================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  -------------

                                    FORM 10-Q

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

                 For the quarterly period ended March 31, 2007.

                                       OR

[_]      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 Issuer as Specified in its Charter)

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

                       21900 BURBANK BOULEVARD, SUITE 270
                        WOODLAND HILLS, CALIFORNIA 91367
                    (Address of Principal Executive Offices)

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


         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 whether the  registrant  is a large  accelerated
filer,  an  accelerated  filer or a  non-accelerated  filer . See  definition of
"accelerated  filer and large  accelerated  filer"in  Rule 12b-2 of the Exchange
Act. (Check one):

   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 MAY 12, 2007 THE ISSUER HAD 18,541,433 SHARES OF COMMON STOCK, $.001
PAR VALUE, ISSUED AND OUTSTANDING.

================================================================================


<PAGE>


                              TAG-IT PACIFIC, INC.
                               INDEX TO FORM 10-Q

PART I   FINANCIAL INFORMATION                                              PAGE
                                                                            ----

Item 1.  Financial Statements .............................................    3

         Consolidated Balance Sheets as of March 31, 2007 (unaudited)
         and December 31, 2006 ............................................    3

         Consolidated Statements of Operations for the Three Months
         Ended March 31, 2007 and 2006 (unaudited) ........................    4

         Consolidated Statements of Cash Flows for the
         Three Months Ended March 31, 2007 and 2006 (unaudited) ...........    5

         Notes to the Consolidated Financial Statements ...................    6

Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations ......................................   13

Item 3.  Quantitative and Qualitative Disclosures about Market Risk .......   26

Item 4.  Controls and Procedures ..........................................   27


PART II  OTHER INFORMATION

Item 1.  Legal Proceedings ................................................   27

Item 1A. Risk Factors .....................................................   28

Item 6.  Exhibits .........................................................   29


                                       2
<PAGE>


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                   (Unaudited)
                                                     March 31,      December 31,
                                                       2007            2006
                                                   ------------    ------------
Assets
Current Assets:
   Cash and cash equivalents ...................   $  3,272,097    $  2,934,673
   Accounts receivable, net ....................      4,865,809       4,664,766
   Note receivable .............................      1,413,817       1,378,491
   Inventories, net ............................      2,778,331       3,051,220
   Recoverable legal costs .....................      3,302,874         107,108
   Prepaid expenses and other current assets ...        359,097         433,926
                                                   ------------    ------------
Total current assets ...........................     15,922,024      12,570,184

Property and equipment, net ....................      5,710,843       5,623,040
Fixed assets held for sale .....................        826,904         826,904
Note receivable, less current portion ..........      1,053,988       1,420,969
Due from related parties .......................        709,822         675,137
Other intangible assets, net ...................      4,110,751       4,139,625
Other assets ...................................        355,496         437,569
                                                   ------------    ------------
Total assets ...................................   $ 28,759,829    $ 25,693,428
                                                   ============    ============

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable .............................   $  5,222,665    $  4,006,241
  Accrued legal costs ..........................      3,518,359         427,917
  Other accrued expenses .......................      3,200,025       3,359,267
  Demand notes payable to related parties ......        664,970         664,970
  Current portion of capital lease obligations .        426,879         432,728
  Current portion of notes payable .............        798,324       1,107,207
  Secured convertible promissory notes .........     12,480,512      12,472,622
                                                   ------------    ------------
Total current liabilities ......................     26,311,734      22,470,952

Unrecognized tax benefits ......................        245,800            --
Capital lease obligations, less current portion         374,825         474,733
Notes payable, less current portion ............      1,074,639       1,061,514
                                                   ------------    ------------
Total liabilities ..............................     28,006,998      24,007,199
                                                   ------------    ------------

Commitments and contingencies (Note 6)

Stockholders' Equity:
   Preferred stock Series A, $0.001 par value;
     250,000 shares authorized; no shares
     issued or outstanding .....................           --              --

   Common stock,  $0.001 par value,
     100,000,000 shares  authorized;
     18,541,433 shares issued and
     outstanding at March 31, 2007;
     18,466,433 at December 31, 2006 ...........         18,541          18,466
  Additional paid-in capital ...................     51,900,173      51,792,502
  Accumulated deficit ..........................    (51,165,883)    (50,124,739)
                                                   ------------    ------------
Total stockholders' equity .....................        752,831       1,686,229
                                                   ------------    ------------
Total liabilities and stockholders' equity .....   $ 28,759,829    $ 25,693,428
                                                   ============    ============


           See accompanying notes to consolidated financial statements


                                       3
<PAGE>


                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                   Three Months Ended March 31,
                                                 ------------------------------
                                                     2007              2006
                                                 ------------      ------------
Net sales ..................................     $  9,090,117      $ 10,638,216
Cost of goods sold .........................        6,342,923         7,795,491
                                                 ------------      ------------
Gross profit ...............................        2,747,194         2,842,725

Selling expenses ...........................          706,235           545,625
General and administrative expenses ........        2,689,171         2,817,131
                                                 ------------      ------------
Total operating expenses ...................        3,395,406         3,362,756
                                                 ------------      ------------
Loss from operations .......................         (648,212)         (520,031)

Interest expense, net ......................          147,132           209,372
                                                 ------------      ------------
Loss before income taxes ...................         (795,344)         (729,403)
Provision for income taxes .................             --                --
                                                 ------------      ------------
Net loss ...................................     $   (795,344)     $   (729,403)
                                                 ============      ============

Basic loss per share .......................     $      (0.04)     $      (0.04)
                                                 ============      ============
Diluted loss per share .....................     $      (0.04)     $      (0.04)
                                                 ============      ============

Weighted average number of common
  shares outstanding:
     Basic .................................       18,533,100        18,241,045
                                                 ============      ============
     Diluted ...............................       18,533,100        18,241,045
                                                 ============      ============


           See accompanying notes to consolidated financial statements


                                       4
<PAGE>


                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                    Three Months Ended March 31,
                                                    --------------------------
                                                        2007           2006
                                                    -----------    -----------
Increase (decrease) in cash and cash equivalents
  Cash flows from operating activities:
    Net loss .....................................  $  (795,344)   $  (729,403)
Adjustments to reconcile net loss to net cash from
  operating activities:
   Depreciation and amortization .................      377,215        305,304
   Increase (decrease) in allowance for doubtful
     accounts ....................................        7,500       (334,474)
   Increase (decrease) in inventory valuation
     reserves ....................................     (159,796)    (2,850,093)
   Disposal of asset .............................         --            8,502
   Stock based compensation ......................       65,000        189,124
   Changes in operating assets and liabilities:
     Receivables, including related party ........     (243,227)      (242,669)
     Inventories .................................      432,685      3,734,521
     Recoverable legal costs .....................   (3,195,767)          --
     Prepaid expenses and other current assets ...       74,829        343,196
     Other assets a&oothero ......................       10,016        (30,429)
     Accounts payable and accrued expenses .......    1,182,174        531,399
     Accrued legal expenses ......................    3,090,442        120,672
                                                    -----------    -----------
  Net cash from operating activities .............      845,727      1,045,650
                                                    -----------    -----------

