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, 1997

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

     Commission File No.: 0-23434

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

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


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

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

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

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

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

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

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

     The aggregate  market value of the 4,354,506 shares of Class A Common Stock
held by non-affiliates of the Company as of April 11, 1997 is $83,824,240.50.

     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                              5,312,666
       par value $.01

       Class B Common Stock                              2,732,249
       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, 1997.

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                                     PART I

     Item 1. Business

     General

     Founded in 1970, Hirsch International Corp. ("Hirsch" or the "Company") 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-head and multi-head
embroidery  machines,  proprietary  application  software,  a  diverse  line  of
embroidery  supplies,  accessories  and  proprietary  products,  and a range  of
equipment  financing  options.  In  addition,  Hirsch  provides a  comprehensive
customer  service  program,  user  training  and software  support.  The Company
believes  its broad  product  offerings  together  with its related  value-added
products  and  services  place it in a strong  competitive  position  within its
marketplace.  From fiscal year 1993 to fiscal year 1997, the Company's net sales
increased at a 29.4% compound  annual rate to $122.2  million,  while net income
increased at a 47.5% compound annual rate to $8.8 million.

     The  Company's  customers  range  from  large  operators  who run  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.

     Hirsch has certain  exclusive  United States rights to sell new  embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima").  Tajima,  located in
Nagoya,  Japan,  is one of  the  world's  leading  manufacturers  of  embroidery
machines,  and is regarded as a  technological  innovator  and  producer of high
quality,  reliable and durable embroidery  equipment.  The Company has exclusive
right to  distribute  Tajima  small  (one  through  six  head)  machines  in the
continental United States and Hawaii and large (six and higher head) machines in
39 states. The exclusive rights to distribute large machines in the nine Western
states and Hawaii in which  Hirsch does not have such  distribution  rights,  is
held by an unrelated third party.

     The Company and Tajima have had a 20-year relationship, and Hirsch believes
it is Tajima's largest distributor in the world. Hirsch collaborates with Tajima
in the  development of new  embroidery  equipment and  enhancements  to existing
equipment.  To date, all Tajima  equipment has been  assembled in Japan.  Hirsch
recently  announced  the formation of a  subsidiary,  Tajima USA, Inc.  ("Tajima
USA"), which initially will assemble Tajima machines with up to six heads in the
United  States  to  provide  additional   manufacturing  capacity.  The  Company
anticipates  that this  manufacturing  capacity  will  enable  it to reduce  its
inventory carrying costs to its customers.

     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 and services to its  customers.  The Company's
software  subsidiary,  Pulse Microsystems Ltd. ("Pulse"),  develops and supplies
application software programs which enhance and simplify the embroidery process,
enable  customization of designs and reduce production costs. Pulse has designed
and delivered the majority of its proprietary  application  software programs to
operate in the Microsoft(R) Windows 95TM environment, which Hirsch believes will
further  enhance and simplify  ease of use and user  flexibility.  The Company's
leasing subsidiary, HAPL Leasing Co., Inc. ("HAPL Leasing"), provides a range of
equipment financing options to customers wishing to finance equipment purchases.
Hirsch  also  sells  a broad  range  of  embroidery  supplies,  accessories  and
proprietary  embroidery  products through Company's  Embroidery Supply Warehouse
division ("ESW").

     The Company's  equipment and value-added  products are marketed and sold by
sales and  marketing  personnel,  whose  efforts are  augmented by trade journal
advertising, informational "open house" seminars and trade

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     shows.  Hirsch  believes  its  reputation,  knowledge  of the  marketplace,
exclusive Tajima  distribution  rights,  industry  expertise and innovation will
enable it to continue to increase the overall size of the  embroidery  equipment
market and its market share.

     The Embroidery Industry

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

     Business Strategy

     The   Company's   objective   is  to  establish   and  maintain   long-term
relationships with its customers by providing them with a single source solution
for their  embroidery  equipment and related  services and financing  needs.  To
achieve this goal,  the Company has  developed a  comprehensive  approach  under
which it (i) 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)  provides  leasing  options to  customers  to finance  equipment
purchases,  (v)  provides  comprehensive  customer  training  in the  use of the
embroidery  machines and related  application  software,  and (vi)  supports and
services the embroidery  machines.  The Company believes that this comprehensive
approach  positions  it to become  its  customers'  preferred  vendor  for their
embroidery  equipment and related  services,  supplies,  and financing needs. To
complement its comprehensive approach effectively and efficiently, the Company's
business strategy includes the following:

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

     Pulse  Microsystem  Software.  The Company's Pulse subsidiary offers a wide
range of  proprietary  application  software  which  enhances and simplifies the
embroidery  process.  The Company has designed  and  delivered a majority of its
proprietary application software products to operate in the Microsoft(R) Windows
95TM environment which the Company believes will enhance creativity, ease of use
and user  flexibility.  The Company intends to aggressively  market its software
with  embroidery   equipment  and  as  an  upgrade  to  its  installed  base  of
approximately  12,000  embroidery  machines.  The  Company  believes  that these
products  have  broad  appeal  to  purchasers  of  single-head   and  multi-head
embroidery machines and present opportunities for the Company to

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increase  sales  of  embroidery  equipment  and  software  as  the  Company
continues  to  emphasize  marketing  activities.  Pulse  intends to  continue to
automate the process of creating  embroidery  applications  in order to open new
markets, reduce costs and increase production efficiencies.  Pulse has increased
the number of its software developers and will continue to develop software that
enhances new features in the embroidery machines being introduced.

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

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

     Customer Support and Service. The Company provides  comprehensive  customer
training,  support and service for the embroidery  machines and software that it
sells. The Company's  customer service department  includes service  technicians
operating out of its  headquarters  and 22 regional  offices.  After the Company
delivers an embroidery  machine to a customer,  its trained  personnel assist in
the installation of the machine and with setup and operation.  The Company has a
staff of service  representatives  who provide  assistance  to its  customers by
telephone.  Most customer problems or inquiries can be handled by telephone, but
when  necessary the Company  dispatches  one of its service  technicians  to the
customer. In addition,  the Company provides at its facilities  introductory and
advanced training  programs  developed by the Company to assist customers in the
use and operation of the embroidery machines it sells.

     Growth Strategy

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

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

     Increase  Penetration  in  Recently  Acquired  New  Equipment  Distribution
Markets. The Company believes that it has excellent  opportunities for growth in
the  distribution  territories  acquired in the  acquisitions  of Sewing Machine
Exchange,  Inc. ("SMX") and Sedeco, Inc. ("Sedeco," and collectively referred to
as "Recent  Acquisitions")  and in the western  states where the Company has the
exclusive right to distribute  small Tajima  machines.  The Company  anticipates
that the  introduction  of its  approach to  marketing  and  customer  training,
support and service will allow it to further  penetrate the  potential  customer
base in these markets.


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     Expand Sales of Value-Added Product and Services.  Once a relationship with
a customer is established by the sale of a new or used embroidery  machine,  the
Company seeks to increase its sales by supplying software developed by Pulse and
a broad range of  embroidery  supplies and equipment  through ESW.  Offering the
customer  leasing options through HAPL Leasing also presents the Company with an
opportunity to increase its revenues. In those regions of the United States into
which the Company has recently  expanded through  acquisitions and obtaining the
right to distribute  small Tajima  machines,  the Company believes that it has a
particularly strong opportunity to expand sales of its value-added  products and
services.  Historically,  the  Company's  sales of  software  products,  leasing
activities and sales of ESW products have been  concentrated in the states where
it has had the exclusive right to distribute  embroidery  machines.  The Company
believes that expanding this area will allow it to better market its value-added
products and services.  To facilitate  this growth,  the Company is establishing
ESW  warehouses  at the same  locations as certain sales  offices.  In addition,
ESW's product line also is offered to all users of  embroidery  equipment in the
United States through trade publications,  print advertising,  catalogue mailers
and trade show participation.

     In addition,  HAPL Leasing has assembled a talented and aggressive staff of
regionalized  sales and support  personnel to blanket this  expanded  territory.
This regional sales  approach is  establishing  HAPL  Leasing's  presence in the
midwest,  southwest and on the west coast,  and will increase  their momentum in
sales and  profitability.  Pulse  continues to set the software  standard in the
embroidery  industry with the release of Version 7 of its  Signature(R)  product
line. The user-friendly  operating  environment of Version 7 places the focus on
the creative end of designing which should  revolutionize the art of digitizing.
In  addition,  the  patented  chenille  software  developed  by  Pulse  has been
positively  received  by  Tajima  and has been  displayed  with  their  chenille
embroidery machines at international trade shows.

     Establish  Assembly  Operations.  The Company  recently  announced plans to
assemble Tajima embroidery machines in the United States through its subsidiary,
Tajima  USA,  initially  in  configurations  of up to six heads.  This  assembly
facility  will be located  near the  Company's  headquarters.  As a result,  the
Company  expects  to be able to better  manage  its  inventory.  Presently,  the
Company's  current  ordering cycle for these machines is  approximately  four to
five months prior to delivery to the Company.  The Company  also  believes  that
establishing  this assembly  facility will further  strengthen its  relationship
with Tajima.

     Embroidery Equipment

     Embroidery  equipment  may contain  single or multiple  sewing  heads.  The
Company markets and distributes over 80 models of embroidery  machines,  ranging
in size from one 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 part of garments or other soft goods.
The selling prices of these machines range from $20,000 to $180,000. Each sewing
head consists of a group of needles  which are fed by spools of thread  attached
to the  equipment.  The  needles  operate  in  conjunction  with  each  other to
embroider the thread into the cloth or other surface in such configuration as to
produce the intended design. Thread flowing to each needle can be of the same or
varying colors.  Each head creates a design and heads operating at the same time
create the same size and shape  designs,  although  designs  created at the same
time can  differ in color.  Thus,  a 30 head  machine  with all heads  operating
simultaneously  creates an identical design on thirty  surfaces.  The design and
production  capabilities  are enhanced  through the integration of computers and
specialized software applications.

     Recent Product Developments.  The Company often collaborates with Tajima in
the  development  of embroidery  products.  Over the past few years,  Tajima has
introduced the following  embroidery  products:  (i) wide Cap embroidery system,
which expands the small sewing field on finished caps to a 270 degree continuous
arc;  (ii)  the  multi-color   chenille   embroidery   machine,   which  enables
embroiderers  to create  more  elaborate  and  colorful  designs  with  chenille
stitches;  (iii) the tandem chenille and embroidery machine,  making it possible
to incorporate  both chenille and embroidery into the same design;  and (iv) the
Emblaser machine,  which  incorporates  embroidery and laser technology into one
system,  reduces  production  time and increases  production  efficiencies.  The
Company

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believes  that the  greater  variety  of  embroidered  products  that these
machines  can produce  will result in demand for these  products  presenting  an
opportunity for growth for the Company.

     Value Added Products

     Software

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

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

     In October 1995, Pulse introduced the Signature software product line which
enables designers to operate in the Microsoft(R)  Windows 95TM environment.  The
Signature  software's  TRUE  TYPE  functionality  facilitates  the  creation  of
embroidered  lettering from any standard computer font. An On-Screen  Digitizing
feature accommodates  imported computer images and then, using many new artistic
features,  easily  digitizes them. This on-screen method is a quick and easy way
to create custom-embroidered designs with professional results.

     In addition,  Pulse has developed  application software that uses bar codes
to  recognize  embroidery  designs  and  embroidered  lettering  for the uniform
industry.  Bar coding will  facilitate  the expedient and accurate  retrieval of
designs from design databases.  Pulse also developed  application software to be
integrated with the new Tajima chenille and laser embroidery machines.

