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

                                   FORM 10-K/A
                                (AMENDMENT NO. 1)

[X]      Annual  Report  Pursuant  to  Section  13 or  15(d)  of The  Securities
         Exchange Act of 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

[_]      Transition  Report  Pursuant  to Section 13 or 15(d) of the  Securities
         Exchange Act of 1934

                         Commission file number 1-13669

                              TAG-IT PACIFIC, INC.
             (Exact Name of Registrant as Specified in Its Charter)

            DELAWARE                                           95-4654481
(State or Other Jurisdiction of                             (I.R.S. Employer
 Incorporation or Organization)                            Identification  No.)

                         21900 BURBANK BLVD., SUITE 270
                        WOODLAND HILLS, CALIFORNIA 91367
               (Address of Principal Executive Offices) (Zip Code)

                                 (818) 444-4100
              (Registrant's Telephone Number, Including Area Code)

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

     TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
     -------------------              -----------------------------------------
COMMON STOCK, $.001 PAR VALUE                  AMERICAN STOCK EXCHANGE

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

                                      NONE

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.

                                 Yes [_] No [X]

Indicate  by check mark if the  registration  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.

                                 Yes [_] No [X]

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 past 90 days.

                                 Yes [X] No [_]

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

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer or a  non-accelerated  filer (as defined in Rule 12b-2 of the
Exchange Act).

Large accelerated filer [_]  Accelerated filer [_]  Non-accelerated filer [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act).          Yes [_] No [X]

At June 30, 2006 the aggregate market value of the voting and non-voting  common
stock held by  non-affiliates  of the registrant was  $12,147,000.  At April 10,
2007 the issuer had 18,466,433 shares of Common Stock,  $.001 par value,  issued
and outstanding.


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                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
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                                EXPLANATORY NOTE

This  Amendment  No. 1 to Form 10-K on Form  10-K/A  (this  "Amendment")  amends
Tag-It Pacific, Inc.'s (the "Company") Annual Report on Form 10-K for the fiscal
year ended December 31, 2006,  originally filed on April 12, 2007 (the "Original
Filing").  The  Company is filing  this  Amendment  to include  the  information
required by Part III and not included in the Original Filing as the Company will
not  file  its  definitive  proxy  statement  within  120 days of the end of the
Company's fiscal year ended December 31, 2006.

Except as  described  above,  no other  changes  have been made to the  Original
Filing. This Amendment continues to speak as of the date of the Original Filing,
and the Company has not updated the disclosures contained therein to reflect any
events which occurred at a date subsequent to the filing of the Original Filing.
As a result  of  these  amendments,  we are  also  filing  as  exhibits  to this
Amendment the  certifications  pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Because no financial statements are contained within this Amendment, we
are not including  certifications  pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. In this  Amendment,  unless the context  indicates  otherwise,  the
terms  "Company,"  "we," "us," and "our" refer to Tag-It Pacific,  Inc., and its
subsidiaries.


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                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  following  table  sets  forth the  name,  age and  position  of each of our
executive officers and directors as of April 16, 2007.

NAME                           AGE       POSITION
----                           ---       --------
Stephen P. Forte.........       40       Chief Executive Officer and Director
Mark  Dyne (1)...........       46       Chairman of the Board of Directors
Colin Dyne (1)...........       44       Vice Chairman of the Board of Directors
Jonathan Burstein (2)....       40       Director
Brent Cohen..............       48       Director
Joseph Miller............       43       Director
Raymond Musci ...........       46       Director
William Sweedler.........       40       Director
Susan White..............       57       Director
Lonnie D. Schnell........       58       Chief Financial Officer
Wouter van Biene.........       58       Chief Operating Officer

         (1) Colin Dyne and Mark Dyne are brothers.
         (2) Jonathan Burstein is Colin Dyne's and Mark Dyne's brother-in-law.


CLASS I DIRECTORS: TERMS EXPIRING IN 2007

JOSEPH MILLER                       Mr.  Miller  has  served  on  the  Board  of
                                    Directors  since June 2005.  Since 2003,  he
                                    has been a  Managing  Director  of  Europlay
                                    Capital  Advisors,  LLC, a merchant  banking
                                    and advisory  firm.  From 1998 to 2003,  Mr.
                                    Miller  was  a  Senior  Vice   President  at
                                    Houlihan  Lokey  Howard & Zukin,  a  leading
                                    middle-market investment bank.. From 1994 to
                                    1998,   Mr.   Miller   served  as  the  Vice
                                    President,    Corporate    Development   for
                                    Alliance     Communications     Corporation,
                                    Canada's  leading  independent  producer and
                                    distributor  of  filmed  entertainment.  Mr.
                                    Miller has  bachelor's  degree in  Economics
                                    and   Business   from  the   University   of
                                    California, Los Angeles

                                    MEMBER: AUDIT COMMITTEE


                                       1
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BRENT COHEN                         Mr.   Cohen  has  served  on  the  Board  of
                                    Directors  since 1998.  Mr. Cohen has served
                                    as Chief Executive Officer and a director of
                                    Dovebid Inc.  since  August 2005.  Mr. Cohen
                                    served as President  and was a member of the
                                    Board  of  Directors   of  First   Advantage
                                    Corporation  (formed  by  the  merger  of US
                                    Search   and   First   American    Financial
                                    screening companies) from June 2003 to 2005.
                                    Mr.  Cohen  served as Chairman of the Board,
                                    President and Chief Executive  Officer of US
                                    Search from  February  2000 until June 2003.
                                    Mr. Cohen previously held various management
                                    positions in both the management  consulting
                                    and  auditing  practice  of  Arthur  Young &
                                    Company (now Ernst & Young). Mr. Cohen holds
                                    a Bachelor  of Commerce  degree,  a Graduate
                                    Diploma  in  Accounting  and an MBA from the
                                    University of Cape Town in South Africa.  He
                                    is also a chartered accountant.

                                    MEMBER:    COMPENSATION,    NOMINATING   AND
                                    GOVERNANCE COMMITTEES

WILLIAM SWEEDLER                    Mr.  Sweedler  has  served  on the  Board of
                                    Directors   since  2006.   He  is  presently
                                    Chairman & CEO of Windsong Allegiance Group,
                                    a diversified brand management and operating
                                    company that specializes in the acquisition,
                                    development,  licensing,  and  comprehensive
                                    creative   management  of  consumer  branded
                                    intellectual  property. The company owns and
                                    licenses  the  brands,  Como  Sport,  Calvin
                                    Klein Golf, Joseph Abboud Golf, and PRX. Mr.
                                    Sweedler  previously  served as  President &
                                    CEO of Joe Boxer, a wholly owned division of
                                    the Iconix  Brand  Group  (NASDAQ:  ICON) of
                                    which he was  Executive  Vice  President and
                                    member of the Board of Directors during 2005
                                    to June 2006.  Prior to Mr. Sweedler joining
                                    Iconix Brand  Group,  he was CEO & President
                                    of Windsong  Allegiance  Apparel  Group from
                                    2001 to 2005.  The company  owned,  managed,
                                    and licensed the brands Joe Boxer, Hathaway,
                                    New Frontier, Pivot Rules, Alexander Julian,
                                    Geoffrey Beene, Ron Chereskin,  and Hawaiian
                                    Tropic.  In 1995, Mr.  Sweedler  co-founded,
                                    Windsong,   Inc.,  a  full  service  apparel
                                    operating  and marketing  company.  Prior to
                                    Windsong,  he worked as a  Regional  Account
                                    Manager at Polo Ralph  Lauren.  He graduated
                                    from Babson College with a B.S. in Finance &
                                    Investments  in  1988.  He has  served  as a
                                    public  director  at Iconix  Brand Group and
                                    Bank of Westport as well as numerous private
                                    organizations.

                                    MEMBER: AUDIT AND COMPENSATION COMMITTEES


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CLASS II DIRECTORS: TERMS EXPIRING IN 2008

STEPHEN P. FORTE                    Mr. Forte has served as our Chief  Executive
                                    Officer since October 2005. Prior to joining
                                    us Mr.  Forte  served as a principal  at the
                                    Forte  Group,  LLC, a  business  development
                                    consulting  company  founded by Mr. Forte in
                                    February of 2005, which focuses on assisting
                                    U.S.  companies expand business overseas and
                                    foreign  corporations  expand their business
                                    in the U.S.  Prior  to  founding  the  Forte
                                    Group,  Mr.  Forte  served as  President  of
                                    Ascendent   Telecommunications,    Inc.,   a
                                    premier  voice  mobility  company,  which he
                                    founded in 1999. Before launching Ascendent,
                                    Mr.  Forte  founded  Travelers  Telecom (aka
                                    Wilshire   Cellular)   in  1993,  a  leading
                                    cellular   rental   provider   and  wireless
                                    carrier for short term users and government.
                                    Mr. Forte  earned a  bachelor's  degree from
                                    the University of Southern California and an
                                    MBA from George  Washington  University.  He
                                    currently serves on the Board for the School
                                    of   Business   at  The  George   Washington
                                    University,  and  serves  as a mentor at the
                                    Marshall   School   of   Business,   at  the
                                    University of Southern California.

SUSAN WHITE                         Ms.   White  has  served  on  the  Board  of
                                    Directors  since  June 2005.  Ms.  White has
                                    served  as  Chief   Executive   Officer  and
                                    President of Brand Identity Solutions,  LLC,
                                    a   branding,    marketing   and   licensing
                                    consulting  company,  since 1984.  Ms. White
                                    has also served as Chief  Executive  Officer
                                    and   President  of   Whitespeed,   LLC,  an
                                    Internet  design,   branding  and  marketing
                                    company,   since   2000.   Ms.   White  also
                                    previously  served as Director of  Marketing
                                    and  Advertising  Worldwide for Warnaco from
                                    November 1997 through August 1999. Ms. White
                                    received a BA from Bay State College.


