SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
                                   (Mark One)

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

                   For the fiscal year ended January 31, 2004

                                       OR

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

             For the transition period from __________ to _________

                         Commission file number 0-23434


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

             (Exact name of registrant as specified in its charter)

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

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

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


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

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


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


                          Common Stock, $.01 Par value

                                    (CLASS A)

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

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

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

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates*  computed by reference  to the price at which the common  equity
was last sold, or the average bid and asked price of such common  equity,  as of
April 26, 2004 was $9,932,156.

The number of shares  outstanding of each of the registrant's  classes of common
stock, as of April 28, 2004 were:


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

            Class A Common Stock                 5,663,611
               Par Value $.01

            Class B Common Stock                 2,668,139
               Par Value $.01

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



                           Hirsch International Corp.
                                    Form 10-K
                   For the Fiscal Year ended January 31, 2004
                                Table of Contents


Part I                                                                 Page
Item 1.  Business                                                      4-13
Item 2.  Properties                                                     14
Item 3.  Legal Proceedings                                              14
Item 4.  Submission of Matters to a Vote of Security Holders            14

Part II
Item 5.  Market for Common Equity and Related Stockholder Matters      14-15
Item 6.  Selected Financial Data                                       16-17
Item 7.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations                 17-26
Item 7A. Quantitative and Qualitative Disclosures
         About Market Risk                                              26
Item 8.  Financial Statements and Supplementary Data                    26
Item 9.  Changes in and Disagreements on Accounting
         And Financial Disclosure                                       26
Item 9A. Controls and Procedures                                        26

Part III
Item 10. Directors and Executive Officers of the Registrant            27-29
Item 11. Executive Compensation                                        30-38
Item 12. Security Ownership of Certain Beneficial
         Owners and Management and Related Stockholder Matters         38-39
Item 13. Certain Relationships and Related Transactions                40-41
Item 14. Principal Accountant Fees and Services                        41-42

Part IV
Item 15. Exhibits, Financial Statement Schedules and
         Reports on Form 8K                                             42
         Signatures and Certifications                                  43
         Exhibit Index                                                 44-45



                                     PART I

Item 1.  Business

General

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

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

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

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

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

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

     Until the fourth quarter of fiscal 2002 the Company's  leasing  subsidiary,
HAPL Leasing Co., Inc. ("HAPL Leasing"),  had provided a wide range of financing
options to customers wishing to finance their purchases of embroidery equipment.
In the fourth  quarter of fiscal  2002,  the  Company  determined  that its HAPL
Leasing subsidiary was not strategic to its business objectives and discontinued
its  operations  (See Note 15 to the  Consolidated  Financial  Statements).  The
Company has  continued  to work with  customers  to help them  obtain  financing
through   independent  leasing  and  financing   companies,   as  an  attractive
alternative for purchasers looking to begin or expand  operations.  Accordingly,
the Company has reported its discontinued  operations in accordance with APB 30.
The consolidated  financial  statements have been  reclassified to segregate the
assets and liabilities and operating  results of these  discontinued  operations
for all periods presented.

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

     In the fourth quarter of fiscal 2002, the Company initiated a restructuring
plan in connection with its continuing operations. The plan was designed to meet
the changing needs of the Company's customers,  to reduce its cost structure and
improve efficiency.  The restructuring initiatives involved the consolidation of
the parts and supplies operation with existing Hirsch operations, the downsizing
of  three  of  its  existing   sales   offices  and  reduction  in  the  overall
administrative   personnel.  The  reduction  in  personnel  during  this  period
represented  approximately 25% of its workforce or 56 people. (See Note 9 to the
Consolidated Financial Statements).

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


The Embroidery Industry

     The development of electronic  computer-controlled  embroidery machines has
led to new  embroidery  applications  and markets,  cost savings,  higher profit
margins  for  users  and  production  efficiencies  which  has  transformed  the
embroidery  industry  from  being  extremely   labor-intensive  to  an  industry
characterized  by a high level of  automation.  Past  innovations  to embroidery
machines  offered  superior design  flexibility and increased speed and provided
the manufacturer with the ability to embroider finished products, the ability to
efficiently embroider up to fifteen colors at a time, automatic thread trimming,
and other labor-saving  improvements.  Innovations include a narrow cylinder arm
sewing head that permits embroidery on small diameter apparel,  such as pockets,
sleeves, pant legs and socks. The embroidery industry on a world-wide basis also
benefits from the demand for licensed products  distributed by apparel and other
manufacturers.  Licensed  names,  logos and  designs  provided  by,  among other
sources, professional and collegiate sports teams and the entertainment industry
appear on caps,  shirts,  outerwear,  luggage  and other  softgoods  for sale at
affordable  prices.  In addition,  the intricacy of the designs capable of being
embroidered have attracted broad fashion and commercial appeal for special event
promotional  marketing.  Embroidery  equipment  may  contain  single or multiple
sewing heads,  each sewing head consisting of one to a group of needles that are
fed by spools of thread  attached to the  equipment.  The design and  production
capabilities  of the sewing  heads are  enhanced  through  the  application  and
integration of computers and specialized software.

Business Strategy

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

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

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

     Pulse  Microsystems  Ltd.  Software.  Pulse,  a  former  subsidiary  of the
Company,  offers a wide range of proprietary  application  software  products to
enhance and simplify  the  embroidery  process.  Pulse's  computer-aided  design
software packages target the different functions performed by embroiderers,  and
are contained in an integrated  product line. A majority of Pulse's  proprietary
application  software  products  are  designed  to operate  in the  Microsoft(R)
Windows(R) 95, Windows(R) 98, Windows(R) 2000,  Windows(R) Me, Windows(R) XP and
Windows(R) NT environments  that the Company  believes will enhance  creativity,
ease of use  and  user  flexibility.  All  Tajima  machines,  as  well as  other
manufacturers'  embroidery machines can be networked through Pulse software.  It
is the Company's  established practice to aggressively market this software with
embroidery  equipment and as an upgrade to its installed  base of  approximately
18,900 embroidery machines.  The Company believes that these products have broad
appeal to purchasers  of  single-head  and  multi-head  embroidery  machines and
present  opportunities for the Company to increase sales of embroidery equipment
and software as the Company continues to emphasize marketing activities.

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

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

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

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

     Retail  Embroidery  Services.  In fiscal 1999, the Company created a retail
embroidery concept known as "Hometown  Threads"(TM) for the purpose of providing
retail  embroidery   services  within   Wal-Mart(R)   establishments.   Hometown
Threads(TM)  continues to expand the number of locations in  Wal-Mart(R)  stores
and other mall and  shopping  center  locations  throughout  the United  States,
through its  franchise  program,  and had 29  franchise  locations at the end of
fiscal 2004.

Discontinued Operations

     In the fourth quarter of fiscal 2002, the Company  determined that its HAPL
Leasing  subsidiary was not strategic to its ongoing objectives and discontinued
HAPL's  Leasing's  operations.   Accordingly,   the  Company  has  reported  its
discontinued  operations in accordance with APB 30. The  consolidated  financial
statements  have  segregated the assets,  liabilities  and operating  results of
these  discontinued  operations  for all  periods  presented  (See Note 7 to the
Consolidated Financial Statements).

     Effective  October 31, 2002,  the Company  completed the sale of all of the
outstanding  equity  interests  in Pulse,  pursuant to the terms of the purchase
agreement by and between Hirsch and 2017146 Ontario Limited  ("Purchaser") dated
as of October 31, 2002, ("The Agreement").

     Pursuant to the Agreement  Hirsch sold its entire equity  interest in Pulse
to the  Purchaser for an aggregate  consideration  of $5.0 Million to be paid as
follows:

(a)  $0.5 Million Cash;

(b)  a $0.5 Million note payable in quarterly  installments  beginning April 30,
     2003 and  including  interest  accruing on the  principal at the rate of US
     Prime + 1% per annum; and

(c)  The assumption of $4.0 Million of Hirsch obligations. All periods presented
     have been restated to reflect the discontinued operations of Pulse.

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

     The purchase price (the  "Purchase  Price") for the Shares was equal to the
Book  Value  (as  defined  in the  Agreement),  calculated  in  accordance  with
generally  accepted  accounting  principles.  At the  closing,  Tajima  paid the
Company the sum of $500,000  (the "Initial  Payment") in partial  payment of the
Purchase  Price.  The  remaining  balance  due on the  Purchase  Price  will  be
determined  on or  before  April  30,  2004,  and paid  promptly  thereafter  in
accordance with the terms of the Agreement.

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

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

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

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

The Company's  Consolidated  Financial  Statements have been restated to reflect
the discontinued operations of TUI


Marketing and Customer Support

     The Company has been selling  embroidery  equipment since 1976 and believes
it is one of the leading  distributors  of Tajima  equipment  in the world.  The
Company  reinforces  recognition of its name through trade magazine  advertising
and  participation  in seminars and over 20 trade shows annually.  The Company's
sales staff is headed by Paul Gallagher,  President and Chief Operating  Officer
of the Company,  and currently  consists of  salespeople  who maintain  frequent
contact with customers in order to understand and satisfy each customer's needs.
The Company's  products are  generally  considered by the industry to consist of
the highest quality embroidery equipment available, and consequently the Company
does  not  attempt  to  compete  exclusively  on a  price  basis  but  rather  a
value-added  basis,  through  its  reputation,  knowledge  of  the  marketplace,
investment in  infrastructure  and  experience in the industry.  In a climate of
intense price competition by lower cost  manufacturers,  the Company attempts to
maintain a balance  between  market share and profit  margins to the best degree
possible.  While in the short-term this may result in reduced market share,  the
Company  believes that this strategy  presents the most promising way to sustain
and grow its business over the long-term.

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

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

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

Supplier Relationships with Tajima

     The Company has four separate distributorship agreements with Tajima which,
collectively,  provide the Company the exclusive  right to  distribute  Tajima's
complete line of standard embroidery,  chenille embroidery and certain specialty
embroidery  machines in 39 States.  The main agreement (the "East  Coast/Midwest
Agreement")  which covers 33 States,  became  effective on February 21, 1991 and
has an initial term of 20 years. The East Coast/Midwest  Agreement is terminable
by Tajima  and/or  the  Company on not less than two years'  prior  notice.  The
second agreement (the "Southwest Agreement") covers six states, became effective
on February 21, 1997 and had an initial term of five years.  This  agreement was
renewed until  February 22, 2004.  The Company is in the process of  negotiating
the Southwest  Agreement,  however,  there can be no assurance that an agreement
can be reached on terms acceptable to the Company. The failure of the Company to
obtain an  extension  of the  Southwest  Agreement  on terms  acceptable  to the
Company could result in a loss of the Company's  right to distribute  embroidery
machines in the territories  covered by the Southwest Agreement which could have
a material  adverse effect on the Company's  business,  operations and financial
condition.  Under the third distributorship agreement, which covers nine western
states and Hawaii, the Company is the exclusive  distributor of Tajima's single,
two, four and six-head model  machines as well as chenille or  chenille/standard
embroidery machines with less than four heads or two stations, respectively (the
"West  Coast  Agreement").  The term of the West  Coast  Agreement,  expired  on
February 20, 2004. The Company is in the process of  negotiating  the West Coast
Agreement,  however,  there can be no assurance that an agreement can be reached
on terms  acceptable  to the  Company.  The  failure of the Company to obtain an
extension of the West Coast  Agreement on terms  acceptable to the Company could
result in a loss of the Company's right to distribute embroidery machines in the
territories  covered by the West  Coast  Agreement  which  could have a material
adverse effect on the Company's  business,  operations and financial  condition.
The fourth  agreement ("the Caribbean  Agreement")  which was effective July 27,
1999 permits the Company to distribute Tajima machines to US-based customers who
are operating  expansion  facilities in the Caribbean  region.  It has continued
without  change from the initial  trial  period,  although the agreement has not
been formally renewed.

     Each of the first three  agreements  may be terminated  upon the failure by
the Company to achieve  certain  minimum sales quotas.  During fiscal 2003,  the
Company  failed to meet these  minimum  sales  quotas;  however,  Tajima  waived
meeting these minimum sales quotas for fiscal 2003. For fiscal 2004, the minimum
sales quotas were met.  Furthermore,  the East  Coast/Midwest  Agreement  may be
terminated, among other reasons, if Henry Arnberg and Paul Levine (or in certain
circumstances,  their spouses and children)  fail to own a sufficient  number of
shares of voting stock to elect a majority of the  Company's  Board of Directors
or, subject to certain  conditions  contained therein in the event of the death,
physical  or mental  disability  of a  duration  of six  months or longer or the
incapacity of both Henry Arnberg and Paul Levine. The Southwest Agreement may be
terminated if the Company fails to remain the sole shareholder of its subsidiary
that is the party to the Southwest  Agreement.  The West Coast  Agreement may be
terminated should any material change occur in the current Class B shareholders,
directors or officers of the Company.

Although  there can be no assurance,  management  of the Company  believes it is
unlikely that the Company would lose Tajima as a source of supply  because:  (i)
the Company has maintained a  relationship  with Tajima for over 20 years and is
one of Tajima's largest distributors; (ii) Tajima's success in the United States
is, in large part, attributable to the Company's knowledge of the marketplace as
well as the  Company's  reputation  for  customer  support;  (iii)  the  Company
supports Tajima's development activities.

Other Supplier Relationships

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

Customers

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

Competition

     The  Company  competes  with  original  equipment  manufacturers,  such  as
Barudan, Brother International,  Happy, Melco Industries and SWF, who distribute
products directly into the Company's markets.  The Company also competes against
local Tajima distributors in certain western US markets. The Company believes it
competes against these  competitors on the basis of its knowledge and experience
in the marketplace,  name  recognition,  customer service and the quality of the
embroidery equipment it distributes. Due to the recent decline in overall demand
for the  embroidery  industry,  potential  customers  may  emphasize  price over
technology when selecting a machine.

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

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

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

Employees

     As of January 31, 2004, the Company employed  approximately 120 persons who
are  engaged in sales,  service  and  supplies,  product  development,  finance,
administration and management for the Company.  None of the Company's  employees
are  represented  by unions.  The Company  believes  its  relationship  with its
employees is good.