     Leasing

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

     Approximately  34.8% of the  Company's  revenues  from sales were  financed
through HAPL Leasing for the year ended January 31, 1997,  compared to 35.3% for
the year ended  January 31,  1996.  HAPL Leasing  minimizes  its leasing risk by
selling substantially all of its sales-type leases to financial  institutions on
a non-recourse basis. The selling price of the leases to financial  institutions
generally  will  be a lump  sum  equal  to the  sales  price  of the  embroidery
equipment  leased,  plus a portion of the finance charges paid by the lessee. In
addition,  at the end of the lease term,  the residual  value of the  embroidery
equipment  may revert to HAPL Leasing or HAPL Leasing sells the equipment to the
lessee  at  terms  agreed  upon in the  original  lease  agreement.  Each  lease
generally  has a term of three to five  years.  As of  January  31,  1997,  HAPL
Leasing had sold approximately 90% of its leases on a non-recourse basis.

     In some cases,  third party funding  sources  condition  their  purchase of
leases on the  establishment  of a payment  history.  HAPL  Leasing also retains
selected  leases for which it has not  obtained a purchase  commitment  from its
funding  sources.  In each case where a lease is retained,  HAPL Leasing applies
its policies and procedures  and knowledge of the industry to determine  whether
to enter into the lease, including an evaluation of the

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purchaser's  business prospects and the creditworthiness of the principals.
HAPL Leasing sells these leases if financing becomes available at a later date.

     HAPL Leasing is  continuing  to increase the number of funding  sources and
works with its funding  sources to develop new lease programs  attractive to the
embroidery industry.

     Embroidery Supply Warehouse

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

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

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

     Marketing and Customer Support

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

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

     The  Company  also  has  developed  an  internal  training  center  for its
employees at its Cleveland training center. The program educates employees about
the embroidery industry,  the history of embroidery and the Company,  embroidery
techniques and the operation of embroidery machines. Service technicians receive
an intensive training program in addition to the aforementioned  program. Senior
service  technicians  also receive formal  training from Japan for several weeks
and receive  technical updates from Tajima throughout the year. The Company will
continue to dedicate  resources to education and training as the  foundation for
providing the highest level of customer service.


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

     The  Company  provides  the  customer  with  a  one-year  warranty  against
malfunctions  from defects in material or workmanship on the Tajima  machines it
distributes.  The warranty  covers parts and labor.  Tajima provides the Company
with a one-year warranty that covers substantially all of the Company's warranty
costs.

     Supplier Relationships with Tajima

     Three separate  distributorship  agreements  govern the Company's  right to
distribute Tajima embroidery equipment in the United States.

     The Company has two 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, has a
term of 20 years and contains a renewal provision which permits  successive five
year  renewals  upon mutual  agreement  of the parties.  The East  Coast/Midwest
Agreement is terminable by Tajima and/or the Company on not less than two years'
prior  notice  except  that  Tajima  cannot  terminate  the  East  Coast/Midwest
Agreement  prior to February  20, 1998.  The second  agreement  (the  "Southwest
Agreement")  covers six states,  became effective on February 21, 1997 and has a
term of five years. Under the third distributorship agreement, which covers nine
western states and Hawaii, the Company is the exclusive  distributor of Tajima's
single, two, four and six head 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
initially  terminates  on February  20, 2002,  and contains a renewal  provision
which  permits  successive  five year  renewals  upon  mutual  agreement  of the
parties.

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

     Although there can be no assurance, management of the Company believes that
the  likelihood  of the loss of Tajima as a source of supply is remote  because:
(i) the Company has a 20 year  relationship  with Tajima and is Tajima's largest
distributor;  (ii)  Tajima's  success  in the United  States is, in large  part,
attributable  to the  Company's  knowledge  of the  marketplace  as  well as the
Company's  reputation  for  customer  support;  and (iii) the  Company and Pulse
support  Tajima's  development  activities and the Pulse  software  enhances the
Tajima product line.

     Other Supplier Relationships

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



                                        8

<PAGE>



     Customers

     The  Company's  customers  range  from  large  operators  who run  numerous
machines to individuals who customize  products on a single  machine.  Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers,  who use embroidery
to embellish their apparel, accessories,  towels, linens and other products with
decorative  appeal; and (iii) embroidery  entrepreneurs,  who produce customized
products  for   individuals,   sports   leagues,   school   systems,   fraternal
organizations, promotional advertisers and other groups. The Company's customers
include: Fruit of the Loom, Russell Licensed Products,  Logo 7, Healthtex,  Five
B's, Osh Kosh B'Gosh, Avanti Lines and William Carter Company.

     Competition

     The  Company  competes  with  distributors,  such as  Macpherson,  Inc.,  a
distributor  of  Barudan   multi-head   embroidery   machines  and   Meistergram
single-head  embroidery  machines,  as well as with  smaller  distributors.  The
Company also  competes with original  equipment  manufacturers,  such as Brother
International and Melco Embroidery Systems ("Melco"),  which distribute products
directly into the Company's  markets.  The Company  believes it competes against
these  distributors  on the basis of knowledge,  experience,  name  recognition,
customer service and the quality of the embroidery equipment it distributes.

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

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

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

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

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

     Patents and Copyrights

     The Pulse  software has  copyright  protection  under  Canadian law and the
Berne Convention which also affords it protection in the United States.  Certain
of  the  Pulse   software  has  also  been  granted   United  States   copyright
registrations.  The  following  patents have been granted in the United  States:
"Method For Modifying  Embroidery Design Programs",  "Embroidery Design System",
"Method  For  Creating  Self-Generating  Embroidery  Pattern"  and  "Method  for
Automatically  Generating  Chain Stitches," and two patents entitled "Method for
Automatically  Generating A  Chenille-Filled  Embroidery  Stitch Pattern." Pulse
also has several other patents pending in the United States Patent and Trademark
Office.  Pulse also has the  following  patent  pending in the  European  Patent
Offices:  "Method for Modifying  Embroidery  Design Programs," and the following
patents pending in the Japanese Patent office:  "Method for Modifying Embroidery
Design  Programs,"  "Method for  Automatically  Generating  Chain  Stitches" and
"Method For Automatically Generating A Chenille-Filled Embroidery Stitch

                                        9

<PAGE>



Pattern."  Pulse  believes  these  protections  are  sufficient  to prevent
unauthorized  third party uses of such  property  rights.  Neither Pulse nor the
Company is aware of any patents or other  intellectual  property rights of third
parties  which  would  prevent  the use of Pulse's  intellectual  property.  The
Company continues to seek intellectual property protection for Pulse products.

     Employees

     As of March 31,  1997,  the  Company  employed  approximately  325  persons
engaged in sales for the Company,  ESW, HAPL Leasing and Pulse, customer service
and supplies,  product development,  and finance  administration and management.
None of the Company's  employees is represented by unions.  The Company believes
its relationship with employees is good.

     Item 2. Properties

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

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

     In addition to the Company's  headquarters,  the Company owns one satellite
office  and leases 22  regional  satellite  offices.  These  offices  consist of
regional  sales  offices,  training  centers,  repair  centers and warehouse and
showroom space.

     Item 3. Legal Proceedings

     There are no material legal proceedings pending against the Company.

     Item 4. Submission of Matters to a 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.



                                       10

<PAGE>



                                     PART II

     Item 5. Market For Common Equity and Related Stockholder Matters

     (a) The Company's outstanding Common Stock consists of two classes, Class A
Common Stock and Class B Common Stock.  The Class A Common Stock, par value $.01
per  share,  trades on the  NASDAQ  Stock  Market  under the  symbol  HRSH.  The
following  table  sets  forth for each  period  indicated  the high and low sale
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 1996 High Low

First Quarter ended April 30, 1995........................$ 8.48        $ 6.23
Second Quarter ended July 31, 1995........................$10.40        $ 6.88
Third Quarter ended October 31, 1995......................$12.20        $ 8.80
Fourth Quarter ended January 31, 1995.....................$12.00        $ 8.80

Fiscal 1997

First Quarter ended April 30, 1996........................$13.20        $10.20
Second Quarter ended July 31, 1996........................$17.60        $12.60
Third Quarter ended October 31, 1996......................$19.25        $15.25
Fourth Quarter ended January 31, 1997.....................$23.00        $17.25

     The sale prices have been adjusted to reflect two 5-for-4 stock splits paid
in the form of a 25% stock divided effected July 25, 1995 and July 22, 1996.

     (b)  As  of  April  21,  1997,   the  Company   believes  that  there  were
approximately 3,395 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.

     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, 1997 and 1996 and for the fiscal years ended January 31, 1997,  1996
and 1995 are  derived  from,  and are  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, 1995, 1994
and 1993 and for the fiscal  years  ended  January 31, 1994 and 1993 are derived
from audited Consolidated Financial Statements not included herein.

                                       11

<PAGE>


<TABLE>
<CAPTION>




                                                                        Year Ended January 31,
                                                                             (in thousands)

                                                    1997               1996              1995              1994              1993
                                                    ----               ----              ----              ----              ----
<S>                                                  <C>               <C>               <C>                <C>               <C>

Statement of Operations Data:

Net Sales...........................            $122,195            $87,974           $70,709           $49,959           $43,584  

Interest income related to sales-type              3,243              3,022             1,617               571                37
leases..............................

Cost of goods sold..................              80,820             58,836            47,881            35,452            30,628

Selling, general and administrative               29,070             20,638            16,155            10,520             9,614
expenses............................

Income before income taxes..........              15,170             11,402             8,159             4,272             3,078

Income taxes........................               6,402              4,837             3,335             1,663(1)          1,226

Net income (5)......................               8,768              6,565             4,823             2,609(1)          1,853

Income per share....................             $  1.10            $  0.87           $  0.66           $  0.49(1)        $  0.35
                                                 =======            =======           =======           ==========        =======

Shares used in the calculation of net
income per share (5)................               7,972              7,512             7,335             5,332             5,332
</TABLE>
<TABLE>
<CAPTION>



                                                                            January 31,
                                                                       (in thousands of dollars)

                                                    1997              1996              1995              1994              1993
                                                    ----              ----              ----              ----              ----
<S>                                              <C>              <C>              <C>                  <C>                <C>

Balance Sheet Data:

Working capital.....................             $22,959        $16,847(3)        $10,363(2)           $ 1,674           $ 5,351

Total assets........................              83,696         47,872(3)         37,504(2)            21,349            15,149

Long-term debt, less current                      13,194(4)       1,779             2,696                  776               935
maturities..........................

Stockholders' equity................              41,682         29,134(3)         20,636(2)             7,830             6,287
</TABLE>



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

     (2) In February 1994, in connection  with its initial public  offering (the
"IPO"),  the Company  received  net  proceeds  of  $7,353,000,  after  deducting
expenses of the IPO.

     (3) In January  1996, in  connection  with a second public  offering of its
Class A Common Stock (the Second  Offering"),  the Company received net proceeds
of $1,906,000, after deducting expenses of the Second Offering.

     (4) Included in long-term debt, less current maturities at January 31, 1997
is $11,645,000 of debt relating to the Company's Recent Acquisitions.


                                       12

<PAGE>



     (5) Income per share figures and shares used in  calculation  of net income
per share have been retroactively  adjusted to refle ct a 5% stock dividend paid
in August  1994 and two  5-for-4  stock  splits  paid in the form of a 25% stock
dividend effected July 1995 and July 1996.

     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.  As used herein, "fiscal year" refers to the fiscal
year ending January 31 of the identified calendar year.

     General

     Hirsch   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-head  and  multi-head   embroidery  machines,
proprietary  application  software  and a diverse line of  embroidery  supplies,
accessories and proprietary products. 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.