JONATHAN BURSTEIN                   Mr. Burstein served as our Vice President of
                                    Operations from 1999 until January 2007, and
                                    has served on our Board of  Directors  since
                                    1999.  During this period,  Mr. Burstein has
                                    been  responsible  for many of our  internal
                                    operations,  including logistics, purchasing
                                    and  managing  key  customer  relationships.
                                    From  1987  until  1999,  Mr.  Burstein  was
                                    responsible for managing many of our largest
                                    customer  accounts.  Mr. Burstein has served
                                    as our Secretary beginning November 2004.

CLASS III DIRECTORS: TERMS EXPIRING IN 2009

MARK DYNE                           Mr. Dyne has served as Chairman of the Board
                                    of Directors  since 1997. Mr. Dyne currently
                                    serves as the Chief  Executive  Officer  and
                                    the  Managing  Partner of  Europlay  Capital
                                    Advisors,   LLC,  a  merchant   banking  and
                                    advisory firm. Mr. Dyne previously served as
                                    Chairman and Chief Executive Officer of Sega
                                    Gaming   Technology  Inc.  (USA),  a  gaming
                                    company,  and Chairman  and Chief  Executive
                                    Officer of Virgin Interactive  Entertainment
                                    Ltd.,  a  distributor  of computer  software
                                    programs  and video  games  based in London,
                                    England. Mr. Dyne was a founder and director
                                    of Packard Bell NEC Australia  Pty.  Ltd., a
                                    manufacturer  and  distributor  of  personal
                                    computers   through  the   Australian   mass
                                    merchant  channel,  and he was a founder and
                                    former  director of Sega Ozisoft Pty Ltd., a
                                    leading    distributor   of    entertainment
                                    software in both Australia and New Zealand.

                                    MEMBER: NOMINATING AND GOVERNANCE COMMITTEES


                                       3
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COLIN DYNE                          Currently,  Mr. Dyne serves as Vice Chairman
                                    of the Board of Directors.  Mr. Dyne founded
                                    Tag-It,  Inc., one of our  subsidiaries,  in
                                    1991 with his father,  Harold Dyne. Mr. Dyne
                                    served as our President  from  inception and
                                    as our Chief Executive  Officer from 1997 to
                                    2005. Before founding Tag-It,  Inc. in 1991,
                                    Mr. Dyne worked in numerous positions within
                                    the stationery products industry,  including
                                    owning  and  operating   retail   stationery
                                    businesses    and   servicing   the   larger
                                    commercial    products    industry   through
                                    contract stationery and printing operations.

RAYMOND MUSCI                       Ray Musci has  served as a  Director  of the
                                    Company since June 2005. Mr. Musci serves as
                                    a  Director  and  President  of  MPLC,  Inc.
                                    (OTCBB:MPNC)  , a  publicly  traded  company
                                    that  develops,  publishes  and  distributes
                                    mobile entertainment  services and products.
                                    From  October  1999 to June 2005,  Mr. Musci
                                    served as the President and Chief  Executive
                                    Officer    and   a    director    of    BAM!
                                    Entertainment,   Inc.,  a  publicly   traded
                                    company   that   develops,   publishes   and
                                    distributes  entertainment software products
                                    and video games.  Mr. Musci currently serves
                                    as   a   director   of   Brilliant   Digital
                                    Entertainment,   Inc.,  a  publicly   traded
                                    corporation (OTCBB:  BDEI). From May 1990 to
                                    July   1999,   Mr.   Musci   served  as  the
                                    President,  Chief Executive Officer and as a
                                    director of Infogrames  Entertainment,  Inc.
                                    (formerly Ocean of America, Inc.), a company
                                    that  develops,  publishes  and  distributes
                                    software products. Mr. Musci also previously
                                    served as a director of Ocean International,
                                    Ltd.,  the  holding   company  of  Ocean  of
                                    America, Inc. and Ocean Software,  Ltd., and
                                    as Executive Vice President/General  Manager
                                    of Data East USA, Inc., a subsidiary of Data
                                    East Corp., a Japanese company.

                                    MEMBER: AUDIT AND COMPENSATION COMMITTEES


OTHER EXECUTIVE OFFICERS

LONNIE D. SCHNELL                   Mr.  Schnell  joined the  Company in January
                                    2006 as our  Chief  Financial  Officer.  Mr.
                                    Schnell  served as Vice President of Finance
                                    for   Capstone   Turbine   Corporation,    a
                                    manufacturer   of   micro-turbine   electric
                                    generators  from 2004 until 2005.  From 2002
                                    to  2004  Mr.   Schnell   served   as  Chief
                                    Financial  Officer  of  EMSource,   LLC,  an
                                    electronic  manufacturing  service  company.
                                    Prior  to  EMSource,  in 2002,  Mr.  Schnell
                                    served as Chief Financial Officer of Vintage
                                    Capital Group,  a private equity  investment
                                    firm.  From 1999 through 2002,  Mr.  Schnell
                                    served  as  Chief   Financial   Officer   of
                                    Need2Buy,    Inc.   a   business-to-business
                                    internet    marketplace    for    electronic
                                    components.  Mr.  Schnell has  completed  an
                                    executive  MBA  program  with  the  Stanford
                                    University Executive  Institute,  and earned
                                    his  Bachelor  of Science in  Accounting  at
                                    Christian Brothers  University.  Mr. Schnell
                                    is  a  Certified   Public   Accountant  with
                                    experience in the  international  accounting
                                    firm of Ernst & Young LLP.


                                       4
<PAGE>


WOUTER VAN BIENE                    Mr. van Biene  joined  the  Company in March
                                    2006 as our Chief Operating  Officer.  Prior
                                    to  joining  us,  Mr.  van  Biene  served as
                                    Senior  Vice   President  -  Operations  for
                                    Ascendent    Telecommunications    Inc.,   a
                                    provider   of   mobile    telecommunications
                                    solutions,  from 2002 through February 2006.
                                    Prior to  joining  Ascendent,  Mr. van Biene
                                    served  from 2001 to 2002 as CFO of AbraComm
                                    Inc., a private,  high tech start up company
                                    in the  telecommunications  arena,  and from
                                    2000 to 2001 as Vice President of Operations
                                    of    CentreCom,     another    high    tech
                                    telecommunications   firm.  Earlier  in  his
                                    career,  Mr.  van  Biene  served  as  CIO of
                                    UStel, Inc, a regional Long Distance Carrier
                                    and as Founder/CFO of Consortium  2000, Inc.
                                    a telecommunications marketing organization.
                                    Prior to that,  Mr. van Biene  held  several
                                    executive  positions  over  a  fourteen-year
                                    time span at American Medical International,
                                    Inc. Mr. van Biene holds a Masters degree in
                                    Economics and Business  Administration  from
                                    the   University   of   Amsterdam   in   the
                                    Netherlands.


AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT

We currently have a separately  designated standing Audit Committee  established
in accordance with Section  3(a)(58)(A) of the Exchange Act. The Audit Committee
currently consists of Raymond Musci, Joseph Miller and William Sweedler,  all of
whom qualify as "independent  directors" as defined in the listing  standards of
the  American  Stock  Exchange  ("AMEX").  The Board of  Directors  has  further
determined that Mr. Musci is an "audit committee  financial expert" as such term
is defined in Item 401(h) of Regulation S-K promulgated by the SEC.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section  16(a) of the  Securities  Exchange Act of 1934  requires our  executive
officers,  directors,  and persons who own more than ten percent of a registered
class of our equity  securities  to file  reports of  ownership  and  changes in
ownership  with the  Securities  and Exchange  Commission.  Executive  officers,
directors and  greater-than-ten  percent stockholders are required by Securities
and  Exchange  Commission  regulations  to furnish the Company  with all Section
16(a)  forms  they file.  Based  solely on our review of the copies of the forms
received by us and written  representations  from certain reporting persons that
they have  complied  with the relevant  filing  requirements,  we believe  that,
during  the  year  ended  December  31,  2006,  all of our  executive  officers,
directors and greater-than-ten  percent  shareholders  complied with all Section
16(a)  filing  requirements,  except for the  following:  (i) one  Statement  of
Changes in Beneficial Ownership on Form 4, reporting one transaction,  was filed
late by Lonnie D. Schnell; (ii) one Statement of Changes in Beneficial Ownership
on Form 4, reporting one  transaction,  was filed late by Colin Dyne;  (iii) one
Statement  of  Changes  in  Beneficial   Ownership  on  Form  4,  reporting  one
transaction,  was filed  late by Mark  Dyne;  (iv) one  Statement  of Changes in
Beneficial  Ownership on Form 4,  reporting one  transaction,  was filed late by
Joseph Miller;  (v) one Statement of Changes in Beneficial  Ownership on Form 4,
reporting  one  transaction,  was  filed  late by  Raymond  Musci;  and (vi) one
Statement  of  Changes  in  Beneficial   Ownership  on  Form  4,  reporting  one
transaction,  was filed late by Brent Cohen;  (vii) one  Statement of Changes in
Beneficial  Ownership on Form 4,  reporting one  transaction,  was filed late by
William  Sweedler;  (viii) one Statement of Changes in  Beneficial  Ownership on
Form 4, reporting one  transaction,  was filed late by Susan A. White,  and (ix)
one  Statement  of Changes in  Beneficial  Ownership  on Form 4,  reporting  two
transactions, was filed late by Jonathan Burstein.