Risk Factors

Dependence on Tajima

     For the fiscal year ended  January  31,  2004,  approximately  85.2% of the
Company's  revenues  resulted  from the sale or  lease of  embroidery  equipment
supplied by Tajima. Four separate distributorship agreements (collectively,  the
"Tajima Agreements") govern the Company's rights to distribute Tajima embroidery
equipment in the United  States and the  Caribbean.  Two of the  distributorship
agreements  with Tajima  collectively  provide the  Company  with the  exclusive
rights to distribute  Tajima's  complete line of standard  embroidery,  chenille
embroidery  and certain  specialty  embroidery  machines in 39 states.  The main
agreement  (the  "East  Coast/Midwest  Agreement"),  which now covers 33 states,
first became effective on February 21, 1991, has an initial term of 20 years and
contains a renewal  provision  which permits  successive five year renewals upon
mutual  agreement  of the  parties.  The  East  Coast/Midwest  Agreement  may be
terminated  by Tajima  and/or  the  Company  on not less than two  years'  prior
notice.  The second  agreement  (the  "Southwest  Agreement")  which  covers six
states,  became  effective on February 21, 1997, and had an initial term of five
years. The Southwest Agreement was renewed and expired on February 22, 2004. The
Company is in the process of negotiating the Southwest Agreement, however, there
can be no assurance that an agreement can be reached on terms  acceptable to the
Company.  The failure of the  Company to obtain an  extension  of the  Southwest
Agreement  on terms  acceptable  to the  Company  could  result in a loss of the
Company's right to distribute  embroidery machines in the territories covered by
the  Southwest  Agreement  which  could  have a material  adverse  effect on the
Company's  business,   operations  and  financial  condition.  Under  the  third
distributorship  agreement,  (the "West  Coast  Agreement")  which  covers  nine
western continental states and Hawaii, the Company is the exclusive  distributor
of Tajima's  small  machines,  as well as chenille and tandem  chenille/standard
embroidery machines with less than four heads or two stations, respectively. The
West Coast Agreement,  which had an initial term of five years, became effective
on February 21,  1997.  The first  renewal  expired on February 20, 2003 and the
second  renewal  expired on February 20, 2004.  The Company is in the process of
negotiating the West Coast Agreement, however, there can be no assurance that an
agreement can be reached on terms acceptable to the Company.  The failure of the
Company to obtain an extension of the West Coast  Agreement on terms  acceptable
to the  Company  could  result in a loss of the  Company's  right to  distribute
embroidery machines in the territories covered by the West Coast Agreement which
could have a material adverse effect on the Company's  business,  operations and
financial condition.  The fourth Agreement (the "Caribbean Agreement") was for a
one-year trial period,  effective  July 27, 1999,  that permitted the Company to
distribute  Tajima  equipment to its existing  US-based  customers who establish
expansion  facilities in the Caribbean region.  Although the Caribbean Agreement
has not been formally  renewed,  activity under this  arrangement  has continued
without  change  from  inception.  Each of the  first  three  Tajima  Agreements
contains  language  that  permits  termination  if the Company  fails to achieve
certain minimum sales quotas or annual targets.  In fiscal 2004, the Company met
its  sales  quotas.  The  Company  believes  that  meeting  the  quotas  for the
foreseeable  future  may  be  difficult.  Furthermore,  the  East  Coast/Midwest
Agreement  may be  terminated  if Henry  Arnberg  and Paul Levine (or in certain
circumstances,  their  spouses and  children)  fail to maintain  ownership  of a
sufficient number of shares of voting stock to elect a majority of the Company's
Board of Directors or, subject to certain conditions  contained therein,  in the
event of the death, physical or mental disability of a duration of six months or
longer,  or  incapacity  of both Henry  Arnberg and Paul Levine.  The  Southwest
Agreement may be terminated if the Company fails to remain the sole  shareholder
of its subsidiary that is the party to the Southwest  Agreement.  The West Coast
Agreement  may be  terminated  should any  material  change occur in the current
Class B shareholders, directors or officers of the Company or should there occur
any change in control of the Company.  The termination of the Tajima  Agreements
(other than the Caribbean Agreement) would have a material adverse effect on the
Company's business, financial condition and results of operations.

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

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

Embroidery Industry

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

Foreign Currency Risks

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

Retail Embroidery Services

     The  Company's  Hometown  Threads  venture  was  created for the purpose of
establishing   retail  embroidery  service  centers  within  Wal-Mart(R)  retail
locations. At the end of fiscal 2001, Hometown Threads concluded a pilot test of
its concept at two  Wal-Mart(R)  centers  located in Texas and was authorized by
Wal-Mart(R)  to  implement  a  strategy  to expand to up to 25 units.  While the
relationship with Wal-Mart(R) is good, the Company is dependent on the continued
existence  of the  master  lease  with  Wal-Mart(R)  for  implementation  of its
franchise program of Hometown Threads within Wal-Mart(R) locations. In addition,
there can be no assurance that locations outside of Wal-Mart(R) will provide the
same  opportunity  for  expansion  of the  franchise  program  as  those  within
Wal-Mart(R), or that the Wal-Mart(R) locations will be available concurrent with
qualified franchisees as those franchises are developed. As of the end of fiscal
2004, the Company's net investment in Hometown  Threads was  approximately  $2.0
million.  Although the Company believes it will be able to access the market for
retail embroidery services,  there is no guarantee that it will be successful in
doing so or that it will be able to do so on a profitable basis.

Inventory

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

Competition

     The Company competes with  distributors of embroidery  machines produced by
manufacturers  other  than  Tajima;  with  manufacturers  who  distribute  their
embroidery  machines  directly  as well as with other  providers  of  embroidery
products and services.  The Company  believes that competition in the embroidery
industry  is  based  on  technological  capability  and  quality  of  embroidery
machines,  price and service. If other manufacturers develop embroidery machines
which are more  technologically  advanced  than  Tajima's  or if the  quality of
Tajima embroidery machines diminishes,  the Company would not be able to compete
as  effectively  which  could have a material  adverse  effect on its  business,
financial   condition  and  results  of  operations.   The  Company  also  faces
competition  in  selling   software,   embroidery   supplies,   accessories  and
proprietary  products  as well  as  providing  customer  training,  support  and
services.  Due to the decline in overall  demand in the industry  which occurred
during  the  last  several  years,   potential  customers  may  emphasize  price
differences over  value-added  services and support in purchasing new embroidery
machines.  Severe price  competition may impair the Company's ability to provide
its customers with value-added  services and support.  The Company's  failure to
compete  effectively in these areas could have a material  adverse effect on its
business, financial condition and results of operations.

Dependence on Existing Management

     Changes  in  the  embroidery  industry  and  recent  restructuring  of  the
Company's  business have resulted in increased  responsibilities  for management
and have placed increased  demands upon the Company's  operating,  financial and
technical   resources.   The  Company's  continued  success  will  depend  to  a
significant  extent upon the abilities and continued  efforts of Henry  Arnberg,
Chairman  of the Board and Chief  Executive  Officer  of the  Company;  and Paul
Gallagher,  its President and Chief Operating Officer. Mr. Gallagher is bound by
a 3 year  agreement  that  commenced  on  September  11,  2001.  The loss of the
services  of  Messrs.  Arnberg,  or,  Gallagher,  or the  services  of other key
management  personnel  could have a material  adverse  effect upon the Company's
business, financial condition and results of operations.

ITEM 2.  PROPERTIES

     The Company's corporate headquarters is in Hauppauge,  New York in a 50,000
square foot facility.  During fiscal 2002,  this facility was sold to Brandywine
Realty  Trust  and  approximately  24,500  square  feet  was  leased  back  in a
concurrent  transaction (See Note 10B to the Consolidated Financial Statements).
During fiscal year 2003, and as part of the Company's  restructuring  plans (See
Note 9 to the Consolidated  Financial  Statements),  the Company leased back the
25,500 square feet of the building  that had remained  empty since March 2001 in
order to consolidate  certain operations in Hauppauge,  NY. This property houses
the Company's executive offices, the Northeast sales office, technical services,
machine and parts  warehousing,  order  fulfillment and used machine storage and
repair facilities.

     In addition to the Company's  headquarters,  the Company leases 15 regional
satellite offices under  non-cancelable  operating leases. These offices consist
of regional sales offices and training  centers.  All leased space is considered
adequate for the operation of our business,  and no difficulties are foreseen in
meeting any future space requirements.

ITEM 3.  LEGAL PROCEEDINGS

     There are no material legal proceedings pending against the Company.

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

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

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)  The Company's  outstanding  Common Stock  consists of two classes,  Class A
     Common Stock and Class B Common Stock.  The Class A Common Stock, par value
     $.01 per  share,  trades on the NASDAQ  Small Cap  Market  under the symbol
     "HRSH".  The following table sets forth for each period  indicated the high
     and low closing bid prices for the Class A Common  Stock as reported by the
     NASDAQ Stock Market.  Trading began in the Class A Common Stock on February
     17, 1994. Class B stock is not publicly traded.

<TABLE>
<CAPTION>
<S>                                                                             <C>               <C>
Fiscal 2004                                                                      High              Low
-----------                                                                      ----              ---

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

Fiscal 2003                                                                      High              Low
-----------                                                                      ----              ---

First Quarter ended April 30, 2002.....................................         $ 0.63            $ 0.40
Second Quarter ended July 31, 2002.....................................         $ 0.55            $ 0.15
Third Quarter ended October 31, 2002...................................         $ 0.35            $ 0.15
Fourth Quarter ended January 31, 2003..................................         $ 0.44            $ 0.19
</TABLE>


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

(b)  As of August 20, 2003, the Company  believes that there were  approximately
     1,949 beneficial owners of its Class A Common Stock.

(c)  Since the third quarter of fiscal 2004, the Company has declared and paid a
     quarterly  dividend  of $.01 per share on its Common  Stock.  Although  the
     Company anticipates continuation of the payment of this quarterly dividend,
     there can be no assurance it will continue to do so. 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.

(d)  Equity Compensation Plan Information

<TABLE>
<CAPTION>

<S>                                      <C>                            <C>                          <C>
                                         (a) Number of                  (b) Weighted-                (c) Number of securities
                                         securities to be               average exercise             remaining available for
                                         issued upon exercise           price of                     future issuance under equity
          Plan Category                  of outstanding                 outstanding                  compensation plans
                                         options, warrants              options, warrants            [excluding securitieds
                                         and rights                     and rights                   reflected in column (a)]
                                         --------------------           -----------------            ----------------------------

Equity compensation plans approved           1,158,000                        $0.50                            1,243,000
by security holders
Equity compensation plans not                  100,000                        $0.50                                0
approved by security holders
                                         --------------------           -----------------            ----------------------------
TOTAL                                        1,258,000                        $0.50                            1,243,000
                                         --------------------           -----------------            ----------------------------

</TABLE>

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

ITEM 6.  SELECTED FINANCIAL DATA

     The  following  selected  consolidated  financial  data  should  be read in
conjunction  with the  Consolidated  Financial  Statements and the Notes thereto
included  elsewhere  herein.  The  consolidated  financial  statement data as of
January 31, 2004 and 2003 and for the fiscal years ended January 31, 2004, 2003,
and  2002  are  derived  from,  and  qualified  by  reference  to,  the  audited
Consolidated  Financial  Statements included elsewhere herein and should be read
in  conjunction  with  those  Consolidated  Financial  Statements  and the Notes
thereto. The consolidated  financial statement data as of January 31, 2002, 2001
and 2000 and for the fiscal  years  ended  January 31, 2001 and 2000 are derived
from audited Consolidated Financial Statements not included herein.

<TABLE>
<CAPTION>
<S>                                                     <C>               <C>              <C>               <C>           <C>
                                                                                 Year Ended January 31,
                                                                   (in thousands of dollars, except per share amounts)
                                                     -------------------------------------------------------------------------------
Hirsch International Corp. and Subsidiaries             2004            2003             2002              2001            2000
-------------------------------------------------    ------------    ------------    -------------     -------------    ------------

Statement of Operations Data:

Net sales...................................            $48,142           $43,956          $50,156           $63,980       $82,813

Cost of sales...............................             31,946            29,849           36,876            44,992        60,664

Operating expenses (2)(3)...................             18,837            17,936           30,661            34,378        33,142

Loss before income tax provision (benefit)               (2,496)          (3,450)         (17,772)          (15,346)      (11,789)

Income tax provision (benefit)..............                 25             (504)          (5,881)                --           221

Loss from continuing operations.............             (2,521)          (2,946)         (11,109)          (15,346)      (12,010)

Income (Loss) from discontinued operations                2,965           (2,604)          (7,216)             (323)           375
..(4)(5)  ...................................

Cumulative effect of accounting change (1)..                 --                --               --                --        (2,187)

Net Income (loss) (1).......................               $444          $(5,550)        $(18,325)         $(15,669)      $(13,822)

Basic and diluted net income (loss) per                 $(0.29)           $(0.34)          $(1.25)           $(1.68)        $(1.28)
   share    from continuing operations......

Basic and diluted net income (loss) per share             $0.35           $(0.30)          $(1.46)           $(0.05)        $(0.04)

Shares used in the calculation of basic and               8,571            8,789            8,894             9,112          9,348
   diluted net income (loss) per share..........

</TABLE>

(1)  During fiscal 2000, the Company  recorded the net of the cumulative  effect
     of SAB 101 accounting  change for revenue  recognition.  This resulted from
     the change in when  revenue  was  recorded  on  equipment  sales based upon
     customer  acceptance  of  installation  rather  than upon  shipment  by the
     Company.

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

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

(4)  Fiscal years 2004,  2003, 2002, 2001 and 2000 have been restated to reflect
     the discontinued operations of TUI, HAPL and Pulse.

(5)  In Fiscal  Year  2004,  the  Company  reversed  $2.0  million  of  reserves
     associated with the UNL lease portfolio which was sold to Beacon Funding in
     September 2003.

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

                                                                                 January 31,
Hirsch International Corp. and Subsidiaries                               (in thousands of dollars)
                                                      -------------------------------------------------------------------
                                                        2004          2003         2002           2001           2000
                                                      ----------    ---------    ----------    -----------    -----------
Balance Sheet Data:
    Working capital...........................          $14,545      $14,399       $22,001        $25,214        $29,627

Total assets..................................           30,346       39,747        46,892         54,030         80,216

Long-term debt, less current maturities.......            2,146        2,388         2,608             79            989

Stockholders' equity..........................          $15,848      $16,065       $21,459        $40,278        $56,253

Hirsch International Corp
Summarized Quarterly Data**

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

2004                                                                First          Second           Third          Fourth
                                                                 ------------    ------------    ------------    ------------
Net Sales.......................................                     $12,102         $11,461         $12,421         $12,157
Gross profit....................................                       4,219           3,996           4,088           3,893
Restructuring costs (income)....................                        (497)           (200)              0            (19)
Income (loss) from discontinued operations......                         143           1,684             715             423
Net income (loss)...............................                         105           1,151            (79)           (733)
                                                                 -----------      ----------      ---------      -----------


Basic and diluted income (loss) per share.......                       $0.01           $0.13         $(0.01)         $(0.08)
                                                                 ===========     ===========     ===========     ===========

2003
                                                                 ------------    ------------    ------------    ------------
Net Sales.......................................                     $12,493         $12,641          $9,752         $10,069
Gross profit....................................                       3,959           3,912           3,308           2,927
Income (loss) from discontinued operations......                     (3,563)             260             242             457
Net (loss)......................................                     (4,517)           (434)           (502)            (97)
                                                                 ------------    ------------    ------------    ------------

Basic and diluted loss per share................                     $(0.51)         $(0.05)         $(0.06)         $(0.01)
                                                                 ============    ============    ============    ============

**Note:  The quarterly data has been restated to reflect the discontinued operations of Tajima USA, Inc.
</TABLE>

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

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

General
-------

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

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

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

     The trend  toward  retrenchment  driven  by the  relocation  and  continued
investment offshore of large multi-head  equipment customers has seen the growth
of small  machine  customers in the  domestic  market.  The market  continues to
experience a decline in large machine sales,  continuing the change in the sales
mix of  embroidery  machines  and an overall  decline in demand.  It was further
compounded  by  weakening  value in  foreign  exchange  of the Yen versus the US
dollar,  resulting in dollar  price  pressure  for machine  sales.  All Japanese
equipment  based  competitors in the industry faced  difficulty in meeting these
new market demands. In fiscal 2002 the Company initiated a restructuring program
to  address  the  market   shifts  in  the  industry,   including   closing  and
consolidating  certain divisions,  reducing total employment,  and consolidating
facilities  that were no longer  required to support its new business model (See
Note 9 of Notes to  Consolidated  Financial  Statements).  In Fiscal  2004,  the
Company  completed its plan of  restructuring  and  reversed,  as a reduction of
operating  expenses,  $716,000 of restructuring costs that had been provided for
facilities and severance costs due to the  re-negotiation of the office facility
in Solon, Ohio.

Results of Operations
---------------------

     The following table presents  certain income statement items expressed as a
percentage of total  revenue for the fiscal years ended  January 31, 2004,  2003
and 2002.

<TABLE>
<CAPTION>
                                                                            2004            2003             2002
                                                                        ------------    ------------    -------------

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

Cost of sales...............................................                66.4%           65.6%            73.5%

Operating expenses..........................................                39.1%           40.8%            49.7%

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

Other expense (income), net.................................                -0.7%           -1.0%            -1.4%
                                                                        ------------    ------------    -------------

(Loss) from continuing operations before income taxes.......                -5.2%           -6.7%           -22.4%

Income tax (benefit) provision..............................                 0.5%          -0.11%           -11.7%

  Income (loss) from discontinued operations, net of tax....                 6.2%           -5.9%           -25.8%
                                                                        ------------    ------------    -------------

Net Income (loss)............................................                0.9%          -12.6%           -36.5%
                                                                        ============    ============    =============

**  Note:  The  results  of  operations   have  been  restated  to  reflect  the
discontinued operations of TUI.
</TABLE>


Use of Estimates and Critical Accounting Policies

     The  preparation  of  Hirsch's  financial  statements  in  conformity  with
accounting   principles   generally  accepted  in  the  United  States  requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial  statements and revenues and
expenses during the period. Future events and their effects cannot be determined
with absolute certainty;  therefore, the determination of estimates requires the
exercise  of  judgment.   Actual  results  inevitably  will  differ  from  those
estimates,  and such  differences  may be material to our financial  statements.
Management continually evaluates its estimates and assumptions,  which are based
on  historical  experience  and other factors that are believed to be reasonable
under the circumstances. These estimates and Hirsch's actual results are subject
to the risk factors listed above under Item 1 Business -- "Risk Factors".