     The  Company's  focus during the past several  years has been on growth and
expansion. The acquisitions of Sewing Machine Exchange, Inc. ("SMX") and Sedeco,
Inc.  ("Sedeco")  increased  the  area in which  the  Company  is the  exclusive
distributor of Tajima  embroidery  equipment from 26 states to 39 states.  These
acquisitions  (the "Recent  Acquisitions")  were  accounted  for as Purchases in
accordance  with  Accounting  Principles  Board  Opinion  on No.  16,  "Business
Combination."  See Note 3 of  Notes to  Consolidated  Financial  Statements.  In
January 1997, Tajima granted the Company the exclusive right to distribute small
(one through six head)  Tajima  embroidery  machines in nine western  states and
Hawaii. With this expansion of the Company's small machine territory to the West
Coast, Hirsch now has the exclusive right to distribute Tajima small machines in
the continental United States and Hawaii. Hirsch also announced the formation of
its newest subsidiary, Tajima USA which has been created for the sole purpose of
assembling Tajima embroidery machines in the United States. Production at Tajima
USA will  consist of models in  configurations  of up to six heads per  machine.
With the full  assistance and support of Tajima,  Hirsch expects the facility to
be in operation by June 1997.

     The Company's growth has also resulted from rapid  technological  change in
embroidery  equipment and related  application  software,  the continued  strong
demand for embroidered products, the creation of new embroidery applications and
the continued  strength of  "embroidery  entrepreneur,"  who produce  customized
products  for   individuals,   sports   leagues,   school   systems,   fraternal
organizations, promotional advertisers and other groups, as a growing segment of
the marketplace.  The Company believes that the purchasers of smaller embroidery
machines are a significant  source of future business for the sale of multi-head
embroidery machines as the entrepreneurs' operations expand.

     The Company's  revenues have increased at a compound  annual growth rate of
31.7% from  $72,326,000 in fiscal year 1995 to $125,439,000 in fiscal year 1997.
Revenue growth from fiscal year 1995 to fiscal year 1997 has benefitted  from an
increase  in revenue  from the sale of  embroidery  machinery  of  approximately
$40,958,000  from $60,753,000 in fiscal year 1995 to $101,711,000 in fiscal year
1997.  Revenue for fiscal year 1997 also benefitted from $14,500,000 in revenues
from the newly acquired distribution territories.  The revenue contribution from
value-added  products  divisions has increased from  approximately 7.5% of total
revenues in fiscal year 1995

                                       13

<PAGE>



to  approximately  9% of total  revenue in fiscal  year 1997 which has also
contributed significantly to the Company's growth during this period.

     Earnings per share have increased at a compound annual growth rate of 29.1%
from $.66 per share for fiscal year 1995 to $1.10 per share for fiscal year 1997
and,  net income has  increased  at a compound  annual  growth  rate of 35% from
$4,823,000  for fiscal year 1995 to $8,768,000  for fiscal year 1997.  Growth in
earnings  per share and net  income is the result of  consistent  margins on the
sale of  embroidery  machinery  and the  growth  in the  sale of  higher  margin
value-added products. The net income contribution from the Company's value-added
products  has  increased  from   approximately   24%  in  fiscal  year  1995  to
approximately  34% in fiscal  year 1997.  After  consideration  of  amortization
expense for the excess of cost over net assets acquired and interest expense for
the incurred debt,  the net income  contributions  from the Recent  Acquisitions
were nominal in fiscal year 1997.

     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, 1995,  1996
and 1997.
<TABLE>
<CAPTION>

                                                      Year Ended January 31,

                                                                           1997      1996       1995
                                                                           ----      ----       ----
<S>                                                                        <C>       <C>        <C> 
Net sales.......................................................           97.4%     96.7%       97.8%
Interest income related to sales-type leases....................            2.6%      3.3%        2.2%
                                                                          ------    ------    --------
Total revenue...................................................          100.0%    100.0%      100.0%
Costs of goods sold.............................................           64.4%     64.7%       66.2%
Selling, general and administrative expenses....................           23.2%     22.7%       22.3%
Interest expense, net...........................................            0.7%      0.4%        0.5%
Other income, net...............................................           (0.3%)    (0.3%)      (0.3%)
                                                                         ------     ------    --------
Income before income taxes......................................           12.0%     12.5%       11.3%
Provision for income taxes......................................            5.0%      5.3%        4.6%
                                                                         ------     ------    --------
Net income......................................................            7.0%      7.2%        6.7%
                                                                         ======     ======    ========
</TABLE>


     Fiscal Year 1997 as Compared to Fiscal Year 1996

         Net  Sales.  Net sales for  fiscal  year  197  were  $122,195,000,  an
increase of $34,221,000, or 38.9%, compared to $87,974,000 for fiscal year 1996.
Approximately  $25,347,000,  or 74.1%,  of this  increase was due to the sale of
embroidery  machinery  for fiscal  year 1997.  The sale of  embroidery  machines
represented  approximately  $101,710,000 or 83.2%,  and $76,363,000 or 86.8%, of
net sales for fiscal  years 1997 and 1996,  respectively.  The Company  believes
that this increase is the result of the continued  strong demand for embroidered
products,  the  creation  of new  embroidery  applications  and  markets and the
continued  strength of "embroidery  entrepreneurs"  as a growing  segment of the
marketplace. Additionally,  technological advances and innovations in embroidery
equipment have opened up new marketing opportunities.

         The  expansion  of the  Company's  distribution  territory  through the
Recent  Acquisitions  also resulted in increased  reenues for fiscal year 1997.
Approximately  $12,500,000 of sales were  attributable to the acquisition of SMX
for the period from June 7, 1996  through  January 31, 1997,  and  approximately
$2,000,000  of sales  were  attributable  to the  acquisition  of Sedeco for the
period from  December 20, 1996 through  January 31, 1997 (See Note 3 of Notes to
Consolidated Financial Statements).

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

                                       14

<PAGE>




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

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

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

     Cost of Goods  Sold.  For fiscal  year 1997,  cost of goods sold  increased
$21,984,000, or 37.4%, to $80,820,000 from $58,836,000 for fiscal year 1996. The
increase was in direct proportion to the Company's  increased sales volume.  The
fluctuation  of the  dollar  against  the yen had a  minimal  effect  on  Tajima
equipment  gross  margins  since  currency  fluctuations   generally  have  been
reflected in pricing  adjustments in order to maintain  consistent gross margins
on machine revenues.  Gross margins for the Company's  value-added  products are
generally higher than gross margins on the sale of embroidery machinery.

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

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

     o Expenses incurred in connection with the Recent Acquisitions.

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

     Provision  for Income Taxes.  The  provision for income taxes  reflected an
effective  tax rate of  approximately  42.2% for fiscal year 1997 as compared to
42.4%  for  fiscal  year  1996.  Differences  from the  federal  statutory  rate
consisted  primarily  of  provisions  for state  income taxes net of Federal tax
benefit.  The principal components of the deferred income tax assets result from
allowances and accruals which are not currently  deductible for tax purposes and
differences in  amortization  periods  between book and tax bases.  There was no
effect on deferred taxes as a result of the SMX acquisition, which was accounted
for as an asset  purchase  for tax  purposes.  The  goodwill  related to the SMX
acquisition is being amortized over 15 years for both book and tax purposes. The
goodwill related to the Sedeco  acquisition,  which was accounted for as a stock
purchase for tax purposes,  resulted in a permanent  difference  since it is not
deductible for tax purposes. The Company has not established any

                                       15

<PAGE>



valuation  allowances  against these deferred tax assets because management
believes it is more likely than not that the Company will  realize  these assets
in the future based upon the historical profitable operations of the Company.

     Net Income. Net Income for fiscal year 1997 increased $2,203,000, or 33.6%,
to $8,768,000 from $6,565,000 for fiscal year 1996. This increase was due to the
continued  growth in machine sales in addition to the contribution to net income
from the sale of the Company's value added products. The net margin decreased to
6.99% in fiscal  year 1997 from 7.21% in fiscal  year  1996.  This  decrease  is
attributable to the increase in SG&A expenses.

     Fiscal Year 1996 as Compared to Fiscal Year 1995

     Net Sales. Net sales for the fiscal year 1996 were $87,974,000, an increase
of  $17,265,000,  or 24.4%,  compared to  $70,709,000  for the fiscal year 1995.
Approximately  $15,609,000 of this increase was the result of increased sales of
embroidery machinery. The sale of embroidery machines represented  approximately
$76,363,000  or 86.8% and  approximately  $80,753,000  or 85.9% of net sales for
fiscal  years  1996 and  1995,  respectively.  The  Company  believes  that this
increase  resulted from the continued strong demand for traditional  embroidered
products,  the expanding  number of new embroidery  applications and markets and
the  emergence  of  embroidery   entrepreneurs  as  a  growing  segment  of  the
marketplace.

     The increase in  single-head  machine  sales has  attributed to the overall
increase  in  net  sales.   Single-head  and  multi-head   embroidery   machines
represented 39.8% and 60.2%, respectively,  of the number of embroidery machines
sold during fiscal year 1996 as compared to 38.0% and 62.0%,  respectively,  for
fiscal year 1995.

     Revenues from the sale of the Company's  proprietary  application software,
embroidery  supplies,  accessories,  proprietary  embroidery  products  and used
machines for fiscal year 1996 aggregated  approximately  $11,611,000 as compared
to  $9,956,000   for  fiscal  year  1995,   which   represents  an  increase  of
approximately   16.6%  for  fiscal  year  1995.   This   increase  is  primarily
attributable to the increase in revenue from the sale of embroidery machines.

     Interest  Income  Related to Sales-Type  Leases.  HAPL Leasing had interest
income of $3,022,000 for fiscal year 1996 compared to $1,617,000 for fiscal year
1995.  This increase was a result of the continued  expansion of HAPL  Leasing's
operations.

     Cost of Goods  Sold.  For fiscal  year 1996,  cost of goods sold  increased
$10,954,000,  or 22.9%,  to $58,836,000  from  $47,881,000 for fiscal year 1995.
This increase was in direct proportion to the Company's  increased sales volume.
The  devaluation  of the dollar  against the yen had a minimal  effect on Tajima
equipment gross margins since all currency fluctuations were generally reflected
in pricing adjustments. Profit margins were consistent throughout the Tajima and
Brother product lines.

     Selling,  General and  Administrative  ("SG&A")  Expenses.  For fiscal year
1996,  SG&A  expenses  increased  $4,483,000,  or  27.8%,  to  $20,638,000  from
$16,155,000  for fiscal year 1995.  SG&A  expenses  increased as a percentage of
revenues to 22.7% from 22.3%.  This increase was primarily  attributable  to the
Company's  investment  in its  infrastructure.  In order to implement its growth
strategy,  the Company hired additional sales and marketing  personnel dedicated
to small machine sales, opened or expanded eight sales offices, hired additional
software  programmers  and support staff and expanded the  embroidery  supplies,
sales  and  marketing  staff.  The  Company  also  increased   expenditures  for
advertising and participation at trade shows and seminars.

     Interest Expense.  Interest expense for fiscal year 1996 increased $40,000,
or 11.3%, to $397,000 from $357,000 fiscal year 1995. This increase was a result
of the mortgage on the Company's new corporate headquarters.


                                       16

<PAGE>



     Provision  for Income Taxes.  The  provision for income taxes  reflected an
effective  tax rate of  approximately  42.4% for fiscal year 1996 as compared to
40.9%  for  fiscal  year  1995.  Differences  from the  Federal  statutory  rate
consisted  primarily  of  provisions  for state  income taxes net of Federal tax
benefits.  The increase in the tax rate for fiscal year 1996 was principally the
result of changes in the sales mix which  resulted in increased  sales to states
with higher  effective tax rates and increased sales of software which are taxed
in a jurisdiction with a higher effective tax rate. The principal  components of
the deferred  income tax assets resulted from allowances and accruals which were
not deductible for tax purposes and differences in amortization  periods between
book and tax bases.  The Company has not  established  any valuation  allowances
against these deferred tax assets because management  believes it is more likely
than not that the Company will realize these assets in the future based upon the
historical profitable operations of the Company.