                                       5
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CODE OF ETHICS

We  have  adopted  a Code of  Ethical  Conduct  that  applies  to our  principal
executive officer,  principal financial officer, principal accounting officer or
controller,  or persons performing  similar  functions,  as well as to our other
employees and  directors  generally.  A copy of our Code of Ethical  Conduct was
filed as an exhibit to our Annual Report on Form 10-K.


                                       6
<PAGE>


ITEM 11.      EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Tag-It Pacific,  Inc.'s  executive  compensation  program is administered by the
Compensation Committee of our Board of Directors, or referred to in this section
as the "Committee." The Committee is responsible for, among other functions: (1)
reviewing and approving  corporate  goals and  objectives  relevant to the Chief
Executive  Officer's  compensation  and evaluating the  performance of the Chief
Executive  Officer  in  light of  these  corporate  goals  and  objectives;  (2)
reviewing and making  recommendations  to the Board of Directors with respect to
the   compensation  of  other  executive   officers;   (3)   administering   our
incentive-compensation  and  equity  based  plans,  which may be  subject to the
approval  of  the  Board  of  Directors;  and  (4)  negotiating,  reviewing  and
recommending the annual salary, bonus, stock options and other benefits,  direct
and  indirect,  of the Chief  Executive  Officer,  and other  current and former
executive officers. The Committee also has the authority to select and/or retain
outside counsel, compensation and benefits consultants, or any other consultants
to provide independent advice and assistance in connection with the execution of
its responsibilities.

Our named executive officers for 2006 were as follows:

         o        Stephen P. Forte, Chief Executive Officer;

         o        Wouter van Biene,  Chief  Operating  Officer  (appointed as of
                  March 1, 2006);

         o        Lonnie D. Schnell,  Chief Financial  Officer  (appointed as of
                  January 26, 2006);

         o        August DeLuca,  former Chief Financial Officer (resigned as of
                  January 20, 2006); and

         o        Jonathan   Burstein,   former   Executive  Vice  President  of
                  Operations (resigned as of January 1, 2007)

COMPENSATION PHILOSOPHY

Our executive  compensation  program is designed to drive company performance to
maximize  shareholder  value  while  meeting  our  needs  and the  needs  of our
employees. The specific objectives of our executive compensation program include
the following:

         o        ALIGNMENT  -  to  align  the  interests  of   executives   and
                  shareholders through equity-based compensation awards;

         o        RETENTION - to attract,  retain and motivate highly qualified,
                  high  performing  executives to lead our continued  growth and
                  success; and

         o        PERFORMANCE - to provide rewards commensurate with performance
                  by emphasizing  variable  compensation  that is dependant upon
                  the executive's achievements and company performance.

In order to  achieve  these  specific  objectives,  our  executive  compensation
program is guided by the following core principles:

         o        Rewards under  incentive  plans are based upon our  short-term
                  and longer-term  financial results and increasing  shareholder
                  value;

         o        Senior executive pay is set at sufficiently competitive levels
                  to attract,  retain and motivate highly  talented  individuals
                  who are necessary for us to achieve our goals,  objectives and
                  overall financial success;


                                       7
<PAGE>


         o        Compensation  of an  executive  is based on such  individual's
                  role,  responsibilities,  performance and  experience,  taking
                  into  account  the  desired  pay   relationships   within  the
                  executive team; and

         o        Our executive compensation program places a strong emphasis on
                  performance-based    variable    pay   to    ensure   a   high
                  pay-for-performance culture. Annual performance of our company
                  and the executive are taken into account in determining annual
                  bonuses that ensures a high pay-for-performance culture.

COMPENSATION ELEMENTS

We compensate senior executives through a variety of components,  including base
salary, annual incentives,  equity incentives, and benefits and perquisites,  in
order to provide our employees with a competitive overall compensation  package.
The mix and value of these components are impacted by a variety of factors, such
as  responsibility  level,  individual  negotiations  and performance and market
practice.  The purpose and key  characteristics for each component are described
below.

BASE SALARY

Base salary  provides  executives  with a steady income stream and is based upon
the executive's level of responsibility,  experience, individual performance and
contributions to our overall success.  Competitive base salaries, in conjunction
with other pay  components,  enable us to attract  and  retain  highly  talented
executives. The Committee typically sets base salaries for our senior executives
at market  levels.  However,  base salaries will vary in practice  based upon an
individual's performance, individual experience and negotiations and for changes
in job responsibilities.

ANNUAL INCENTIVE BONUSES

Annual  incentive  bonuses  are  a  variable   performance-based   component  of
compensation.  The primary  objective of an annual  incentive bonus is to reward
executives  for  achieving  corporate  and  individual  goals  and  to  align  a
meaningful  portion  of total pay  opportunities  for  executives  and other key
employees to the attainment of our company's performance goals. Annual incentive
awards are also used as a means to recognize the  contribution  of our executive
officers to overall financial, operational and strategic success. In conjunction
with our employment agreement with our Chief Executive Officer, we established a
Management  Incentive  Program  (the  "MIP")  which  provides  that  15%  of the
Company's  earnings before interest and taxes (or "EBIT") will be set aside each
fiscal  year for  payment to the CEO and such other  members  of  management  as
determined  by the Board of  Directors.  For 2006,  one-half  of the MIP fund is
allocable to the CEO, with the  distribution  of the balance to other members of
management as determined by the Board of Directors.  For 2007 and future periods
through 2009 (or until the CEO's employment agreement  terminates,  if earlier),
one-third of the MIP Fund is allocable to the CEO.

EQUITY INCENTIVES

Equity  incentives  are  intended  to align  senior  executive  and  shareholder
interests  by  linking  a  meaningful  portion  of  executive  pay to  long-term
shareholder  value  creation and  financial  success  over a multi-year  period.
Equity incentives are also provided to our executives to attract and enhance the
retention  of  executives  and  other  key  employees  and to  facilitate  stock
ownership by our senior executives.  The Committee also considers individual and
company performance when determining long-term incentive opportunities.

HEALTH & WELFARE AND 401-K BENEFITS

The named executive officers participate in a variety of retirement,  health and
welfare,  and paid time-off benefits designed to enable us to attract and retain
our workforce in a competitive marketplace. Health and welfare and paid time-off
benefits help ensure that we have a productive and focused workforce.


                                       8
<PAGE>


SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS

We do not have a formal plan for severance or separation  pay for our employees,
but we typically include a severance  provision in the employment  agreements of
our executive officers that is triggered in the event of involuntary termination
without cause or in the event of a change in control.

In order to preserve the morale and productivity and encourage  retention of our
key  executives  in the face of the  disruptive  impact of an actual or  rumored
change in control, we provide a bridge to future employment in the event that an
executive's  job is  eliminated as a  consequence  of a change in control.  This
provision is intended to align executive and  shareholder  interests by enabling
executives to consider corporate  transactions that are in the best interests of
the shareholders and other  constituents  without undue concern over whether the
transactions  may  jeopardize the  executive's  own  employment.  Our employment
agreements with our current named executive  officers provide a lump sum payment
and benefits  continuation  as a result of an  involuntary  termination  without
cause or for good reason following a change in control, plus accelerated vesting
of stock or option awards.

OTHER BENEFITS

In order to attract and retain highly qualified  executives,  we provide some of
our named executive officers, including our CEO, with automobile allowances that
we believe are consistent with current market practices. Our executives also may
participate  in a  401(k)  plan  under  which  we  match  contributions  for all
employees up to 100% of an employee's  contributions  to a maximum of $1,000 and
subject to any limitations imposed by ERISA.


OTHER FACTORS AFFECTING COMPENSATION

ACCOUNTING AND TAX CONSIDERATIONS

We  consider  the  accounting  implications  of all  aspects  of  our  executive
compensation program. Our executive  compensation program is designed to achieve
the most favorable  accounting (and tax) treatment  possible as long as doing so
does not conflict with the intended plan design or program objectives.

PROCESS FOR SETTING EXECUTIVE COMPENSATION

When making pay  determinations  for named  executive  officers,  the  Committee
considers  a variety of factors  including,  among  others:  (1) actual  company
performance  as  compared  to   pre-established   goals,   (2)  overall  company
performance  and size  relative  to industry  peers,  (3)  individual  executive
performance  and expected  contribution  to our future  success,  (4) changes in
economic  conditions and the external  marketplace  and (5) in the case of named
executive  officers,  other than Chief Executive Officer,  the recommendation of
our Chief Executive  Officer.  Ultimately,  the Committee uses its judgment when
determining how much to pay our executive officers. The Committee evaluates each
named executive officer's performance during the year against established goals,
leadership   qualities,   business   responsibilities,    current   compensation
arrangements and long-term  potential to enhance shareholder value. The opinions
of outside  consultants  are also  taken into  consideration  in  deciding  what
salary,  bonus,  long-term  incentives  and other benefits and severance to give
each  executive in order to meet our  objectives  stated  above.  The  Committee
considers,  compensation  information from data gathered from annual reports and
proxy  statements  from  companies  that  the  Committee   generally   considers
comparable to the Company;  compensation of other Company employees for internal
pay equity  purposes;  and  levels of other  executive  compensation  plans from
compensation  surveys.  The  Committee  sets  the pay for  the  named  executive
officers and other executives,  by element and in the aggregate,  at levels that
it  believes  are  competitive  and  necessary  to attract  and retain  talented
executives capable of achieving the Company's long-term objectives.