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

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

     Revenue Recognition - The Company distributes  embroidery equipment that it
offers for sale. Where  installation  and customer  acceptance are a substantive
part of the sale,  by its terms,  the Company has  deferred  recognition  of the
revenue until such customer  acceptance of installation has occurred.  In fiscal
years  2004,  2003  and  2002,  most  sales  of new  equipment  did not  require
installation  within the terms of the sales contract and  accordingly  sales are
booked when shipped. Service revenues and costs are recognized when services are
provided.  Sales of computer  hardware and software are recognized  when shipped
provided that no significant  vendor and post-contract  and support  obligations
remain and  collection is probable.  Sales of parts and supplies are  recognized
when shipped.

     Long lived Assets - The Company  reviews its long-lived  assets,  including
property, plant and equipment, identifiable intangibles (goodwill) and purchased
technologies,  for  impairment  whenever  events  or  changes  in  circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine  recoverability  of its long-lived  assets,  the Company evaluates the
probability  that  future  undiscounted  net cash  flows  will be less  than the
carrying  amount of the  assets.  During  the  fourth  quarter  of fiscal  2001,
$7,640,000 of goodwill  associated  with the  acquisitions  of SMX  Corporation,
Sedeco Corporation and All Pro Punching, Inc. was written off. During the fourth
quarter  of fiscal  2002,  the  remaining  balance  of  $3,477,000  of  goodwill
associated with the  acquisitions of SMX Corporation and Sedeco  Corporation was
written off (See Note 16 to the Consolidated Financial Statements).


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

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

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

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

     Reserves for Discontinued Operations - In the fourth quarter of fiscal 2002
and the first quarter of Fiscal 2003 the Company made provisions for the winding
down of the HAPL Leasing subsidiary.  Management regularly reviews the remaining
reserves and in Management's  opinion adequate provisions have been made for the
winding down of HAPL's operations.

Fiscal Year 2004 as Compared to Fiscal Year 2003
------------------------------------------------

     Net sales.  Net sales for fiscal year 2004 were $48.1 million,  an increase
of $4.1 million,  or 9.3%  compared to $ 44.0 million for fiscal year 2003.  The
Company  believes that the increase in the sales level for the fiscal year ended
January 31, 2004 is primarily attributable to an increased penetration of single
head and  small  machines  in the  market  as well as the  aggressive  marketing
campaign  targeting new and existing customers with the new value added packages
and renewed focus on growing parts and supply sales.

     Cost of sales.  For fiscal year 2004,  cost of sales increased $2.1 million
or 7.0%, to $31.9 million from $29.8 million for fiscal year 2003.  The increase
was a result  of the  related  increase  in net sales  for  fiscal  year 2004 as
compared to fiscal year 2003.  The  Company's  gross margin  improved for fiscal
year  2004 to 33.6%,  as  compared  to 32.1% for  fiscal  year  2003.  While the
fluctuation of the dollar against the yen has  historically had a minimal effect
on Tajima  equipment gross margins,  since currency  fluctuations  are generally
reflected in pricing  adjustments in order to maintain  consistent gross margins
on machine revenues, increased cost of sales reflects the continuing product mix
shift from larger equipment with higher gross margins to smaller  equipment with
lower gross margins.  The improvement in gross margin is mainly  attributable to
increased  margins  on  software  sales  pursuant  to the terms of the  purchase
agreement  with Pulse,  in addition to a reduction  in sales of older  inventory
carried at higher costs.

     Operating  Expenses.  As reported for fiscal year 2004,  operating expenses
increased  $0.9 million or 5.0%,  to $18.8 million from $17.9 million for fiscal
year 2003. Excluding the reversal of the non-recurring charges for restructuring
costs of $0.7 million,  operating  expenses were $19.6  million,  an increase of
$1.7  million or 9.5% from $17.9  million.  This  increase  was due to  expenses
associated with increased sales,  increased  advertising and marketing programs,
and increased professional fees.

     Interest  Expense.  Interest  expense for fiscal year 2004 was $0.2 million
versus interest  expense of $0.3 million for fiscal year 2003.  Interest expense
is primarily  associated  with the  sale/leaseback  transaction of the corporate
headquarters.  Interest  income of $334,000,  primarily  from the tax refund was
recognized during fiscal 2004.

     Other (Income)  Expense.  Other income for fiscal 2004 was $360,000  versus
$638,000 for fiscal 2003. In fiscal 2004,  other income included a $234,000 gain
on sale of assets  offset by $219,000 in currency  losses.  In fiscal 2003 other
income included a $214,000 gain on sale of fixed assets,  $55,000  currency gain
and a $270,000 gain on the sale of HTT company owned stores.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective  tax benefit rate of  approximately  1.5% for the twelve  months ended
January 31,  2004 as  compared  to an income tax benefit  rate of 20% for fiscal
year 2003.  The benefit rate for the fiscal 2004 year is a direct  result of the
Job Creation and Worker  Assistance Act  temporarily  extending the carryback of
Net Operating  Losses from two years to five years.  This change has enabled the
Company to  carryback  its two most recent  years  losses and obtain a refund of
approximately $6 million. During fiscal 2004, the Company received the carryback
claim  refund  from the IRS along with  applicable  interest  through the refund
date. The difference of the above rate to the federal statutory rate for 2004 is
the  valuation  allowance  established  on deferred tax assets since the Company
cannot determine the future utilization of those assets.

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

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

     The purchase price (the  "Purchase  Price") for the Shares was equal to the
Book  Value  (as  defined  in the  Agreement),  calculated  in  accordance  with
generally  accepted  accounting  principles.  At the  closing,  Tajima  paid the
Company the sum of $500,000  (the "Initial  Payment") in partial  payment of the
Purchase  Price.  The  remaining  balance  due on the  Purchase  Price  will  be
determined  on or  before  April  30,  2004,  and paid  promptly  thereafter  in
accordance with the terms of the Agreement.

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

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

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

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

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

     Net Income  (Loss).  The net income for fiscal year 2004 was  $444,000,  an
increase of $5.1 million, compared to a net loss of $5.5 million for fiscal year
2003. This increase is attributable to the increase in net sales, an increase in
the cost of sales, an increase in operating expenses, reversals of restructuring
accruals,  and the change in income  (loss) on  discontinued  operations of $6.0
million.

Fiscal Year 2003 as Compared to Fiscal Year 2002
------------------------------------------------

     Net sales. Net sales for fiscal year 2003 were $44.0 million, a decrease of
$6.2  million,  or 12.4%  compared to $ 50.2  million for fiscal year 2002.  The
Company believes that the reduction in the sales level for the fiscal year ended
January 31, 2003 is primarily  attributable  to a decrease in overall demand for
new multi-head  embroidery machines,  as well as increased pricing pressure from
the  marketplace on new and used machine  sales.  Sales of the Company's new and
used machines,  computer hardware and software,  application software for fiscal
year 2003  aggregated  approximately  $42.2 million as compared to $43.8 million
for fiscal  year 2002,  a decrease of $1.6  million or 3.7%.  Sales of parts and
supplies  dropped  $2.7  million,  or 46%,  which is  indicative  of the reduced
activity of the embroidery market in the US. Other revenues, including franchise
revenues increased $0.5 million from fiscal 2002.

     Cost of sales.  For fiscal year 2003,  cost of sales decreased $7.0 million
or 19.0%,  to $29.9  million from $36.9  million for fiscal year 2002.  The $7.0
million  decrease  was a result of the related  decrease in net sales for fiscal
year 2003 as compared  to fiscal  year 2002.  The  Company's  gross  margin as a
percent of sales  increased for fiscal year 2003 to 32.1%,  as compared to 26.5%
for fiscal  year 2002.  Included in cost of sales for 2002 was a  write-down  of
inventory  of  approximately  $1.8  million  (See  Note  4 to  the  Consolidated
Financial Statements).  Excluding the writedown of inventory,  gross margin as a
percent  of sales  would  have been  30.1%.  The  increase  in gross  margins is
attributable  to  the  increase  in  other  revenue  (which  includes  franchise
revenues), which carries higher gross margins.

     Operating  Expenses.  Operating  expenses  for fiscal year 2003,  decreased
$12.8  million or 41.7%,  to $17.9  million  from $30.7  million for fiscal year
2002.  Excluding the charges for goodwill  impairment and restructuring costs in
fiscal 2002,  operating expenses were $24.9 million in fiscal 2002, a decline of
$7.0  million  or 28.1% to $17.9  million  in  fiscal  2003.  This  decline  was
attributable to the cost reduction initiatives the Company put into place at the
end of fiscal 2002. The Company  performed an impairment  evaluation  during the
fourth  quarter of fiscal 2002 for the SMX  Corporation  and Sedeco  Corporation
territories  and as a result  wrote off the balance of the  goodwill  associated
with these acquisitions. The goodwill write-off represented a per-share net loss
of $ 0.39 both on a basic and  diluted  basis for fiscal  year  2002.  Operating
expenses for 2002 also include  restructuring  charges  reflecting the Company's
plan to  reduce  operating  costs  relative  to the  anticipated  sales  volume.
Included in this  non-recurring  charge are $.6  million in  employee  severance
costs and $2.1 million in facilities combinations/lease restructures (See Note 9
to the Consolidated Financial Statements).

     Interest  Expense.  Interest  expense  for fiscal year 2003 was $.3 million
versus  interest  expense of $.3  million  for fiscal  year  2002.  The  Company
continued its aggressive  inventory  reduction  program in fiscal year 2003. The
results  of this  program  directly  reflect  increased  liquidity  and meant no
increase in interest  expense as a result of the eliminations of working capital
borrowings  outstanding against the Company's Revolving Credit Agreements during
both fiscal 2003 and fiscal 2002. The sale of the corporate  headquarters during
fiscal 2002 also reduced the need for working capital borrowings.

     Other Income. Other income for fiscal 2003 was $638,000 versus $708,000 for
fiscal  2002.  In fiscal 2003 other income  included a $214,000  gain on sale of
assets,  $55,000  currency  gain and a  $270,000  gain on the  sale of  Hometown
Threads  company owned stores.  In fiscal 2002 other income  included a $171,000
gain on sale of assets in addition to a $381,000 currency gain,  interest income
of $124,000 and other income of $32,000.

     Income tax  (benefit)  provision.  The income tax  provision  reflected  an
effective tax rate of approximately  20% for the twelve months ended January 31,
2003 as compared  to an income tax benefit  rate of 36.6 % for fiscal year 2002.
The tax  provision  for fiscal  2003  represents  Federal and State taxes on the
Company's 55% owned  subsidiary  and was reduced by the actual NOL carryback for
the prior year.  The benefit rate for the fiscal 2002 year is a direct result of
the Job Creation and Worker  Assistance Act temporarily  extending the carryback
of Net  Operating  Losses from two years to five years.  This change has enabled
the Company to carryback its two most recent years losses and obtain a refund of
approximately  $6  million.  The  difference  of the above  rate to the  federal
statutory rate for 2003 is the valuation  allowance  established on deferred tax
assets  since the  Company  cannot  determine  the future  utilization  of those
assets, as well as minimum franchise taxes for fiscal 2003.

     Loss from  Discontinued  Operations.  In the fourth quarter of fiscal 2002,
the Company determined that its HAPL Leasing subsidiary was not strategic to the
Company's ongoing objectives and discontinued  operations.  The Company has made
provisions  for the cost of winding down the operations as well as the potential
losses that could be incurred in  disposing  of its minimum  lease  payments and
residual  receivables.  The operating  loss in fiscal 2002 includes $4.6 million
provision  for the  Ultimate  Net  Loss  ("UNL")  liability  and the sale of the
residual  receivable  associated  with it; $2.6 million  increase in the Minimum
Lease Payment Receivable  ("MLPR")  provision;  as well as $1.1 million in other
costs.  The operating loss in fiscal 2003 includes an additional $4.0 million to
account for expected  additional losses in liquidating the leasing  subsidiary's
remaining  lease  portfolio.  The Company's  Statements of Operations  have been
restated to reflect the results of the HAPL Leasing  subsidiary as  discontinued
operations. (See Note 7 to the Consolidated Financial Statements).

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

     Pursuant to the Agreement, Hirsch sold all of its equity interests in Pulse
to the  Purchaser for an aggregate  consideration  of $5.0 million to be paid as
follows:  (a) $0.5 million cash, (b) a $0.5 million note payable in 11 quarterly
installments  beginning  April 30, 2003 and including  interest  accruing on the
principal  balance at the rate of US Prime +1% per annum, and (c) the assumption
of $4.0  million  of Hirsch  obligations.  All  periods  presented  reflect  the
discontinued  operations  of Pulse  (See  Note 7 to the  Consolidated  Financial
Statements).

     Net loss. The net loss for fiscal year 2003 was $5.5 million, a decrease of
$12.8  million,  compared to a net loss of $ 18.3  million for fiscal year 2002.
This decrease is attributable to the decrease in operating  expenses  associated
with the restructuring  charge of $2.3 million and the Impairment of Goodwill of
$ 3.5 million  which were recorded in fiscal 2002 and a reduction in the loss on
discontinued  operations  of $4.6  million as well as the  reduction in Selling,
General and  Administrative  expenses  of $7.0  million and an increase in Gross
Profit of $0.8 million, offset by a drop in tax benefit of $5.4 million.

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

     The Company's working capital remained relatively constant at $14.6 million
at January 31,  2004 as compared to $14.4  million at January 31, 2003 a nominal
change of $0.2 million or 1%.

     During Fiscal 2004,  The Company's  cash  increased  $1.3 million or 17% to
$9.0 million from $7.7 million at January 31, 2004. The majority of the increase
was due to the receipt of the $3.6 million  refund in Federal  Income Taxes from
the  carry-back  of prior year  losses,  additional  cash  provided by operating
activities  of $0.45  million due to the  conversion  of  inventory  and current
assets into cash,  increases in accounts payable and trade  acceptances  payable
offset by  increases  in accounts  receivable,  net cash  provided by  investing
activities  of $0.05  million and net cash used in financing  activities of $2.8
million.

     Investing  activities  provided  $0.05  million in cash during  fiscal 2004
versus a use of cash of $0.02 million during Fiscal 2004.  Investing  activities
during  Fiscal  2004  included  $0.55  million in capital  expenditures  for the
purchase of additional  fixed assets,  $0.5 million in proceeds from the sale of
Pulse and $0.1  million in  proceeds  from the sale of Company  owned  franchise
stores.

     Financing  activities used $2.8 million in cash during fiscal 2004 versus a
$1.5 million use of cash during Fiscal 2003.  Financing activities during fiscal
2004 included  $2.1 million in additional  collateral to cover Letters of Credit
at Congress  Financial,  $0.42  million in the  repurchase  of 470,000  treasury
shares at an average  market price of $0.98 per share under the Company's  Stock
Repurchase  program,  $0.17  million in dividend  payments  during the third and
fourth  quarters of fiscal 2004,  $0.12 million in long term debt repayments and
cash of $0.01 million provided by stock options exercised.

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

     The  following  table  shows  the  Company's  contractual  obligations  and
commitments (See Notes 9 and 14 to the Consolidated Financial Statements).