Cash flows from investing activities:
     Acquisition of property and equipment .......     (356,195)       (25,148)
     Proceeds from sale of equipment .............         --            2,500
                                                    -----------    -----------
  Net cash used by investing activities ..........     (356,195)       (22,648)
                                                    -----------    -----------

Cash flows from financing activities:
     Collection of notes receivable ..............      331,656         20,332
     Proceeds from exercise of stock options .....       42,750           --
     Repayment of capital leases .................     (105,756)      (248,541)
     Repayment of notes payable ..................     (420,758)       (45,567)
                                                    -----------    -----------
    Net cash used by financing activities ........     (152,108)      (273,776)
                                                    -----------    -----------

Net increase in cash .............................      337,424        749,226
Cash at beginning of period ......................    2,934,673      2,277,397
                                                    -----------    -----------

Cash at end of period ............................  $ 3,272,097    $ 3,026,623
                                                    ===========    ===========

Supplemental  disclosures of cash flow
  information:  Cash received (paid) during
  the period for:
     Interest paid ...............................  $  (262,144)   $  (257,737)
     Interest received ...........................  $    75,820    $    36,696


          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


                              TAG-IT PACIFIC, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 1.  PRESENTATION OF INTERIM INFORMATION

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not  include  all  of the  information  and  footnotes  required  by  accounting
principles  generally  accepted  in the  United  States for  complete  financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments  that, in the opinion of the management of Tag-It Pacific,  Inc.
and its consolidated subsidiaries (collectively,  the "Company"), are considered
necessary  for a  fair  presentation  of  the  financial  position,  results  of
operations,  and cash flows for the periods presented. The results of operations
for such periods are not necessarily  indicative of the results expected for the
full fiscal year or for any future period. The accompanying financial statements
should be read in conjunction with the audited consolidated financial statements
of the Company  included in the Company's  Form 10-K for the year ended December
31,  2006.  The balance  sheet as of December 31, 2006 has been derived from the
audited financial  statements as of that date but omits certain  information and
footnotes required for complete financial statements.

NOTE 2.  EARNINGS PER SHARE

         The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:

<TABLE>
<CAPTION>
                                                                                           PER SHARE
THREE MONTHS ENDED MARCH 31, 2007:                             LOSS          SHARES          AMOUNT
                                                           ------------    ------------   ------------
<S>                                                        <C>               <C>          <C>
Basic loss per share:
Loss available to common stockholders ..................   $   (795,344)     18,533,100   $      (0.04)

Effect of Dilutive Securities:
Options ................................................                          --
Warrants ...............................................                          --
                                                           ------------    ------------   ------------
Loss available to common stockholders ..................   $   (795,344)     18,533,100   $      (0.04)
                                                           ============    ============   ============

THREE MONTHS ENDED MARCH 31, 2006: Basic loss per share:
Loss available to common stockholders ..................   $   (729,403)     18,241,045   $      (0.04)

Effect of Dilutive Securities:
Options ................................................                          --
Warrants ...............................................                          --
                                                           ------------    ------------   ------------
Loss available to common stockholders ..................   $   (729,403)     18,241,045   $      (0.04)
                                                           ============    ============   ============
</TABLE>

        Warrants to purchase  1,093,813  shares of common stock at between $3.65
and $5.06, options to purchase 4,703,135 shares of common stock at between $0.37
and $5.23,  convertible  debt of $12,500,000  convertible at $3.65 per share and
other  convertible  debt  of  $500,000  convertible  at  $4.50  per  share  were


                                       6
<PAGE>


outstanding  for the three months ended March 31, 2007, but were not included in
the  computation  of diluted  loss per share  because  the effect of exercise or
conversion would have an antidilutive effect on loss per share.

         Warrants to purchase  1,243,813 shares of common stock at between $3.50
and $5.06, options to purchase 4,474,635 shares of common stock at between $0.37
and $5.23,  convertible debt of $12,500,000  convertible at $3.65 per share, and
other  convertible  debt  of  $500,000  convertible  at  $4.50  per  share  were
outstanding  for the three months ended March 31, 2006, but were not included in
the  computation  of diluted  loss per share  because  the effect of exercise or
conversion would have an antidilutive effect on loss per share.

NOTE 3.  STOCK BASED COMPENSATION

          The Company accounts for stock-based awards to employees and directors
in accordance with Statement of Financial  Accounting Standards No. 123 (revised
2004), "Share-Based Payment," ("SFAS 123(R)") which requires the measurement and
recognition of compensation  expense for all share-based  payment awards made to
employees  and  directors  based on  estimated  fair values.  Options  issued to
consultants  are  accounted for in  accordance  with the  provisions of Emerging
Issues Task Force (EITF) No. 96-18,  "Accounting for Equity Instruments That Are
Issued to Others Than Employees for Acquiring,  or in Conjunction  with Selling,
Goods or Services".

         There were no options  granted  during the three months ended March 31,
2007.  During the three months  ended March 31,  2007,  a  consultant  exercised
options to acquire  75,000 shares of common  stock.  Cash received upon exercise
was $42,750 or $0.57 per share.  At the time of  exercise,  the total  intrinsic
value of the options exercised was  approximately  $72,000 (or $0.96 per share).
Because the option exercised was a non-qualified  stock option, the Company will
receive a tax deduction for the intrinsic value amount.

         During the three  months  ended March 31,  2006,  the  Company  granted
10-year options to employees and directors to acquire 2,610,135 shares of common
stock at a weighted-average exercise price of $0.42. Options granted were valued
using the  Black-Scholes  option-pricing  model at values  ranging from $0.20 to
$0.34 per share.  Assumptions  used to value the options were:  expected term of
5.3 - 6.1 years,  expected volatility of 140%, expected annual dividends of zero
and a risk-free interest rate of 4.29% - 4.60%.

         During the three months ended March 31, 2006,  the Company  granted two
10 year  options to a consultant  to acquire a total of 75,000  shares of common
stock at $0.57 per share.  An option of 50,000  shares was vested when  granted,
and an option for 25,000  shares  vested on December  31,  2006.  The option for
50,000  shares was valued at $0.56 per share  using the  following  assumptions:
expected term of 10 years,  expected  volatility of 160%, expected dividend rate
of zero,  and  risk-free  interest  rate of 4.53%.  The option for 25,000 shares
vesting at December 31, 2006 was also initially  valued at $0.56 per share using
the same  assumptions,  but was revalued each  reporting  period until vested in
accordance  with EITF 96-18.  During the three months  ended March 31, 2006,  no
options or warrants were exercised.


                                       7
<PAGE>


         The following  table  summarizes  the activity in the  Company's  share
based plans during the three months ended March 31, 2007.  At March 31, 2007 the
Company may issue additional awards to acquire up to a total of 2,621,477 shares
of common stock under the 1997 Plan.