                                       9
<PAGE>


FACTORS CONSIDERED

In administering the compensation program for senior executives, including named
executive officers, the Committee considers the following:

         o        CASH  VERSUS  NON-CASH  COMPENSATION.  The  pay  elements  are
                  cash-based except for the long-term  incentive program,  which
                  is equity-based.  In 2006, the long-term incentive program for
                  the  named  executive  officers  consisted  entirely  of stock
                  grants and option awards that vest in installments  over a one
                  to four year period;

         o        PRIOR YEAR'S  COMPENSATION.  The committee considers the prior
                  year's bonuses and long-term  incentive  awards when approving
                  bonus payouts or equity grants;

         o        ADJUSTMENTS  TO  COMPENSATION.  On an  annual  basis,  and  in
                  connection with setting executive  compensation  packages, the
                  Committee reviews our operating income growth, earnings before
                  interest and taxes  growth,  earnings per share  growth,  cash
                  flow  growth,  operating  margin,  revenue  growth,  and total
                  shareholder  return  performance.  In addition,  the Committee
                  considers peer group pay practices, emerging market trends and
                  other  factors.  No  specific  weighing  is  assigned to these
                  factors  nor are  particular  targets  set for any  particular
                  factor.   Total  compensation  from  year  to  year  can  vary
                  significantly  based  on our  and the  individual  executive's
                  performance.  The base  compensation  of our  Chief  Executive
                  Officer increased at the end of 2006 from $275,000 annually to
                  $325,000 for 2007 in  accordance  with the  provisions  in his
                  employment contract.  Additionally,  in October 2006 our Chief
                  Financial  Officer's  base  compensation  was  increased  from
                  $185,000  annually to $225,000  as a  consequence  of superior
                  performance and individual contributions to achievement of the
                  Company's objectives.

         o        APPLICATION  OF  DISCRETION.  It is our policy and practice to
                  use discretion in  determining  the  appropriate  compensation
                  levels considering performance.


                                       10
<PAGE>


REPORT OF COMPENSATION COMMITTEE

The  Compensation  Committee of our Board of Directors  consists of Brent Cohen,
Raymond Musci and William  Sweedler.  The Compensation  Committee is responsible
for considering and making  recommendations to the Board of Directors  regarding
executive  compensation and is responsible for administering the Company's stock
option and executive incentive compensation plans.

The  Compensation  Committee  has reviewed and  discussed  with  management  the
Compensation  Discussion  and  Analysis  included in this  report.  Based on the
review and discussion with management, the Compensation Committee recommended to
the Board of Directors that the Compensation Discussion and Analysis be included
in the Company's Annual Report on Form 10-K.

COMPENSATION COMMITTEE
Brent Cohen
Raymond Musci
William Sweedler

April 30, 2007


                                       11
<PAGE>


EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following  table sets forth,  as to each person  serving as Chief  Executive
Officer  and Chief  Financial  Officer  during  2006,  and the three most highly
compensated  executive officers other than the Chief Executive Officer and Chief
Financial Officer who were serving as executive  officers at the end of the 2006
whose   compensation   exceeded  $100,000   (referred  to  as  "named  executive
officers"), information concerning all compensation earned for services to us in
all capacities for 2006.

<TABLE>
<CAPTION>
                                                                                      NON-EQUITY
                                                                                      INCENTIVE
                                                               STOCK     OPTION          PLAN          ALL OTHER
NAME AND                                   SALARY     BONUS     AWARDS    AWARDS     COMPENSATION    COMPENSATION      TOTAL
PRINCIPAL POSITION                 YEAR      ($)       ($)      ($)(5)    ($)(6)         ($)            ($)(7)          ($)
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
<S>                                <C>     <C>          <C>     <C>       <C>           <C>             <C>           <C>
Stephen P. Forte                   2006    275,000      -       77,468    73,995        90,050          35,497        552,010
  Chief Executive Officer
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Wouter van Biene (1)               2006    180,000      -         -       27,526        45,025           7,006        259,557
  Chief Operating Officer
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Lonnie D. Schnell (2)              2006    171,346      -         -       31,998        45,025          24,634        273,003
  Chief Financial Officer
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
August DeLuca (3)                  2006     19,372      -        1,071       -            -              7,868         28,311
  (former Chief Financial
  Officer)
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
Jonathan Burstein (4)              2006    240,000      -       28,516       -            -             33,031        301,547
  (former Executive V.P.)
--------------------------------- ------- ---------- --------- --------- ---------- --------------- ---------------- ----------
</TABLE>

   (1) Mr. van Biene was appointed  Chief Operating  Officer  effective March 1,
       2006.

   (2) Mr. Schnell was appointed Chief Financial  Officer  effective January 26,
       2006.

   (3) Mr. DeLuca  resigned as Chief  Financial  Officer  effective  January 20,
       2006.

   (4) Mr. Burstein resigned as Executive Vice President of Operations effective
       January 1, 2007.

   (5) The amounts in this column  represent the dollar  amounts  recognized for
       financial  statement  reporting  purposes in fiscal 2006 with  respect to
       stock  awards and options  granted in 2006 as well as prior  fiscal years
       under our 1997 Stock Plan in accordance  with SFAS No. 123R.  Pursuant to
       SEC rules, the amounts shown exclude the impact of estimated  forfeitures
       related to service-based vesting conditions.  For additional  information
       on the valuation  assumptions with respect to these grants, refer to note
       9 to our consolidated  financial  statements in our Annual Report on Form
       10-K for the year ended  December 31, 2006.  These amounts do not reflect
       the actual  value that may be  realized by the named  executive  officers
       which depends on the value of our shares in the future.

   (6) The amounts in this column  represent the dollar  amounts  recognized for
       financial  statement  reporting  purposes in fiscal 2006 with  respect to
       inducement  stock options  granted in 2006 in accordance  with SFAS 123R.
       For additional  information on the valuation  assumptions with respect to
       option grants,  including the options  granted in 2006, see note 9 to the
       consolidated  financial  statements in our Annual Report on Form 10-K for
       the year ended December 31, 2006. These amounts do not reflect the actual
       value that may be realized by the named executive  officers which depends
       on the value of our shares in the future.

   (7) All other compensation consists of the following (amounts in dollars):

<TABLE>
<CAPTION>
   ------------------------------- ------------- -------------- ------------- ------------- --------------
                                    Mr.  Forte   Mr. van Biene   Mr. Schnell    Mr.DeLuca    Mr. Burstein
   ------------------------------- ------------- -------------- ------------- ------------- --------------
<S>                                      <C>             <C>          <C>            <C>           <C>
   Health & medical insurance (a)        12,916          6,925        12,673         7,868         15,136
   ------------------------------- ------------- -------------- ------------- ------------- --------------
   Life & disability insurance (b)           81             81            81                        5,012
   ------------------------------- ------------- -------------- ------------- ------------- --------------
   Automobile allowances                 22,500                                                    12,883
   ------------------------------- ------------- -------------- ------------- ------------- --------------
   Consulting services (c)                                            11,880
   ------------------------------- ------------- -------------- ------------- ------------- --------------
       Total                             35,497          7,006        24,624         7,868         33,031
   ------------------------------- ------------- -------------- ------------- ------------- --------------
</TABLE>

   (a) Includes payments of medical premiums.
   (b) Includes executive and group term life insurance.
   (c) Represents fees for services provided prior to employment.


                                       12
<PAGE>


EXECUTIVE COMPENSATION

The 2006 compensation for our Chief Executive Officer was in accordance with our
employment  agreement  completed  with Mr.  Forte in March  2006.  The terms and
conditions established in this agreement were the result of our consideration of
our 2005 operating  performance,  our 2005  Restructuring and Strategic Plan and
current operating performance levels, as well as the compensation levels for our
previous CEO,  comparative  industry  compensation levels, and negotiations with
Mr. Forte. The base compensation was evaluated in conjunction with the long-term
equity  awards  and  annual  bonus   incentives  to  establish  a   compensation
arrangement  providing  a  substantial  incentive  for  the  achievement  of our
long-term  objectives and for adding  shareholder value.  Accordingly,  the base
compensation  was established  near minimum industry levels for the same role in
comparable companies,  and a long-term equity option of 900,000 shares of common
stock,   representing   approximately  4.9%  of  our  outstanding   shares,  was
established as an inducement to maximum  performance  achievements and increased
shareholder  values.  The option  grant was  established  to vest monthly over a
three-year term, after a minimum initial term of twelve months, to coincide with
the  objectives  of the Company's  Strategic  Plan. In addition to the long-term
equity incentive, a cash incentive, the MIP fund, was established as provided in
Mr.  Forte's  employment  agreement  setting aside 15% of the Company's EBIT for
annual bonus awards to Mr.  Forte and the other senior  executives.  One-half of
this MIP Fund was allocated to Mr. Forte in 2006 and is shown in the table above
as non-equity  incentive plan compensation,  and one-third of the MIP fund is to
be  allocated  to Mr. Forte in 2007  through  2009.  In addition,  Mr. Forte was
provided a stock  grant of  135,135  shares,  and an  additional  option  grant,
vesting in one year, for 135,135 shares of common stock, in consideration of his
significant  contributions in the initial  development and implementation of the
Company's  2005  Restructuring  Plan,  and  the  development  of  the  Company's
Strategic Plan.

