0
                                          ------       -----

        Total Liabilities.............    (8,613)       (447)
                                          ------        ----

                                          $3,420     $10,173
                                          ======     =======


                                      F-14

<PAGE>

8.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                         January 31,
                                                  2002                 2001
                                                  ----                 ----

     Accounts payable                          $4,900,000         $ 5,864,000
     Accrued restructuring costs (A)            2,464,000                -
     Accrued commissions payable                  158,000              72,000
     Accrued payroll costs                        543,000             421,000
     Accrued warranty and installation costs      543,000             560,000
     Customer deposits payable                     64,000             344,000
     Deferred revenue                              97,000              64,000
     Other accrued expenses                     1,319,000             599,000
                                              -----------          ----------
     Total accounts payable and accrued
          expenses                            $10,088,000          $7,924,000
                                              ===========         ===========

     (A)  In the fourth  quarter of the year ended January 31, 2002, the Company
          initiated  a  restructuring  plan in  connection  with its  continuing
          operations.  The plan was designed to meet the  changing  needs of the
          Company's  customers  and to reduce  its cost  structure  and  improve
          efficiency. The restructuring initiatives involve the consolidation of
          the parts and supplies operations with existing Hirsch operations, the
          provision for the  downsizing  of three of its existing  sales offices
          and reduction in the overall administrative  personnel.  The reduction
          in  personnel  represents  25% of its  work  force or 56  people.  The
          severance payable at year-end is expected to be paid by June 30, 2003.

          The following table summarizes the resructuring costs and activities:

<TABLE>
<CAPTION>
                                           Amount Charged                                           Balance at
                                          to Restructuring  Cash Payments    Non-Cash Charges    January 31, 2002
                                          ----------------  -------------    ----------------    ----------------

<S>                                         <C>                <C>                 <C>              <C>
Severance and Benefits...............       $  581,000         $102,000                  -          $  479,000

Excess facilities including future lease
obligations and property and
equipment............................        2,079,000           76,000             28,000           1,975,000

Other restructuring-related costs....           13,000            3,000                  -              10,000
                                            ----------         --------            -------          ----------

                                            $2,673,000         $181,000            $28,000          $2,464,000
                                            ==========         ========            =======          ==========
</TABLE>


                                      F-15

<PAGE>

9.    LONG TERM OBLIGATIONS

                                                          January 31,
                                                    2002               2001
                                                    -----------------------

        Obligation Under Capital Lease (A)      $1,724,000                  -
        Deferred Gain on Sale of Building (B)    1,086,000                  -
        Other                                         -                  117,000
                                                -----------          -----------
        Total                                    2,810,000               117,000
        Less: Current maturities                   202,000                38,000
                                                -----------          -----------
        Long-term maturities                    $2,608,000           $    79,000
                                                ===========          ===========

     (A)  Obligation  Under  Capital  Lease of the  Company at January  31, 2002
          matures as follows:

              Fiscal Year
                 Ending
               January 31,

                  2003                  $  280,000
                  2004                     289,000
                  2005                     297,000
                  2006                     306,000
                  2007                     316,000
                  2008 and thereafter    1,390,000
                                         ---------
      Total Minimum Lease Payments     $ 2,878,000

      Less:  Amount representing
         interest                       (1,154,000)
                                        ----------

      Present value of net minimum
         lease payments                  1,724,000

      Less current portion                  82,000
                                         ---------

      Long term lease obligations       $1,642,000
                                        ==========

     (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.

     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.


                                      F-16

<PAGE>

10.  INCOME TAXES

The provision  (benefit) for income taxes is based on income (loss) before taxes
on  income,  minority  interest  in net  earnings  of  subsidiary,  discontinued
operations and cumulative effect of accounting changes as follows:

                                               Years ended
                                               -----------
                          January 31, 2002   January 31, 2001  January 31, 2000
                          ----------------   ----------------  ----------------

Domestic .................  $(16,287,000)      $(14,517,000)     $(10,998,000)
Foreign  .................      (306,000)        (1,199,000)        1,686,000
                            ------------       ------------      ------------

    Total ................  $(16,593,000)      $(15,716,000)     $ (9,312,000)
                            ============       ============      ============


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

<TABLE>
<CAPTION>
                                                           January 31,
                                                2002          2001          2000
                                                ----          ----          ----