Payments due by period (in thousands)

<TABLE>
<CAPTION>
<S>                                                      <C>            <C>              <C>             <C>            <C>
                                                            Total         Less than           1-3           4-5           More than
                                                                            1 year           years          years           5 years
Contractual Obligations/Commitments
----------------------------------------------------    -----------    -------------    -------------    ----------     ------------

Capital lease obligations.......................            $1,541             $123             $530          $528             $360

Operating Lease obligations.....................             2,896              780            1,448           429              239

Purchase Commitments............................             2,100            1,200              900             0                0

Employment Agreements...........................               438              438                0             0                0
                                                        -----------    -------------    -------------    ----------     ------------
Total                                                       $6,975           $2,541           $2,878          $957             $599
                                                        ===========    =============    =============   ===========     ============

</TABLE>


Revolving Credit Facility and Borrowings
----------------------------------------

     The Company has a Loan and Security  Agreement  ("the Congress  Agreement")
with Congress Financial Corporation  ("Congress") for a three year term expiring
on November 26, 2005. The Congress  Agreement  provides for a credit facility of
$12  million  for Hirsch and all  subsidiaries.  Advances  made  pursuant to the
Congress  Agreement may be used by the Company and its  subsidiaries for working
capital loans,  letters of credit and deferred  payment  letters of credit.  The
terms  of the  Congress  Agreement  require  the  Company  to  maintain  certain
financial covenants.  The Company was in compliance with all financial covenants
at  January  31,  2004.  The  Company  has $2.3  million  in  letters  of credit
outstanding at January 31, 2004.

Future Capital Requirements
---------------------------

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

Backlog and Inventory
---------------------

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

Inflation
---------

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

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

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial  Instruments  with  Characteristics  of both  Liabilities and Equity",
effective for financial instruments entered into or modifies after May 31, 2003,
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning after June 15, 2003. This statement  establishes  standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics  of both  liabilities  and equity.  It  requires  that an issuer
classify  a  freestanding  financial  instrument  that is within  its scope as a
liability (or an asset in some  circumstances).  The Adoption of SFAS No. 150 is
not  expected  to  have  an  impact  on  the  Company's  consolidated  financial
statements.

     The  Emerging  Issues  Task Force  ("EITF")  issued  EITF  Issue No.  00-21
"Revenue Arrangements with Multiple  Deliverables" ("Issue 00-21").  Issue 00-21
addresses  certian aspects of the accounting by a vendor for arrangements  under
which  it  will  perform  multiple  revenue  generating  activities  and  how to
determine whether an arrangement  involving multiple  deliverables contains more
than  one  unit  of  accounting.   Issue  00-21  became  effective  for  revenue
arrangements entered into in fiscal periods after June 15, 2003. The adoption of
Issue  00-21  did not  have a  material  effect  on the  Company's  consolidated
financial statements.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.

ITEM 9A.  CONTROLS AND PROCEDURES

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

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


                                    PART III

                      Documents Incorporated by Reference:


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information Regarding Executive Officers and Directors
------------------------------------------------------

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


<TABLE>
<CAPTION>
<S>                                        <C>       <C>
Name                                       Age       Position
----                                       ---       --------

Henry Arnberg.......................       61        Chairman of the Board of Directors and Chief Executive Officer
Paul Levine.........................       51        Vice Chairman of the Board of Directors and Chief Executive Officer of
                                                     Hometown Threads, LLC
Paul Gallagher......................       54        President, Chief Operating Officer and Director
Beverly Eichel......................       46        Vice President - Finance and Administration, Chief Financial Officer and
                                                     Secretary
Marvin Broitman.....................       65        Director
Herbert M. Gardner..................       64        Director
Mary Ann Domuracki .................       48        Director
Howard Arnberg .....................       34        President of Hometown Threads, LLC
</TABLE>


     Henry Arnberg,  has been Chief Executive Officer of the Company since 1970,
held the position of Chairman of the Board of the Board of Directors  since 1980
and served as President of the Company until December 1998. Mr. Arnberg received
a Bachelor of Science in  Accounting  from the  University of Bridgeport in 1965
and an MBA in Finance and Management from the Adelphi University in 1971.


     Paul Levine,  has been employed by the Company since 1974 and has served as
a director since 1981. Mr. Levine currently serves as Vice Chairman of the Board
of Directors and Chief Executive Officer of Hometown Threads. Prior thereto, for
more than 5 years,  Mr.  Levine served as the  Company's  President,  during the
period of December  1998 until  February  2003.  From 1981 to December  1998, he
served as the Company's  Chief Operating  Officer,  Executive Vice President and
Secretary.  Mr. Levine  received a Bachelor of Science in Business from New York
University in 1974.


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


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


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


     Herbert M. Gardner,  director of the Company since April 1994, is currently
Executive Vice  President of  Barrett-Gardner  Associates,  Inc., a merchant and
investment  banking firm.  Between 1978 and 2002,  Mr. Gardner had been a Senior
Vice President of Janney  Montgomery Scott LLC, an investment  banking firm. Mr.
Gardner is Chairman of the Board of  Directors  of Supreme  Industries,  Inc., a
manufacturer  of  specialized  truck bodies and shuttle buses.  In addition,  he
serves as a Director of Nu Horizons  Electronics Corp., an electronic  component
distributor;  TGC Industries,  Inc., a seismic services  company;  and Co-Active
Marketing  Group,  Inc., a marketing and sales  promotion  company;  Rumson-Fair
Haven Bank and Trust Company,  a New Jersey state  independent,  commercial bank
and trust company and Chase  Packaging  Corp.  Mr.  Gardner serves on the Audit,
Stock Option and Compensation Committees of the Company's Board of Directors.


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


     Howard  Arnberg,  has been employed by the Company  since 1995,  serving in
various  operational roles. Mr. Arnberg served as the Company's Vice President -
New  Business  Development  and  currently  serves as the  President of Hometown
Threads,   LLC.   Mr.   Arnberg   earned  a  Bachelor  of  Science  in  Business
Administration from the University of Florida at Gainesville in 1991 and a Juris
Doctor from  Brooklyn  Law School in 1994.  He is a member of the New York State
Bar  Association  and the American Bar  Association.  Mr.  Arnberg is the son of
Henry Arnberg, the Company's Chairman and Chief Executive Officer. Committees of
the Board of Directors

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

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


Code of Ethics
--------------

     The  Company  has  adopted a code of  ethics  applicable  to the  Company's
Executive Officer and financial officer,  which is a "Code of Ethics" defined by
the applicable  rules of the Securities and Exchange  Commission.  A copy of the
Company's  Code of  Ethics  is being  filed  with the  Securities  and  Exchange
Commission  as exhibit  14.1 to this  Annual  Report on Form 10-K.  The  Company
undertakes to provide to any person with out charge, upon request, a copy of the
Company's  Standards of Business Conduct.  Requests for such copy should be made
in writing to the  Company at its  principal  office,  which is set forth on the
first page of this Form 10-K,  attention Chief Financial Officer. If the Company
makes any amendment to this code of ethics, other than technical, administrative
or non-substantive amendments, or grants any waivers, including implicit waivers
from a  provision  of the code of ethics to the  Company's  principal  executive
officer,  principal  financial officer or persons  performing similar functions,
the Company will disclose the motive for the amendment or waiver,  its effective
date and to what it applied  on a report on Form 8-K filed  with the  Securities
and Exchange Commission.

Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

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

     To the  Company's  knowledge,  based  solely on its review of the copies of
such forms received by it and  representations  from certain reporting  persons,
the Company  believes  that during the fiscal year ended  January 31, 2004,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than ten percent beneficial owners were satisfied.


ITEM 11.  EXECUTIVE COMPENSATION

     The  following  table sets forth the  compensation  earned during the three
fiscal  years  ended  January 31,  2004,  2003 and 2002 by the  Company's  Chief
Executive Officer and by the four most highly paid Company's  Executive Officers
whose  total  compensation  for  such  periods  exceeded  $100,000  (the  "Named
Executives"):

Summary Compensation Table
--------------------------

<TABLE>
<CAPTION>
                                                                    Annual Compensation               Long Term Compensation Awards
                                                           --------------------------------------     -----------------------------
                                                Fiscal                               Other Annual                       All Other
Name and Principal Position                     Year        Salary        Bonus      Compensation      Options         Compensation
-------------------------------------------    --------    -------      --------     ------------      -------         ------------

Henry Arnberg
   <S>                                            <C>         <C>          <C>          <C>              <C>              <C>
   Chairman of the Board of Directors and
   Chief Executive Officer                      2004        $250,000       -            $2,060            -                  -
                                                2003        $279,166       -            $2,060            -                  -
                                                2002        $278,462       -            $2,031            -                  -

Paul Levine
  Vice-Chairman of the Board of Directors
  and Chief Executive Officer of Hometown
  Threads, LLC                                  2004        $250,000       -            $3,532            -                  -
                                                2003        $279,166       -            $3,532            -                  -
                                                2002        $278,462       -            $3,427            -                  -

Paul Gallagher
  President, Chief Operating Officer and
  Director                                      2004        $300,000    $150,000(3)     $3,675            -                  -
                                                2003        $300,000    $ 75,000        $3,675          300,000              -
                                                2002        $125,000       -               -            100,000              -

Beverly Eichel
  Vice President-Finance and Chief
  Financial Officer and Secretary               2004        $250,000    $ 87,500(3)     $9,000            -                  -
                                                2003        $235,000    $ 35,250        $9,000          218,000              -
                                                2002           -           -               -              -                  -

Howard Arnberg                                  2004        $170,000       -            $7,200            -                  -
  President of Hometown Threads, LLC            2003        $169,438    $ 23,375(2)     $7,200           72,900              -
                                                2002        $153,635    $ 19,125(1)     $7,200            -                  -

<FN>
(1) Bonuses were earned in fiscal 2002 but paid in fiscal 2003
(2) Bonuses were earned in fiscal 2003 but paid in fiscal 2004
(3) Bonuses were earned in fiscal 2004 but paid in fiscal 2005
</FN>
</TABLE>


Option Exercises and Holdings
-----------------------------

     The following table sets forth information concerning the exercise of stock
options by the Named  Executives  during the Company's fiscal year ended January
31, 2003 the number of options  owned by the Named  Executives  and the value of
any in-the-money unexercised stock options as of January 31, 2003.


Aggregated  Option  Exercises  in Last  Fiscal  Year and Fiscal  Year End Option
Values

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

<S>                           <C>                     <C>                 <C>                             <C>
Henry Arnberg                        0                    $0                        0/0                              $ 0/0
Paul Gallagher                       0                    $0                  192,000/208,000                     $ 0/56,250
Beverly Eichel                       0                    $0                  101,000/117,000                     $ 0/31,500
Howard Arnberg                       0                    $0                   34,300/38,600                      $ 0/21,055

</TABLE>

There were no stock options granted to the Named Executives during fiscal 2004


Employment Agreements
---------------------

Paul Gallagher

     As  of  September  11,  2001,  Mr.  Gallagher  entered  into  a  three-year
employment  agreement  to  serve as the  Company's  President,  Chief  Operating
Officer and a director.

     Mr. Gallagher's  employment agreement provides for the payment of an annual
base salary of $300,000. In December,  2002 the Compensation  Committee approved
an amendment to the employment agreement to provide for annual bonus payments as
follows:  $75,000  for fiscal  year 2003 and for each of fiscal  2004 and fiscal
2005,  a minimum  bonus  payment of 50% of Mr.  Gallagher's  annual base salary,
provided  the  Company  achieves  a  pre-tax  profit  of  between  $400,000  and
$2,999,999.  Additional incremental increases in the bonus payment can be earned
based upon the  achievement  of a pre-tax profit in excess of $3,000,000 up to a
maximum additional bonus payment of 50% of annual base salary. In addition,  the
employment   agreement  provides  for  the  reimbursement  of  certain  business
expenses, the provision of health insurance and the use of a Company automobile.

     The agreement provided requires Mr. Gallagher to devote his entire business
time and attention to the Company and provides for termination upon his death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any  twelve  (12)  month  period),  or for cause (as
defined in the Gallagher  Agreement).  In the event the Company  terminates  the
employment agreement other than for cause or materially breaches its obligations
there under,  Mr.  Gallagher is entitled to receive payment of his salary for up
to six months plus a pro-rata of his bonus  payment  that would have become due.
The employment agreement also provides that Mr. Gallagher shall not compete with
the Company  during the term of the  agreement and for a period of two (2) years
thereafter.  There is no change of control provision contained in the employment
agreement.

     In addition,  in connection with the execution of the employment agreement,
Mr.  Gallagher also received options to purchase 100,000 shares of the Company's
Class A Common Stock.

Beverly Eichel

     As of February  1, 2002,  Ms.  Eichel  entered  into a two-year  employment
agreement  to serve as the  Company's  Vice-President-Finance,  Chief  Financial
Officer and  Secretary.  The term of the  agreement  was  subsequently  extended
through and including May 31, 2004.

     Ms.  Eichel's  employment  agreement  provides for the payment of an annual
salary of $235,000  for the first year and  $250,000  for the second year of the
term. In December 2002, the Compensation  Committee approved an amendment to the
employment  agreement to provide for annual bonus  payments as follows:  $35,250
for fiscal year 2003,  and for fiscal 2004 a minimum  bonus payment equal to 35%
of Ms.  Eichel's  annual base  salary  provided  the Company  achieves a pre-tax
profit of between $400,000 and $2,999,999.  Additional  incremental increases in
the bonus  payment can be earned  upon the  achievement  of a pre-tax  profit in
excess of  $3,000,000  up to a maximum  additional  bonus  payment of 65% of Ms.
Eichel's base annual salary.  In addition,  Ms.  Eichel's  employment  agreement
provides for the reimbursement of business expenses  including an automobile and
cellular  phone  allowance,  the  provision  of  health  insurance  and  related
benefits.

     The agreement  provided  requires Ms. Eichel to devote her entire  business
time and attention to the Company and provides for termination upon her death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment  agreement).  The employment  agreement also provides that Ms.
Eichel shall not compete with the Company  during the term of the  agreement and
for a  period  of two (2)  years  thereafter.  There  is no  change  of  control
provision contained in the employment agreement.

     In addition,  in connection with the execution of the employment agreement,
Ms.  Eichel also  received  options to purchase  50,000 shares of Class A Common
Stock.

Howard Arnberg

     As of February 1, 2002,  Mr.  Arnberg  entered  into a two-year  employment
agreement to serve as President of Hometown Threads, LLC ("Hometown Threads").

     Mr. Arnberg's  employment  agreement  provides for the payment of an annual
base salary of $170,000. In addition, Mr. Arnberg is entitled to receive certain
quarterly  and  annual  performance  based  bonus and  incentive  payments.  Mr.
Arnberg's  employment  agreement  provides  for the  reimbursement  of  business
expenses  (including up to $25,000 in relocation  expenses),  an automobile  and
cellular phone allowance, the provision of health insurance and related benefits
and a relocation package.

     The agreement  provided  requires Mr. Arnberg to devote his entire business
time and attention to the Company and provides for termination upon his death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) moth period),  or for cause (as defined
in the employment  agreement).  The employment  agreement also provides that Mr.
Arnberg shall not compete with the Company  during the term of the agreement and
for a period of one (1) year thereafter.

     The  agreement  further  states  a change  of  control  provision  which is
triggered upon the sale or change in control of Hometown  Threads,  as well as a
severance provision which entitles Mr. Arnberg to the payment of an amount equal
to six (6)  months  base  annual  salary  plus a  pro-rata  of his  bonus if his
employment  is  terminated  other  than for cause or if the  Company  materially
breaches the terms of the employment agreement provided that if such termination
or  material  breach  occurs  within  two  (2)  years  following  Mr.  Arnberg's
relocation  to the State of  Florida,  he shall be  entitled  to his base annual
salary for a twelve (12) month period.

     In addition,  in connection with the execution of the employment agreement,
Mr. Arnberg  received options to purchase 20,000 shares of the Company's Class A
Common Stock. This agreement has expired.

Director's Compensation
-----------------------

     Directors who are employees of the Company or its  subsidiaries  receive no
compensation,  as  such,  for  service  as  members  of  the  Board  other  than
reimbursement of expenses incurred in attending meetings.  Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or  stockholder's  meeting attended and $1,000
for each  meeting  of an  executive  committee  of the Board  attended,  and are
reimbursed for expenses  incurred in attending such meetings.  In addition,  all
non-employee  directors  participate in the Company's 1994 Non-Employee Director
Stock Option Plan.  In fiscal  2002,  the Board  approved the issuance of 50,000
warrants  to each of two  independent  directors  for  services  rendered to the
Company.  The  warrants had an exercise  price of $.50 per share,  which was the
fair market value on the date of grant.  In fiscal 2004,  the Board approved the
issuance of 10,000  options under the Company's 1994  Non-Employee  Stock Option
Plan to each of three independent directors.  The options have an exercise price
of $.92 per share,  which was the fair market value as of the date of the grant.
The directors were also granted certain  registration rights associated with the
warrants.