Messrs.  van Biene and Schnell were employed early in 2006 at the recommendation
of the  Chief  Executive  Officer  to  assist  in  the  completion  of the  2005
Restructuring and Strategic Plan. The terms and conditions  established in their
employment  agreements  were also the  result of our  consideration  of our 2005
operating  performance,  our 2005  Restructuring  and Strategic Plan and current
operating  performance  levels, as well as our previous  compensation levels for
similar  positions,  comparative  industry  compensation  levels, and individual
negotiations.  The base  compensation  was  evaluated  in  conjunction  with the
long-term  equity awards and annual bonus incentives to establish a compensation
arrangement  providing  a  substantial  incentive  for  the  achievement  of our
long-term  objectives and for adding  shareholder value.  Accordingly,  the base
compensation  for their positions was established  near minimum  industry levels
for the same role in comparable  companies,  and long-term equity  incentives in
the form of grants of options to  purchase  325,000  shares to Mr. van Biene and
400,000  shares to Mr.  Schnell,  were  established  as an inducement to maximum
performance  achievements  and increased  shareholder  values.  The options vest
monthly over a three-year  term for Mr. van Biene,  and a four-year term for Mr.
Schnell,  after a minimum  initial term of twelve  months,  to coincide with the
objectives  of the Company's  Strategic  Plan. In addition Mr. van Biene and Mr.
Schnell are  participants in the MIP fund  established by us as described above,
pursuant  to which we set aside 15% of our EBIT for annual  bonus  awards to the
CEO and the other senior  executives as approved by the Board of Directors.  The
payments allocated to Mr. van Biene and Mr. Schnell under the MIP fund are shown
in the summary compensation table as non-equity incentive plan compensation.

We  entered  into an  employment  agreement  with Mr.  Burstein  in  March  2006
providing  for base  compensation  of  $240,000,  and stock  options to purchase
425,000 shares of common stock, vesting monthly over three years after a minimum
initial term of twelve  months.  January 1, 2007, we and Mr.  Burstein  mutually
terminated this employment  agreement in exchange for a consulting  agreement as
further described below in this report under "Employment Agreements, Termination
of Employment and Change of Control Arrangements".


                                       13
<PAGE>


GRANTS OF PLAN-BASED AWARDS IN FISCAL 2006

The following table provides  information  about  equity-awards  granted to each
named executive  officer in 2006 under our 1997 Stock Plan and inducement grants
made outside of the plan.

<TABLE>
<CAPTION>
                                                                   ALL OTHER       EXERCISE
                                                  ALL OTHER      OPTION AWARDS:     OR BASE                  GRANT DATE
                                                STOCK AWARDS:      NUMBER OF       PRICE OF      MARKET      FAIR VALUE
                                                  NUMBER OF        SECURITIES       OPTION      PRICE ON      OF OPTION
                          GRANT      APPROVAL     SHARES OF        UNDERLYING       AWARDS     GRANT DATE      AWARDS
NAME                     DATE(1)     DATE(1)      STOCK (#)       OPTIONS (#)     ($/SH) (2)   ($/SH) (2)      ($)(3)
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
<S>                      <C>         <C>           <C>              <C>              <C>          <C>          <C>
Stephen P. Forte         1/16/06     1/16/06       135,135             -               -          $0.37         50,000
                         1/16/06     1/16/06          -             135,135          $0.37        $0.37         27,468
                         1/16/06     1/16/06          -             900,000          $0.37        $0.37        187,515
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Wouter van Biene          3/1/06     1/26/06          -             325,000          $0.53        $0.50         98,552
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Lonnie D. Schnell        1/26/06     1/26/06          -             400,000          $0.59        $0.57        137,387
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
Jonathan Burstein        1/16/06     1/16/06          -             425,000          $0.37        $0.37         89,223
----------------------- ----------- ----------- --------------- ----------------- ------------ ------------ --------------
</TABLE>

(1)   The  grant  date of an  option  award  is the date  that the  compensation
      committee  fixes as the date the  recipient  is  entitled  to receive  the
      award.  The  approval  date is the date  that the  compensation  committee
      approves the award.

(2)   The exercise  price of option awards  differs from the market price on the
      date of grant.  The exercise price of options  granted in 2006 is equal to
      the average  closing sales prices of our common stock for the five trading
      days prior to and  including  the grant date, as reported on AMEX, , while
      the market  price on the date of grant is the closing  price of our common
      stock on that date.

(3)   The grant  date fair value is  generally  the  amount  the  company  would
      expense in its financial  statements over the award's service period,  but
      does not include a reduction for forfeitures.


Option  awards  granted to our  executive  officers are for a 10 year term,  and
generally  vest on a monthly  pro rata basis over a 3 or 4 year  period,  with a
12-month  delay  required  prior to the initial  vesting of any  shares.  Upon a
change of control or involuntary  termination  without cause, the vesting of all
options  granted to the named  executive  officers in 2006 is accelerated to the
date  of  termination,   as  described  below  under   "Employment   Agreements,
Termination of Employment and Change of Control Arrangements."


                                       14
<PAGE>


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2006

The following  table  provides  information  with respect to  outstanding  stock
options held by each of the named executive officers as of December 31, 2006

<TABLE>
<CAPTION>
                                          NUMBER OF SECURITIES
                                         UNDERLYING UNEXERCISED
                                                 OPTIONS
                                      ------------------------------    OPTION          OPTION
                                           (#)            (#)          EXERCISE       EXPIRATION
NAME                    GRANT DATE     EXERCISABLE   UNEXERCISABLE     PRICE ($)         DATE
---------------------- -------------- -------------- --------------- -------------- ---------------
<S>                      <C>             <C>          <C>                <C>          <C>
Stephen P. Forte          1/16/06        135,135           -             $0.37        1/16/2016
                          1/16/06        350,000      550,000 (1)        $0.37        1/16/2016
---------------------- -------------- -------------- --------------- -------------- ---------------
Wouter van Biene          3/1/06            -         325,000 (2)        $0.53         3/1/2016
---------------------- -------------- -------------- --------------- -------------- ---------------
Lonnie D. Schnell         1/26/06           -         400,000 (3)        $0.59        1/26/2016
---------------------- -------------- -------------- --------------- -------------- ---------------
Jonathan Burstein         1/16/06           -         425,000 (4)        $0.37        1/16/2016
                          4/11/03        35,000            -             $3.50         4/11/13
                         12/31/02        25,000            -             $3.63         12/31/12
                         11/08/01        15,000            -             $3.64         11/08/11
                         12/12/00        20,000            -             $3.75         12/12/10
                          4/10/00        15,000            -             $4.25         4/10/10
                          2/28/00        15,000            -             $4.63         2/28/10
                         12/20/99        20,000            -             $4.31         12/20/09
                         10/10/98        30,000            -             $1.30         10/10/08
---------------------- -------------- -------------- --------------- -------------- ---------------
</TABLE>

   (1) Mr. Forte's  options  become  exercisable at 25,000 shares per month over
       the next 22 months.

   (2) Mr. van Biene's options become  exercisable with regard to 108,333 shares
       on March 1, 2007 and then with respect to 9,028 shares per month over the
       next 24 months.

   (3) Mr. Schnell's options become exercisable with regard to 100,000 shares on
       January 26, 2007 and then with respect to 8,333 shares per month over the
       next 36 months.

   (4) Mr. Burstein's  options become  exercisable with regard to 141,667 shares
       on January 16, 2007 and then with respect to 11,806 shares per month over
       the next 24 months.


OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2006

The following table provides information with respect to vesting of stock during
the year ended December 31, 2006. There were no stock option exercises by any of
the named executive officers during 2006

                                           STOCK AWARDS
                                ------------------------------------
                                NUMBER OF SHARES    VALUE REALIZED
                                   ACQUIRED ON        ON VESTING
NAME                               VESTING (#)          ($)(1)
------------------------------- ------------------ -----------------
Stephen P. Forte                     135,135            50,000
------------------------------- ------------------ -----------------
Wouter van Biene                        -                 -
------------------------------- ------------------ -----------------
Lonnie D. Schnell                       -                 -
------------------------------- ------------------ -----------------
Jonathan Burstein                       -                 -
------------------------------- ------------------ -----------------

    (1) Represents  the number of shares  vested times the closing  price of our
       common stock on the vesting date as reported by AMEX.


                                       15
<PAGE>


EMPLOYMENT   AGREEMENTS,   TERMINATION  OF  EMPLOYMENT  AND  CHANGE  OF  CONTROL
ARRANGEMENTS

EMPLOYMENT AGREEMENTS

We have  entered  into  the  following  employment  agreements  with  our  named
executive officers.

On March 16,  2006,  we entered  into an  Executive  Employment  Agreement  with
Stephen  Forte,  pursuant  to which Mr.  Forte  serves  as our  Chief  Executive
Officer.  This employment  agreement has a term  continuing  though December 31,
2008,  which may be extended to December 31, 2009.  Pursuant to this  agreement,
Mr.  Forte  receives an annual base salary of $275,000 for 2006 and $325,000 for
each  subsequent  year of the term and will be  entitled  to  receive  an annual
incentive  bonus based upon our earnings before interest and taxes. In the event
that prior to the end of the term,  Mr.  Forte's  employment is terminated by us
"without  cause" (as defined in the  agreement),  by Mr. Forte for "good reason"
(as defined in the agreement) or due to Mr.  Forte's death or  disability,  then
Mr. Forte or his estate will be entitled to receive,  in addition to all accrued
salary,  (i)  severance  payments  equal  to Mr.  Forte's  base  salary  for the
remaining term of the agreement or, in the case of death or disability,  through
December 31, 2008,  (ii) a pro rated portion of the annual  incentive  bonus for
the year in which the termination  occurred,  (iii) full acceleration of vesting
of the options  issued to Mr. Forte pursuant to the agreement and (iv) continued
healthcare  coverage for Mr. Forte and his  dependents for the remaining term of
the agreement.  In connection with the employment agreement and as an inducement
to  employment,  we previously  granted Mr. Forte an option to purchase  900,000
shares  of our  common  stock,  which  vests  over a period of three  years.  In
addition, in lieu of $50,000 in cash compensation,  we granted Mr. Forte 135,135
shares of common stock and an option to purchase  135,135 shares of common stock
that vested in full on October 24, 2006.  All of these options will vest in full
upon a change of  control  of our  company or upon  termination  of Mr.  Forte's
employment without cause, for good reason or due to his death or disability.