     Net Income. Net income for fiscal year 1996 increased $1,742,000, or 36.1%,
to $6,565,000  from  $4,823,000  for fiscal year 1995.  The Company's net margin
increased  from 6.7% in fiscal  year 1995 to 7.2% in  fiscal  year  1996.  These
increases were  primarily due to the continued  growth in the sale of embroidery
equipment and increased sales of the Company's value-added products.

     Liquidity and Capital Resources

     Operating Activities and Cash Flows

     The  Company's  working  capital  was  $22,959,000  at  January  31,  1997,
increasing  $6,112,000,  or 36.3%,  from  $16,847,000  at January 31, 1996.  The
Company has financed its  operations  principally  through cash  generated  from
operations, long-term financing of certain capital expenditures and the proceeds
from the Secondary  Offering  completed in January 1996. The  acquisition of SMX
was financed  through a term loan  agreement  with a bank.  The  acquisition  of
Sedeco was financed through  borrowings against the $30 million Revolving Credit
Facility  described  below  (See  Note  8 of  Notes  to  Consolidated  Financial
Statements).

     During  fiscal  year 1997,  the  Company's  cash and cash  equivalents  and
short-term investments available-forsale increased by $1,609,000 to $10,460,000.
Net cash of  $3,422,000  was  provided  by the  Company's  operating  activities
principally  as a result of the  Company's  earnings of  $8,768,000.  Changes to
working  capital  components   resulted  in  a  use  of  cash  of  approximately
$7,598,000.  Cash  provided by  increases  in the  balance of trade  acceptances
payable,  income taxes payable and customer deposits  aggregating  approximately
$5,889,000 was offset by cash used to increase inventory,  accounts  receivable,
net investment in sales-type leases and other assets aggregating $10,885,000 and
a decrease in accounts payable and accrued expenses of approximately $2,602,000.
These  changes  resulted  from  expansion  of the  Company's  business  and  the
acquisitions during the year.

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

     Revolving Credit Facility and Borrowings

     In January 1997, The Company  entered into a $30,000,000  Revolving  Credit
Facility with two banks (the "Revolving Credit Facility").  The Revolving Credit
Facility is to be used for working capital loans, letters of credit and deferred
payment  letters of credit and bear interest as defined in the Revolving  Credit
Facility.  The  terms  of the  Revolving  Credit  Facility  restrict  additional
borrowings  by the Company and require the Company to maintain  certain  minimum
tangible  net worth,  quick  asset  ratio and fixed  charge  coverage  levels as
defined. The Revolving Credit Facility also provides a $15,000,000  sub-Facility
to  finance  acquisitions  (as  defined  therein),   under  which  approximately
$4,446,000 was outstanding at January 31, 1997 to finance the Sedeco acquisition
and repay its

                                       17

<PAGE>



outstanding  credit  facilities  (see  Notes  3  and  8  (C)  of  Notes  to
Consolidated Financial Statements).  The Revolving Credit Facility had also been
used for letters of credit and deferred  payment  letters of credit  aggregating
approximately  $13,332,000  at January 31, 1997.  There were no working  capital
loans outstanding at January 31, 1997.

     On June 10, 1996,  the Company  entered into a term loan  agreement  with a
bank (the "Term Loan  Agreement")  pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit  facilities
under which  approximately  $6,750,000 was  outstanding on January 31, 1997. The
loan is repayable  in twenty  equal  quarterly  installments  of  principal  and
interest (as defined in the Term Loan Agreement)  commencing September 30, 1996.
The loan has been  guaranteed by Hirsch,  Pulse and SMX and requires the Company
to maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined.

     HAPL  Leasing   sells   substantially   all  of  its  leases  to  financial
institutions  on a non-recourse  basis several months after the  commencement of
the lease term thereby reducing its financing requirements.  HAPL Leasing, which
was fully activated in May 1993, has closed  $93,953,000 in lease  agreements as
of January 31,  1997.  As of February 28, 1997,  approximately  $84,782,000,  or
90.2%, of the leases have been sold to third party  financial  institutions on a
non-recourse basis.

     Future Capital Requirements

     The Company believes its existing cash and funds generated from operations,
together with amounts  available under the 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.

     Inventory  at  January  31,  1997 of new  Tajima  embroidery  machines  was
$9,151,000  representing  approximately one month's sales which is comparable to
historical inventory levels.  Inventory of approximately $3,094,000 consisted of
computer software, used machines and other equipment, supplies and accessories.

     Inflation

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

     Recent Pronouncements of the Financial Accounting Standards Board

     Earnings  Per Share and Capital  Structure.  Recent  pronouncements  of the
Financial  Accounting  Standards  Board  ("FASB"),  which are not required to be
adopted  at this date,  include  Statement  of  Financial  Accounting  Standards
("SFAS") No. 129, "Disclosure of Information about Capital Structure" ("SFAS No.
129") and SFAS No. 128,  "Earnings Per Share" ("SFAS No. 128"). SFAS No. 129 and
128 specify  guidelines as to the method of computation as well as  presentation
and disclosure  requirements  for earnings per share  ("EPS").  The objective of
these  statements is to simplify the calculation  and to make the U.S.  standard
for computing EPS more  compatible with the EPS standards of other countries and
with that of the International Accounting Standards Committee.  These statements
are  effective  for fiscal  years  ending  after  December  15, 1997 and earlier
application is not permitted.

                                       18

<PAGE>



SFAS 129 and 128 will have an impact on the Company's EPS  calculation  and
disclosure requirements but management cannot predict the outcome at this time.

     Accounting   for   Transfers   and   Servicing  of  Financial   Assets  and
Extinguishment of Debt. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial  Assets  and  Extinguishment  of  Liabilities"  ("SFAS  No.  125")  is
effective for  transactions  occurring  after  December 15, 1996,  although many
provisions  have been  effectively  deferred  by the  issuance  of SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
until  after  December  15,  1997 for  certain  transactions.  Adoption of these
pronouncements  are not  expected  to have a  material  impact on the  Company's
consolidated financial statements.

     Stock-Based Compensation. The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") for fiscal year 1997. As discussed in
Note 2 of Notes to Consolidated  Financial Statements,  the Company continues to
account  for  its  stock-based  awards  using  the  intrinsic  value  method  in
accordance  with APB No, 25,  "Accounting for Stock Issued to Employees" and its
related   interpretations.   Accordingly,   no  compensation  expense  has  been
recognized  in  the  consolidated   financial   statements  for  employee  stock
arrangements.  SFAS No.  123  requires  disclosure  of pro forma net  income and
earnings  per share had the  Company  adopted  the fair  value  method as of the
beginning of fiscal year 1996.  The Company's  calculations  were made using the
Black-Scholes  option  pricing  model.  If the computed  fair values of the 1997
awards had been amortized to expense over the vesting period of the awards,  pro
forma net income for fiscal year 1997 would have been  approximately  $8,494,000
($1.07 per share). The impact of SFAS No. 123 on pro forma net income for fiscal
year 1996 was zero. However, the impact of outstanding  non-vested stock options
has been excluded  from the pro forma  calculation;  accordingly,  the pro forma
adjustments  for fiscal years 1997 and 1996 are not  indicative of future period
pro forma  adjustments,  when the calculation will apply to all applicable stock
options.

     Item 8. Financial Statements And Supplementary Data

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

     Item 9. Changes In And  Disagreement  With  Accountants  On Accounting  and
Financial Disclosure

     None


                                       19

<PAGE>



                                     PART IV

     Item 10. Exhibits, Financial Statement Schedules And Reports On Form 8-K
<TABLE>
<CAPTION>
 
     (a)(1) CONSOLIDATED FINANCIAL STATEMENTS                                                                PAGE(S) 
         <S>                                                                                                 <C> 

         Index to Consolidated Financial Statements                                                          F-1

         Independent Auditor's Reports                                                                       F-2

         Consolidated Balance Sheets as of January 31, 1997 and 1996                                         F-3

         Consolidated Statements of Income for the years ended January 31,                                   F-5
         1997, 1996 and 1995

         Consolidated Statements of Stockholder's Equity for the years ended                                 F-6
         January 31, 1997, 1996 and 1995

         Consolidated Statements of Cash Flows for the years ended January                                   F-7
         31, 1997, 1996 and 1995

         Notes to Consolidated Financial Statements                                                   F-9 - F-23

</TABLE>

     (a)(2) FINANCIAL STATEMENT SCHEDULES

     None

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

     Exhibit                         Description
     Number
     <S>     <C>
 
     *3.1    Amended  and  Restated  Certificate  of Incorporation  of the  Registrant 
     *3.2    By-Laws of the Company
     *4.1    Specimen of Class  A  Common  Stock  Certificate
     *4.2    Specimen  of  Class B  Common  Stock Certificate
  ***10.1    $7,500,000 Term Loan Agreement,  Dated as of June 10, 1996,
             among  Hirsch  International  Corp.,  HAPL  Leasing Co.,  Inc.,  Sewing  Machine
             Exchange,  Inc.,  Pulse  Microsystems,  Ltd.  and  The  Bank  of New  York  
     10.2    $30,000,000  Revolving  Credit Facility Dated as of January 7, 1997 among Hirsch
             International  Corp.,  HAPL Leasing Co., Inc.,  Sewing Machine  Exchange,  Inc.,
             Pulse  Microsystems,  Ltd.,  Sedeco,  Inc., The Bank of New York and Fleet Bank,
             N.A. 
   **10.3    $2,295,000 Mortgage Note from Hirsch International Corp. to Chemical
             Bank 
   **10.4    Mortgage between Hirsch International Corp. and Chemical Bank 
   **10.5    Guaranty of Payment of HAPL Leasing Col,  Inc.  and Pulse  Microsystems  Ltd. to
             Chemical  Bank
 ****10.6    Stock  Purchase  Agreement,  dated June 7, 1996, by and
             among Hirsch  International  Corp.  and Ronald H.  Krasnitz and Martin  Krasnitz
*****10.7    Stock  Purchase  Agreement,  Dated  December  20, 1996 by and between
             Hirsch International Corp. and Jimmy L. Yates

</TABLE>

                                       20

<PAGE>



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

    *10.8   Employment Agreement between Henry Arnberg and the Registrant
    *10.9   Employment Agreement between Paul Levine and the Registrant
    *10.10  Employment Agreement between Kenneth Shifrin and the Registrant
    *10.11  Employment Agreement between Tas Tsonis and the Registrant
    *10.12  Employment Agreement between Brian Goldberg and Pulse Microsystems Ltd.
  ***10.13  Employment Agreement between Ronald H. Krasnitz and Sewing Machine Exchange,
            Inc.
  ***10.14  Employment Agreement between Martin Krasnitz and Sewing Machine Exchange, Inc.
     10.15  Employment Agreement between Jimmy L. Yates and Sedeco, Inc.
    *10.16  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")
     10.17  Amendment Number Two to Hirsch Distributorship Agreement, Dated June 7, 1996
     10.18  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.
     10.19  West Coast Distributorship Agreement, Dated February 21, 1997, among Tajima
            Industries Ltd., Nomura Trading Co. Ltd. and Nomura (America) Corp., and Hirsch
            International Corp.
  ***10.20  Stock Option Plan, as Amended
    #10.21  1994 Non-Employee Director Stock Option Plan
     10.22  Registration Rights Agreement, Dated December 20, 1996, between Hirsch
            International Corp. and Jimmy L. Yates
     10.23  Non-Qualified Stock Option Agreement between Hirsch International Corp. and Jimmy
            L. Yates, Dated December 6, 1996
     10.24  Non-Qualified Stock Option Agreement between Hirsch International Corp. and
            Ronald H. Krasnitz, Dated June 7, 1996
     10.25  Non-Qualified Stock Option Agreement between Hirsch International Corp. and Martin
            Krasnitz, Dated June 7, 1996
     21.1   List of Subsidiaries of the Registrant
    
</TABLE>

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

     *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
fiscal year ended January 31, 1995.