Compensation  Committee  Interlocks and Insider  Participation  in  Compensation
Decisions
---------

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

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

Compensation Committee Report
-----------------------------

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

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

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

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

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

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

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

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

Base Salary

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

Short-Term Incentives

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

Long-Term Incentives

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

Chief Executive Officer

     Mr.  Arnberg's  base  salary  and  long-term  incentive   compensation  are
determined by the Compensation  Committee,  based upon the same factors as those
used  by  the  Compensation  Committee  for  executives  in  general.  Effective
September 1, 2002,  Mr.  Arnberg  agreed to a voluntary  reduction of his annual
base salary from $300,000 to $250,000.

     In addition to his base salary,  Mr.  Arnberg is eligible to participate in
the short-term  and long-term  incentive  programs  outlined above for the other
Named  Executives.  Mr.  Arnberg did not receive a  short-term  incentive  bonus
payment or any  long-term  incentive  stock  options from the Company for fiscal
2004.

                            COMPENSATION COMMITTEE:

                        Mary Ann Domuracki (Chairperson)
                                 Marvin Broitman
                               Herbert M. Gardner

Stock Option Plans
------------------

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

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

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

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

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

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

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

Stock Performance Graph/Table
-----------------------------

     The  Company  believes  that  it is  the  only  publicly-held  firm  in the
embroidery  equipment  industry,  and  therefore  does not  believe  that it can
reasonably  identify an embroidery  industry-based  peer group.  The Company has
elected to define a peer group based on a group of six industrial  distributors,
trading in similar SIC Codes,  with relatively low market  capitalization  for a
benchmark.  The following  graph and table compares the change in the cumulative
total stockholder return for the five-year period beginning on January 31, 2000,
and ending on January 31,  2004,  based upon the market  price of the  Company's
Class A Common Stock,  with the cumulative  total return of the NASDAQ Composite
Index  and the  defined  Peer  Group.  The Peer  Group  includes  the  following
companies:  Lancer Corp.; Quipp Inc.; Paul Mueller Company; Oilgear Company; and
Key Technology  Inc. The graph assumes a $100  investment on January 31, 2000 in
each of the indices and the reinvestment of any and all dividends.

                                [GRAPH OMITTED]



<TABLE>
<CAPTION>

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

                                              1/31/00         1/31/01         1/31/02         1/31/03        1/31/04
                                              -------         -------         -------         -------        -------
<S>                                            <C>             <C>             <C>             <C>           <C>
Hirsch International Corp.                     $100            $ 77            $38             $32            $172
NASDAQ Composite Index                          100              70             49              34              52
Peer Group                                      100             115             86              91             122
</TABLE>


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

The  following  table sets forth the  beneficial  ownership of shares of Class A
Common Stock and Class B Common  Stock as of April 19, 2004,  by (i) each person
who owns  more than 5% of the  outstanding  shares of Class A and Class B Common
Stock;  (ii) each executive  officer and director of the Company;  and (iii) all
officers and directors of the Company as a group:


<TABLE>
<CAPTION>

                                                                                Amount and Nature of
Name and Address of Beneficial Owner (1)        Title of Class (2)             Beneficial Ownership             Percent of Class
-----------------------------------------    --------------------------    ------------------------------    ----------------------
<S>                                                   <C>                           <C>                              <C>
Henry Arnberg...................                      Class A                         13,158                           *
                                                      Class B                      1,368,578 (3)                     51.3%

Paul Levine.....................                      Class A                            -                             -
                                                      Class B                      1,099,621 (4)                     41.2%

Marvin Broitman.................                      Class A                         72,604 (5)                      1.3%
                                                      Class B                            -                             -

Herbert M. Gardner..............                      Class A                         79,474 (6)                      1.4%
                                                      Class B                            -                             -

Mary Ann Domuracki..............                      Class A                         19,999 (7)                       *
                                                      Class B                            -                             -

Paul Gallagher..................                      Class A                        486,666 (8)                      8.3%
                                                      Class B                            -                             -

Beverly Eichel..................                      Class A                        131,333 (9)                      2.3%
                                                      Class B                            -                             -

Howard Arnberg..................                      Class A                         43,567 (10)                      *
                                                      Class B                         25,000                           *

All Officers and Directors as a group                 Class A                        846,801                         13.8%
(eight persons)
                                                      Class B                      2,493,199                         93.4%

<FN>
*    Less than one percent

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

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

(3)  Includes  968,518 shares of Class B Common Stock held by an estate planning
     entity for the benefit of Mr.  Arnberg's  children.  Mr. Arnberg  exercises
     voting control over these shares

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

(5)  Includes  options to purchase  10,000  shares of Class A Common Stock at an
     exercise  price of $0.96  and 7,499  shares  of Class A Common  Stock at an
     exercise  price of $0.27  and 3,333  shares  of Class A Common  Stock at an
     exercise  price of $0.92 per share.  Also  includes  warrants  to  purchase
     50,000 shares of Class A Common Stock at $0.50 per share.  Does not include
     options to  purchase  5,001  shares of Class A Common  Stock at an exercise
     price of $0.27 and options to purchase 6,667 shares of Class A Common Stock
     at an exercise price of $0.92 per share.

(6)  Includes 8,002 shares held in retirement account.  Also includes 640 shares
     owned by his wife as to which he disclaims beneficial  ownership.  Includes
     options to purchase  10,000  shares of Class A Common  Stock at an exercise
     price of $0.96;  7,499 shares of Class A Common Stock at an exercise  price
     of $0.27 and 3,333 shares of Class A Common  Stock at an exercise  price of
     $0.92 per share.  Also includes warrants to purchase 50,000 shares of Class
     A Common  Stock at $0.50 per share.  Does not  include  options to purchase
     5,001  shares  of Class A Common  Stock at an  exercise  price of $0.27 and
     options to  purchase  6,667  shares of Class A Common  Stock at an exercise
     price of $0.92 per share.

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

(8)  Includes  options to purchase  100,000 and 91,666  shares of Class A Common
     Stock at an exercise price of $0.95 and $0.27 per share respectively.  Does
     not include  options to purchase  208,334 shares of Class A Common Stock at
     an exercise price of $0.27 per share.

(9)  Includes  options to  purchase  50,000 and 51,333  shares of Class A Common
     Stock at an exercise price of $0.52 and $0.27 per share respectively.  Does
     not include  options to purchase  116,667 shares of Class A Common Stock at
     an exercise price of $0.27 per share.

(10) Includes  options to purchase  20,000  shares of Class A Common Stock at an
     exercise  price of $1.00 per share,  options to purchase  13,334  shares of
     Class A Common  Stock at $0.52 per  share and  options  to  purchase  7,633
     shares of Class A Common  Stock at an  exercise  price of $0.27 per  share.
     Does not include  options to purchase 10,000 shares of Class A Common Stock
     at an exercise  price of $1.00 per share,  options to purchase 6,666 shares
     of Class A Common Stock at an exercise price of $0.52 per share and options
     to purchase  15,267 shares of Class A Common Stock at an exercise  price of
     $0.27 per share.
</FN>
</TABLE>

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Effective  October 31, 2002,  the Company  completed the sale of all of the
outstanding equity interests in its Pulse Microsystems Ltd. subsidiary ("Pulse")
to an entity  affiliated  with Tas Tsonis,  a former director of the Company and
Chief Executive Officer of Pulse, and Brian Goldberg, a former Vice President of
the Company and President of Pulse.  The  consideration  received by the Company
was approximately equal to Pulse's net asset value. The terms of the transaction
were the product of an extensive arms-length  negotiation between Management and
the purchaser and were approved by the Board of Directors after  presentation by
and  consultation  with  Management.  Management  and the Board believe that the
consideration received by the Company for the transferred equity interests to be
within  a  range  of  value  that  was  fair  to  the  Company.  (See  Note 7 to
Consolidated Financial Statements)

     The Company executed an Purchase and Sale Agreement with Tajima Industries,
Ltd.  ("Tajima") and the Company's Tajima USA, Inc.  subsidiary ("TUI") pursuant
to which the  Company  sold and Tajima  purchased  all of the common  stock (the
"Shares") owned by the Company, constituting a 55% equity interest, in TUI, upon
the terms and conditions set forth in the Purchase and Sale Agreement.  The sale
was effective as of January 31, 2004. Upon the consummation of the sale,  Tajima
owned 100% of TUI.

     The purchase price (the  "Purchase  Price") for the Shares was equal to the
Book  Value  (as  defined  in the  Agreement),  calculated  in  accordance  with
generally  accepted  accounting  principles.  At the  closing,  Tajima  paid the
Company the sum of $500,000  (the "Initial  Payment") in partial  payment of the
Purchase  Price.  The  remaining  balance  due on the  Purchase  Price  will  be
determined  on or  before  April  30,  2004,  and paid  promptly  thereafter  in
accordance with the terms of the Agreement.

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

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

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

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

     The Company  has  advanced  approximately  $496,000  for  premiums on split
dollar life  insurance  for Henry  Arnberg,  the  Company's  Chairman  and Chief
Executive  Officer and Paul  Levine,  the  Vice-Chairman  of the Board and Chief
Executive Officer of Hometown Threads,  LLC. The spouse of each Messrs.  Arnberg
and Levine are the  beneficiaries of these respective  policies.  These advances
are collateralized by the cash surrender value of the policies, which totaled in
the aggregate  approximately $681,000 at January 31, 2004 for both policies. The
premiums for these  policies  are  currently  being paid out of the  accumulated
dividends for the policies.


     Howard Arnberg, the President of Hometown Threads, LLC ("Hometown Threads")
and the son of Henry  Arnberg,  the  Company's  Chairman  of the Board and Chief
Executive Officer entered into a two-year employment agreement, as amended, with
the Company and Hometown  Threads,  commencing  February 1, 2002. The employment
agreement  provides  for the payment to Mr.  Arnberg of an annual base salary of
$170,000. In addition,  Mr. Arnberg is entitled to receive certain quarterly and
annual performance based bonus and incentive payments.  Mr. Arnberg's employment
agreement  provides for the reimbursement of business expenses  (including up to
$25,000 in relocation expenses), an automobile and cellular phone allowance, the
provision of health insurance and related benefits and a relocation package. The
employment agreement requires Mr. Arnberg to devote his entire business time and
attention  to the  Company  and  provides  for  termination  upon  his  death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment  agreement).  The employment  agreement also provides that Mr.
Arnberg shall not compete with the Company  during the term of the agreement and
for a period of one (1) year  thereafter.  The employment  agreement  contains a
change  of  control  provision  which is  triggered  upon the sale or  change in
control of Hometown Threads, as well as a severance provision which entitles Mr.
Arnberg to the payment of an amount  equal to six (6) months base annual  salary
plus a pro-rata  portion of his bonus if his employment is terminated other than
for cause or if the  Company  materially  breaches  the terms of the  employment
agreement provided that if such termination or material breach occurs within two
(2) years following Mr. Arnberg's  relocation to the State of Florida,  he shall
be  entitled  to his base  annual  salary for a twelve  (12) month  period.  Mr.
Arnberg also received options to purchase 20,000 shares of the Company's Class A
Common Stock.

     Marc Arnberg, the son of Henry Arnberg, the Company's Chairman of the Board
and Chief Executive Officer, is employed by the Company as the Product Director.
Mr.  Arnberg  receives  a base  salary  as  well  as the  opportunity  to earn a
performance  based  bonus  based  on  criteria  established  by  management  for
employees of a similar level of responsibility.

     Henry  Arnberg,  the  Company's  Chairman of the Board and Chief  Executive
Officer,  together with his wife and Paul Levine, the Company's Vice Chairman of
the Board and  President of Hometown  Threads,  LLC,  had owned a travel  agency
which had been located on the premises of the Company's  corporate  headquarters
in Hauppauge, New York. The Company would pay this entity customary fees for any
travel and related  services  provided to the Company.  During fiscal 2004, this
entity terminated its options, and ceased closing business.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  following  table  sets  forth  the fees paid to BDO  Seidman,  LLP for
professional  services for each of the two fiscal  years ended  January 31, 2004
and 2003:

<TABLE>
<CAPTION>
                                                                        2004                   2003
                                                                  ------------------     ------------------
<S>                                                                   <C>                    <C>
          Audit Fees.........................................         $175,000               $154,000
          Audit-Related Fees.................................           29,000                 29,000
          Tax Fees...........................................           55,000                 48,000
                                                                  ------------------     ------------------
                                                                      $259,000               $231,000
                                                                  ==================     ==================
</TABLE>

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

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

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

The Audit Committee  negotiates the annual audit fee directly with the Company's
independent  auditors.  The Audit  Committee has also  established  pre-approved
services for which the Company's management can engage the Company's independent
auditors.  Any work in  addition  to these  pre-approved  services  in a quarter
requires  the  advance  approval  of the Audit  Committee.  The Audit  Committee
considers  whether the provision of permitted  non-audit  services is compatible
with  maintaining  BDO Seidman,  LLP's  independence.  On a regular  basis,  all
services under arrangements not in existence on May 6, 2003 were pre-approved by
the Audit Committee.


PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     10.  The following documents are filed as part of this report:

          1. Index to Consolidated Financial Statements Signature Page

     10. Independent Auditors' Report

               Consolidated Balance Sheets

               Consolidated Statements of Operations

               Consolidated Statements of Stockholders' Equity

               Consolidated Statements of Cash Flows

               Notes to Consolidated Financial Statements

          3.   The  Exhibits,  which are listed on the  Exhibit  Index  attached
               hereto

(b)  Reports on Form 8-K

     10.  On February 23, 2004,  the Company filed a report on Form 8-K with the
          Securities and Exchange  Commission  announcing the sale of its equity
          interest in its Tajima USA, Inc. subsidiary.



                                   SIGNATURES


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


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

                                                     By:/s/ Henry Arnberg
                                                        ----------------------
                                                        Henry Arnberg,
                                                        Chief Executive Officer
Dated:  April 29, 2004

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

/s/ Henry Arnberg                              Chairman of the Board of Directors and Chief Executive      April 29, 2004
------------------------------------------     Officer (Principal Executive Officer)
Henry Arnberg


/s/ Paul Gallagher                             President and Chief Operating Officer and Director          April 29, 2004
------------------------------------------
Paul Gallagher


/s/ Beverly Eichel                             Vice President-Finance and Administration, and Chief        April 29, 2004
------------------------------------------     Financial Officer (Principal Accounting and Financial
Beverly Eichel                                 Officer), Secretary


/s/ Daniel Vasquez                             Corporate Controller                                        April 29, 2004
------------------------------------------
Daniel Vasquez


/s/ Marvin Broitman                            Director                                                    April 29, 2004
------------------------------------------
Marvin Broitman


/s/ Mary Ann Domuracki                         Director                                                    April 29, 2004
------------------------------------------
Mary Ann Domuracki


/s/ Herbert M. Gardner                         Director                                                    April 29, 2004
------------------------------------------
Herbert M. Gardner
</TABLE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

    Exhibit No.      Description of Exhibit
-----------------    ---------------------------------------------------------------------------------------------------------------
<S>                  <C>
            %3.1     Restated Certificate of Incorporation of the Registrant

            ^3.2     Amended and Restated By-Laws of the Registrant

            *4.1     Specimen of Class A Common Stock Certificate

            *4.2     Specimen of Class B Common Stock Certificate

           *10.1     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")

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

           @10.3     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.

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

           +10.5     Memorandum of Request for Business with Mexico, Latin American and Caribbean Countries among Hirsch
                     International Corp., Tajima Industries Ltd. and TM Trading Co., Ltd. dated as of July 27, 1999

         +++10.6     1993 Stock Option Plan, as amended

         ***10.7     2003 Stock Option Plan

         +++10.8     1994 Non-Employee Director Stock Option Plan, as amended

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

         ++10.10     First Amendment to Lease dated December 2001 between the Company and Brandywine Operating Partnership, L.P.

