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. The current economic environment has resulted in lower consumer confidence and lower sales. This trend may lead to further reduced consumer spending, which could affect our net sales and our profitability.

Company Overview

The Company, founded in 1968, is a leading provider of equipment and education and support services to the decorated apparel industry. The Company represents the decorated apparel industry's leading brands including Tajima embroidery equipment, MHM screen printing equipment, SEIT textile bridge lasers, Pulse Microsystems digitizing and design software, Kornit and Mimaki digital printers. 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 Tajima USA, Inc. ("TUI"), screen printing machines manufactured by MHM, textile laser machines manufactured by SEIT, digital printer manufactured by Kornit and Mimaki as well as a wide variety of supplies and accessories.

On August 4, 2008, the Company acquired 80% of the outstanding equity interest in U. S. Graphic Arts, Inc. ("U.S. Graphics") pursuant to a Share Purchase and Sale Agreement. In connection with, and as is condition to the acquisition, Graphic Arts Acquisition Corporation, a wholly-owned subsidiary of the Company, purchased certain outstanding indebtedness of U.S. Graphics and agreed, under certain circumstances, to make further advances to U. S. Graphics. U. S. Graphics develops and manufactures digital inkjet printers for the worldwide decorated apparel industry.

The current economic environment has resulted in lower consumer confidence and lower sales. This trend may lead to further reduced consumer spending, which could affect our net sales and our future profitability. Therefore, we have taken cost reduction actions to address the uncertainty posed by the current economic conditions. The Company is also seeking a new revolving line of credit.

The Company is and has been affected by the fluctuating value in foreign exchange of the US dollar versus the Yen resulting in dollar price pressure for machine sales. Most Japanese based equipment competitors in the industry (including the Company) have faced difficulty as a result of the fluctuation in the exchange rate.

The following table presents certain income statement items expressed as a percentage of total revenue for the years ended December 31, 2008 and 2007.

                                     2008    2007

Net sales                             100%    100%
Cost of sales                        69.8%   62.6%
Operating expenses                   46.7%   33.8%
Interest expense                      0.1%    0.0%
Other expense (income), net          -0.4%   -0.7%
Income (loss) before income taxes   -16.3%    4.3%
Income tax provision                  0.0%    0.3%
Net Income (loss)                   -16.3%    4.0%

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 are likely to differ from those estimates, and such differences may be material to our financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances.

Critical Accounting Policies

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

Revenue Recognition - The Company distributes embroidery, screenprinting and laser 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 2008 and 2007, most sales of new equipment did not require installation as a substantive part of sales, and accordingly, the Company recorded its sales at the time the machinery was shipped. Service revenues (which are not material) and costs are recognized when services are provided. Sales of software are recognized when shipped since no post-contract or support obligations remain. Sales of parts and supplies are recognized when shipped.

Identifiable Intangible Assets - Our definite lived intangible assets are tested under FAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" when impairment indicators are present. An undiscounted model is used to determine if the carrying value of the asset is recoverable. If not, a discounted analysis is done to determine the fair value. We engage a valuation analysis expert to prepare the models and calculations used to perform the tests, and we provide them with estimates regarding the expected growth and performance for future years.

Changes in the assumptions used could materially impact our fair value estimates. Assumptions critical to our fair value estimates are: (i) discounted rate used to derive the present value factors used in determining the fair value of the trademarks and customer lists; (ii) royalty rates used in our trademark valuation; (iii) projected average revenue growth rates used in the trademark and customer list models; and (iv) projected long-term growth rates used in the derivation of terminal year values. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.

The 2008 impairment charge to identifiable intangible assets of $845,000 relates to the customer list of U.S. Graphics, which was primarily the result of a decrease in the projected revenue derived from repeat customers, especially due to poor performance in early 2009. At December 31, 2008, after the impairment charge, we had identifiable intangible assets of approximately $481,000.

As indicated above, the method to compute the amount of impairment incorporates quantitative data and

qualitative criteria including new information that can dramatically change the decision about the valuation of an intangible asset in a very short period of time.

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. The Company maintains a lien on its equipment sales until the required payment is made.

Inventories - Inventories are valued at the lower of cost or market. Cost is determined using the First-in, first-out weighted average cost method for supplies and parts and specific cost for embroidery and screenprinting 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 provides a five-year limited warranty for its embroidery machines and a one-year limited warranty for its screenprinting, textile lasers and digital printing 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.

Stock Based Compensation - The Company accounts for share-based compensation cost in accordance with Statement of Financial Standards No.
123(R), "Share-Based Payment". The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The compensation cost is recognized over the service period which is usually the vesting period of the award. For the years ended December 31, 2008 and 2007, the Company recognized $353,000 and $759,000, respectively, of non-cash compensation expense included in Selling, General and Administrative expense in the Consolidated Statement of Operations. The Company used the Black-Scholes valuation model. This option pricing model requires the impact of highly subjective assumptions including the expected lives, volatility, risk free rate & expected dividend rate. It also requires the Company to estimate for forfeitures.

2008 as Compared to 2007

Net sales. Net sales for 2008 were $42.5 million, a decrease of $10.1 million, or 19.2% compared to $52.6 million for 2007. The decrease in sales volume 2008 is mainly attributable to the decrease in sales volume of $14.3 million from Tajima embroidery equipment, a $0.6 million decrease in screenprinting equipment, and a decrease of $0.8 million from software sales. Offsetting these products were increases in SEIT textile lasers of $0.8 million, Kornit and Mimaki digital printers of $1.0 million, and sales from U. S Graphic's of $4.2 million from their T-Jet digital printer and ancillary products. All other product categories combined for a decrease of

$0.3 million. There are no major customers who exceed 10% of revenues in either period.