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

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

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

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

     (b)(1) REPORTS ON FORM 8-K

     A report on Form 8-K was filed by the  Company on  January  3,  1997,  with
respect to the Company's  acquisition  of all the  outstanding  capital stock of
Sedeco, Inc. for $6.6 million on December 20, 1996.

                                     
                                       21

<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.
                                     --------------------------
 
                                 By: \s\Henry Arnberg
                                    ---------------------------
                                    Henry Arnberg, President

Dated: May 1, 1997

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

<TABLE>
<CAPTION>

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

\s\Henry Arnberg           Chairman of the Board of Directors, President           May 1, 1997
----------------------     and Chief Executive Officer (Principal Executive
Henry Arnberg              Officer)

\s\Paul Levine             Executive Vice President, Chief Operating               May 1, 1997
----------------------     Officer and Secretary (Principal Operating
Paul Levine                Officer)

\s\Tas Tsonis              Vice President and Director                            May 1, 1997
----------------------
Tas Tsonis

\s\Kenneth Shifrin         Vice President-Finance and Chief Financial             May 1, 1997
----------------------     Officer (Principal Accounting and Financial
Kenneth Shifrin            Officer)

\s\Ronald Krasnitz         Vice President and Director                            May 1, 1997
----------------------
Ronald Krasnitz

\s\Herbert M. Gardner      Director                                               May 1, 1997
----------------------
Herbert M. Gardner

\s\Marvin Broitman         Director                                              May 1, 1997
----------------------
Marvin Broitman                         

\s\Douglas Schenendorf     Director                                              May 1, 1997
----------------------
Douglas Schenendorf
</TABLE>


<PAGE>
               
             TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES                              PAGE


Independent Auditors' Report                                             F-2


Consolidated Balance Sheets as of January 31, 1997 and 1996              F-3


Consolidated Statements of Income for the years ended
  January 31, 1997, 1996 and 1995                                        F-5


Consolidated Statements of Stockholders' Equity for the years
  ended January 31, 1997, 1996 and 1995                                  F-6


Consolidated Statements of Cash Flows for the years ended
  January 31, 1997, 1996 and 1995                                        F-7


Notes to Consolidated Financial Statements                               F-9


                                       F-1


<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, 1997 and 1996, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for  each of the  three  years in the  period  ended  January  31,  1997.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all  material   respects,   the  consolidated   financial   position  of  Hirsch
International  Corp. and  Subsidiaries  as of January 31, 1997 and 1996, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended  January 31, 1997 in conformity  with  generally
accepted accounting principles.

     DELOITTE & TOUCHE LLP

     Jericho, New York
     March 11, 1997



<PAGE>



     HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

     CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                                          January 31,
                                                                                    1997                1996
ASSETS
<S>                                                                                 <C>                 <C>   
Current Assets:
  Cash and cash equivalents                                                     $   7,864,662      $   6,564,628
  Short-term investments available-for-sale                                         2,595,601          2,286,194
  Accounts receivable, net of an allowance for
    doubtful accounts of approximately $2,578,000
    and $1,041,000, respectively                                                   21,761,001         13,707,328
  Net investment in sales-type leases-
    current portion (Note 5)                                                        1,715,164          1,592,733
  Inventories, net (Notes 4 and 11)                                                15,768,865          7,969,203
  Deferred income taxes (Note 9)                                                    1,298,250          1,055,473
  Other current assets                                                                774,968            630,295
                                                                             ----------------    ---------------

         Total Current Assets                                                      51,778,511         33,805,854
                                                                             ----------------    ---------------

Net investment in sales-type leases - non-current
  portion (Note 5)                                                                  9,179,421          7,052,091

Excess of cost over net assets acquired, net of
  accumulated amortization of approximately
  $383,000 and $0, respectively (Note 3)                                           14,043,331             -

Purchased technologies, net of accumulated
  amortization of approximately $558,000 and
  $367,000, respectively                                                              781,196            972,508

Property, plant and equipment, net of accumulated
  depreciation and amortization (Notes 6 and 8)                                     6,242,137          4,840,530

Other assets (Notes 3 and 9)                                                        1,671,208          1,201,143
                                                                             ----------------    ---------------

         Total Assets                                                        $     83,695,804    $    47,872,126
                                                                             ================    ===============

</TABLE>

     See notes to consolidated financial statements.

                                       F-3


<PAGE>




     HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

     CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                          January 31,
                                                                                    1997                1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                                <C>                 <C> 

Current Liabilities:
  Trade acceptances payable (Note 11)                                        $     13,331,834   $     8,656,094
  Accounts payable and accrued expenses (Note 7)                                   10,159,556         6,774,178
  Current maturities of long-term debt (Note 8)                                     2,429,500           242,760
  Income taxes payable (Note 9)                                                     1,541,561           733,009
  Customer deposits payable                                                         1,357,063           552,981
                                                                             ----------------   ---------------
         Total Current Liabilities                                                 28,819,514        16,959,022
Long-term debt, less current maturities (Note 8)                                   13,194,034         1,778,626
                                                                             ----------------   ---------------
         Total Liabilities                                                         42,013,548        18,737,648
                                                                             ----------------   ---------------
Commitments and Contingencies (Notes 8 and 11)

Stockholders'  Equity  (Notes  1 and  10):  Preferred  stock,  $.01  par  value;
  authorized:
    1,000,000 shares; issued:  none                                                    -                -
  Class A common stock, $.01 par value;
    authorized: 20,000,000 shares, outstanding,
    5,312,666 and 3,288,200 shares, respectively                                       53,127            32,882
  Class B common stock, $.01 par value;
    authorized: 3,000,000 shares, outstanding:
    2,732,249 and 2,868,606 shares, respectively                                       27,322            28,686
  Additional paid-in capital                                                       15,626,059        11,885,627
  Unrealized holding gain (loss) on short-term
     investments available-for-sale                                                    20,827           (15,105)
  Retained earnings                                                                25,954,921        17,202,388
                                                                             ----------------   ---------------
         Total Stockholders' Equity                                                41,682,256        29,134,478
                                                                             ----------------   ---------------
         Total Liabilities and Stockholders' Equity                          $     83,695,804   $    47,872,126
                                                                             ================   ===============



</TABLE>

     See notes to consolidated financial statements.

                                       F-4


<PAGE>



     HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                             Year Ended January 31,
                                                                   1997               1996              1995
<S>                                                            <C>                   <C>              <C>

Net sales                                                   $   122,195,444       $  87,974,185    $  70,708,874

Interest income related to sales-type leases                      3,243,340           3,022,239        1,617,292
                                                            ---------------       -------------    -------------

Total revenue                                                   125,438,784          90,996,424       72,326,166
                                                            ---------------       -------------    -------------

Cost of goods sold (Note 11)                                     80,819,751          58,835,780       47,881,483
Selling, general and administrative
  expenses                                                       29,070,201          20,638,144       16,154,880
Interest expense (Note 8)                                           832,337             396,976          356,595
Other income, net                                                  (453,774)           (276,702)        (225,465)
                                                            ---------------       -------------    -------------

Total expenses                                                  110,268,515          79,594,198       64,167,493
                                                            ---------------       -------------    -------------

Income before income taxes                                       15,170,269          11,402,226        8,158,673

Provision for income taxes (Note 9)                               6,402,320           4,837,294        3,335,355
                                                            ---------------       -------------    -------------

Net income                                                  $     8,767,949       $   6,564,932    $   4,823,318
                                                            ===============       =============    =============

Net income per share                                               $1.10                $0.87            $0.66
                                                                   =====                =====            =====


Weighted average number of shares used in
  the calculation of net income per share (Note 10D)              7,971,630           7,511,694        7,335,080
                                                            ===============       =============   ============== 


</TABLE>












     See notes to consolidated financial statements.


                                       F-5


<PAGE>



HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                              Class A            Class B
                                           Common Stock       Common Stock        Additional
                                             (Note 10)          (Note 10)         Paid-In    Unrealized  Retained     Holding Gain 
                                          Shares   Amount   Shares      Amount    Capital                            (Loss) Total 
<S>                                      <C>       <C>      <C>        <C>        <C>        <C>         <C>         <C>   
Earnings                                        
Balance, February 1, 1994                250,000  $2,500   3,000,000  $ 30,000   $  227,442   $  -     $ 7,570,151   $  7,830,093
Proceeds from initial public offering
  of common stock, net (Note 1)        1,187,500  11,875     (56,250)     (562)   7,341,276      -              -       7,352,589
Issuance of shares in connection with
  acquisition (Note 1)                   156,250   1,562         -           -      660,939      -              -         662,501
Transfer of Class B stock to Class A
  stockholder                             10,000     100     (10,000)     (100)         -        -              -            -
Stock dividend (5%)                      226,879   2,269         -           -    1,741,833      -         (1,744,102)       -
Unrealized holding loss (Note 2C)           -         -          -           -          -     (32,880)              -     (32,880)
Net income                                  -         -          -           -          -        -          4,823,318   4,823,318
                                       ---------   ------- ---------   --------  ------------ ---------   ------------ ------------
Balance, January 31, 1995              1,830,629  18,306   2,933,750    29,338    9,971,490   (32,880)     10,649,367  20,635,621
Proceeds from public offering of
  common stock, net (Note 1)             265,144   2,652     (65,144)     (652)   1,906,160      -              -       1,908,160
Stock dividend (25%) (Note 10D)        1,191,115  11,911         -           -          -        -            (11,911)      -
Exercise of stock options                  1,312      13         -           -        7,977      -              -           7,990
Unrealized holding gain (Note 2C)           -          -         -           -          -     17,775            -          17,775
Net income                                  -          -         -           -          -        -          6,564,932   6,564,932
                                       ---------  -------  ----------   -------- ------------ ---------   ------------ ------------
Balance, January 31, 1996              3,288,200  32,882   2,868,606    28,686   11,885,627  (15,105)      17,202,388  29,134,478
Issuance of shares in connection
  with acquisitions (Note 3)             143,668   1,437         -           -    2,636,407      -              -       2,637,844
Transfer of Class B to Class A
  stockholder                            136,357   1,364    (136,357)   (1,364)         -        -              -            -
Stock dividend (25%) (Note 10D)        1,541,580  15,416         -           -          -        -           (15,416)        -
Exercise of stock options and warrants   202,861   2,028         -           -    1,104,025      -              -       1,106,053
                                 
Unrealized holding gain (Note 2C)            -         -         -           -          -      35,932           -          35,932
</TABLE>

                                       F-6


<PAGE>


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


Net income                                   -        -         -           -          -             -        8,767,949  8,767,949
                                       ---------  -------  ----------  --------  ------------     --------- ------------ ----------
Balance, January 31,  1997             5,312,666  $53,127  2,732,249  $ 27,322  $15,626,059     $  20,827   $25,954,921 $41,682,256
                                       =========  =======  ==========  ========  ============     ========= ============ ==========
</TABLE>


     See notes to consolidated financial statements.