<TABLE>
<CAPTION>
                                                                                   Weighted
                                                                                   Average
                                                           Number of Shares     Exercise Price
                                                           ----------------    ----------------
<S>                                                               <C>          <C>
 EMPLOYEES AND DIRECTORS
 Options and warrants outstanding - January 1, 2007 ....          5,002,635    $           1.41
      Granted ..........................................               --                  --
      Exercised ........................................               --                  --
      Cancelled ........................................           (299,500)   $           1.03
                                                           ----------------    ----------------
Options and warrants outstanding - March 31, 2007 ......          4,703,135    $           1.44
                                                           ================    ================

 NON-EMPLOYEES
 Options and warrants outstanding - January 1, 2007 ....          1,318,813    $           4.13
      Granted ..........................................               --                  --
      Exercised ........................................            (75,000)   $            .57
      Cancelled ........................................           (150,000)   $           3.50
                                                           ----------------    ----------------
 Options and warrants outstanding - March 31, 2007 .....          1,093,813    $           4.46
                                                           ================    ================
</TABLE>

NOTE 4.  INVENTORIES

         Inventories are stated at the lower of cost or market value and are all
categorized  as finished  goods.  Inventory  reserves  are recorded for damaged,
obsolete,  excess and  slow-moving  inventory.  We use estimates to record these
reserves.  Slow-moving inventory is reviewed by category and may be partially or
fully  reserved for  depending on the type of product and the length of time the
product has been included in  inventory.  Reserve  adjustments  are made for the
difference  between the cost of the inventory and the estimated market value, if
lower, and charged to operations in the period in which the facts that give rise
to these adjustments become known.  Market value of inventory is estimated based
on the impact of market  trends,  an evaluation of economic  conditions  and the
value of current orders relating to the future sales of this type of inventory.

         Inventories consist of the following:

                                                     March 31,      December 31,
                                                       2007             2006
                                                   ------------     ------------
Finished goods ...............................     $  3,860,500     $  4,293,220
Less reserves ................................        1,082,200        1,242,000
                                                   ------------     ------------
Total inventories ............................     $  2,778,300     $  3,051,220
                                                   ============     ============

NOTE 5.  INCOME TAXES

         On January 1, 2007 the Company  adopted  the  provisions  of  Financial
Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in
Income  Taxes-an  interpretation  of FASB  Statement No. 109" ("FIN 48"). FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements and  prescribes a recognition  threshold and
measurement process for financial statement recognition and measurement of a tax
position  taken or expected to be taken in a tax  return.  FIN


                                       8
<PAGE>


48 also  provides  guidance on the  recognition,  classification,  interest  and
penalties,  accounting in interim periods,  disclosure and transition associated
with income tax liabilities.

         As a result of the  implementation of FIN 48, the Company recognized an
increase in liabilities for unrecognized tax benefits of approximately $245,800,
which was  accounted  for as an  increase  in the  January  1, 2007  accumulated
deficit.

         The Company  recognizes  interest  accrued related to unrecognized  tax
benefits in interest  expense and penalties in income tax expense.  There was no
interest or  penalties  recognized  during the three months ended March 31, 2007
and 2006 for  unrecognized  tax  benefits.  At March 31,  2007 the  Company  had
approximately  $33,800  accrued in interest and  penalties  associated  with the
unrecognized tax liabilities.

NOTE 6.  CONTINGENCIES AND GUARANTEES

         In May,  2006,  the Company  received  notice from the  American  Stock
Exchange  ("AMEX") that it was not in  compliance  with certain of the continued
listing  standards as set forth in the AMEX Company  Guide due to the failure to
comply with Section  1003(a)(i)  and Section  1003(a)(ii)  of the Company Guide,
which effectively required that the Company maintain  shareholders' equity of at
least  $4,000,000.  Following  the notice from AMEX the Company was afforded the
opportunity to submit a "plan of compliance" to AMEX outlining in detail how the
Company  expected  to achieve  the  minimum  equity  requirements  and to regain
compliance.  On August 3, 2006 the Company received  notification from AMEX that
the Company's plan to regain  compliance with the minimum  shareholders'  equity
requirements  of the AMEX  Company  Guide had been  accepted and the Company has
been granted an extension  until November 16, 2007 to achieve the AMEX continued
listing requirements. During this period the Company will be subject to periodic
review by the AMEX Staff and failure to make progress  consistent  with the plan
or to regain  compliance  with  continued  listing  standards  by the end of the
extension  period  could  result  in  being  delisted  from the  American  Stock
Exchange.

         On October 12, 2005, a shareholder class action complaint-- HUBERMAN V.
TAG-IT PACIFIC, INC., ET AL., Case No. CV05-7352 R(Ex)--was filed against us and
certain of our current and former  officers and  directors in the United  States
District  Court for the Central  District of  California  alleging  claims under
Section 10(b) and Section 20 of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5  promulgated  thereunder.  The action is brought on behalf of all
purchasers of our publicly-traded securities during the period from November 14,
2003 to August 12, 2005. On January 23, 2006 the court heard  competing  motions
for  appointment of lead  plaintiff/counsel  and appointed Seth Huberman as lead
plaintiff. The lead plaintiff thereafter filed an amended complaint on March 13,
2006. The amended  complaint  alleges that  defendants made false and misleading
statements about the Company's  financial  situation and its  relationship  with
certain of its large customers  during a purported class period between November
13,  2003 and August  12,  2005.  It  purports  to state  claims  under  Section
10(b)/Rule  10b-5 and Section 20(a) of the Securities  Exchange Act of 1934. The
Company filed a motion to dismiss the amended complaint, which motion was denied
by the Court on July 17,  2006.  On December  21, 2006 the Court  established  a
trial date of May 1, 2007 and ordered completion of discovery by March 19, 2007.
On February 20, 2007, the Court denied class certification.  Plaintiff has moved
the court to  reconsider  the ruling,  and also to intervene a new  plaintiff to
pursue class certification.  Both of those motions were denied on April 2, 2007.
In  addition,  the same day the Court  granted  defendants'  motion for  summary
judgment,  and on or about April 5, 2007 the Court entered  judgment in favor of
all defendants.  On or about April 30, 2007, plaintiff filed a notice of appeal.
We believe  that this matter will be resolved in trial or in  settlement  within
the limits of its insurance coverage,  however the outcomes of this action or an
estimate of the  potential  losses,  if any,  related to the  lawsuit  cannot be


                                       9
<PAGE>


reasonably  predicted,  and an adverse  resolution  of any of the lawsuit  could
potentially have a material adverse effect on our financial position and results
of operations.