On March 16,  2006,  we entered  into an  employment  agreement  with Wouter van
Biene,  pursuant to which Mr. van Biene serves as our Chief Operating Officer on
an "at-will" basis.  Pursuant to this offer letter, Mr. van Biene is entitled to
an annual  base  salary of  $225,000  and will be  eligible to receive an annual
incentive  bonus based upon our earnings before interest and taxes. In the event
that Mr. van Biene's  employment is terminated by us without "cause" (as defined
in the  agreement) or due to Mr. van Biene's death or  disability,  then Mr. van
Biene or his estate will be entitled to receive as severance, in addition to all
accrued salary,  (i) salary  continuation and continuation of coverage under our
group health plan for a period of six months if the  termination  occurs  during
the first  year of  employment,  a period of  twelve  months if the  termination
occurs during the second year of  employment  or a period of eighteen  months if
the  termination  occurs  after the second year of  employment,  and (ii) twelve
months  acceleration of vesting of all outstanding  options.  In connection with
the offer letter and as an inducement to employment,  we previously  granted Mr.
van Biene an option to purchase 325,000 shares of our common stock,  which vests
over a period of three years.  Upon a change of control of our  company,  50% of
Mr. van  Biene's  then-outstanding  unvested  stock  options  shall vest and the
remaining  unvested  options shall vest in full if Mr. van Biene is  terminated,
his position or base pay is reduced or he is required to relocate  within twelve
months following the change of control.

On March 16, 2006, we entered into an employment  agreement with Lonnie Schnell,
pursuant  to which  Mr.  Schnell  serves as our Chief  Financial  Officer  on an
"at-will"  basis.  Pursuant  to this offer  letter,  Mr.  Schnell is entitled to
receive an annual  base  salary of  $185,000  and will be eligible to receive an
annual incentive bonus based upon our earnings before interest and taxes. In the
event that Mr.  Schnell's  employment is  terminated  by us without  "cause" (as
defined in the agreement) or due to Mr. Schnell's death or disability,  then Mr.
Schnell or his estate will be entitled to receive as  severance,  in addition to
all accrued salary,  (i) salary  continuation and continuation of coverage under
our  group  health  plan  for a  period  of  six  months  and  (ii)  six  months
acceleration of vesting of all outstanding options. In connection with the offer
letter and as an inducement to employment,  we previously granted Mr. Schnell an
option to purchase 400,000 shares of our common stock, which vests over a period
of four years.  Upon a change of control of our  company,  50% of Mr.  Schnell's
then-outstanding  unvested  stock options shall vest and the remaining  unvested
options shall vest in full if Mr.  Schnell is  terminated,  his position or base
pay is reduced or he is required to relocate  within six months before or twelve
months following the change of control.


                                       16
<PAGE>


Effective January 1, 2007, we entered into a consulting  agreement with Jonathan
Burstein, previously our Executive Vice President of Operations. Under the terms
of the consulting  agreement,  Mr.  Burstein will provide  specified  consulting
services to us for a term of up to 24 months. As consideration for the services,
we will pay Mr.  Burstein  an amount of  $225,000  per annum plus an  additional
$3,333.33  per month for the  first 18 months of the term of the  agreement.  We
also agreed to provide Mr.  Burstein  with medical  benefits  and an  automobile
allowance  for a period of 18 months.  In  addition,  the  consulting  agreement
provides  that the  employment  offer  letter  previously  entered into with Mr.
Burstein on March 16, 2006, is terminated as of January 1, 2007. The termination
of the employment  offer letter was mutually agreed upon by both parties and Mr.
Burstein  will not be  entitled to receive any  severance  or other  benefits in
connection  with the  termination.  All  outstanding  stock  options held by Mr.
Burstein  will  continue to vest in  accordance  with their terms as long as Mr.
Burstein  continues  to  provide  services  to us or  serves  on  our  Board  of
Directors.

POTENTIAL SEVERANCE PAYMENTS

As described above, our employment  agreements with Messrs. Forte, van Biene and
Schnell  provide  for  severance  benefits  in the  event  that the  executive's
employment  is  terminated  due to  executive's  death or  disability  or by the
Company without  "cause" and, in the case of Mr. Forte,  for "good reason.." The
following  table sets forth  severance  payments and benefits that we would have
been  obligated  to pay to  Messrs.  Forte,  van Biene and  Schnell  assuming  a
triggering  event had occurred under each of their  respective  agreements as of
December 31, 2006:

<TABLE>
<CAPTION>
                                                        CONTINUATION OF        VALUE OF
                                                        CONTINUATION OF    ACCELERATION OF
                        CASH SEVERANCE    BONUS VALUE   HEALTH BENEFITS   VESTING OF EQUITY     TOTAL SEVERANCE
NAME                    PAYMENT ($)(1)      ($)(2)            ($)           AWARDS ($)(3)        BENEFITS ($)
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
<S>                        <C>              <C>              <C>               <C>                 <C>
Stephen P. Forte           565,847          90,050           16,415            566,500             1,238,812
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
Wouter van Biene           132,149             -              5,538            195,273               332,960
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
Lonnie D. Schnell          124,994             -              6,005            154,498               285,497
---------------------- ----------------- -------------- ----------------- ------------------- --------------------
</TABLE>

(1)   Includes   (i)  earned  and  unpaid  base  salary   through  the  date  of
      termination,  (ii) accrued but unpaid  vacation  and (iii) cash  severance
      payments based on the executive's salary payable in a lump sum or periodic
      payments as provided in the executive's employment agreement.

(2)   Includes (i) bonus amounts  under the MIP earned for the completed  fiscal
      year and (ii) a pro  rated  portion  of bonus  under  the MIP for  partial
      fiscal years prior to the termination date.

(3)   Based on the closing  price of our common  stock on  December  29, 2006 of
      $1.03, as reported by AMEX.


POTENTIAL CHANGE IN CONTROL PAYMENTS

As described above, our employment  agreements with Messrs. Forte, van Biene and
Schnell provide for accelerated  vesting of all or a portion of the options held
by such executives upon a change in control.  The following table sets forth the
change in control benefits that we would have been obligated to pay to our named
executive  officers assuming a change of control had occurred as of December 31,
2006:

<TABLE>
<CAPTION>
                      VALUE OF ACCELERATION OF VESTING OF EQUITY AWARDS ($)(1)
                     ---------------------------------------------------------
                                                    CHANGE IN CONTROL WITH
         NAME         CHANGE IN CONTROL ONLY (2)     ADDITIONAL TRIGGER (3)
-------------------- --------------------------- -----------------------------
<S>                           <C>                          <C>
Stephen P. Forte              556,500                      556,500
-------------------- --------------------------- -----------------------------
Wouter van Biene              167,375                      334,750
-------------------- --------------------------- -----------------------------
Lonnie D. Schnell             206,000                      412,000
-------------------- --------------------------- -----------------------------
</TABLE>

(1)   Based on the closing  price of our common  stock on  December  29, 2006 of
      $1.03, as reported by AMEX.


                                       17
<PAGE>


(2)   Upon a change in control,  (i) Mr. Forte is entitled to full  acceleration
      of currently  outstanding  options and (ii) Messrs.  van Biene and Schnell
      are each  entitled  to  accelerated  vesting  with  respect  to 50% of the
      unvested portion of outstanding options.

(3)   Messrs.  van Biene and Schnell are each entitled to full  acceleration  of
      vesting of the remaining unvested portion of all outstanding stock options
      if,  within in 12  months  following  the  change  in  control:  (i) he is
      terminated  by the  acquirer,  (ii) his position is reduced to less than a
      general manager  position or a vice president  level  position,  (iii) his
      base pay is reduced  below his  prevailing  base pay amount at the time of
      the change in control or (iv) he is asked to  relocate  to an office  more
      than 60 miles from his office prior to the change in control.


DIRECTOR COMPENSATION

The  general  policy  of  the  Board  of  Directors  is  that  compensation  for
independent directors should be a mix of cash and equity-based compensation.  We
do not pay  management  directors for Board service in addition to their regular
employee   compensation.   The  full  Board  of   Directors   has  the   primary
responsibility   for  reviewing  and   considering  any  revisions  to  director
compensation.

The  following  table  details the total  compensation  earned by the  company's
non-employee directors in 2006.

<TABLE>
<CAPTION>
                           FEES EARNED OR         OPTION          ALL OTHER
NAME                      PAID IN CASH ($)     AWARDS ($)(8)   COMPENSATION ($)     TOTAL ($)
------------------------ ------------------- ----------------- ---------------- ----------------
<S>                             <C>                  <C>             <C>             <C>
Mark Dyne (1)                    42,000              12,139           25,000          79,139
------------------------ ------------------- ----------------- ---------------- ----------------
Colin Dyne (2)                        -              12,139          335,000         347,139
------------------------ ------------------- ----------------- ---------------- ----------------
Brent Cohen (3)                  39,500              12,139                -          51,639
------------------------ ------------------- ----------------- ---------------- ----------------
Joseph Miller (4)                44,500              12,139                -          56,639
------------------------ ------------------- ----------------- ---------------- ----------------
Raymond Musci (5)                46,000              12,139                -          58,139
------------------------ ------------------- ----------------- ---------------- ----------------
William Sweedler (6)             18,583              12,033                -          30,616
------------------------ ------------------- ----------------- ---------------- ----------------
Susan White (7)                  30,500              12,139                -          42,639
------------------------ ------------------- ----------------- ---------------- ----------------
   Total                        221,083              84,867          360,000         665,950
------------------------ ------------------- ----------------- ---------------- ----------------
</TABLE>

(1)   As of December 31, 2006, Mr. Mark Dyne held options to purchase a total of
      323,000 shares.  The Other  compensation  consists of per diem fees earned
      for services rendered.