                                       F-7


<PAGE>
     HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  Year Ended January 31,
                                                                        1997               1996              1995
<S>                                                                 <C>             <C>                   <C> 

Cash flows from operating activities:
  Net income                                                     $   8,767,949       $   6,564,932      $4,823,318
Adjustments  to  reconcile   net  income  to  net cash 
  provided  by  operating  activities:
  Depreciation and amortization                                      1,763,464           1,142,018         896,860
  Provision for bad debts                                              433,225             578,402         435,798
  Provision for slow-moving inventories                                230,000             419,667          92,627
  Loss on disposal of assets                                            18,303              61,615          12,513
  Deferred income taxes                                               (192,885)           (288,428)       (330,775)
  Changes in operating assets and liabilities:
    Accounts receivable                                             (5,011,589)         (5,592,861)     (4,157,208)
    Net investment in sales-type leases                             (2,287,261)         (1,899,759)
(859,699)
    Inventories                                                    (2,777,864)          (1,244,337)
(1,125,485)
    Other current assets                                              (61,033)            (113,933)
(330,884)
    Other assets                                                     (746,954)            (403,271)
(222,567)
    Trade acceptances payable                                       4,675,740            1,346,590
1,939,775
    Accounts payable and accrued expenses                          (2,602,069)           1,351,833
1,914,887
    Income taxes payable                                              408,552               15,809         551,196
    Customer deposits payable                                         804,082             (245,386)         56,886
                                                                 -------------        -------------   -------------
         Net cash provided by operating activities                  3,421,660            1,692,891       3,697,242
                                                                 -------------        -------------   -------------
Cash flows from investing activities:
  Capital expenditures                                             (1,446,437)          (1,123,125)
(4,505,712)
  Acquisition of Pulse Microsystems Ltd.                                -                     -
(750,000)
  Acquisition of Sewing Machine Exchange, Inc.                     (4,973,222)                -               -
  Acquisition of Sedeco, Inc.                                      (4,153,038)                -               -
  Short-term investments:
    (Purchases) proceeds                                             (392,116)           1,226,854
                                                                 -------------         ------------
 
         Net cash (used in) provided by
          investing activities                                    (10,964,813)             103,729     (8,926,513)

                                                                 -------------        -------------   -------------
</TABLE>


                                      F-8






<PAGE>



     HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                             Year Ended January 31,
 
                                                                   1997               1996              1995
<S>                                                               <C>              <C>                <C>  
Cash flows from financing activities:
  Proceeds from public offering                             $     -             $   2,325,000      $8,251,000
  Repayment of short-term notes payable                           -                     -          (2,436,967)
  Proceeds of long-term debt                                   11,946,305               -           2,295,000
  Repayments of long-term debt                                 (4,209,171)           (311,647)       (139,709)
  Dividends paid                                                  -                     -            (750,000)
  Proceeds from exercise of stock options and warrants          1,106,053               7,990           -
                                                            -------------       -------------       ----------

         Net cash provided by
           financing activities                                 8,843,187           2,021,343
                                                            -------------       -------------
7,219,324
Increase in cash and cash equivalents                           1,300,034           3,817,963
1,990,053
Cash and cash equivalents, beginning of period                  6,564,628           2,746,665         756,612
                                                            -------------       -------------      ----------
Cash and cash equivalents, end of period                    $   7,864,662       $   6,564,62        
                                                            =============       =============      
Supplemental disclosure of cash flow information:
  Interest paid                                             $     796,419       $     387,431        $339,127
                                                            =============       =============      ==========
339,127
  Income taxes paid                                         $   5,788,038       $   4,842,640      $3,125,648
                                                           =============       =============      ===========
Non-cash investing and financing activities:
  Property and equipment returned in
   satisfaction of capital lease                            $     -             $    (622,295)     $      -
                                                            =============       =============      ==========
  Satisfaction of capital lease obligation                  $     -             $     691,052      $      -
                                                            =============       =============      ==========

</TABLE>

     The Company  purchased all of the capital stock of SMX and Sedeco (see Note
3)  for  $8,690,000  and  $6,565,000,   respectively.  In  connection  with  the
acquisitions the following activity was recorded:


                                       F-9
<PAGE>
<TABLE>
<CAPTION>

                                                                                    SMX                 Sedeco     
<S>                                                                               <C>                 <C>

Fair value of assets acquired                                                   $   6,360,000        $4,359,000
Fair value of liabilities assumed                                                  (7,711,000)       (1,378,000)
                                                                                   -----------      ------------ 
Net assets acquired                                                                $1,351,000         2,981,000
                                                                                  ============      ============
Cash paid (gross) for net assets                                                $   5,000,000        $4,165,000
Promissory notes issued for net assets                                              3,500,000             -
Class A common stock issued for net assets                                            238,000         2,400,000
Acquisition costs                                                                     755,000           548,000
                                                                                -------------      -------------
Total consideration                                                                 9,493,000        7,113,000
Less net assets acquired                                                            1,351,000       (2,981,000)
Less accumulated amortization                                                        (361,000)         (22,000)
Less offset of promissory notes                                                      (550,000)            -
                                                                                -------------      -------------
Excess of cost over net assets acquired                                         $   9,933,000      $ 4,110,000
                                                                                =============      =============
</TABLE>


     See notes to consolidated financial statements.


                                                    F-10


<PAGE>



     HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED  FINANCIAL  STATEMENTS  
     YEARS ENDED JANUARY 31, 1997, 1996 and 1995


     NOTE 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")  and  Sedeco,  Inc.  ("Sedeco")  (collectively,   the  "Company").   The
operations of SMX and Sedeco are included in consolidated operations since their
acquisitions on June 7, 1996 and December 20, 1996, respectively (see Note 3).

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

     During fiscal 1995, the Company consummated an initial public offering (the
"IPO") of Class A common stock.  The Company sold 1,000,000  shares at $8.00 per
share.  Net proceeds of  $7,353,000,  after offering  expenses of  approximately
$898,000, were received by the Company.

     Concurrent  with the  IPO,  the  Company  acquired  all of the  outstanding
capital stock of Pulse.  The  acquisition  of Pulse has been  accounted for as a
purchase  and  accordingly,  the  acquired  assets  have been  recorded at their
estimated fair market values at the date of  acquisition.  The cost in excess of
fair value of Pulse has been  recorded as  purchased  technologies  and is being
amortized over a period of seven years.

     On January 24, 1996, the Company consummated a secondary public offering of
Class A common stock (the "Second Offering"). The Company sold 200,000 shares at
$12.375 per share.  Another 800,000 shares were sold by certain of the Company's
officers. Net proceeds of approximately  $1,906,000,  after offering expenses of
approximately  $417,000, were received by the Company. On February 15, 1996, the
underwriters  exercised  their  over-allotment  option to purchase an additional
150,000 shares from certain of the Company's officers.

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

     NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (A) Principles of  Consolidation - The  consolidated  financial  statements
include the accounts of

                                      F-11


<PAGE>



the Company and its wholly-owned  subsidiaries.  All intercompany  balances
and transactions have been eliminated in consolidation.

                                      F-12


<PAGE>



     (B) Revenue  Recognition  - The Company  distributes  embroidery  equipment
which it offers for  -------------------  sale or lease.  Revenue related to the
sale of  equipment is recorded at the time of shipment.  Lease  contracts  which
meet the  criteria  of  Statement  of  Financial  Accounting  Standards  No. 13,
"Accounting  For Leases" are  accounted  for as  sales-type  leases.  Under this
method,  revenue is recognized as a sale at the later of the time of shipment or
acceptance  by the lessee in an amount equal to the present  value of the rental
payments under the lease term (usually 36-60 months). The difference between the
total lease  payments and the present  value is  amortized  over the term of the
lease so as to produce a constant  periodic rate of return on the net investment
in the lease.  To date,  all leases  issued by the Company and HAPL Leasing have
been sales-type  leases.  The operating method of accounting for leases would be
followed for lease contracts not meeting the above  criteria.  Under this method
of accounting, aggregate rental revenue would be recognized over the term of the
lease.

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

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

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

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

     (F) Foreign  Operations - Assets and  liabilities of the Company's  foreign
subsidiary are translated at year-end exchange rates.  Results of operations are
translated using the average exchange rate prevailing throughout the year. Gains
and losses from foreign currency transactions are included in net income and are
not significant.

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

                                      F-13


<PAGE>



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

          Asset Category                   Lives in Years
         ----------------                  --------------
         Building                               39
         Furniture and fixtures                5-7
         Machinery and equipment               5-7 
         Automobiles                           3-5
         Leasehold improvements               5-20  

     (H) Software  Development  Costs - The development of new software products
and   enhancements   to  existing   products  are  expensed  as  incurred  until
technological feasibility has been established.  After technological feasibility
is  established,  any additional  costs would be capitalized in accordance  with
Statement of Financial  Accounting Standards No. 86 "Accounting for the Costs of
Computer  Software  to Be Sold,  Leased,  or  Otherwise  Marketed".  Capitalized
software costs are amortized on a straight-line  basis over the estimated useful
product lives (normally three years)  commencing in the month following  product
release.  During  the  years  ended  January  31,  1997 and  1996,  the  Company
capitalized  approximately  $364,000 and $252,000 of software development costs,
respectively.  Such  costs are  included  in other  assets  on the  accompanying
consolidated  balance sheets.  Amortization  expense for the years ended January
31,  1997 and 1996 was  approximately  $84,000  and  $21,000,  respectively.  No
software development costs were capitalized in fiscal 1995.

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

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

     (K) 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

                                      F-14


<PAGE>



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.

     (L) Net Income  Per Share - Net  income per share is based on the  weighted
average  number of common  shares  outstanding  during the period  after  giving
retroactive  effect to stock dividends and splits (see Note 10D).  Stock options
are  considered  to be common  stock  equivalents  and,  accordingly,  have been
included in the  computation  of earnings per share for the years ended  January
31, 1997, 1996 and 1995, respectively, using the Treasury Stock Method.

     (M) 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").

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

     (O) Fair Value of Financial  Instruments  - Financial  instruments  consist
primarily  of  investments  in  cash,  short-term  investments,   trade  account
receivables,  accounts  payable  and debt  obligations.  At January 31, 1997 and
1996, the fair value of the Company's  financial  instruments  approximated  the
carrying value (see Note 2C).

     NOTE 3 - ACQUISITIONS

     (A)  Acquisition of Sewing  Machine  Exchange - On June 7, 1996 the Company
acquired  all of the  outstanding  capital  stock of SMX.  The  acquisition  was
accounted  for as a purchase in  accordance  with  Accounting  Principles  Board
Opinion No. 16 "Business Combinations" ("APB 16") and accordingly,  the acquired
assets and assumed liabilities have been recorded at their estimated fair market
values at the date of  acquisition.  The cost in excess of fair  value of SMX is
being amortized over a 15-year period.

     The purchase price was $8,690,000, paid in the form of a promissory note in
the principal amount of $4,250,000 to each of the two former shareholders of SMX
and by delivery of an aggregate of 9,375 shares of the Company's  Class A Common
Stock.  Pursuant to the terms of the promissory  notes, the Company was required
to make a principal payment on each note in the amount of $2,500,000 on June 13,
1996 with the  balance of each note  ($1,750,000)  payable  in 60 equal  monthly
installments  of principal  and interest  beginning  July 7, 1996 (see Note 8B).
These notes were subsequently  reduced by $550,000 related to certain guarantees
in the stock purchase  agreement  regarding  inventory and accounts  receivable.
Concurrent with the acquisition,  the Company entered into five-year  employment
contracts with SMX's former shareholders pursuant to which they received 331,250
options to purchase  shares of Hirsch Class A common  stock (see Note 10B).  The
options were issued at fair market value at the date of acquisition  and vest in
four annual installments of 25

                                      F-15


<PAGE>



percent each on the first,  second,  third,  and fourth  anniversary of the
date of grant and expire five years from the date thereof.