         On April 16,  2004 the Company  filed suit  against  Pro-Fit  Holdings,
Limited  ("Pro-Fit")  in the U.S.  District  Court for the  Central  District of
California -- TAG-IT PACIFIC, INC. V. PRO-FIT HOLDINGS,  LIMITED, CV 04-2694 LGB
(RCx) -- asserting various contractual and tort claims relating to our exclusive
license and intellectual  property agreement with Pro-Fit,  seeking  declaratory
relief,  injunctive  relief and damages.  It is the Company's  position that the
agreement with Pro-Fit gives us the exclusive rights in certain geographic areas
to Pro-Fit's  stretch and rigid  waistband  technology.  On September  17, 2004,
Pro-Fit filed an answer  denying the material  allegations  of the complaint and
filed  counterclaims  alleging  various  contractual  and  tort  claims  seeking
injunctive relief and damages. We filed a reply denying the material allegations
of Pro-Fit's  pleading.  Pro-Fit has since  purported to terminate the exclusive
license and intellectual  property  agreement based on the same alleged breaches
of the agreement that are the subject of the parties'  existing  litigation,  as
well as on an additional basis. On February 9, 2005, and again on June 16, 2005,
we amended our  pleadings in the  litigation  to assert  additional  breaches by
Pro-Fit of its  obligations  under the agreement  and under  certain  additional
letter  agreements,  and for a declaratory  judgment that  Pro-Fit's  patent No.
5,987,721  is invalid and not  infringed  by us.  Thereafter,  Pro-Fit  filed an
amended answer and counterclaims denying the material allegations of the amended
complaint and alleging  various  contractual and tort claims seeking  injunctive
relief and damages. Pro-Fit further asserted that we infringed its United States
Patent Nos.  5,987,721 and 6,566,285.  We filed a reply denying the  substantive
allegations of the amended  counterclaims.  On June 5, 2006 the Court denied the
Company's   motion  for  partial   summary   judgment   holding   that   summary
adjudification  that we did not breach our agreement with Pro-Fit by engaging in
certain  activities  in Columbia was not  appropriate.  The Court also held that
Pro-Fit  was not  "unwilling  or unable" to fulfill  orders by  refusing to fill
orders with goods produced in the United States.  The Court did not find that we
breached our agreement with Pro-Fit and a trial is required to determine  issues
concerning  our  activities  in Columbia  and whether  other  actions by Pro-Fit
constituted  an  unwillingness  or inability  to fill  orders.  As a result of a
change in the law, we dismissed our antitrust claims against Pro-Fit.  The Court
has not yet set a date for trial of this matter. We have historically  derived a
significant  amount  of  revenue  from the sale of  products  incorporating  the
stretch  waistband  technology  and our  business,  results  of  operations  and
financial  condition could be materially  adversely affected if the dispute with
Pro-Fit is not  resolved  in a manner  favorable  to us.  Additionally,  we have
incurred  significant  legal  fees in this  litigation,  and  unless the case is
settled,  we will continue to incur additional legal fees in increasing  amounts
as the case accelerates to trial.

            A subsidiary, Tag-It de Mexico, S.A. de C.V., has operated under the
Mexican  government's  Maquiladora  Program,  which entitles Tag-It de Mexico to
certain  favorable  treatment  as respects  taxes and duties  regarding  certain
imports.  In July of 2005,  the Mexican  Federal Tax Authority  asserted a claim
against  Tag-It  de  Mexico  alleging  that  certain  taxes had not been paid on
imported  products  during the years 2000,  2001,  2002 and 2003.  In October of
2005,  the Company  filed a  procedural  opposition  to the claim and  submitted
documents to the Mexican Tax Authority in  opposition to this claim,  supporting
the Company's position that the claim was without merit. The Mexican Federal Tax
Authority failed to respond to the opposition  filed, and the required  response
period by the Tax  Authority  has  lapsed.  In  addition,  a  controlled  entity
incorporated  in Mexico  (Logistica  en Avios,  S.A. de C.V.)  through which the
Company  conducted its operations in 2005, may be subjected to a claim or claims
from the Mexican Tax Authority,  as identified  directly above, and additionally
to other tax issues,  including those arising from employment taxes. The Company
believes  that any such claim is defective on both  procedural  and  documentary
grounds and does not believe there will be a material adverse effect on us.

         We  currently  have  pending  a  number  of  other  claims,  suits  and
complaints that arise in the ordinary course of our business. We believe that we
have meritorious defenses to these claims and that the claims are either covered
by insurance  or, after  taking into account the  insurance in place,  would not
have a material  effect on our  consolidated  financial  condition  if adversely
determined against us.


                                       10
<PAGE>


         In November  2002, the FASB issued FIN No. 45  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  including  Indirect  Guarantees of
Indebtedness of Others - and interpretation of FASB Statements No. 5, 57 and 107
and  rescission  of FIN  34."  The  following  is a  summary  of  the  Company's
agreements that it has determined are within the scope of FIN 45:

         In  accordance  with the bylaws of the Company,  officers and directors
are  indemnified  for certain events or  occurrences  arising as a result of the
officer or director's serving in such capacity.  The term of the indemnification
period is for the  lifetime of the officer or  director.  The maximum  potential
amount of future  payments  the  Company  could be  required  to make  under the
indemnification provisions of its bylaws is unlimited.  However, the Company has
a director and officer liability  insurance policy that reduces its exposure and
enables it to recover a portion of any future  amounts  paid. As a result of its
insurance policy coverage,  the Company believes the estimated fair value of the
indemnification  provisions of its bylaws is minimal and therefore,  the Company
has not recorded any related liabilities.

         The Company enters into indemnification provisions under its agreements
with  investors  and its  agreements  with other parties in the normal course of
business,  typically  with  suppliers,  customers  and  landlords.  Under  these
provisions, the Company generally indemnifies and holds harmless the indemnified
party for losses  suffered or incurred by the  indemnified  party as a result of
the  Company's  activities  or, in some  cases,  as a result of the  indemnified
party's activities under the agreement.  These indemnification  provisions often
include  indemnifications  relating to representations  made by the Company with
regard  to  intellectual  property  rights.  These  indemnification   provisions
generally survive termination of the underlying agreement. The maximum potential
amount of future  payments  the  Company  could be  required to make under these
indemnification  provisions is unlimited.  The Company has not incurred material
costs to defend  lawsuits  or settle  claims  related  to these  indemnification
agreements.  As a result, the Company believes the estimated fair value of these
agreements  is minimal.  Accordingly,  the Company has not  recorded any related
liabilities.

NOTE  7. NEW ACCOUNTING PRONOUNCEMENTS

         In  September   2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements",  ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting  principles,
and  expands  disclosures  about fair value  measurements.  SFAS No. 157 applies
under  other  accounting  pronouncements  that  require  or  permit  fair  value
measurements,  and  does  not  require  any new  fair  value  measurements.  The
application  of SFAS No. 157  however  may  change  current  practice  within an
organization.  SFAS No. 157 is effective  for all fiscal years  beginning  after
November 15, 2007, with earlier application  encouraged.  We do not believe that
SFAS No. 157 will have a material impact on our financial  position,  results of
operations or cash flows.

         In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial  Assets and Financial  Liabilities-Including  an amendment of FASB
Statement No. 115," ("SFAS No. 159") which expands the use of fair value.  Under
SFAS No. 159 a company may elect to use fair value to measure accounts and loans
receivable,  available-for-sale and held-to-maturity  securities,  equity method
investments,  accounts  payable,  guarantees,  issued  debt and  other  eligible
financial  instruments.  SFAS No. 159 is  effective  for years  beginning  after
November  15,  2007.  We do not  believe  that SFAS No. 159 will have a material
impact on our financial position, results of operations or cash flows.

NOTE 8.  GEOGRAPHIC INFORMATION

         The Company  specializes  in the  distribution  of a full range of trim
items  to  manufacturers  of  fashion  apparel,  specialty  retailers  and  mass
merchandisers.  There is not enough  difference  between  the types of


                                       11
<PAGE>


products  developed and distributed by the Company to account for these products
separately or to justify segmented reporting by product type.