(2)   As of December 31,  2006,  Mr. Colin Dyne held options to purchase a total
      of 565,000shares.  The other compensation  consists of consulting fees for
      services rendered.

(3)   As of December  31,  2006,  Mr.  Cohen held options to purchase a total of
      125,000 shares.

(4)   As of December  31, 2006,  Mr.  Miller held options to purchase a total of
      60,000 shares.

(5)   As of December  31,  2006,  Mr.  Musci held options to purchase a total of
      60,000 shares.

(6)   As of December 31, 2006, Mr.  Sweedler held options to purchase a total of
      30,000 shares.

(7)   As of December  31,  2006,  Ms.  White held options to purchase a total of
      60,000 shares.

(8)   The amounts in this column  represent the dollar  amounts  recognized  for
      financial  statement purposes in fiscal 2006 with respect to stock options
      granted in 2006 as well as prior fiscal  years,  in  accordance  with SFAS
      123R. For additional information on the valuation assumptions with respect
      to option grants, including the options granted in 2006, see note 9 to the
      consolidated  financial  statements  in our Annual Report on Form 10-K for
      the year ended December 31, 2006.  These amounts do not reflect the actual
      value that may be realized by the named  executive  officers which depends
      on the value of our shares in the future.

Our policy is to pay non-employee directors $1,500 for their personal attendance
at any meeting of the Board of Directors,  $1,000 for their personal  attendance
at any committee  meeting,  and $500 for attendance at any telephonic meeting of
the Board of Directors or of a committee of the Board of Directors.  We also pay
non-employee  directors an annual  retainer of $20,000 for Board  service and an
additional retainer of $5,000 for service on each committee. The Chairman of the
Board  receives  an  annual  retainer  of  $25,000  for Board  service.  We also
reimburse  directors for their reasonable  travel expenses incurred in attending
board or committee meetings and pay non-employee  directors a per diem for board
services.


                                       18
<PAGE>


We do not have a formal  policy  with  regard to  option  grants to our Board of
Directors,  but we generally  follow a practice of granting an option for 30,000
shares of stock upon initial  appointment or election to the Board of Directors,
and  thereafter  issuing  annual  option grants to all  non-employee  members of
30,000 shares.

During 2006 and through March 31, 2007 we had a verbal  agreement with Mr. Colin
Dyne to provide  consulting  services  following his  resignation in 2005 as our
Chief Executive Officer.  For the year ended December 31, 2006, we paid Mr. Dyne
$275,000 annually for these services in addition to $60,000 in a cash settlement
of a prior stock  option  commitment.  We entered into a written  agreement  was
completed  with Mr. Dyne  effective  April 1, 2007 that  provides for  continued
consulting  services  through November 30, 2008 in exchange for a consulting fee
of $25,000 per month.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of our Board of Directors currently consists of Brent
Cohen,  Raymond Musci and William Sweedler.  No current executive officer of the
Company  has  served  as a member  of the  board of  directors  or  compensation
committee  of any  entity  for  which a  member  of our  Board of  Directors  or
Compensation Committee has served as an executive officer.


                                       19
<PAGE>


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

EQUITY COMPENSATION PLAN INFORMATION

         The following  table sets forth certain  information as of December 31,
2006 regarding  equity  compensation  plans (including  individual  compensation
arrangements) under which our equity securities are authorized for issuance:

<TABLE>
<CAPTION>
                                                                                   NUMBER OF SECURITIES
                                   NUMBER OF SECURITIES TO     WEIGHTED-AVERAGE    REMAINING AVAILABLE
                                   BE ISSUED UPON EXERCISE    EXERCISE PRICE OF    FOR FUTURE ISSUANCE
                                   OF OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS      UNDER EQUITY
                                     WARRANTS AND RIGHTS     WARRANTS AND RIGHTS   COMPENSATION PLANS
                                   -----------------------   -------------------   --------------------
<S>                                       <C>                      <C>                 <C>
Equity compensation plans
approved by security holders.....         3,452,635                $ 1.84              2,321,977
Equity compensation plans not
approved by security holders.....         2,868,813                $ 2.14                    -
                                   -----------------------   -------------------   --------------------
   Total.........................         6,321,448                $ 1.98              2,321,977
                                   =======================   ===================   ====================
</TABLE>

Options and warrants issued pursuant to equity  compensation  plans not approved
by security holders are summarized as follows:

      o     150,000  warrants  issued  in  conjunction  with  private  placement
            transaction in 2001 and 2002, are exercisable at $3.50 per share and
            expire at various date through February 2007.

      o     30,000  warrants  issued for services in 2004,  are  exercisable  at
            $4.29 per share and expire in July 2007.

      o     172,500  warrants  issued for services in 2003,  are  exercisable at
            $5.06 per share and expire in May 2008.

      o     572,818  warrants  issued for services in 2003,  are  exercisable at
            $4.74 per share and expire in December 2008.

      o     102,741  warrants  issued in  conjunction  with a private  placement
            transaction in 2004,  are  exercisable at $3.65 per share and expire
            in November 2009.

      o     215,754  warrants  issued for services in 2004,  are  exercisable at
            $3.65 per share and expire in November 2009.

      o     1,625,000  inducement  options  issued  to  employees  in  2006  are
            exercisable at a weighted  average exercise price of $0.46 per share
            and expire in January and March of 2016.

Each of the above plans provides that the number of shares with respect to which
options and  warrants  may be granted,  and the number of shares of common stock
subject to an outstanding option or warrant,  shall be proportionately  adjusted
in the event of a  subdivision  or  consolidation  of shares or the payment of a
stock dividend on common stock.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents  information  regarding the beneficial ownership of
our common stock as of April 30, 2007:

      o     each  person who is known to us to be the  beneficial  owner of more
            than 5% of our outstanding common stock;

      o     each of our directors;

      o     each of our named executive officers; and

      o     all of our directors and executive officers as a group


                                       20
<PAGE>


Beneficial  ownership  is  determined  in  accordance  with  the  rules  of  the
Securities and Exchange  Commission that deem shares to be beneficially owned by
any person who has or shares  voting or  investment  power with  respect to such
shares.  Shares of common stock under warrants or options currently  exercisable
or  exercisable  within  60 days of the  date of  this  information  are  deemed
outstanding  for purposes of computing  the  percentage  ownership of the person
holding such  warrants or options but are not deemed  outstanding  for computing
the  percentage  ownership of any other person.  As a result,  the percentage of
outstanding  shares of any person as shown in this  table  does not  necessarily
reflect the person's actual ownership or voting power with respect to the number
of  shares of common  stock  actually  outstanding  at April  30,  2007.  Unless
otherwise  indicated,  the persons named in this table have sole voting and sole
investment power with respect to all shares shown as beneficially owned, subject
to  community  property  laws where  applicable.  As of April 30,  2007,  we had
18,466,433 shares of common stock issued and outstanding.

The address of each person listed is in our care,  at 21900  Burbank  Boulevard,
Suite 270, Woodland Hills,  California  91367,  unless otherwise set forth below
such person's name.

                                                       NUMBER OF       PERCENT
NAME OF BENEFICIAL OWNER                                 SHARES       OF CLASS
--------------------------------------------         -------------   -----------

DIRECTORS:
Mark Dyne (1)...............................             1,353,112         7.1%
Colin Dyne (2)..............................              1,137680         6.0%
Stephen P. Forte (3)........................               832,087         4.4%
Jonathan Burstein (4).......................               514,485         2.7%
Lonnie D. Schnell (5) ......................               208,332         1.1%
Wouter van Biene (6)........................               172,917            *
William Sweedler (7)........................               132,000            *
Brent Cohen (8) ............................               125,000            *
Raymond Musci (8)...........................                60,000            *
Joseph M. Miller (8)........................                60,000            *
Susan White (8) ............................                60,000            *
Directors and executive officers as a group
  (11 persons) (9)  ........................             4,655,613        22.1%

OTHER 5% HOLDERS:
The Pinnacle Fund, L.P. (10)................             1,095,890         5.6%
  4965 Preston Park Blvd., Suite 240
  Plano, TX 75093
Todd Kay....................................             1,003,500         5.4%
  3151 East Washington Blvd.
  Los Angeles, CA  90023

* Less than one percent.

(1)   Includes  323,000  shares of  common  stock  reserved  for  issuance  upon
      exercise of stock options which are currently  exercisable,  83,334 shares
      of common stock  reserved for issuance upon exercise of warrants which are
      currently  exercisable  and 111,111  shares of common  stock  reserved for
      issuance upon conversion of debt which is currently convertible.  Includes
      176,600  shares held by a limited  liability  company of which Mr. Dyne is
      the manager and a member.

(2)   Includes  565,000  shares of  common  stock  reserved  for  issuance  upon
      exercise of stock options that are currently exercisable.

(3)   Includes  535,135  shares of  common  stock  reserved  for  issuance  upon
      exercise of stock options that are currently exercisable.

(4)   Includes  375,697  shares of  common  stock  reserved  for  issuance  upon
      exercise of stock options that are currently exercisable.

(5)   Includes  141,665  shares of  common  stock  reserved  for  issuance  upon
      exercise of stock options that are currently exercisable.