<S>                                        <C>             <C>         <C>
     Current:
      Federal                              $(6,000,000)    $ 23,000    $(3,074,000)
      State and foreign                       (817,000)    (377,000)      (770,000)
                                            ----------    ----------    ----------
     Total current                          (6,817,000)    (354,000)    (3,844,000)
                                            ----------    ----------    ----------
     Deferred:
      Federal                                     -         100,000      3,853,000
      State and foreign                           -          30,000        963,000
                                            ----------    ----------    ----------
     Total deferred:                              -         130,000      4,816,000
                                            ----------    ----------    ----------
   Total income tax (benefit) provision    $(6,817,000)   $(224,000)   $   972,000
                                           ===========    ==========   ===========

</TABLE>

Of the tax expense  (benefit) above $(863,000),  $0 and $262,000,  for the years
ended January 31, 2002, 2001 and 2000,  respectively,  has been  reclassified to
discontinued operations.

The tax effects of temporary  differences  that give rise to deferred income tax
liabilities  at January 31, 2002 and  deferred  income tax assets at January 31,
2001 are as follows:

<TABLE>
<CAPTION>
                                                       January 31, 2002                  January 31, 2001
                                              Net Current         Net Long-       Net Current        Long-Term
                                              Deferred Tax        Term Deferred   Deferred Tax       Deferred Tax
                                                 Assets           Tax Assets         Assets           Assets
                                             ----------------------------------   --------------------------------

<S>                                          <C>                <C>                <C>               <C>
     Accounts receivable                     $  1,056,000       $       -          $    471,000      $      -
     Inventories                                1,141,000               -             1,083,000             -
     Accrued warranty costs                       217,000               -               224,000             -
     Other accrued expenses                       925,000                                25,000             -
     Purchased technologies and goodwill                           1,386,000               -           2,175,000
     Net operating loss                              -                  -                  -           5,295,000
     Reserves for discontinued operations       3,494,000                                  -             540,000
     Gain on sale of building                                        434,000             -                -
                                                ---------          ---------       ------------       ----------
                                                6,833,000          1,820,000          1,803,000        8,010,000
     Less valuation allowance                  (6,833,000)        (1,820,000)        (1,803,000)      (8,010,000)
                                                ---------          ---------         ----------       ----------
                                              $         0       $          0       $          0      $          0
                                              ===========       ============       ============      ============

</TABLE>

A valuation  allowance  for such  deferred  tax assets has been  established  at
January 31, 2002 and January 31, 2001,  since the Company  cannot  determine the
future utilization of those assets.

At January 31, 2001 a deferred tax liability of $130,000 resulted from temporary
differences  in  unrealized  foreign  currency  exchange gain and is included in
accrued expenses.

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:

                                                      Year Ended January 31,
                                                  2002        2001        2000
                                                  ----        ----        ----
     Federal statutory income tax rate           (34.0)%     (34.0)%     (34.0)%
     State income taxes, net of Federal benefit    5.0         5.0         5.0
     Permanent differences                          -           -          2.1
     Valuation Allowance                           1.9        27.6        36.5
                                                 ------      -----       -----
     Effective income tax rate                   (27.1)%      (1.4)%       9.6 %
                                                 ======      =====       =====

                                      F-17

<PAGE>

11.  STOCKHOLDERS' EQUITY

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

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

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

          Stock  option  transactions  during the years ended  January 31, 2002,
          2001 and 2000 for the 1993 Plan are summarized below:


<TABLE>
<CAPTION>
                                                                    Exercise           Weighted Average
                                                  Shares           Price Range          Exercise Price
                                                  ------           -----------          --------------

<S>                                               <C>            <C>                      <C>
Options outstanding - January 31, 1999            535,000        $4.88 - $24.20           $    15.53

 Options canceled                                 (88,000)       $4.88 - $24.20           $    15.53
 Options issued                                   264,000        $1.75 - $5.25            $     3.42
                                                  -------        --------------           ----------
Options outstanding - January 31, 2000            711,000        $1.75 - $24.20           $     9.91

 Options canceled                                 (49,000)       $1.75 - $24.20           $     9.91
 Options issued                                    20,000        $0.91 -   3.00            $    1.86
                                                  -------        --------------           ----------
Options outstanding - January 31, 2001            682,000        $0.91 - $24.20           $     9.45
                                                  -------        --------------           ----------