         The Company distributes its products  internationally and has reporting
requirements  based on geographic  regions.  Long-lived assets are attributed to
countries  based on the location of the assets and revenues  are  attributed  to
countries based on customer delivery locations, as follows:

                                                  Three Months Ended March 31,
           Country / Region                     -------------------------------
SALES                                              2007                 2006
                                                -----------         -----------
United States ........................          $   842,500         $   913,300
Asia .................................            7,023,300           6,320,400
Mexico ...............................              280,000           1,135,500
Dominican Republic ...................              385,100           1,640,800
Other ................................              559,200             628,200
                                                -----------         -----------
                                                $ 9,090,100         $10,638,200
                                                ===========         ===========


                                                  March 31,         December 31,
                                                    2007                2006
                                                 -----------        -----------
LONG-LIVED ASSETS:
     United States .....................         $ 9,595,700        $ 9,531,659
     Asia ..............................             408,100            386,516
     Mexico ............................               3,700              5,078
     Dominican Republic ................             641,000            668,067
                                                 -----------        -----------
                                                 $10,648,500        $10,591,320
                                                 ===========        ===========


                                       12
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

FORWARD LOOKING STATEMENTS

         This report and other  documents  we file with the SEC contain  forward
looking statements that are based on current expectations,  estimates, forecasts
and projections about us, our future performance,  our business or others on our
behalf, our beliefs and our management's  assumptions.  These statements are not
guarantees of future performance and involve certain risks,  uncertainties,  and
assumptions  that are difficult to predict.  We describe our  respective  risks,
uncertainties,  and  assumptions  that could  affect  the  outcome or results of
operations  below.  We  have  based  our  forward  looking   statements  on  our
management's  beliefs and  assumptions  based on  information  available  to our
management  at the time the  statements  are made.  We caution  you that  actual
outcomes and results may differ materially from what is expressed,  implied,  or
forecast by our forward looking  statements.  Reference is made in particular to
forward looking  statements  regarding  projections or estimates  concerning our
business,  including  demand  for our  products  and  services,  mix of  revenue
streams, ability to control and/or reduce operating expenses,  anticipated gross
margins and  operating  results,  cost  savings,  product  development  efforts,
general  outlook  of  our  business  and  industry,   international  businesses,
competitive  position,  adequate  liquidity to fund our  operations and meet our
other cash requirements.

OVERVIEW

         The  following  management's  discussion  and  analysis  is intended to
assist the reader in understanding our consolidated  financial statements.  This
management's  discussion and analysis is provided as a supplement to, and should
be  read  in  conjunction  with,  our  consolidated   financial  statements  and
accompanying notes.

         Tag-It  Pacific,  Inc.  designs,  sells,  manufactures  and distributes
apparel  zippers,  specialty  waistbands  and various  apparel trim  products to
manufacturers of fashion apparel, specialty retailers and mass merchandisers. We
sell and market these products under various branded names including  Talon, and
Tekfit. We operate the business globally under three product groups.

         We plan to increase our global  expansion of Talon zippers  through the
establishment of a network of Talon owned sales,  distribution and manufacturing
locations,  distribution relationships, and joint ventures. The network of these
distributors  and  manufacturing  joint ventures in combination with Talon owned
and  affiliated  facilities  under the Talon  brand is  expected  to improve our
time-to-market  by  eliminating  the typical setup and  build-out  phase for new
manufacturing  capacity  throughout  the world,  and by sourcing,  finishing and
distributing to apparel manufacturers in their local markets.

         We have  strategically  structured  our  trim  business  to focus as an
outsourced product  development,  sourcing and sampling  department for the most
demanding  brands and  retailers.  We believe  that trim design  differentiation
among  brands  and  retailers  has  become  a  critical  marketing  tool for our
customers.  By assisting our customers in the development,  design, sampling and
sourcing of trim,  we expect to achieve  higher  margins for our trim  products,
create  long-term  relationships  with  our  customers,  grow  our  sales  to  a
particular  customer by supplying trim for a larger  proportion of their brands,
and  better  differentiate  our  trim  sales  and  services  from  those  of our
competitors.  We  plan  to  aggressively  expand  our  trim  business  footprint
globally,  so we may better serve our apparel factory customers in the field, in
addition to our brand and retail  customer.  We believe we can lead the industry
in trim  sourcing  by having both an  intimate  relationship  with our brand and
retail  customers,  and having a distributed  service  organization to serve our
factory  customers  (those that manufacture for the apparel brand and retailers)
globally.

         Our Tekfit services provide manufacturers with the patented technology,
manufacturing  know-how and materials required to produce garments incorporating
an  expandable  waistband.  These  products  are  currently  produced by several
manufacturers  for one  single  brand.  In  October  2006 our  exclusive  supply


                                       13
<PAGE>


contract with this single brand  expired.  With the expiration of this exclusive
contract we now have broader access to other customers and we intend to actively
expand this product  offering to other  brands.  However,  sales to the previous
single  brand are  expected to decline  significantly  through the next  several
quarters,  and orders  from new brands are not  expected to fully  offset  these
declines  in  the  near  term.   Consequently   we  expect  sales  and  earnings
contributions from this product line to be significantly  lower for at least the
first  half of 2007;  though  we  believe  our  sales of the  product  will grow
significantly  from current levels as we market our products to new customers in
the coming months.

         Our efforts to expand this  product  offering to other  customers  have
also been limited by a licensing dispute. As described more fully in this report
under  Contingencies  and Guarantees  (see Note 6 to our unaudited  consolidated
financial  statements),  we are  presently in litigation  with Pro-Fit  Holdings
Limited related to our exclusively licensed rights to sell or sublicense stretch
waistbands manufactured under Pro-Fit's patented technology.

         The  revenues  we derive from the sale of  products  incorporating  the
stretch waistband technology,  represented approximately 19% of our consolidated
revenues  for 2006 and  accordingly  the  results of  operations  and  financial
condition could be materially  adversely affected if our dispute with Pro-Fit is
not resolved in a manner  favorable to us, or if we are unsuccessful in securing
new customers to replace the revenues previously generated by the single brand.

RESULTS OF OPERATIONS

         The following  table sets forth selected  statements of operations data
shown as a percentage of net sales for the periods indicated:

                                                 THREE MONTHS ENDED MARCH 31,
                                                 -----------------------------
                                                     2007             2006
                                                 ------------     ------------
Net Sales ....................................          100.0%           100.0%
Cost of goods sold ...........................           69.8             73.3
                                                 ------------     ------------
Gross margin .................................           30.2             26.7
Selling expenses .............................            7.8              5.1
General and administrative expenses ..........           29.5             26.5
                                                 ------------     ------------
Operating loss ...............................           (7.1)%           (4.9)%
                                                 ============     ============

         SALES

         For the three months ended March 31, 2007 and 2006, sales by geographic
region based on the location of the customer as a percentage of sales:

                                                   THREE MONTHS ENDED MARCH 31,
                                                   ----------------------------
                                                       2007            2006
                                                   ------------    ------------
United States ..................................            9.3%            8.6%
Asia ...........................................           77.3            59.4
Mexico .........................................            3.0            10.7
Dominican Republic .............................            4.2            15.4
Other ..........................................            6.2             5.9
                                                   ------------    ------------
     Total .....................................          100.0%          100.0%
                                                   ============    ============


                                       14
<PAGE>


         Sales for the three months ended March 31, 2007 were $9.1  million,  or
$1.5  million  (14.5%)  less  than  sales for the same  period in 2006.  The net
decrease  reflects the decline in sales of Tekfit  products  resulting  from the
termination in October 2006 of our exclusive contract for this product. Sales in
Asia increased for the three months ended March 31, 2007 by  approximately  $0.7
million or 11% over the same  period in 2006;  offset by a decline in sales from
Mexico in 2006 that were discontinued or were shifted to Asia in response to the
shift of  apparel  production  from Latin  America  to Asia and other  worldwide
markets  that  began in  2004.  We  responded  to these  market  changes  with a
restructuring  plan  implemented  in the third  quarter  of 2005  that  included
reducing  our  operations  in Mexico and  focusing our efforts on the markets in
Asia.