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

       ++++10.12     Amendment No. 1 to Loan and Security Agreement dated as of April 28, 2003

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

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

      *****10.15     Purchase and Sale Agreement dated as of January 31,2004, by and among the Company, Tajima Industries, Ltd. and
                     Tajima USA, Inc.

            14.1     Code of Ethics

            21.1     List of Subsidiaries of the Registrant

            23.1     Independent Auditor's Consent

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

**** Incorporated by reference from  Registrant's  Report on Form 8-K filed with
     the Commission on February 23, 2004.

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

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



                          Index to Financial Statements
                           Hirsch International Corp.

<TABLE>
<CAPTION>

<S>                                                                                       <C>
Independent Auditors' Report                                                            F-2

Consolidated Financial Statements

         Balance Sheet as of January 31, 2004 and 2003                                  F-3-F-4

         Statements of Operations for the years ended
                  January 31, 2004, 2003 and 2002                                       F-5

         Statements of Stockholders' Equity for the years ended
                  January 31, 2004, 2003 and 2002                                       F-6

         Statements of Cash Flows for the years ended
                  January 31, 2004, 2003 and 2002                                       F-7

         Notes to the Consolidated Financial Statements                                 F-8-F-24

</TABLE>



                          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, 2004 and 2003, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  January 31,  2004.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of Hirsch
International  Corp.  and  subsidiaries  as of January 31, 2004 and 2003 and the
results of their  operations and their cash flows for each of the three years in
the period  ended  January 31, 2004 in  conformity  with  accounting  principles
generally accepted in the United States of America.




/s/ BDO Seidman, LLP
BDO Seidman, LLP
Melville, New York
April 15, 2004, except for Note 15, which is as of April 30, 2004


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   JANUARY 31
<TABLE>
<CAPTION>

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

ASSETS                                                                               2004                             2003

CURRENT ASSETS:
<S>                                                                               <C>                               <C>
   Cash and cash equivalents                                                      $8,963,000                        $7,702,000
   Restricted cash (Note 2)                                                        3,000,000                           900,000
   Short term note receivable (Note 7)                                                     -                           500,000

   Accounts receivable, net of an allowance for possible losses of
   $680,000 and $1,451,000, respectively (Notes 4 and 15)                          6,587,000                         3,980,000
   Inventories, net (Notes 3 and 15)                                               6,922,000                         6,470,000
   Prepaid and refundable income taxes                                                     -                         3,385,000
   Other current assets                                                              288,000                           686,000
   Assets of discontinued operations (Notes 5 and 7)                               1,137,000                        12,070,000
                                                                          ----------------------------     -------------------------
                          Total current assets                                    26,897,000                        35,693,000
                                                                          ----------------------------     -------------------------

PROPERTY, PLANT AND EQUIPMENT, Net (Note 6)                                        2,419,000                         2,798,000
OTHER ASSETS (Note 8)                                                              1,030,000                         1,256,000
                                                                          ----------------------------     -------------------------
                              TOTAL ASSETS                                       $30,346,000                       $39,747,000
                                                                          ============================     =========================


See notes to consolidated financial statements.

                                                                                                                        (Continued)
</TABLE>


<TABLE>
<CAPTION>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   JANUARY 31

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

LIABILITIES AND STOCKHOLDERS' EQUITY                                                    2004                            2003

CURRENT LIABILITIES:

<S>                                                                                 <C>                             <C>
   Trade acceptances payable (Note 15d)                                             $ 1,324,000                     $ 969,000
   Accounts payable and accrued expenses (Note 9)                                     8,768,000                     7,850,000
   Customer deposits and other                                                          625,000                       865,000
   Liabilities of discontinued operations (Note 7)                                    1,635,000                    11,610,000
                                                                            ---------------------         ---------------------
                  Total current liabilities                                          12,352,000                    21,294,000

CAPITALIZED LEASE OBLIGATIONS - Less current maturities (Note 10)                     1,418,000                     1,541,000
DEFERRED GAIN - (Note 10)                                                               728,000                       847,000
                                                                            ---------------------         ---------------------
   Total liabilities                                                                 14,498,000                    23,682,000
                                                                            ---------------------         ---------------------

COMMITMENTS AND CONTINGENCIES (Note 15)

STOCKHOLDERS' EQUITY (Note 12): Preferred stock, $.01 par value; authorized:
   1,000,000 shares; issued: none                                                             -                             -
   Class A common stock, $.01 par value; authorized: 20,000,000 shares;
   issued and outstanding; 6,827,000 and 6,815,000 shares respectively                   68,000                        68,000
   Class B common stock, $.01 par value; authorized: 3,000,000 shares,
   outstanding: 2,668,000 shares                                                         27,000                        27,000
   Additional paid-in capital                                                        41,408,000                    41,397,000
   Accumulated deficit                                                             (23,638,000)                  (23,825,000)
                                                                            ---------------------         ---------------------
                                                                                     17,865,000                    17,667,000
   Less: Treasury Class A Common stock at cost, 1,164,000 and 695,000
   shares, respectively                                                               2,017,000                     1,602,000
                                                                            ---------------------         ---------------------
        Total stockholders' equity                                                   15,848,000                    16,065,000
                                                                            ---------------------         ---------------------
                                                                                    $30,346,000                   $39,747,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                            =====================         =====================

See notes to consolidated financial statements.
</TABLE>


<TABLE>
<CAPTION>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

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

                                                                                         Three Years Ended January 31,
                                                                                   2004             2003                2002
                                                                              --------------   ---------------    ---------------
<S>                                                                            <C>               <C>                 <C>
NET SALES                                                                      $48,142,000       $43,956,000         $50,156,000

COST OF SALES (Note 15)                                                         31,946,000        29,849,000          36,876,000
                                                                              --------------   ---------------    ---------------
GROSS PROFIT                                                                    16,196,000        14,107,000          13,280,000
                                                                              --------------   ---------------    ---------------
OPERATING EXPENSES
    Selling, general and administrative expenses                                19,553,000        17,936,000          24,925,000
    Impairment of goodwill (Note 16)                                                     -                 -           3,477,000
    Restructuring costs (income) (Note 9)                                        (716,000)                 -           2,259,000
                                                                              --------------   ---------------    ---------------
                  Total operating expenses                                      18,837,000        17,936,000          30,661,000
                                                                              --------------   ---------------    ---------------

OPERATING LOSS                                                                 (2,641,000)       (3,829,000)        (17,381,000)
                                                                              --------------   ---------------    ---------------
OTHER INCOME  (EXPENSE)
    Interest expense                                                             (215,000)         (259,000)           (317,000)
    Other income - net                                                             360,000           638,000             708,000
                                                                              --------------   ---------------    ---------------
                  Total other income                                               145,000           379,000             391,000
                                                                              --------------   ---------------    ---------------

LOSS FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES, AND
DISCONTINUED OPERATIONS                                                        (2,496,000)       (3,450,000)        (16,990,000)

INCOME TAX PROVISION (BENEFIT) (Note 11)                                            25,000         (504,000)         (5,881,000)
                                                                              --------------   ---------------    ---------------
LOSS FROM CONTINUING OPERATIONS                                                (2,521,000)       (2,946,000)        (11,109,000)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS - NET (Note 7)                        2,965,000       (2,604,000)         (7,216,000)
                                                                              --------------   ---------------    ---------------
NET INCOME (LOSS)                                                                 $444,000      ($5,550,000)       ($18,325,000)
                                                                              ==============   ===============    ===============
LOSS PER SHARE:
    Basic and diluted:
    Loss from continuing operations                                                ($0.29)           ($0.34)             ($1.25)

    Income (loss) from discontinued operations                                        0.34            (0.30)              (0.81)
                                                                              --------------   ---------------    ---------------
    Net income (loss)                                                                $0.05           ($0.64)             ($2.06)
                                                                              ==============   ===============    ===============

WEIGHTED AVERAGE NUMBER OF SHARES IN THE
 CALCULATION OF INCOME (LOSS) PER SHARE
    Basic and diluted                                                            8,571,000         8,789,000           8,893,900
                                                                              ==============   ===============    ===============

See notes to consolidated financial statements.

</TABLE>


<TABLE>
<CAPTION>

                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                THREE YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
------------------------------------------------------------------------------------------------------------------------------------

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

<S>                                              <C>                 <C>             <C>               <C>              <C>
BALANCE, JANUARY 31, 2001                        6,815,000           $68,000         2,668,000         $27,000          $41,397,000
  Purchase of treasury shares (Note 13)                 --                --                --              --                   --
    Gain on foreign currency translation                --                --                --              --                   --
    Net loss                                            --                --                --              --                   --
  Total comprehensive income                            --                --                --              --                   --
                                           ---------------   ---------------   ---------------    --------------    ----------------
BALANCE, JANUARY 31, 2002                        6,815,000            68,000         2,668,000          27,000           41,397,000
  Comprehensive income:
    Gain on foreign currency translation                --                --                --              --                   --
    Net loss                                            --                --                --              --                   --
  Total comprehensive income                            --                --                --              --                   --
                                           ---------------   ---------------   ---------------    --------------    ----------------
BALANCE, JANUARY 31, 2003                        6,815,000            68,000         2,668,000          27,000           41,397,000
   Exercise of stock options & warrants             12,000                --                --              --               11,000
   Dividends                                            --                --                --              --                   --
  Purchase of treasury shares (Note 13)                 --                --                --              --                   --
    Net income                                          --                --                --              --                   --
                                           ---------------   ---------------   ---------------    --------------    ----------------
BALANCE, JANUARY 31, 2004                        6,827,000           $68,000         2,668,000         $27,000          $41,408,000
                                           ===============   ===============   ===============    ==============    ================
</TABLE>
<TABLE>
<CAPTION>

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

<S>                                                     <C>                    <C>           <C>                 <C>
BALANCE, JANUARY 31, 2001                               $88,000                $50,000       $(1,352,000)        $40,278,000
  Purchase of treasury shares (Note 13)                      --                     --          (250,000)          (250,000)
     Loss on foreign currency translation             (244,000)                     --                 --          (244,000)
     Net loss                                                --           (18,325,000)                 --       (18,325,000)
                                                                                                               ---------------
  Total comprehensive income                                 --                     --                 --       (18,569,000)
                                               -----------------    --------------------    ---------------    ---------------
BALANCE, JANUARY 31, 2002                             (156,000)           (18,275,000)        (1,602,000)         21,459,000
     Gain on foreign currency translation               156,000                     --                 --            156,000
     Net loss                                                --            (5,550,000)                 --        (5,550,000)
                                                                                                               ---------------
  Total comprehensive income                                 --                     --                 --        (5,394,000)
                                               -----------------    --------------------    ---------------    ---------------
BALANCE, JANUARY 31, 2003                                    --           (23,825,000)        (1,602,000)        $16,065,000
    Exercise of stock options & warrants                     --                     --                 --             11,000
    Purchase of treasury shares (Note 13)                    --                     --          (415,000)          (415,000)
    Dividends                                                --              (257,000)                 --          (257,000)
     Net income                                              --                444,000                 --            444,000
                                               -----------------    --------------------    ---------------    ---------------
BALANCE, JANUARY 31, 2004                                 $  --          ($23,638,000)       ($2,017,000)        $15,848,000
                                               =================    ====================    ===============    ===============

See notes to consolidated financial statements.
</TABLE>


<TABLE>
<CAPTION>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          THREE YEARS ENDED JANUARY 31,

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

                                                                                 2004                2003                 2002
                                                                                 ----                ----                 ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                            <C>              <C>                 <C>
   Net Income (loss)                                                           $444,000         $(5,550,000)        $(18,325,000)
   Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
   Depreciation and amortization                                                887,000              809,000            2,186,000
   Gain on sale of assets                                                     (169,000)            (119,000)            (170,000)
   Changes in reserves                                                        (140,000)              410,000            3,275,000
   Deferred income taxes                                                              -            (130,000)                    -
   Minority interest                                                            235,000              196,000                    -
   Write-off of goodwill                                                              -                    -            3,477,000
   Reversal of restructuring accrual reserves                                 (716,000)                    -                    -
   Reversal of lease reserves                                               (2,000,000)                    -                    -

Changes in assets and liabilities:
   Accounts receivable                                                      (2,498,000)            4,675,000            1,461,000
   Net investments of sales type leases                                         553,000            5,365,000          (2,897,000)
   Inventories                                                                1,431,000            2,910,000            (466,000)
   Other current assets and other assets                                        453,000          (1,431,000)              160,000
   Trade acceptances payable                                                    355,000          (1,216,000)          (1,790,000)
   Accounts payable and accrued expenses                                      1,989,000          (3,718,000)           10,634,000
   Prepaid income taxes and income taxes payable                              3,176,000            3,742,000          (5,124,000)
                                                                         ---------------    -----------------    -----------------
     Net cash provided by (used in) operating activities                      4,010,000            5,943,000          (7,579,000)
                                                                         ---------------    -----------------    -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                       (552,000)            (547,000)            (533,000)
   Proceeds from sale of fixed assets                                           100,000                    -            4,236,000
   Proceeds from sale of subsidiary                                             500,000              530,000                    -
                                                                         ---------------    -----------------    -----------------
     Net cash provided by (used in) investing activities                         48,000             (17,000)            3,703,000
                                                                         ---------------    -----------------    -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Restricted Cash                                                          (2,100,000)            (900,000)                    -
   Repayments of long-term debt                                               (123,000)             (83,000)             (53,000)
   Payment of Deferred Financing Costs                                                -            (518,000)                    -
   Exercise of Stock Options                                                     11,000                    -                    -
   Payment of Dividends                                                       (170,000)                    -                    -
   Purchase of treasury shares                                                (415,000)                    -            (250,000)
                                                                         ---------------    -----------------    -----------------
     Net cash used in financing activities                                  (2,797,000)          (1,501,000)            (303,000)
                                                                         ---------------    -----------------    -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                               -              156,000            (244,000)
                                                                         ---------------    -----------------    -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              1,261,000            4,581,000          (4,423,000)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                  7,702,000            3,121,000            7,544,000
                                                                         ---------------    -----------------    -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                       $8,963,000           $7,702,000           $3,121,000
                                                                         ===============    =================    =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest and bank fees paid                                                 $215,000             $259,000             $419,000
                                                                         ===============    =================    =================
   Income taxes paid                                                           $350,000               $9,000               $7,000
                                                                         ===============    =================    =================
<FN>
Supplemental  Disclosure of non-cash investing activity: On October 31, 2002 the
Company  received  a note in the amount of  $500,000  from the sale of its Pulse
subsidiary.  In connection with the sale of its TUI subsidiary effective January
31, 2004,  the Company  incurred  accounts  payable to TUI in the amount of $4.5
million.

See notes to consolidated financial statements.
</FN>
</TABLE>


                   HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   YEARS ENDED JANUARY 31, 2004, 2003 AND 2002

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

1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION

     The accompanying  consolidated financial statements include the accounts of
Hirsch International Corp.  ("Hirsch"),  HAPL Leasing Co., Inc. ("HAPL" or "HAPL
Leasing"),  Pulse  Microsystems,  Ltd. through October 31, 2002 (Pulse),  Sewing
Machine  Exchange,  Inc.  ("SMX"),  Sedeco,  Inc.  ("Sedeco"),  Hirsch Equipment
Connection,  Inc.  ("HECI"),  Hirsch  Business  Concepts LLC  ("HBC"),  Hometown
Threads  LLC  ("Hometown"),  and Tajima USA,  Inc.  ("TUI")  (collectively,  the
"Company").

     On January 6, 1998, Tokai Industrial Sewing Machine Company  ("Tokai"),  an
affiliate  of Tajima,  the  Company's  major  supplier,  purchased  a 45 percent
interest in TUI for $900,000.  For  financial  reporting  purposes,  the assets,
liabilities  and earnings of TUI are  consolidated  in the  Company's  financial
statements.  Tokai's 45 percent  interest  in TUI has been  reported as minority
interest in the Company's  Consolidated Balance Sheet as of January 31, 2003 and
Tokai's  share of the  earnings  has been  reported as minority  interest in the
Company's Consolidated  Statements of Operations for the years ended January 31,
2004,  2003 and 2002.  As of January  31,  2004 the  Company  sold its  majority
position in TUI to Tajima  Industries  and its  earnings  have been  reported as
discontinued operations.