Options canceled                                 (594,000)       $0.95 - $17.00           $    12.19
 Options issued                                   190,000        $0.95 -   1.00            $    0.97
                                                  -------        --------------           ----------
Options outstanding - January 31, 2002            278,000        $0.95 - $17.00           $     1.71
                                                  -------        --------------           ----------

Options exerciseable at January 31, 2002          163,000        $1.75 - $17.00           $     6.50
                                                  =======       ===============           ==========
</TABLE>


<TABLE>
<CAPTION>
                                              Options Outstanding             Options Exercisable
                                          Weighted Avg.      Weighted                        Weighted
                                           Remaining         Average                         Average
       Range of                Number     Contractual        Exercise         Number         Exercise
    Exercise Prices         Outstanding    Life (yrs)         Price        Exerciseable       Price
    ---------------         -----------    ----------         -----        ------------       -----

<S>                         <C>            <C>               <C>           <C>               <C>
     $0.91 - $5.25             74,000         3.0            $  3.19           49,000        $  3.50
    $ 0.95 - $1.00            190,000         5.0            $  0.97          100,000        $  0.95
    $17.00 - $17.00            14,000           0            $ 17.00           14,000        $ 17.00
                              -------                                       --------
                              278,000                                        163,000

</TABLE>

          All 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.
          There are  approximately  361,000  shares  available for future grants
          under the 1993 Plan.

                                      F-18

<PAGE>

          The 1994  Non-Employee  Director  Stock  Option  Plan (the  "Directors
          Plan") has  approximately  234,000 shares of Common Stock reserved for
          issuance.   Pursuant  to  the  terms  of  the  Directors   Plan,  each
          independent  unaffiliated  Director  shall  automatically  be granted,
          subject to  availability,  without any further  action by the Board of
          Directors or the Stock Option Committee: (i) a non-qualified option to
          purchase 7,500 shares of Common Stock upon their election to the Board
          of  Directors;  and (ii) a  non-qualified  option to  purchase  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 31, 2002,
          2001 and 2000 for the Directors' Plan are summarized below:


<TABLE>
<CAPTION>
                                                                        Exercise       Weighted Average
                                                       Shares          Price Range      Exercise Price
                                                       ------          -----------      --------------

<S>                                                    <C>            <C>              <C>
          Options outstanding - January 31, 1999        45,000        $5.36 - $22.00      $ 11.35

           Options cancelled                            (8,000)       $     9.36          $  9.36
           Options issued                                7,000        $     2.25          $  2.25
                                                       -------        --------------      -------
          Options outstanding - January 31, 2000        44,000        $2.25 - $22.00      $ 12.44

           Options  cancelled                          (12,000)       $     9.12          $  9.12
                                                       -------        --------------      -------
          Options outstanding - January 31, 2001        32,000        $2.25 - $22.00      $ 12.16

             Options  cancelled                        (32,000)       $2.25 - $22.00      $ 12.16
                                                       -------        --------------      -------
          Options outstanding - January 31, 2002             0                     0            0
                                                       =======        ==============      =======
          Options exerciseable - January 31, 2001            0                     0            0
                                                       =======        ==============      =======

</TABLE>

     There are  approximately  182,000 shares  available for future grants under
     the Directors' Plan.

                                      F-19

<PAGE>

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


<TABLE>
<CAPTION>
             Exercise       Weighted Average
                                                             Shares          Price Range      Exercise Price
                                                             ------          -----------      --------------

<S>                                                         <C>            <C>                   <C>
          Options outstanding - January 31, 1999            453,000        $4.88 - $18.25        $ 15.69
           Options cancelled                                (49,000)       $4.88 - $18.25        $  8.42
                                                            -------        --------------        -------
          Options outstanding - January 31, 2000            404,000        $16.20 - $18.25       $ 16.57
                                                            -------        --------------        -------
          Options outstanding - January 31, 2001            404,000        $16.20 - $18.25       $ 16.57
           Options cancelled                               (404,000)       $16.20 - $18.25       $ 16.57
          Options outstanding - January 31, 2002                  0                      0             0
                                                            =======        ===============       =======
          Options exerciseable at January 31, 2002                0                      0             0
                                                            =======        ===============       =======