         COST OF SALES

         Cost of sales  for the three  months  ended  March  31,  2007 were $6.3
million,  or 69.8% of sales, as compared to $7.8 million, or 73.3% of sales, for
the same period in 2006. The total  reduction in cost of sales for the period of
$1.4 million is primarily  the result of improved  manufacturing,  distribution,
and  inventory  costs  of  approximately  $0.4  million,   and  lower  costs  of
approximately  $1.0 million  associated  with the net volume  decline.  The cost
reductions  for the three  months ended March 31, 2007  principally  reflect the
elimination of inventory write-offs recorded in the first quarter of 2006.

         SELLING EXPENSES

         Selling  expense  for the three  months  ended March 31, 2007 were $0.7
million,  or 7.8% of sales, as compared to $0.5 million,  or 5.1% of sales,  for
the same  period in 2006.  The  increase  in selling  costs  reflects  the costs
associated  with  additional  sales  employees   (approximately   $120,000)  and
additional marketing and advertising expenses (approximately  $130,000),  offset
by  lower  royalty  costs  and  administrative  costs  (approximately   $90,000)
associated with the decline in Tekfit sales.

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative expense for the three months ended March 31,
2007 were $2.6 million, or 29.5 percent of sales, as compared with $2.8 million,
or 26.5% of sales,  for the same period in 2006. The increase in the general and
administrative expense as a percentage of sales is principally the result of the
lower  sales   volume  in  the  period.   The  net   reduction  in  general  and
administrative  costs of $125,000  results  from lower  legal costs  ($232,000),
lower  professional and audit costs ($63,000),  lower  share-based  compensation
costs ($54,000),  and lower administrative costs ($78,000);  partially offset by
increases  in costs  associated  with the  expansion  of the  business  in Asia,
including  increased employee and facility costs ($80,000);  and fewer bad debts
recoveries ($222,000).

         For the three months  ended March 31, 2007 we incurred  $0.9 million in
professional,  audit and legal fees associated mainly with the completion of our
year-end audit, and in litigation  expenses associated with our Pro-Fit license.
These costs  represent a decrease of $0.3 million over the  comparable  costs in
the same  period of 2006.  During  the three  months  ended  March 31,  2007 the
share-based  compensation  costs associated with the  implementation of FAS 123R
was $65,000 as compared with $119,000 for the same period in 2006. For the three
months  ended March 31, 2007  general and  administrative  expenses  were net of
$10,000 in net recoveries of bad debts, and for the three months ended March 31,
2006 general and  administrative  expenses  were net of $233,000 in net bad debt
recoveries.

         INTEREST EXPENSE

         Interest expense decreased by approximately $60,000 to $147,000 for the
three months ended March 31, 2007, as compared to the same period in 2006 due to
lower borrowings under certain notes, net of increased  interest earnings on our
note receivable.


                                       15
<PAGE>


         INCOME TAXES

         There was no  provision  for income  taxes for the three  months  ended
March 31, 2007 or 2006 due to the operating  losses  incurred and no benefit for
income  taxes  has been  recorded  since  there is not  sufficient  evidence  to
determine that we will be able to utilize our net operating loss  carry-forwards
to offset future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

     The  following  table  summarizes  selected  financial  data at (amounts in
thousands):

                                                       March 31,    December 31,
                                                         2007           2006
                                                     ------------   ------------
Cash and cash equivalents ........................   $      3,272   $      2,935
Total assets .....................................         28,760         25,694
Current debt .....................................         26,312         22,471
Non-current debt .................................          1,449          1,536
Stockholders' equity .............................            753          1,686

         CASH AND CASH EQUIVALENTS

         Cash and cash  equivalents  increased  by $337,000 at March 31, 2007 as
  compared to December 31, 2006,  principally due to cash generated by operating
  activities  and lower cash used in financing  activities,  net of increases in
  capital expenditures.

         Cash provided by operating  activities is our only recurring  source of
funds, and was  approximately  $0.8 million for the three months ended March 31,
2007.  The cash  provided  by (used by)  operating  activities  during the three
months resulted principally from:

Net loss before non-cash expenses ...........................       $  (353,000)
Inventory reductions, net of reserves .......................           273,000
Receivable increases, net of reserves .......................          (236,000)
Increase in accounts payable and accrued expense ............         1,182,000
Other .......................................................           (20,000)
                                                                    -----------
                                                                    $   846,000

         Net cash used in investing  activities for the three months ended March
31, 2007 was  $356,000 as compared to $23,000 for the three  months  ended March
31,  2006.  These  expenditures  were  principally   associated  with  leasehold
improvements in new facilities, office equipment for new employees, improvements
in our technology systems and a marketing website acquisition.  The cash used in
the first  quarter  of 2006  represents  capital  expenditures  for  replacement
computer equipment.

         Net cash used in financing  activities for the three months ended March
31, 2007 was  approximately  $152,000 and  primarily  reflects the  repayment of
borrowings under capital leases and notes payable,  net of collections under our
note  receivable  and funds raised from the exercise of stock  options.  For the
three  months  ended March 31, 2006 the cash used by  financing  activities  was
$274,000 and  represented  the  repayment of notes  payable and capital  leases,
partially offset by our note receivable payments.

         Accrued  legal  costs at March  31,  2007 of $3.5  million  principally
reflects  amounts due in from our defense of the Class  Action  compliant  filed
against us in October 2005, (See Note 6 for more discussion of this litigation).
The  recoverable  legal  costs  of $3.3  million  at  March  31,  2007  reflects
contractual  and  anticipated   reimbursements   from  our  insurance   carriers
associated with this litigation.


                                       16
<PAGE>


         We currently satisfy our working capital requirements primarily through
cash flows generated from  operations.  As the major industry brands continue to
outsource apparel  manufacturing to offshore  locations,  our foreign customers,
though backed by U.S.  brands and  retailers,  will  continue to increase.  This
makes  traditional   financing   arrangements  with  U.S.  banks  and  financial
institutions  difficult and accordingly we continue to evaluate  non-traditional
financing of our foreign assets.

         We believe that our existing cash and cash  equivalents and anticipated
cash  flows  from our  operating  activities  and  available  financing  will be
sufficient to fund our minimum working capital and capital expenditure needs for
at least the next twelve months.  This conclusion is based on the belief that we
have successfully completed the restructuring plan adopted in 2005, and that our
strategic  plan and the  company's  current  structure  will allow for continued
profitability;  that we  will  collect  our  note  and  accounts  receivable  in
accordance to existing  terms;  and that we will  complete a refinancing  of the
convertible  notes  payable by their  maturity  date in November  2007.  We have
discussed the  refinancing of these notes with the current note holders and with
various financial and investment institutions.  We believe we will be successful
in  completing  a  modification  or  replacement  of these  notes prior to their
maturity.