Cost of sales. For 2008, cost of sales decreased $3.2 million or 9.7%, from $32.9 million in 2007 to $29.7 million in 2008. The decrease was primarily the result of $7.6 million in Tajima embroidery machines, $0.7 million in MHM screenprinting equipment. Offsetting the increase was a $3.8 million increase from U. S. Graphic's, $1.0 million from Kornit and Mimaki digital printing equipment, $0.6 million in SEIT textile lasers. All other product categories resulted in a net decrease of $0.2 million. Included in cost of sales for 2008 and 2007 was a currency gain of $177,000 and $43,000 respectively. The Company's gross margin decreased for 2008 to 30.2%, as compared to 37.4% for 2007. The reduction in gross margin was a result of reduced selling prices and higher product costs. For the year ended December 31, 2008 as compared to the year ended December 31, 2007, the Company experienced a decrease in gross margin dollars primarily from embroidery machines of $6.7 million, and from software sales of $0.8 million. These were offset by increases in gross margin dollars from U. S. Graphic's of $0.4 million, from MHM screenprinting machines of $0.1 million, and from SEIT Textile lasers of $0.2 million and $0.2 million from Kornit and Mimaki digital printers. All other product categories combined resulted in a total gross margin decrease of $0.2 million. The fluctuation of the dollar against the yen, which is the currency the Company's embroidery machines are priced in, has affected and is likely to continue to affect the Company's machine sales pricing competitiveness. Embroidery machinery prices have changed in US dollars due to these exchange rate fluctuations. Some, but not, all of the Company's competitors face similar circumstances.

Operating Expenses. For 2008, overall operating expenses increased $2.1 million or 11.8%, from $17.8 million in 2007 to $19.9 million for 2008. Selling, general and administrative expenses associated with the Company's ongoing operations increased $0.8 million, or 4.4% to $19.0 million for 2008 from $18.2 million for 2007. The increase in selling, general and administrative expenses are attributable to increased marketing costs associated with adding three new digital printing products of $0.2 million, increased depreciation and amortization associated with implementing a new Enterprise Resource Planning ("ERP") and Customer Relationship Manangement ("CRM") system of $0.1 million and $2.6 million in operating expenses from U.S Graphics. These increases were partially offset by decreases in salaries and commissions of $1.2 million, reduction of professional fees of $0.3 million and all other items netting to a $0.6 million decrease. Included in 2008 operating expenses was an impairment charge for $845,000, related to the impairment of the Customer List from U.S. Graphics. Included in 2007 were approximately $0.9 million in bonus costs and the recognition of $450,000 in income associated with the settlement agreement with Sheridan Square Entertainment.

Interest Expense. Interest expense for 2008 was $63,000 as compared to $12,000 for 2007. The increased interest expense relates to financing costs primarily from U.S. Graphics.

Other (Income) Expense. Other income for 2008 was $190,000 of other income as compared to $357,000 in 2007. In both 2008 and 2007 this was primarily due to lower cash balances at lower interest rates resulting in lower interest income.

Income Tax Provision. The income tax provision reflects an effective tax rate of 0.0% for 2008 as compared to an effective tax rate of 7.1% for 2007. The difference of the above rates to the federal statutory rate are a result of adjustments for state income taxes and permanent differences offset by the valuation allowance established on deferred tax assets since the Company cannot determine the future utilization of those assets.

Net Income. The net loss for 2008 was $6.9 million as compared to net income for year 2007 was $2.1 million, a change of $9.0 million.

The Company's working capital decreased $8.4 million or 44.2% to $10.6 million at December 31, 2008 from $19.0 million at December 31, 2007. This decrease was primarily the result of decreased operating results.

During 2008, the Company's cash decreased $9.5 million or 66.0% to $4.9 million from $14.4 million at December 31, 2007. Cash used in operating activities in calendar 2008 was $7.5 million. Of these amounts, $2.3 million resulted from the unrestricting of cash used to collateralize a standby letter of credit, $9.8 million was used in other operating activities including the paydown of accounts payable and the purchase of inventory.

Cash used in investing activities consisted of capital expenditures of $1.4 million which is from the investment in a new CRM and ERP system. Cash used in financing activities was $0.5 million primarily relating to the payoff of acquired debt.

Revolving Credit Facility and Borrowings

The Company does not currently have a credit facility as it believes it has sufficient cash to fund current working capital needs. The Company, at this time, does intend to enter into a new revolving line of credit.

Future Capital Requirements

The Company believes its existing cash and funds generated from operations will be sufficient to meet its working capital requirements. Working capital requirements at the Company's subsidiary, U.S. Graphics, is primarily dependant on a revolving note payable with its ultimate parent. If U.S. Graphics cannot sustain the facility, U.S. Graphics will have working capital deficiencies.

Capital expenditures are expected to be immaterial.

Backlog and Inventory

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

Inflation

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

Off Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB provided a one-year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption of SFAS No. 157 did not have a material impact on our results of operations or our financial position. For 2008, SFAS 157 had no impact because the Company does not have any financial assets and liabilities that get marked to market on a recurring basis.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which requires an acquirer to do the following:
expense acquisition related costs as incurred; to record contingent consideration at fair value at the acquisition date with subsequent changes in fair value to be recognized in the income statement; and any adjustments to the purchase price allocation are to be recognized as a period cost in the income statement. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The adoption of SFAS 141R will effect the accounting for future acquisitions, if any.

In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51." This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective prospectively, except for certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. The adoption of FASB No. 160 is not expected to have a material impact on our results of operations or our financial position.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.