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

See Note 7 to the Consolidated Financial Statements for discontinued  operations
of the leasing subsidiary, Pulse and TUI as of January 31, 2004.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

b.   Revenue Recognition - The Company distributes  embroidery equipment.  Where
     installation and customer acceptance are a substantive part of the sale, by
     its terms,  the Company has deferred  recognition of the revenue until such
     customer  acceptance of  installation  has occurred.  In fiscal years 2004,
     2003 and 2002,  most sales of new  equipment  did not require  installation
     within the terms of the sales  contract;  these sales were  recorded at the
     time of shipment, at which time title is transferred to the customer.

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

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

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

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

f.   Foreign Currency  Transactions - Trade acceptances  payable are denominated
     in Japanese  yen and are  related to the  purchase  of  equipment  from the
     Company's   major  supplier.   Gains  and  losses  from  foreign   currency
     transactions are included in other income, net and are not significant.

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

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

h.   Impairment of Long-Lived  Assets - The Company  reviews  long-lived  assets
     whenever  events or changes in  circumstances  indicate  that the  carrying
     value of any of these  assets may not be  recoverable.  In that  regard the
     Company will assess the  recoverability of such assets based upon estimated
     undiscounted cash flow forecasts. During the fourth quarter of Fiscal 2002,
     the  remaining  balance  of  $3,477,000  of  goodwill  associated  with the
     acquisitions  of SMX  Corporation  and Sedeco  Corporation was written off.
     (See Note 16).

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

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

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

l.   Income  (Loss)  Per  Share - Basic  earnings  per  share  are  based on the
     weighted  average number of shares of common stock  outstanding  during the
     period. Diluted earnings per share are based on the weighted average number
     of  shares of  common  stock and  common  stock  equivalents  (options  and
     warrants)  outstanding  during the period,  computed in accordance with the
     treasury stock method.  Outstanding options and warrants were anti-dilutive
     for the fiscal years ended January 31, 2004, 2003 and 2002.

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

     The Company follows  Statement of Financial  Accounting  Standards No. 123,
     "Accounting for Stock-Based  compensation," ("SFAS 123") which requires the
     disclosure of pro forma net income and earnings per share.  Under SFAS 123,
     the fair value of stock-based awards to employees is calculated through the
     use of option  pricing  models,  even though such models were  developed to
     estimate  the fair value of freely  tradable,  fully  transferable  options
     without vesting restrictions, which significantly differ from the Company's
     stock option  awards.  These models also  require  subjective  assumptions,
     including  future stock price  volatility  and  expected  time to exercise,
     which greatly affect the calculated values. The Company's calculations were
     made at the date of the grant using the Black-Scholes  option pricing model
     with the following  weighted  average  assumptions:  Fiscal 2004:  dividend
     yield of 4.00%,  volatility  of 72%,  risk-free  interest rate of 2.37% for
     grants on  06/02/2003,  2.14% for grants on 06/16/2003 and 2.63% for grants
     on 07/09/2003 and an expected life of 5 years;  Fiscal 2003: dividend yield
     of 0%,  volatility of 79%,  risk-free  interest rate of 4.48% for employees
     and 4.07% for non-employees and and expected life of 5 years;  Fiscal 2002:
     dividend yield of 0%, volatility of 79%,  risk-free  interest rate of 3.97%
     and expected  life of 3.6 years The Company's  calculations  are based on a
     multiple option  valuation  approach and forfeitures are recognized as they
     occur.  The weighted average fair value of the options granted during 2004,
     2003 and 2002 was $0.84, $0.16 and $0.53, respectively.

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


<TABLE>
<CAPTION>

                                                              Year Ended January 31,
                                              2004                     2003                    2002
                                              ----                     ----                    ----
Net income (loss):
<S>                                         <C>                    <C>                     <C>
  Net income (loss) as reported             $444,000               $(5,550,000)            $(18,325,000)

Deduct Total stock-based employee
compensation expense determined
under fair value method                      70,000                   82,000                  182,000
                                       --------------------     --------------------    --------------------
  Pro forma net income (loss)               $374,000               $(5,632,000)            $(18,507,000)
                                       ====================     ====================    ====================
Basic and diluted net income
 (loss) per share:
  As reported                                 $0.05                   $(0.63)                 $(2.06)
  Pro forma                                   $0.04                   $(0.64)                 $(2.08)
</TABLE>

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

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

p.   Fair  Value  of  Financial  Instruments  -  Financial  instruments  consist
     primarily  of  investments  in  cash,  cash   equivalents,   trade  account
     receivables,  accounts  payable and debt  obligations.  Where quoted market
     prices are not  available,  fair values are estimated  based on assumptions
     concerning the amount and timing of estimated  future cash flow and assumed
     discount rates  reflecting  varying  degrees of credit risk, at January 31,
     2004 and  2003,  the  fair  value of the  Company's  financial  instruments
     approximated the carrying value.

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

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of both Liabilities and Equity",
     effective for financial  instruments entered into or modifies after May 31,
     2003,  and  otherwise is effective  at the  beginning of the first  interim
     period beginning after June 15, 2003. This statement  establishes standards
     for how an issuer  classifies and measures  certain  financial  instruments
     with  characteristics  of both liabilities and equity.  It requires that an
     issuer  classify a  freestanding  financial  instrument  that is within its
     scope as a liability (or an asset in some  circumstances).  The adoption of
     SFAS  No.  150  is  not  expected  to  have  an  impact  on  the  Company's
     consolidated financial statements.

     The Emerging  Issues Task Force ("EITF") issued EITF Issue No,
     00-21 "Revenue  Arrangements with Multiple  Deliverables"  ("Issue 00-21").
     Issue 00-21  addresses  certain  aspects of the  accounting by a vendor for
     arrangements  under  which  it will  perform  multiple  revenue  generating
     activities and how to determine whether an arrangement  involving  multiple
     deliverables contains more than one unit of accounting.  Issue 00-31 became
     effective  for revenue  arrangements  entered into in fiscal  periods after
     June 15, 2003.  The adoption of Issue 00-21 did not have a material  effect
     on the Company's consolidated financial statements.

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

s.   Shipping and handling  expenses - The Company records shipping and handling
     expenses  in  operating  expenses on the  statement  of  operations.  These
     expenses were approximately; $974,000, $1,012,000 and $1,194,000 during the
     years ended January 31, 2004, 2003 and 2002,  respectively.  Amounts billed
     to customers were immaterial for all periods presented.


3.       INVENTORIES

                                                  January 31,
                                            2004                   2003
                                     --------------------------------------

New machines                                 $5,194,000         $5,180,000
Used machines                                   344,000            796,000
Parts and accessories                         2,966,000          2,290,000
Less reserve for slow-moving
 inventory                                   (1,582,000)        (1,796,000)
                                     --------------------------------------
Total                                        $6,922,000         $6,470,000
                                     --------------------------------------


4. CHANGES IN RESERVES

Allowance for Doubtful Accounts:
--------------------------------
<TABLE>
<CAPTION>

                                     Opening                                 Ending
                                     Balance    Additions    Write Offs      Balance
                                     -------    ---------    ----------      -------
<S>                                  <C>          <C>        <C>            <C>
     Year ended January 31, 2004    $1,451,000   $230,000   $(1,001,000)   $  680,000

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

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


     Inventory Reserve
     -----------------
<TABLE>
<CAPTION>
                                      Opening                                                       Ending
                                      Balance       Additions       Write Offs      Adjustments     Balance
                                      -------       ---------       ----------      -----------     -------
<S>                                 <C>            <C>            <C>              <C>            <C>
     Year ended January 31, 2004    $1,946,000     $   80,000     $          0     $  (444,000)   $1,582,000

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

     Year ended January 31, 2002    $2,450,000     $2,405,000     $(2,670,000)     $          0   $2,185,000

<FN>
During fiscal 2004 the Company reversed $444,000 in inventory reserves that were
no longer necessary.
</FN>
</TABLE>


5. NET INVESTMENT IN SALES-TYPE LEASES
<TABLE>
<CAPTION>
                                                                                               January 31,
                                                                                       2004                   2003
                                                                                --------------------  -------------------
<S>                                                                                       <C>               <C>
Total minimum lease payments receivable                                                   $423,000          $ 2,331,000
Estimated residual value of leased property (unguaranteed) (A)                             853,000            3,920,000
Reserve for estimated uncollectible lease payments                                         (94,000)          (1,165,000)
Less: Unearned income                                                                      (79,000)            (413,000)
                                                                                --------------------  -------------------
Net investment - Included in Assets of discontinued operations                          $1,103,000          $ 4,673,000
(See Note 7)                                                                    ====================  ===================

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


6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>

                                                                                       January 31,
                                                                                2004                   2003
                                                                         --------------------  -----------------
<S>                                                                               <C>                <C>
Property Under Capital Lease Obligation                                           $1,786,000         $1,786,000
Software                                                                             576,000            458,000
Machinery and equipment                                                            5,316,000          5,546,000
Furniture and fixtures                                                             1,986,000          1,927,000
Automobiles                                                                          294,000            294,000
Leasehold improvements                                                               583,000            304,000
                                                                         --------------------  -----------------
Total                                                                             10,541,000         10,315,000
Less: Accumulated depreciation and amortization                                  (8,122,000)        (7,517,000)
                                                                         --------------------  -----------------
Property, plant and equipment, net                                                $2,419,000         $2,798,000
                                                                         ====================  =================
</TABLE>


7. DISCONTINUED OPERATIONS

     In the fourth quarter of Fiscal 2002, the Company  determined that its HAPL
Leasing  subsidiary  was not strategic to the Company's  ongoing  objectives and
discontinued its operations.  Accordingly, the Company reported its discontinued
operations in accordance with APB 30. The consolidated financial statements have
segregated the assets,  liabilities and operating results of these  discontinued
operations for all periods presented.  Management intends to sell the net assets
by January 2005.

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


                                          For the year ended January 31,
                                      2004             2003             2002
                                      ----             ----             ----
Revenue...........................  $ 619            $ 1,554          $ 3,488
Gross profit......................    278                128            1,575
Income (loss) from
 discontinued operations..........  $2,000           $(4,000)         $(7,686)

     The  operating  loss in fiscal 2003  includes a reserve of $4 million as an
additional  provision for the liquidation of the lease portfolio.  The operating
loss in fiscal 2002  includes $4.6 million  provision for the CIT/UNL  liability
and the  sale of the  residual  receivables  associated  with it;  $2.6  million
increase in the MLPR provision;  $0.6 million employee severance costs; and $0.5
million in asset write off and provision  for future  losses until  termination.
The  UNL  (Ultimate  Net  Loss)  represents  the  Company's  liability  of up to
approximately  10% of all  contracts  purchased by CIT. The increase in the MLPR
(Minimum Lease Payments Receivable)  provision was to reserve against a probable
loss on the sale of the remaining  portfolio.  In July 2003, the Company entered
into a  transaction  whereby the Company  assigned its interest in the remaining
UNL  lease  portfolios  from the CIT Group to  Beacon  Funding.  As part of this
transaction,  the  Company  sold to  Beacon  Funding  Corporation  the  residual
receivables associated with the lease portfolio for approximately  $375,000. The
Company  reversed as part of discontinued  operations,  $2.0 million of reserves
associated with the UNL lease  portfolio.  The  transaction  closed in September
2003.

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

                                              For the year ended January 31,
                                               2004                  2003
                                           --------------      --------------
Assets:
   Accounts receivable...................   $    0              $   16
   MLPR and residuals (Note 5)...........    1,103               4,673
   Property, plant and equipment, net....        0                  33
   Inventory.............................       23                 113
   Prepaid taxes and other assets........       11                  79
                                           --------------      --------------
Total Assets.............................   $1,137              $4,914
                                           ==============      ==============

Liabilities:
   Accounts payable and accrued expenses.   $1,548              $6,758
   Income taxes payable..................       87                  87
                                           --------------      --------------
   Long term debt........................        0                  14
                                           --------------      --------------
Total Liabilities........................    $1,635              $6,859
                                           ==============      ==============

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

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

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

                                                 For the year ended January 31,
                                                    2003               2002
                                                    ----               ----
Revenue........................................   $3,731             $ 4,547
Gross profit...................................    2,510               2,906
Income (loss) from discontinued operations.....   $  228             $ (384)


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

     The purchase price (the  "Purchase  Price") for the Shares was equal to the
Book Value (as defined in the Agreement) calculated in accordance with generally
accepted accounting principles.  At the closing, Tajima paid the Company the sum
of $500,000 (the "Initial  Payment") in partial  payment of the Purchase  Price.
The remaining  balance due on the Purchase Price will be determined on or before
April 30, 2004, and paid promptly thereafter in accordance with the terms of the
Agreement.

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

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

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

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


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


Summary operating results of the discontinued operations of Tajima USA, Inc. are
as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      For the year ended January 31,
                                                         2004                      2003                      2002
                                                 ----------------------    ----------------------    ---------------------
<S>                                                    <C>                       <C>                      <C>
Revenue.......................................         $12,941                   $12,194                  $11,249
Gross Profit..................................           1,525                     1,266                      620
Income from discontinued operations...........         $   965                   $ 1,168                    $ 854
</TABLE>

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

                                         January 31,
                                            2003
                                        --------------
Assets:

   Cash................................     $    5
   Accounts Receivable.................        375
   Accounts Receivable from Hirsch
    International Corp.................      3,641
   Property, Plant & Equipment.........         69
   Inventory...........................      3,028
   Prepaid Taxes & Other Assets........         38
                                        --------------
Total Assets...........................     $7,156
                                        ==============

Liabilities:
   Accounts Payable & Accruals.........     $2,716
   Minority Interest...................      1,932
   Income Taxes Payable................        103
                                        --------------
Total Liabilities......................     $4,751
                                        ==============


8. OTHER ASSETS

<TABLE>
<CAPTION>
                                                                                              January 31,
                                                                                        2004               2003
                                                                                   ---------------    ----------------
                <S>                                                                   <C>                  <C>
                 Deferred Financing Costs (1)                                         $1,162,000           $1,153,000
                 Officers Loans Receivable (2)                                           496,000              496,000
                 Other                                                                   200,000              259,000
                                                                                   ---------------    ----------------
                 Total other assets                                                   $1,858,000           $1,908,000

                 Accumulated amortization of Long Term Other Assets                   $ (828,000)          $(652,000)
                                                                                   ---------------    ----------------
                 Other Assets, net                                                    $1,030,000           $1,256,000
                                                                                   ===============    ================
<FN>
(1)  Deferred  financing  related  to the  execution  of the (3 years)  Loan and
     Security  Agreement in November 2002, and they are being amortized over the
     term of the agreement from Congress Financial Corp.