         If we are  unable  to  successfully  complete  the  refinancing  of the
convertible notes or to collect our note and accounts receivable,  or experience
greater than  anticipated  reductions in sales, we may need to raise  additional
capital,  or obtain  alternate  financing  to repay the  convertible  notes,  or
further  reduce the scope of our  business in order to fully  satisfy our future
short-term  liquidity  requirements.  If we cannot raise  additional  capital or
arrange alternate financing or reduce the scope of our business in response to a
substantial  decline in sales,  we may default on the payment of the convertible
notes  payable.  The event of a  default  on the  payment  of these  notes  will
materially affect the business operations in the long-term, however the on-going
operations  for 2007 are  nevertheless  anticipated  to  substantially  continue
throughout  the 2007  year-end  as  operations  from assets not pledged to these
notes continues.

         The extent of our future long-term capital  requirements will depend on
many  factors,  including  our  results  of  operations,  future  demand for our
products,  the size and timing of future  acquisitions,  and our expansion  into
foreign  markets.  Our need for  additional  long-term  financing  includes  the
integration  and  expansion  of our  operations  to exploit our rights under our
Talon trade name,  the expansion of our operations in the Asia and other markets
and the  further  development  of our  waistband  technology.  If our cash  from
operations is less than  anticipated  or our working  capital  requirements  and
capital expenditures are greater than we expect, we may need to raise additional
debt or  equity  financing  in  order  to  provide  for our  operations.  We are
continually  evaluating  various  financing  strategies to be used to expand our
business and fund future growth or acquisitions.  There can be no assurance that
additional debt or equity  financing will be available on acceptable terms or at
all.  If we are  unable to secure  additional  financing,  we may not be able to
execute our plans for expansion,  including  expansion  into foreign  markets to
promote our Talon brand trade name and we may need to implement  additional cost
savings initiatives.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following summarizes our contractual  obligations at March 31, 2007
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:

<TABLE>
<CAPTION>
                                                    Payments Due by Period
                            -------------------------------------------------------------------
                                           Less than        1-3           4-5          After
 Contractual Obligations       Total        1 Year         Years         Years        5 Years
-------------------------   -----------   -----------   -----------   -----------   -----------
<S>                         <C>           <C>           <C>           <C>           <C>
Demand notes payable
   to related parties(1)    $ 1,197,600   $ 1,197,600   $      --     $      --     $      --
Capital lease obligations   $   902,600   $   493,000   $   409,600          --     $      --
Operating leases ........   $ 1,342,800   $   448,000   $   878,000   $    16,800   $      --
Notes payable ...........   $ 2,114,600   $   882,700   $   619,500   $   612,400   $      --
Convertible notes payable   $12,958,200   $12,958,200   $      --     $      --     $      --
                            -----------   -----------   -----------   -----------   -----------
     Total Obligations ..   $18,515,800   $15,979,500   $ 1,907,100   $   629,200   $      --
                            ===========   ===========   ===========   ===========   ===========
</TABLE>


                                       17
<PAGE>


(1)      The majority of notes payable to related parties are due on demand with
         the  remainder  due and payable on the fifteenth day following the date
         of delivery of written demand for payment, and include accrued interest
         payable through March 31, 2007.

         At March 31,  2007 and  2006,  we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

         A director and significant shareholder of Tarrant Apparel Group is also
a significant  shareholder of the Company. Sales to Tarrant for the three months
ended March 31, 2007 were $100,  and sales to Tarrant for the three months ended
March 31, 2006 were  $25,300.  As of March 31, 2007 and  December 31, 2006 there
were no amounts due from Tarrant.

         Colin Dyne, a director and  significant  stockholder  of the Company is
also a significant  shareholder in People's  Liberation,  Inc.  During the three
months  ended March 31, 2007 and 2006,  we had sales of  $141,800  and  $15,500,
respectively,  to subsidiaries of People's  Liberation,  Inc. At March 31, 2007,
accounts  receivable  included  $104,400  outstanding  from People's  Liberation
subsidiaries.  At  December  31,  2006,  accounts  receivable  of  $83,400  were
outstanding from subsidiaries of People's Liberation, Inc.

         Due from  related  parties at March 31, 2007  includes  $709,800 and at
December 31, 2006,  $675,100 of unsecured  notes,  advances and accrued interest
receivable from Colin Dyne. The notes and advances bear interest at 7.5% and are
due on demand.

         Demand notes payable to related parties  includes notes and advances to
Mark Dyne,  the  Chairman of the Board of Directors of the Company or to parties
related to or affiliated  with Mark Dyne. The balance of Demand notes payable to
related parties at March 31, 2007 and at December 31, 2006 was $665,000.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted  to $37,500 for the three  months  ended March 31, 2007 and
2006.

         Consulting  fees of $68,750  were paid for  services  provided by Colin
Dyne for the three  months  ended  March 31, 2007 and 2006.  Consulting  fees of
$73,400 were paid for services provided by Jonathan Burstein, a Director for the
three months ended March 31, 2007.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions for the reporting  period and as of
the financial statement date. We base our estimates on historical experience and
on various  other  assumptions  that are  believed  to be  reasonable  under the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  These estimates and assumptions  affect the reported  amounts of
assets  and  liabilities,  the  disclosure  of  contingent  liabilities  and the
reported amounts of revenue and expense.  Actual results could differ from those
estimates.

         Critical  accounting  policies  are  those  that are  important  to the
portrayal of our financial  condition and results,  and which require us to make
difficult,  subjective and/or complex judgments.  Critical  accounting  policies
cover  accounting  matters  that are  inherently  uncertain  because  the future
resolution  of such  matters is  unknown.  We  believe  the  following  critical
accounting policies affect our more significant  judgments and estimates used in
the preparation of our consolidated financial statements:

         o        Accounts  receivable  balances  are  evaluated  on a continual
                  basis   and   allowances   are   provided   for    potentially
                  uncollectible  accounts based on management's  estimate of the
                  collectibility   of  customer   accounts.   If  the  financial
                  condition of a customer were to  deteriorate,  resulting in an
                  impairment  of its  ability to make  payments,  an  additional
                  allowance may be required.