</TABLE>

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

          The Company follows  Statement of Financial  Accounting  Standards No.
          123,  "Accounting  for Stock-Based  compensation,"  ("SFAS 123") which
          requires  the  disclosure  of pro forma net  income and  earnings  per
          share.  Under  SFAS  123,  the fair  value of  stock-based  awards  to
          employees is calculated through the use of option pricing models, even
          though such models were developed to estimate the fair value of freely
          tradable,  fully  transferable  options without vesting  restrictions,
          which  significantly  differ from the Company's  stock option  awards.
          These models also require  subjective  assumptions,  including  future
          stock price  volatility  and expected time to exercise,  which greatly
          affect the calculated  values.  The Company's  calculations  were made
          using  the  Black-Scholes  option  pricing  model  with the  following
          weighted average  assumptions for 2002, 2001 and 2000:  expected life,
          3.6 years;  stock  volatility,  79.0 percent in 2002,  69.4 percent in
          2001 and 68.3 percent in 2000; risk free interest rate of 3.97 percent
          in  2002,  risk  free  interest  rate of 6.7  percent  in 2001 and 6.0
          percent in 2000,  and no  dividends  during  the  expected  term.  The
          Company's  calculations  are  based  on a  multiple  option  valuation
          approach and forfeitures are recognized as they occur.

                                      F-20

<PAGE>

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



<TABLE>
<CAPTION>
                                                                 Year Ended January 31,
                                                        2002           2001             2000
                                                        ----           ----             ----

<S>                                                <C>             <C>             <C>
          Net (loss):

           As reported                             $(18,325,000)   $(15,671,000)   $(13,822,000)
           Pro forma                               $(18,419,000)   $(16,095,000)   $(16,510,000)
          Basic (loss) per share:
           As reported                                  $ (2.06)        $ (1.72)        $ (1.48)
           Pro forma                                    $ (2.07)        $ (1.77)        $ (1.77)
          Diluted (loss) per share:
           As reported                                  $ (2.06)        $ (1.72)        $ (1.48)
           Pro forma                                    $ (2.07)        $ (1.77)        $ (1.77)

</TABLE>

12.  TREASURY STOCK

     Treasury  stock at January 31, 2002  consists of 694,000  shares of Class A
     common  stock  purchased  in open market  transactions  for a total cost of
     approximately  $1,602,000 pursuant to a stock repurchase program authorized
     by the Board of Directors in fiscal year 1999.  As of September  2001,  the
     Board of Directors rescinded its stock repurchase program.

13.  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 31, 2002,  2001 and 2000.  The Company funds all
     amounts when due.

                                      F-21


<PAGE>

14.  CHANGE IN ACCOUNTING METHOD

     On December 3, 1999, The SEC issued its "Staff Accounting  Bulletin No.101-
     Revenue Recognition in Financial  Statements," ("SAB 101") which represents
     a clarification  of "Generally  Accepted  Accounting  Principles"  ("GAAP")
     regarding the timing of revenue  recognition.  Beginning with the reporting
     of  fiscal  year  2000  results,  Hirsch  has  implemented  the  provisions
     contained  in SAB 101.  SAB 101  establishes  and  clarifies  the basis for
     revenue  recognition.  Revenue is recorded on certain equipment sales based
     upon customer acceptance of installation,  rather than upon shipment by the
     Company.  Historically,  as the cost of the installation is not material to
     the sale,  Hirsch's  accounting  practice  had been to record the sale upon
     shipment and to accrue the installation  expense where installation was not
     yet completed.  This change in accounting method resulted in an increase of
     $6.4 million in sales and $4.2 million in cost of sales during  fiscal year
     2000 which were  originally  reported in fiscal  year 1999 and  required an
     adjustment  of fiscal  year 2000  results  in the  amount of $2.2  million,
     disclosed as the cumulative  effect on the fiscal year's results due to the
     application of the changed accounting  method.  This accounting change also
     results in a deferral of $3.7 million in sales  revenue and $2.5 million in
     cost of sales,  yielding a gross margin of $1.2 million  which was deferred
     to fiscal year 2001.