                                      F-16


<PAGE>



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

     The purchase price was  $6,565,000,  paid in the form of $4,165,000 in cash
and  $2,400,000  in the  Company's  Class A common  stock.  Concurrent  with the
acquisition,  the Company  entered  into a five-year  employment  contract  with
Sedeco's former shareholder  pursuant to which 60,300 options to purchase shares
of Hirsch  Class A common  stock (see Note 10B) were  issued.  The options  were
issued at fair market value at the date of  acquisition  and vest in four annual
installments  of 25  percent  each  on the  first,  second,  third,  and  fourth
anniversary of the date of grant and expire five years from the date of grant.

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

     NOTE 4 - INVENTORIES 

                                                           January 31,
                                                       1997           1996
                                                       ----           ----
     Machines                                    $ 12,244,563     $6,158,040 
     Parts and  accessories                         5,527,352      2,837,165
     Less:  Reserve for slow moving inventory      (2,003,050)    (1,026,002)
                                               --------------- --------------
      Total                                       $15,768,865    $ 7,969,203
                                               =============== ==============

     NOTE 5 - NET INVESTMENT IN SALES-TYPE  LEASES
                                                          January 31,
                                                      1997            1996
                                                      ----            ---- 
Total  minimum  lease  payments  receivable     $  11,141,379    $ 9,595,952
Estimated residual value of leased
   property (unguaranteed)                          3,058,948      1,832,088
Reserve for estimated uncollectible
   lease payments                                    (337,500)      (300,000)
Less: Unearned income                              (2,968,242 )   (2,483,216)
                                               ---------------  --------------
Net investment                                     10,894,585      8,644,824 
Less:   Current  portion                            1,715,164      1,592,733
                                               ---------------  --------------  
Non-current  portion                              $ 9,179,421    $ 7,052,091
                                               ===============  ==============

                                      F-17


<PAGE>



     At January 31, 1997 future  annual  lease  payments  receivable  (including
estimated residual values) under sales-type leases are as follows:

    Fiscal Year Ending January 31,
              1998                                        $     2,808,430
              1999                                              2,693,405
              2000                                              2,567,790
              2001                                              2,373,487
              2002                                              2,093,999
            Thereafter                                          1,663,216
                                                             ---------------
                                                          $    14,200,327
                                                             ===============  

     NOTE 6 - PROPERTY,  PLANT AND EQUIPMENT 

                                                            January 31,
                                                        1997          1996 
                                                        ----          ----
Land and building                                     $ 3,288,137 $ 2,767,355
Machinery and equipment                                 3,039,794   1,996,191
Furniture and fixtures                                  1,373,929     880,773  
Automobiles                                               670,056     275,421
Leasehold improvements                                  1,368,845     658,875
                                                    -------------- ----------- 
Total at cost                                           9,740,761   6,578,615  
Less: Accumulated depreciation and amortization        (3,238,242) (1,738,085)
Reserve  for  assets  held  for  sale                    (260,382)        -
                                                    --------------- ----------
Property,  plant  and  equipment,  net               $  6,242,137  $4,840,530
                                                    ============== ===========

     NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                             January 31,
                                                          1997         1996
                                                          ----         ----
                                                                        
       Accounts payable                              $ 4,640,688   $ 2,863,371
       Accrued commissions payable                       818,969       845,746
       Accrued payroll costs                             832,529       685,435
       Accrued warranty costs                            625,635       365,635
       Other accrued expenses                          3,241,735     2,013,991
                                                  --------------- -------------
       Total accounts payable and accrued expenses  $ 10,159,556  $  6,774,178
                                                  =============== =============


     NOTE 8 - LONG-TERM DEBT
                                                            January 31,
                                                         1997         1996
                                                         ----         ---- 
       Term Note (A)                              $  6,750,000    $     -
       Promissory Notes (B)                          2,541,662          -
       Sedeco acquisition (C)                        4,446,305         -
       Mortgage (D)                                  1,778,625    2,008,126
       Other                                           106,942       13,260
                                                 -------------  ------------
       Total (E)                                    15,623,534    2,021,386
       Less:  Current maturities                     2,429,500      242,760
                                                --------------  ------------
       Long-term maturities                     $   13,194,034  $ 1,778,626
                                                ==============  ============


                                      F-18


<PAGE>



     (A) On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan  Agreement")  pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan is  repayable  in 20 equal  quarterly  installments  of  principal  and
interest (as defined in the Term Loan Agreement)  beginning  September 30, 1996.
The loan has been guaranteed by Hirsch,  Pulse and SMX, and requires the Company
to maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined.

     (B)  In  connection  with  the  acquisition  of  SMX,  the  Company  issued
promissory notes in the principal amount of $4,250,000 to each of the two former
shareholders of SMX.  Pursuant to the terms of the promissory notes, the Company
was  required to make a  principal  payment on June 13, 1996 with the balance of
each note ($1,750,000) payable in 60 equal monthly installments of principal and
interest  beginning  July 7,  1996.  The notes  bear  interest  at the rate (the
"Hirsch Rate")  defined in the Hirsch Term  Agreement  plus two percent  through
June 1999 and from July 1999 through  maturity at the Hirsch  Rate.  Pursuant to
the terms of the Stock Purchase  Agreement,  the former shareholders of SMX made
certain  guarantees with respect to  collectibility  of accounts  receivable and
salability of inventory among other things.  In the fourth quarter,  these notes
were reduced by approximately $550,000 (See Note 3).

     (C) In  connection  with the  purchase  of  Sedeco,  the  Company  borrowed
approximately  $4,446,000  to fund the  acquisition  and repay  Sedeco's  credit
facilities.  The amounts were  borrowed  under the  provisions  of the Revolving
Credit  Facility  (see E) and bear  interest as defined  therein.  The  Revolver
matures  three years from the closing date at which  point,  any amounts used to
fund acquisitions thereunder will convert to a term loan facility and be paid in
12 equal quarterly  installments over a three-year  period. At January 31, 1997,
all amounts  outstanding  thereunder  were  classified in Long-Term  Debt on the
Balance Sheets.

     (D) On  October  27,  1994,  Hirsch  entered  into a ten  year,  $2,295,000
mortgage   agreement  with  a  bank  (the  "Mortgage")  for  its  new  corporate
headquarters.  The Mortgage bears interest at a fixed rate of 8.8 percent and is
payable in equal monthly  principal  installments  of $19,125.  The terms of the
Mortgage, among other things, restrict additional borrowings by the Company, and
require the Company to maintain certain debt service  coverage ratio levels,  as
defined in the Mortgage.  The obligation under the Mortgage is secured by a lien
on the premises and the related improvements thereon.

     (E) The Company has a $30,000,000  Revolving Credit Facility with two banks
(the "Facility").  The Facility is for working capital loans, letters of credit,
and  deferred  payment  letters  of credit and bear  interest  as defined in the
Facility.  The terms of the Facility,  among other things,  restrict  additional
borrowings  by the Company and  require  the  Company to  maintain,  among other
things,  certain minimum tangible net worth,  quick asset ratio and fixed charge
coverage levels, as defined. The Facility also provides a $15,000,000  sub-limit
to  finance  acquisitions  (as  defined  therein),   under  which  approximately
$4,446,000  was  outstanding at January  31,1997 for the Sedeco  acquisition(see
Notes 3 and 8C).  This  Facility  has also been used for  letters  of credit and
deferred  payment  letters of credit  aggregating  approximately  $13,332,000 at
January 31, 1997. There were no working capital loans  outstanding  against this
Facility at January 31, 1997.

                                      F-19


<PAGE>

     The Company had an unsecured  Line of Credit  Agreement  with a bank in the
prior year,  to finance  working  capital  loans,  lines of credit and  deferred
payment  letters  of credit.  This line had been used for  letters of credit and
deferred  payment  letters of credit  aggregating  approximately  $8,656,000  at
January 31, 1996.

     Long-term debt (including  capitalized lease obligations) of the Company at
January 31, 1997 matures as follows:

  Fiscal Year Ending January 31,
            1998                                            $    2,429,500
            1999                                                 2,479,259
            2000                                                 6,911,201
            2001                                                 2,194,297
            2002                                                   979,500
          Thereafter                                               629,777
                                                             --------------
                                                            $   15,623,534
<TABLE>
<CAPTION>
     NOTE 9 - INCOME TAXES

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

                                                                                     January 31, 
                                                                        1997            1996           1995
                                                                      -------          ------         ------
<S>                                                                <C>               <C>             <C>

   Current:
    Federal                                                        $ 4,841,997      $3,855,262      $2,831,498   
    State                                                            1,753,208       1,270,460         834,632
                                                                   -------------    -----------      ---------
   Total current                                                     6,595,205       5,125,722       3,666,130
                                                                   -------------    -------------    ---------
   Deferred: 
    Federal                                                           (100,052)       (223,811)       (252,960)
    State                                                              (92,833)        (64,617)        (77,815) 
                                                                  --------------    -------------    ----------
   Total deferred                                                     (192,885)       (288,428)       (330,775) 
                                                                  --------------    -------------    ----------
   Total provision  for income  taxes                              $ 6,402,320    $  4,837,294      $3,335,355 
                                                                   =============   =============     ==========
</TABLE>


     The tax effects of temporary  differences that give rise to deferred income
tax assets at January 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                             January 31, 1997                   January 31, 1996
                                                     -------------------------------        -----------------------
                                                           Net               Net             Net                Net
                                                       Current         Long-Term          Current         Long-Term
                                                       Deferred          Deferred         Deferred          Deferred
                                                     Tax Assets        Tax Assets       Tax Assets        Tax Assets
                                                     ----------        ----------       ----------       -----------
         <S>                                         <C>               <C>             <C>               <C>   

         Accounts receivable                        $  589,178      $      -          $  413,946        $      -
         Inventories                                   487,142             -             450,239               -
         Accrued warranty costs                        152,068             -             147,241               -
         Other accrued expenses                         69,862             -              44,047               -
         Purchased technologies                           -            131,492               -              92,365
         Net investments in sales-type leases
           (allowance for doubtful accounts)              -            140,470               -             120,810
         Capitalized software development
         costs                                            -           (201,139)              -             (92,460)
                                                     -------------      -----------   ------------      -------------
         Total                                     $ 1,298,250      $   70,823        $  1,055,473      $  120,715
                                                     =============      ===========   ============      =============

</TABLE>
                                     
                                      F-20
 
<PAGE>
     
     Valuation allowances for such deferred tax assets have not been established
as it is more likely than not that the Company will realize  these assets in the
future based upon the historical profitable operations of the Company.

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

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

                                                     Year Ended January 31,
                                                 1997        1996        1995
   Federal statutory income tax rate            34.0%        34.0%       34.0%
   State income taxes, net of Federal benefit    8.4          7.5         6.1
   Permanent differences                        (0.2)         0.9         0.8 
                                              -----------------------  --------
Effective income tax rate                       42.2%        42.4%       40.9%
                                              ==========    ======      ======

NOTE 10 - STOCKHOLDERS' EQUITY

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

     (B) Stock  Option Plans - The Company  maintains  two stock  options  plans
pursuant to which an aggregate of 984,375 shares of Common Stock may be granted.

     The 1993  Stock  Option  Plan was  adopted  by the  Board of  Directors  in
December  1993 and was approved by the  stockholders  of the Company on July 28,
1994 (the "1993 Plan").