(6)   Includes  135,417  shares of  common  stock  reserved  for  issuance  upon
      exercise of stock options that are currently exercisable.


                                       21
<PAGE>


(7)   Includes 30,000 shares of common stock reserved for issuance upon exercise
      of stock options that are currently exercisable.

(8)   Consists of shares of common stock reserved for issuance upon the exercise
      of the stock options that are currently exercisable.

(9)   Includes  2,410,914  shares of common stock  reserved  for  issuance  upon
      exercise of stock options which currently are exercisable,  111,111 shares
      of common stock  reserved for issuance  upon  conversion  of debt which is
      currently  convertible  and 83,334  shares of common  stock  reserved  for
      issuance upon exercise of warrants which currently are exercisable.

(10)  Information  taken from  Schedule  13G filed with the SEC on February  14,
      2007.  Consists of 1,095,890  shares of common stock reserved for issuance
      upon  conversion  of  convertible  promissory  notes  that  are  currently
      convertible.


The information as to shares beneficially owned has been individually  furnished
by the respective directors, named executive officers, and other stockholders of
the company,  or taken from  documents  filed with the  Securities  and Exchange
Commission.


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

REVIEW AND APPROVAL OF RELATED PARTY TRANSACTIONS

We have  adopted a policy that  requires  Board  approval of  transactions  with
related persons as defined by SEC  regulations,  including any sales or purchase
transaction,  asset exchange  transaction,  operating  agreement,  or advance or
receivable  transaction  that could put our assets or operating  performance  at
risk. All of our directors and executive officers of the Company are required at
all times, but not less than annually,  to disclose all relationships  they have
with  companies or  individuals  that have  conducted  business  with, or had an
interest in, the Company.  Our executive  officers monitor our operations giving
consideration to the disclosed relationships and refer potential transactions to
the Board of Directors for approval.  The Board of Directors considers a related
party transaction for its potential  economic benefit to the Company,  to ensure
the transaction is "arms length" and in accordance with our policies and that it
is properly disclosed in our reports to shareholders.

REPORTABLE RELATED PARTY TRANSACTIONS

Other than the employment  arrangements  described  elsewhere in this report and
the transactions described below, since January 1, 2006, there has not been, nor
is there currently proposed,  any transaction or series of similar  transactions
to which we were or will be a party:

      o     in which the amount involved exceeds $120,000; and

      o     in  which  any  director,   executive   officer,   shareholder   who
            beneficially  owns 5% or more of our  common  stock or any member of
            their  immediate  family  had or  will  have a  direct  or  indirect
            material interest.

Colin Dyne,  a member of our Board,  is a  significant  shareholder  in People's
Liberation,  Inc., the parent company of Versatile  Entertainment,  Inc.  During
2006, we had sales of $147,000 to Versatile Entertainment.  At December 31, 2006
accounts receivable of $83,400 were outstanding from Versatile Entertainment.

At December  31,  2006,  we had an  aggregate  of $655,489 of  unsecured  notes,
advances  and accrued  interest  receivable  due from Colin Dyne.  The notes and
advances bear interest at 7.5% and are due on demand.

As December 31, 2006,  we had an aggregate of $664,971 in notes and advances due
to Mark Dyne, the Chairman of our Board of Directors or to parties related to or
affiliated  with Mark Dyne. The notes are payable on demand and accrue  interest
at rates ranging from 0% to 11% per annum.


                                       22
<PAGE>


We paid  consulting  fees to  Diversified  Investments,  a company owned by Mark
Dyne, in the amount of $150,000 during the year ended December 31, 2006.

We paid consulting fees of $335,000 to Colin Dyne during year ended December 31,
2006 for consulting  services provided,  and have an agreement with Mr. Dyne for
services through November 30, 2008. See the "Director  Compensation"  section in
item 11 of this report for a description of this agreement.

On January 1, 2007 we entered  into an  agreement  with Mr.  Jonathan  Burstein,
previously our Executive  Vice  President of  Operations,  and a Director of the
Board, to provide consulting  services to the Company through December 31, 2008.
See the "Employment Agreements,  Termination of Employment and Change of Control
Arrangements"  section in item 11 of this report for a full  description of this
agreement.

DIRECTOR INDEPENDENCE

Since  July 2006,  majority  of our Board of  Directors  has been  comprised  of
"independent" directors within the meaning of the applicable rules for companies
traded on the American Stock Exchange.  The Board  determined that each of Brent
Cohen,  Joseph  Miller,  Raymond  Musci,  William  Sweedler and Susan White were
independent.  The Board has also determined that each of Joseph Miller,  Raymond
Musci and William  Sweedler meet the  independence  requirements for services on
the Audit Committee  pursuant to the rules for companies  traded on the American
Stock Exchange.


ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

SERVICES PROVIDED BY THE INDEPENDENT AUDITORS

The  audit   committee  of  our  Board  of  Directors  is  responsible  for  the
appointment,   compensation,   retention  and  oversight  of  the  work  of  the
independent auditors.

On December 16, 2005, we engaged Singer Lewak Greenbaum & Goldstein LLP ("SLGG")
as our independent  registered public accounting firm. BDO Seidman, LLP ("BDO"),
served as our principal  independent  public  accounting firm for the year ended
December 31, 2004. BDO resigned as the Company's  independent  public accounting
firm on  November  22,  2005  upon its  completed  review of  information  to be
included in our Form 10-Q for the quarter ended September 30, 2005.

AUDIT FEES - The aggregate fees billed by our independent  registered accounting
firms for professional  services  rendered for the audit of our annual financial
statements and review of our financial  statements included in our Forms 10-Q or
services that are normally  provided in connection with statutory and regulatory
filings, were $554,600 for fiscal year 2005 and $403,400 for fiscal year 2006.

AUDIT-RELATED  FEES - The aggregate  fees billed by our  independent  registered
accounting  firms for professional  services  rendered for assurance and related
services  reasonably  related to the  performance  of the audit or review of our
financial  statements  (other than those reported  above) was $0 for fiscal year
2005 and $0 for fiscal year 2006.

TAX FEES - The aggregate fees billed by our  independent  registered  accounting
firms for professional services rendered for tax compliance,  tax advice and tax
planning were $44,100 for fiscal year 2005 and $29,100 for fiscal year 2006.

ALL  OTHER  FEES - There  were  no fees  billed  by our  independent  registered
accounting firms for services rendered to us during 2005 and 2006 other than the
services  described  above under  "Audit  Fees,"  "Audit-Related  Fees" and "Tax
Fees."


                                       23
<PAGE>


The audit committee  approved all of the foregoing  services provided by BDO and
SLGG.

POLICY REGARDING PRE-APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT AUDITORS

The audit committee has established a general policy requiring it's pre-approval
of all  audit  services  and  permissible  non-audit  services  provided  by the
independent  auditors,  along with the associated fees for those  services.  For
both types of pre-approval,  the audit committee considers whether the provision
of  a  non-audit   service  is  consistent  with  the  SEC's  rules  on  auditor
independence,  including  whether  provision  of the service (1) would  create a
mutual or conflicting interest between the independent auditors and the Company,
(2) would place the  independent  auditors in the  position of auditing  its own
work,  (3)  would  result  in the  independent  auditors  acting  in the role of
management or as an employee of the Company,  or (4) would place the independent
auditors in a position of acting as an advocate for the  Company.  Additionally,
the  audit  committee  considers  whether  the  independent  auditors  are  best
positioned  and qualified to provide the most  effective and efficient  service,
based  on  factors  such  as the  independent  auditors'  familiarity  with  our
business,  personnel,  systems or risk  profile  and  whether  provision  of the
service by the  independent  auditors  would  enhance  our  ability to manage or
control risk or improve audit quality or would otherwise be beneficial to us.



                                     PART IV

ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a)   FINANCIAL  STATEMENTS  AND  SCHEDULES.  (Previously  filed  with the
            Original Filing.)


      (b)   Exhibits:

             31.1       Certificate of Chief Executive  Officer pursuant to Rule
                        13a-14(a) under the Securities and Exchange Act of 1934,
                        as amended

             31.2       Certificate of Chief Financial  Officer pursuant to Rule
                        13a-14(a) under the Securities and Exchange Act of 1934,
                        as amended


                                       24
<PAGE>


                                   SIGNATURES

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

                                       TAG-IT PACIFIC, INC.

                                       /S/ LONNIE D. SCHNELL
                                       --------------------------------
                                       By:      Lonnie D. Schnell
                                       Its:     Chief Financial Officer


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE                       TITLE                             DATE
---------                       -----                             ----

     *                          Chief Executive Officer           April 30, 2007
-------------------------       (Principal Executive
Stephen P. Forte                Officer) and Director

/S/LONNIE D. SCHNELL            Chief Financial Officer           April 30, 2007
-------------------------       (Principal Accounting and
Lonnie D. Schnell               Financial Officer)

     *                          Chairman of the Board of          April 30, 2007
-------------------------       Directors
Mark Dyne

     *                          Director                          April 30, 2007
-------------------------
Jonathan Burstein

                                Director                          April 30, 2007
-------------------------
Brent Cohen

     *                          Director                          April 30, 2007
-------------------------
Colin Dyne

     *                          Director                          April 30, 2007
-------------------------
Joseph Miller

     *                          Director                          April 30, 2007
-------------------------
Raymond Musci

     *                          Director                          April 30, 2007
-------------------------
William Sweedler

     *                          Director                          April 30, 2007
-------------------------
Susan White


         * By: /S/ LONNIE D. SCHNELL
               -----------------------------------
               Lonnie D. Schnell, Attorney-in-fact


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