                                      F-22


<PAGE>

15.  COMMITMENTS AND CONTINGENCIES

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

          Fiscal Year
            Ending
          January 31,
          -----------

            2003              1,092,000
            2004                948,000
            2005                729,000
            2006                660,000
            2007                572,000
            2008 and after    1,002,000
                             ----------
                             $5,003,000

          Rent expense was approximately  $1,215,000,  $1,191,000 and $1,240,000
          for the years ended January 31, 2002, 2001 and 2000, 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.

     c.   The  Company  has a  Revolving  Credit  and  Security  Agreement  (the
          "Agreement")  with PNC Bank  which  expires  in  September  2002.  The
          Agreement  provides for a commitment of $20 million for Hirsch and all
          subsidiaries,  collateralized by assets, primarily accounts receivable
          and  inventory.  The  Agreement  is used for  working  capital  loans,
          letters of credit  and  deferred  payment  letters of credit and bears
          interest as scheduled and defined in the  Agreement.  The terms of the
          Agreement,  as amended,  restrict additional borrowings by the Company
          and require the Company to  maintain an interest  coverage  ratio,  as
          defined therein.  There were no outstanding working capital borrowings
          against the  Agreement as of January 31, 2002.  The Agreement was also
          used to support letters of credit of approximately  $0.3 million as of
          that date. The Company was in compliance with all financial  covenants
          at year-end.


                                      F-23

<PAGE>

     d.   Dependency Upon Major Supplier - During the fiscal years ended January
          31, 2002,  2001, and 2000, the Company made purchases of approximately
          $27,789,000,  $33,863,000,  and $42,193,00  respectively,  from Tajima
          Industries  Ltd.  ("Tajima"),   the  manufacturer  of  the  embroidery
          machines the Company sells. This amounted to approximately 85, 86, and
          94  percent  of the  Company's  total  purchases  for the years  ended
          January 31, 2002, 2001, and 2000, respectively.

          The Company  has  several  separate  distributorship  agreements  with
          Tajima which, collectively, provide the Company the exclusive right to
          distribute Tajima's complete line of embroidery machines in 39 states.
          The main agreement (the "East Coast / Midwest Agreement") which covers
          33 states,  including the original Hirsch territory and the additional
          states acquired in the SMX territory, became effective on February 21,
          1991 and has a term of 20 years. The East Coast / Midwest Agreement is
          terminable  by Tajima  and/or the  Company on not less than two years'
          prior notice. The second agreement (the "Southwest  Agreement") covers
          the six states acquired in the Sedeco  territory,  became effective on
          February  21, 1997 and has a term of five years.  This  agreement  was
          renewed until February 22, 2003.

          In the states of Arizona, California,  Hawaii, Idaho, Montana, Nevada,
          Oregon,  Utah,  Washington  and Wyoming,  the Company is the exclusive
          distributor of Tajima's  single,  two, four, and six-head  machines as
          well as chenille or  chenille/standard  embroidery  machines with less
          than  four  heads  or two  stations,  respectively  (the  "West  Coast
          Agreement").  The West Coast Agreement has a term of five years.  This
          agreement was renewed.  Tajima may terminate the West Coast  Agreement
          or its exclusivity on 30 days written notice or upon a material change
          in the current  Class B  shareholders  in which  case,  the West Coast
          Agreement  can be  terminated  earlier.  The Company has satisfied its
          obligations  to Tajima under the agreement as to the minimum  quantity
          of  embroidery  machines to be sold for calendar year  2000-2001.  The
          minimum   quantity  to  be  sold  in  calendar   year   2001-2002   is
          approximately 1,309 machines in various designations, as defined.

                                       F-24

<PAGE>

16.  GOODWILL IMPAIRMENT

     During the fourth  quarter of fiscal 2002 in view of the  overall  industry
     decline  in demand for  embroidery  equipment  and  related  products,  the
     resulting   decline  in  Company  revenue   delivered  in  the  territories
     associated with the  acquisition of SMX Corporation and Sedeco  Corporation
     and the Company's impairment evaluation,  the Company wrote-off the balance
     of $3,477,000 of Goodwill as an impairment charge to operations.

     During  the  fourth   quarter  of  fiscal  2001,   the  Company  wrote  off
     approximately $7,640,000 of goodwill as an impairment charge to operations.
     This write-off includes the remaining value of goodwill associated with its
     acquisition  of  the  digitzing  embroidery  business  assets  of  All  Pro
     Punching, Inc.

                                      F-25