(2)  Related to split dollar life insurance policy on 2 officers of the Company.
     The Company no longer pays  premiums on the policies and will be reimbursed
     by the cash surrender value of these policies.
</FN>
</TABLE>


9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>

                                                                           January 31,
                                                                     2004              2003
                                                                 --------------    --------------
<S>                                                                 <C>                 <C>
Other accrued expenses                                              $1,349,000          $875,000
Accounts payable                                                     1,124,000           676,000
Accounts payable to TUI                                              4,482,000         3,641,000
Accrued payroll costs                                                  812,000           460,000
Accrued warranty                                                       543,000           543,000
Deferred revenue                                                       423,000           179,000
Accrued commissions payable                                             35,000           108,000
Accrued restructuring costs (A)                                              -         1,368,000
                                                                 --------------    --------------
Total accounts payable and accrued expenses                         $8,768,000        $7,850,000
                                                                 ==============    ==============

<FN>
(A)  In the fourth  quarter of the year ended  January  31,  2002,  the  Company
     initiated  a   restructuring   plan  in  connection   with  its  continuing
     operations.  The  plan  was  designed  to meet  the  changing  needs of the
     Company's   customers  and  to  reduce  its  cost   structure  and  improve
     efficiency.  The restructuring initiatives involve the consolidation of the
     parts  and  supplies  operations  with  existing  Hirsch  operations,   the
     provision  for the  downsizing  of three of its existing  sales offices and
     reduction  in  the  overall  administrative  personnel.  The  reduction  in
     personnel represents 25% of its work force or 56 people.
</FN>
</TABLE>

The following table summarizes the restructuring costs and activities:
<TABLE>
<CAPTION>
                              Balance at             Cash           Non-Cash        Balance at         Cash           Discontinued
                           January 31, 2001        Payments         Charges      January 31, 2002     Payments         Operations
                          -------------------    -------------    -------------  -----------------  -------------    -------------
<S>                           <C>                 <C>              <C>             <C>              <C>               <C>
Severance and                 $ 581,000           $ 102,000        $   -           $   479,000      $ 379,000         $     -
Benefits..............
Excess facilities
including future lease
obligations and
property and
equipment............         2,092,000              79,000          28,000          1,985,000        510,000           207,000
                          -------------------    -------------    -------------  -----------------  -------------    -------------
                             $2,673,000           $ 181,000        $ 28,000        $ 2,464,000      $ 889,000         $ 207,000
                          ===================    =============    =============  =================  =============    =============
</TABLE>
<TABLE>
<CAPTION>
                                                                   Reversal of
                              Balance at             Cash            Prior             Balance at
                           January 31, 2003        Payments         Accruals        January 31, 2004
                          -------------------    -------------    -------------    -------------------
<S>                           <C>                 <C>              <C>                     <C>
Severance and                 $ 100,000           $ (21,000)       $ (79,000)          $   -
Benefits..............

Excess facilities
including future lease
obligations and
property and
equipment............         1,268,000            (631,000)        (637,000)              -
                          -------------------                                      -------------------
                             $1,368,000           $(652,000)       $(716,000)         $    -
                          ===================    =============    =============    ===================
</TABLE>


10. LONG TERM OBLIGATIONS
<TABLE>
<CAPTION>
                                                                 January 31,
                                                        2004                    2003
                                                ---------------------    -------------------
<S>                                                       <C>                    <C>
Obligation Under Capital Lease (A)                        $1,541,000             $1,642,000
Deferred Gain on Sale of Building (B)                        847,000                967,000
Other                                                              -                 18,000
                                                ---------------------    -------------------
                                                           2,388,000              2,627,000
Total
Less: Current maturities                                   (242,000)              (239,000)
                                                ---------------------    -------------------
Long-term maturities                                      $2,146,000             $2,388,000
                                                =====================    ===================
<FN>
(A)  Obligation  Under  Capital Lease of the Company at January 31, 2004 matures
     as follows:

Fiscal Year Ending January 31,
2005                                                         $ 297,000
2006                                                           306,000
2007                                                           316,000
2008                                                           325,000
2009                                                           335,000
2010 and thereafter                                            730,000
                                                     -----------------
Total Minimum Lease Payments                                $2,309,000

Less:  Amount representing interest                          (768,000)
                                                     -----------------
Present value of net minimum lease payments                  1,541,000

Less current portion                                           123,000
                                                     -----------------
Long term lease obligations                                 $1,418,000
                                                     =================

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

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

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


11. INCOME TAXES

     The  provision  (benefit) for income taxes is based on income (loss) before
     taxes on income and discontinued operations as follows:
<TABLE>
<CAPTION>
                                                                                    Years ended
                                                      -------------------------------------------------------------------------
                                                         January 31, 2004          January 31, 2003          January 31, 2002

<S>                                                      <C>                       <C>                       <C>
          Domestic...............................        $(2,496,000)              $(3,450,000)              $(11,254,000)
          Foreign - included in discontinued
          operations (See Note 7)................                  0                   536,000                  (306,000)
                                                      ----------------------    ----------------------    ---------------------
           Total.................................        $(2,496,000)              $(2,914,000)              $(11,560,000)
                                                      ======================    ======================    =====================
</TABLE>

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

                                                                        January 31,
                                                      2004                  2003                    2002
                                                -----------------     ------------------     -----------------
Current:
<S>                                                  <C>                  <C>                <C>
   Federal                                           $  -                 $(504,000)         $(5,671,000)
   State                                              25,000                   -                (210,000)
                                                -----------------     ------------------     -----------------
                                                      25,000               (504,000)          (5,881,000)
Total current
                                                -----------------     ------------------     -----------------
Deferred:
   Federal                                              -                      -                    -
   State and foreign                                    -                      -                    -
                                                -----------------     ------------------     -----------------
                                                        -                      -                    -
Total deferred:
                                                -----------------     ------------------     -----------------
Total income tax (benefit) provision                 $25,000              $(504,000)         $(5,881,000)
                                                =================     ==================     =================
</TABLE>

Tax  expense  (benefit)  of  $348,000,  $(381,000)  and  $(863,000)  related  to
discontinued  operations  for the years ended  January 31, 2004,  2003 and 2002,
respectively.

The tax effects of temporary differences that give rise to deferred income tax
assets and liabilities at January 31, 2004 and 2003 are as follows:
<TABLE>
<CAPTION>
                                                     January 31, 2004                           January 31, 2003
                                             Net Current          Net Long-            Net Current             Long-Term
                                            Deferred Tax        Term Deferred          Deferred Tax          Deferred Tax
                                               Assets             Tax Assets              Assets                Assets
                                           ----------------    -----------------    -------------------    ------------------
<S>                                               <C>                         <C>             <C>                          <C>
Accounts receivable                               $271,000                    $0              $579,000                     $0
Inventories                                        683,000                     0               849,000                      0
Accrued warranty costs                             217,000                     0               217,000                      0
Other accrued expenses                              10,000                     0               578,000                      0
Deferred franchise revenue                         169,000                     0                     0                      0
Purchased technologies and goodwill                      0             2,259,000                     0              2,559,000
Net operating loss                                       0             6,905,000                     0              5,545,000
Reserves for discontinued operations               658,000                     0             3,393,000                      0
Gain on sale of building                                 0               338,000                     0                386,000
                                           ----------------    -----------------    -------------------    ------------------
                                                 2,008,000             9,502,000             5,616,000              8,490,000
Less valuation allowance                       (2,008,000)           (9,502,000)           (5,616,000)            (8,490,000)
                                           ----------------    -----------------    -------------------    ------------------
                                                        $0                    $0                    $0                    $0
                                           ================    =================    ===================    ==================
</TABLE>
A full valuation  allowance for such deferred tax assets has been established at
January  31,  2004 and 2003,  since the  Company  cannot  determine  the  future
utilization of those assets.

Net operating loss carried forwards expire through 2024.

In fiscal 2002,  the Company was able to extend its  carryback of Net  Operating
Losses from two years to five years as a direct  result of the Job  Creation and
Workers  Assistance Act. This change  resulted in the Company  applying for a $6
million  tax refund.  During  fiscal 2004 the  Company  received  the  remaining
carryback claim refund from the IRS along with applicable  interest  through the
refund date.

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

<TABLE>
<CAPTION>
                                                                           Year Ended January 31,
                                                               2004                 2003                2002
                                                          ----------------    -----------------    ----------------
<S>                                                          <C>                   <C>                 <C>
Federal statutory income tax rate                            (34.0)%               (34.0)%             (34.0)%
State income taxes, net of Federal benefit                      1.0                  -                  (1.9)
Permanent differences                                          27.3                 35.4                  0
Valuation Allowance                                             6.7                (16.0)                1.3
                                                          ----------------    -----------------    ----------------
Effective income tax rate                                      1.0%               (14.6)%              (34.6)%
                                                          ================    =================    ================
</TABLE>


12. STOCKHOLDERS' EQUITY

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

     b.   Stock  Option  Plans - The Company  maintains  two stock  option plans
          pursuant to which an aggregate of  approximately  1,984,000  shares of
          Common Stock may be granted.

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

Stock option transactions during the years ended January 31, 2004, 2003 and 2002
for the 1993 Plan are summarized below:

<TABLE>
<CAPTION>
                                                                               Exercise              Weighted Average
                                                          Shares              Price Range             Exercise Price
                                                    -----------------    ---------------------    ----------------------
<S>                                                         <C>                  <C>   <C>                  <C>
Options outstanding - January 31, 2001                      682,000              $0.91-$2.40                $9.45

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

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

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

Options exercisable at January 31, 2004                     469,000              $0.27-$5.25                $0.72
                                                    =================    =====================    ======================
</TABLE>

<TABLE>
<CAPTION>
                                                          Options Outstanding                   Options Exercisable

                                                     Weighted Avg.        Weighted                             Weighted
 Range of Exercise Price                               Remaining           Average                              Average
                                    Number            Contractual         Exercise            Number           Exercise
                                 Outstanding           Life (yrs)           Price           Exercisable          Price
----------------------------    ----------------    -----------------    -------------    ----------------    -------------
<S>    <C>   <C>                    <C>                   <C>               <C>               <C>                <C>
       $1.75-$5.25                  28,000                1.0               $3.50             28,000             $3.50
       $0.91-$2.72                  15,000                2.0               $1.81             15,000             $1.81
       $0.95-$1.00                 130,000                3.0               $0.96             120,000            $0.96
       $0.27-$0.52                 855,000                4.0               $0.29             306,000            $0.32
       $0.72-$0.86                  40,000                5.0               $0.79                0                 0
                                ----------------                                          ----------------
                                  1,068,000                                                   469,000
</TABLE>

Most options issued vest in three annual  installments of 33-1/3 percent each on
the first,  second, and third anniversary of the date of grant except for 50,000
issued in 2003 which vested immediately.  There are approximately 682,000 shares
available for future grants under the 1993 Plan.

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

Stock option transactions during the years ended January 31, 2004, 2003 and 2002
for the Directors' Plan are summarized below:

<TABLE>
<CAPTION>
                                                                           Exercise           Weighted Average
                                                        Shares           Price Range           Exercise Price
                                                    ---------------    -----------------    ----------------------
<S>                                                     <C>              <C>   <C>                 <C>
Options outstanding-January 31, 2001                    32,000           $2.25-$22.00              $12.16
     Options issued                                     20,000              $0.96                   $0.96
     Warrants issued                                   100,000              $0.50                   $0.50
     Options cancelled                                 (32,000)          $2.25-$22.00              $12.16
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 31, 2002                   120,000           $0.50-$0.96                $0.58
                                                    ---------------    -----------------    ----------------------
     Options cancelled                                    0                   0                       0
Options issued                                          40,000           $0.27-$0.89                $0.43
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 31, 2003                   160,000           $0.27-$0.96                $0.54
Options issued                                          30,000              $0.92                   $0.92
                                                    ---------------    -----------------    ----------------------
Options outstanding-January 31, 2004                    90,000           $0.27-$0.96                $0.68
                                                    ===============    =================    ======================
Warrants exercisable-January 31, 2004                  100,000              $0.50                   $0.50
                                                    ===============    =================    ======================
</TABLE>

There are  approximately  144,000  shares  available for future grants under the
Directors' Plan.


13. TREASURY STOCK

     Treasury  stock at January 31,  2004 and 2003  consists  of  1,164,000  and
695,000  shares  respectively  of Class A common stock  purchased in open market
transactions  for a  total  cost of  approximately  $2,017,000  and  $1,602,0000
respectively  pursuant to a stock repurchase  program authorized by the Board of
Directors in fiscal year 1999.


14. PROFIT SHARING PLAN

     Profit  Sharing  Plan - The  Company has a  voluntary  contribution  profit
sharing plan (the "Plan"),  which  complies with Section  401(k) of the Internal
Revenue  Code.  Employees  who have  attained the age of 21 and have one year of
continuous  service are eligible to  participate  in the Plan.  The Plan permits
employees  to make a  voluntary  contribution  of  pre-tax  dollars to a pension
trust, with a discretionary matching contribution by the Company up to a maximum
of two  percent of an  eligible  employee's  annual  compensation.  The  Company
elected not to make  matching  contributions  for fiscal years ended January 31,
2004, 2003 and 2002. The Company funds all amounts when due.


15.      COMMITMENTS AND CONTINGENCIES

a.   Minimum  Operating  Lease  Commitments  - The Company  has  non-cancellable
     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,

                    2005                    $780,000
                    2006                     644,000
                    2007                     539,000
                    2008                     265,000
                    2009                     214,000
               2010 and after                454,000
                                        ------------------
                                           $2,896,000
                                        ==================

     Rent expense was  approximately  $584,000,  $574,000 and $1,068,000 for the
     years ended January 31, 2004, 2003 and 2002, respectively. The decline from
     previous years is the result of termination of various facility leases.

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

c.   The Company has a Loan and Security  Agreement  ("the Congress  Agreement")
     with Congress Financial  Corporation  ("Congress") for three years expiring
     on November 26, 2005.  The Congress  Agreement,  as amended April 30, 2004,
     provides  for  a  credit  facility  of  $12  million  for  Hirsch  and  all
     subsidiaries  and is  collateralized  by eligible  accounts  receivable and
     inventory  as defined  in the  agreement.  Advances  made  pursuant  to the
     Congress  Agreement  may be used by the  Company and its  subsidiaries  for
     working  capital loans,  letters of credit and deferred  payment letters of
     credit. The terms of the Congress Agreement require the Company to maintain
     certain  financial  covenants.  The  Company  was in  compliance  with  all
     financial covenants at fiscal 2004 year-end. The Agreement was also used to
     support  letters of credit and bankers  acceptances of  approximately  $3.8
     million as of January 31, 2004.

d.   Dependency  Upon Major Supplier - During the fiscal years ended January 31,
     2004,   2003,  and  2002;  the  Company  made  purchases  of  approximately
     $22,067,000,   $21,115,000,  and  $27,789,000  respectively,   from  Tajima
     Industries Ltd. ("Tajima"), the manufacturer of the embroidery machines the
     Company sells. This amounted to approximately 73, 74, and 85 percent of the
     Company's total  purchases for the years ended January 31, 2004,  2003, and
     2002,  respectively.  Purchases from Tajima are purchases  under letters of
     credit.  Outstanding letters of credit as of January 31, 2004 are reflected
     in trade acceptances payable on the balance sheet.

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

The second agreement (the "Southwest  Agreement") covers the six states acquired
in the Sedeco territory, became effective on February 21, 1997 and has a term of
five years.  This  agreement was renewed until February 22, 2004. The Company is
in the process of negotiating the Southwest Agreement,  however, there can be no
assurance  that an agreement can be reached on terms  acceptable to the Company.
The failure of the Company to obtain an extension of the Southwest  Agreement on
terms acceptable to the Company could result in a loss of the Company's right to
distribute  embroidery  machines  in the  territories  covered by the  Southwest
Agreement which could have a material adverse effect on the Company's  business,
operations and financial condition.

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").

Each of the  first  three  Tajima  Agreements  contains  language  that  permits
termination if the Company fails to achieve  certain  minimum sales quotas.  The
Company achieved the quota for fiscal 2004.

The West Coast  Agreement has a term of five years.  This agreement was renewed.
until  February 21, 2004 Tajima may  terminate  the West Coast  Agreement or its
exclusivity on 30 days' written notice or upon a material  change in the current
Class B shareholders  in which case, the West Coast  Agreement can be terminated
earlier. The Company has satisfied its obligations to Tajima under the agreement
for the fiscal year 2004. The Company is in the process of negotiating  the West
Coast  Agreement,  however,  there can be no assurance  that an agreement can be
reached on terms acceptable to the Company. The failure of the Company to obtain
an extension  of the West Coast  Agreement  on terms  acceptable  to the Company
could result in a loss of the Company's right to distribute  embroidery machines
in the  territories  covered  by the West  Coast  Agreement  which  could have a
material  adverse  effect on the Company's  business,  operations  and financial
condition.

e.   Purchase  Commitments  - The  Company  entered  into a three  year  minimum
     purchase  commitment  with Pulse under which the  Company is  obligated  to
     purchase  $100,000 of software  each month.  The  commitment  was effective
     November 1, 2002 and runs until  October 31,  2005.  As of January 31, 2004
     there was $2.1 million remaining under this commitment.


16.      GOODWILL IMPAIRMENT

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