     The 1993 Plan has 750,000 shares of Common Stock reserved for issuance upon
the  exercise  of options  designated  as either  (i)  incentive  stock  options
("ISOs")  under the Internal  Revenue Code of 1986, as amended (the "Code"),  or
(ii) non-qualified  options.  ISOs may be granted under the Stock Option Plan to
employees  and officers of the Company.  Nonqualified  options may be granted to
consultants,  directors  (whether  or not  they  are  employees),  employees  or
officers of the Company.

                                      F-21


<PAGE>



     Stock option transactions during the years ended January 31, 1997, 1996 and
1995 for the 1993 Plan are summarized below:
<TABLE>
<CAPTION>

                                                                                                   Weighted
                                                              Shares       Price Range         Average Price
        Options granted                                       53,467      $4.88 - $5.89            $  5.43
                                                             ---------      -------------       ------------
<S>                                                          <C>          <C>                   <C>  


        Options outstanding - January 31, 1995                53,467      $4.88 - $5.89            $  5.43

        Options granted                                       11,720     $9.12 - $10.04            $  9.73
        Options exercised                                     (1,640)        $4.88                 $  4.88
                                                            ---------   ------------------     ------------

        Options outstanding - January 31, 1996                63,547     $4.88 - $10.04            $  6.21
        Options granted                                      255,625    $10.20 - $17.05            $ 14.94
        Options exercised                                     (4,602)         $4.88                $  4.88
        Options canceled                                      (5,625)        $14.50                $ 14.50
                                                           ----------   -----------------      -----------

        Options outstanding - January 31, 1997               308,945     $4.88 - $17.05            $ 13.23
                                                           ==========   =================      ===========

        Options exercisable at January 31, 1997               51,127     $4.88 - $10.04            $  5.76
                                                           ==========   =================     ============
</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           Exercisable        Price
<S>              <C>                   <C>                <C>                <C>               <C>              <C>

             $  4.88 - $  5.89             47,225           2.5            $  5.43              47,225           $5.43
             $  9.12 - $10.20              11,720           3.5            $  9.83               3,902           $9.73
             $14.50 - $17.05              250,000           4.5             $15.00              -                   -
                                      -----------                                            ----------
                                          308,945                                               51,127
                                      ===========                                            ==========
</TABLE>


     All  options  granted  for the  fiscal  year  ended  January  31,  1995 are
exercisable  one year from the date of grant and expire five years from the date
of grant.  All options  issued  subsequent  to the fiscal year ended January 31,
1995 vest in three  annual  installments  of 33-1/3  percent  each on the first,
second,  and third  anniversary  of the date of grant.  There are 435,188 shares
available  for future  grants under the 1993 Plan.  Approximately  5,625 options
have been canceled under this plan.

     The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") was
adopted by the Board of  Directors in  September  1994,  and was approved by the
Stockholders  of the Company in June 1995. The Directors Plan has 234,375 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-

                                      F-22


<PAGE>



qualified  option to purchase  2,500  shares of Common Stock on the date of
each annual  meeting of  stockholders  following  their election to the Board of
Directors.  The exercise price under each option is the fair market value of the
Company's  Common Stock on the date of grant.  Each option has a five-year  term
and vests in three  annual  installments  of 33-1/3  percent  each on the first,
second,  and third  anniversary of the date of grant.  Options granted under the
Directors Plan are generally not transferable  during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution. In
the event an  optionee  ceases to be a member of the Board of  Directors  (other
than by reason  of death or  disability),  then the  non-vested  portion  of the
option  immediately  terminates and becomes void and any vested but  unexercised
portion of the option  may be  exercised  for a period of 180 days from the date
the optionee  ceased to be a member of the Board of  Directors.  In the event of
death or permanent disability of an optionee,  all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.

     Stock option transactions during the years ended January 31, 1997, 1996 and
1995 for the Directors Plan are summarized below:
<TABLE>
<CAPTION>

                                                                                                       Weighted
                                                                             Shares                  Price Range
                                                                             ======                  ===========
       Average Price
       -------------

      <S>                                                              <C>         <C>              <C>   

       Options granted                                                 35,157      $ 5.36                 $ 5.36
                                                                     --------    --------            -----------      
       Options outstanding - January 31, 1995                          35,157      $ 5.36                $  5.36
                  Options granted                                      11,718      $ 9.12                $  9.12
                                                                     ---------   -----------------   -----------
                  Options outstanding - January 31, 1996               46,875    $5.36 - $9.12           $  6.30
                  Options granted                                       9,375      $15.50                $ 15.50
                                                                     ---------   -----------------   -----------
                  Options outstanding - January 31, 1997               56,250       $5.36 - $15.50       $  7.83
                                                                     =========   =================   ===========
                  Options exercisable at January 31, 1997              27,344       $5.36 -  $9.12          5.90
                                                                     =========   =================   ===========

</TABLE>

<TABLE>
<CAPTION>


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


                  $  5.36                  35,157           2.5            $  5.36              23,438           $5.36
                  $  9.12                  11,718           3.5            $  9.12               3,906           $9.12
                  $ 15.50                   9,375           4.5             $15.50              -                  -
                                      -----------                                              ----------
                                           56,250                                                  27,344
                                      ===========                                              ==========
</TABLE>


     There are 178,125  shares  available  for future grants under the Directors
Plan. No options have been exercised or canceled under this plan.

     In  connection   with  the   acquisitions   of  Sedeco,   SMX,  and  Pulse,

approximately 427,000 nonplan options have been issued as follows:


                                                    F-23


<PAGE>

<TABLE>
<CAPTION>



                                                                                                       Weighted
                                                                  Shares          Price Range      Average Price
                                                                 -------          -----------      -------------
<S>                                                             <C>               <C>               <C>
 
                Options granted - Pulse acquisition                  35,892         $ 4.88             $  4.88
                                                                 ----------    ----------------       ---------
                Options outstanding -

                  January 31, 1995 and 1996                          35,892         $ 4.88             $  4.88
                Options granted - SMX and Sedeco
                  acquisitions                                      391,550     $16.20 - $18.25        $ 16.52
                                                                 ----------     ---------------      ----------
                Options outstanding -

                  January 31, 1997                                  427,442     $ 4.88 - $18.25        $ 15.54
                                                                 ==========    ================      ==========
                Options exercisable at January 31, 1997              35,892       $  4.88              $  4.88
                                                                 ==========    ================     ===========
</TABLE>



                                      F-24


<PAGE>
<TABLE>
<CAPTION>



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

                  $  4.88                  35,892           2.5               $  4.88              35,892       $4.88
                  $ 16.20                 331,250           4.5                $16.20              -              -
                  $ 18.25                  60,300          4.75                $18.25              -              -
                                      -----------                                              ----------
                                          427,422                                                  35,892
                                      ===========                                              ==========

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

     In addition,  pursuant to the IPO, the  underwriters  received  warrants to
purchase from the Company  205,080 shares of Class A Common Stock.  The warrants
are exercisable for a period of four years commencing one year after the date of
the IPO at  exercise  prices  ranging  from 107  percent  to 128  percent of the
initial public  offering  price.  During the fiscal year ended January 31, 1997,
198,300  warrants  were  exercised at a price of $5.56 per share.  Approximately
6,780 are exercisable at a price of $5.90 per share.

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

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and earnings  per share had the Company  adopted the fair value method as
of the beginning of fiscal 1996.  Under SFAS 123, the fair value of  stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable  options without vesting  restrictions,  which  significantly
differ from the  Company's  stock  option  awards.  These  models  also  require
subjective  assumptions,  including  future stock price  volatility and expected
time to exercise,  which greatly  affect the  calculated  values.  The Company's
calculations  were made using the  Black-Scholes  option  pricing model with the
following  weighted average  assumptions for 1997 and 1996:  expected life, five
years following vesting;  stock volatility,  28 percent, risk free interest rate
of 6.0  percent  and no  dividends  during  the  expected  term.  The  Company's
calculations are based on a multiple option  valuation  approach and forfeitures
are recognized as they occur. If the computed fair values of the 1997 awards had
been amortized to expense over the vesting  period of the awards,  pro forma net
income would have been approximately $8,494,000 ($1.07 per share). The impact of
SFAS 123 on pro  forma net  income  for 1996 was zero.  However,  the  impact of
outstanding  non-vested stock options granted prior to February 1, 1995 has been
excluded  from the pro  forma  calculation;  accordingly,  the 1997 and 1996 pro
forma  adjustments  are not  indicative of future period pro forma  adjustments,
when the calculation will apply to all applicable stock options.

                                      F-25


<PAGE>



     (D)  Stock  Dividend  - On June 25,  1996 and June 23,  1995,  the  Company
declared  five-for-four  stock splits  effected in the form of 25 percent  stock
dividends  which were paid on July 22, 1996 and July 24, 1995 to stockholders of
record on July 8,  1996 and July 10,  1995,  respectively.  The par value of the
shares remains unchanged at $.01 per share.

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

     (E) Profit Sharing Plan - The Company has a voluntary  contribution  profit
sharing plan (the "Plan"),  which  complies with Section  401(k) of the Internal
Revenue  Code.  Employees  who have  attained the age of 21 and have one year of
continuous  service are eligible to  participate  in the Plan.  The Plan permits
employees  to make a  voluntary  contribution  of  pre-tax  dollars to a pension
trust,  with a  matching  contribution  by the  Company  up to a maximum  of two
percent of an eligible employee's annual  compensation.  The Company contributed
approximately  $78,000,  $59,000 and  $54,000,  for the years ended  January 31,
1997, 1996 and 1995, respectively. The Company funds all amounts when due.

     NOTE 11 - COMMITMENTS AND CONTINGENCIES

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


       Fiscal Year Ending January 31,
                    1998                           $     531,548
                    1999                                 360,117
                    2000                                 186,720
                    2001                                 109,680
                    2002                                  88,567
                    Thereafter                            38,260
                                                   -------------
                    Total                          $   1,314,892
                                                   =============

     Rent  expense was  approximately  $617,000,  $264,000  and $235,000 for the
years ended January 31, 1997, 1996 and 1995, respectively.

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

     At January 31, 1997,  the Company held foreign  currency  contracts for the
purchase of Japanese yen amounting to approximately $58,000,000.

                                      F-26


<PAGE>



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

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

     (E) Dependency  Upon Major Supplier - During the fiscal years ended January
31,  1997,   1996  and  1995,  the  Company  made  purchases  of   approximately
$69,000,000,  $47,000,000 and $40,000,000,  respectively, from Tajima Industries
Ltd. ("Tajima"),  the manufacturer of the embroidery machines the Company sells.
This  amounted to  approximately  83, 80 and 82 percent of the  Company's  total
purchases for the years ended January 31, 1997, 1996 and 1995, respectively.

     The Company has two separate distributorship  agreements with Tajima which,
collectively,  provide the Company the exclusive  right to  distribute  Tajima's
complete line of embroidery machines in 39 states. The main agreement (the "East
Coast / Midwest  Agreement")  which  covers 33 states,  including  the  original
Hirsch territory and the additional states acquired in the SMX territory, became
effective on February  21,  1991,  has a term of 20 years and contains a renewal
provision which permits  successive five year renewals upon mutual  agreement of
the parties.  The East Coast / Midwest  Agreement is terminable by Tajima and/or
the Company on not less than two years' prior notice  except that Tajima  cannot
terminate  the East Coast / Midwest  Agreement  prior to February 20, 1998.  The
second agreement (the "Southwest  Agreement")  covers the six states acquired in
the Sedeco  territory,  became  effective on February 21, 1997 and has a term of
five years.

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

     The minimum  purchase of embroidery  machines for 1996 was met. The minimum
quantity  to be sold in  1997 is  1,503  machines  in  various  designations  as
defined.

                                      F-27


<PAGE>


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


                                   * * * * * *

                                      F-28




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