                                       18
<PAGE>


                  Allowance  adjustments are charged to operations in the period
                  in which the facts  that give rise to the  adjustments  become
                  known.

         o        Inventories  are stated at the lower of cost or market  value.
                  Inventory  is  evaluated  on a  continual  basis  and  reserve
                  adjustments are made based on management's  estimate of future
                  sales value, if any, of specific  inventory  items.  Inventory
                  reserves  are  recorded  for  damaged,  obsolete,  excess  and
                  slow-moving  inventory.  We  use  estimates  to  record  these
                  reserves.  Slow-moving  inventory  is reviewed by category and
                  may be partially or fully  reserved for  depending on the type
                  of  product  and the  length  of time  the  product  has  been
                  included in inventory.  Reserve  adjustments  are made for the
                  difference between the cost of the inventory and the estimated
                  market  value,  if lower,  and  charged to  operations  in the
                  period in which the facts that give rise to these  adjustments
                  become known.  Market value of inventory is estimated based on
                  the  impact  of  market  trends,  an  evaluation  of  economic
                  conditions  and the value of current  orders  relating  to the
                  future sales of this type of inventory.

         o        We record  deferred tax assets arising from  temporary  timing
                  differences between recorded net income and taxable net income
                  when and if we believe that future earnings will be sufficient
                  to realize the tax benefit.  For those jurisdictions where the
                  expiration date of tax benefit carry-forwards or the projected
                  taxable  earnings  indicate that  realization is not likely, a
                  valuation  allowance is provided.  If we determine that we may
                  not realize all of our deferred  tax assets in the future,  we
                  will make an adjustment to the carrying  value of the deferred
                  tax asset,  which would be reflected as an income tax expense.
                  Conversely,  if we  determine  that we will realize a deferred
                  tax asset, which currently has a valuation allowance, we would
                  be required to reverse the valuation allowance, which would be
                  reflected  as an  income  tax  benefit.  We  believe  that our
                  estimate of deferred tax assets and  determination to record a
                  valuation   allowance   against   such  assets  are   critical
                  accounting  estimates because they are subject to, among other
                  things,  an  estimate  of  future  taxable  income,  which  is
                  susceptible  to change and  dependent  upon events that may or
                  may not occur, and because the impact of recording a valuation
                  allowance  may be  material  to  the  assets  reported  on the
                  balance sheet and results of operations.

         o        We record  impairment  charges  when the  carrying  amounts of
                  long-lived  assets  are  determined  not  to  be  recoverable.
                  Impairment is measured by assessing the usefulness of an asset
                  or by  comparing  the  carrying  value of an asset to its fair
                  value. Fair value is typically  determined using quoted market
                  prices,  if available,  or an estimate of undiscounted  future
                  cash flows  expected  to result  from the use of the asset and
                  its eventual  disposition.  The amount of  impairment  loss is
                  calculated  as the excess of the carrying  value over the fair
                  value.  Changes in market  conditions and management  strategy
                  have historically caused us to reassess the carrying amount of
                  our long-lived  assets.  Long-lived  assets are evaluated on a
                  continual basis and impairment adjustments are made based upon
                  management's valuations.

         o        Sales  are   recognized   when   persuasive   evidence  of  an
                  arrangement exists, product delivery has occurred,  pricing is
                  fixed or determinable,  and collection is reasonably  assured.
                  Sales  resulting  from  customer   buy-back   agreements,   or
                  associated  inventory storage arrangements are recognized upon
                  delivery  of the  products  to the  customer,  the  customer's
                  designated  manufacturer,  or upon notice from the customer to
                  destroy  or  dispose  of  the  goods.  Sales,  provisions  for
                  estimated  sales  returns,  and the cost of products  sold are
                  recorded  at the time title  transfers  to  customers.  Actual
                  product  returns are charged  against  estimated  sales return
                  allowances.


                                       19
<PAGE>


         o        Upon approval of a restructuring plan by management, we record
                  restructuring  reserves  for  certain  costs  associated  with
                  facility  closures and business  reorganization  activities as
                  they are incurred or when they become  probable and estimable.
                  Such  costs are  recorded  as a current  liability.  We record
                  restructuring reserves in compliance with SFAS 146 "Accounting
                  for  Costs  Associated  with  Exit  or  Disposal  Activities",
                  resulting in the recognition of employee severance and related
                  termination  benefits  for  recurring  arrangements  when they
                  became  probable and  estimable  and on the accrual  basis for
                  one-time   benefit   arrangements.   We  record   other  costs
                  associated with exit activities as they are incurred. Employee
                  severance  and  termination  benefits are  estimates  based on
                  agreements  with the relevant union  representatives  or plans
                  adopted by us that are  applicable to employees not affiliated
                  with unions.  These costs are not associated  with nor do they
                  benefit continuing  activities.  Inherent in the estimation of
                  these  costs  are  assessments  related  to  the  most  likely
                  expected outcome of the significant  actions to accomplish the
                  restructuring.  Changing  business  conditions  may affect the
                  assumptions  related  to the  timing  and  extent of  facility
                  closure  activities.  We review  the  status of  restructuring
                  activities on a quarterly basis and, if  appropriate,  records
                  changes based on updated estimates.

         o        We are  currently  involved  in various  lawsuits,  claims and
                  inquiries,  most of which  are  routine  to the  nature of the
                  business,  and in accordance with SFAS No. 5,  "Accounting for
                  Contingencies."  We  accrue  estimates  of  the  probable  and
                  estimable  losses  for the  resolution  of these  claims.  The
                  ultimate  resolution  of these  claims could affect our future
                  results of operations for any  particular  quarterly or annual
                  period  should our exposure be materially  different  from our
                  earlier estimates or should  liabilities be incurred that were
                  not previously accrued.

NEW ACCOUNTING PRONOUNCEMENTS

        In  September   2006,   the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements",  ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting  principles,
and expands  disclosures about fair value  measurements.  This Statement applies
under  other  accounting  pronouncements  that  require  or  permit  fair  value
measurements,  and  does  not  require  any new  fair  value  measurements.  The
application  of SFAS No. 157  however  may  change  current  practice  within an
organization.  SFAS No. 157 is effective  for all fiscal years  beginning  after
November 15, 2007, with earlier application  encouraged.  We do not believe that
SFAS No. 157 will have a material impact on our financial  position,  results of
operations or cash flows.

         In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial  Assets and Financial  Liabilities-Including  an amendment of FASB
Statement No. 115," ("SFAS No. 159") which expands the use of fair value.  Under
SFAS No. 159 a company may elect to use fair value to measure accounts and loans
receivable,  available-for-sale and held-to-maturity  securities,  equity method
investments,  accounts  payable,  guarantees,  issued  debt and  other  eligible
financial  instruments.  SFAS No. 159 is  effective  for years  beginning  after
November  15,  2007.  We do not  believe  that SFAS No. 159 will have a material
impact on our financial position, results of operations or cash flows.

CAUTIONARY STATEMENTS AND RISK FACTORS

         Several   of  the   matters   discussed   in  this   document   contain
forward-looking  statements  that  involve  risks  and  uncertainties.   Factors
associated with the  forward-looking  statements that could cause actual results
to differ from those projected or forecast are included in the statements below.
In  addition to other


                                       20
<PAGE>


information  contained in this report,  readers  should  carefully  consider the
following cautionary statements and risk factors.

         OUR  GROWTH  AND  OPERATING  RESULTS  COULD  BE  MATERIALLY,  ADVERSELY
AFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING
OUR RIGHTS UNDER OUR EXCLUSIVE LICENSE AND INTELLECTUAL  PROPERTY AGREEMENT WITH
PRO-FIT.  Pursuant to our  agreement  with Pro-Fit  Holdings,  Limited,  we have
exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  We are in litigation with Pro-Fit  regarding our rights.
See Part II, Item 1, "Legal  Proceedings" for discussion of this litigation.  We
have  derived  a  significant  amount  of  revenues  from the  sale of  products
incorporating  the  stretch  waistband  technology.  Our  business,  results  of
operations and financial condition could be materially  adversely affected if we
are  unable  to reach a  settlement  in a manner  acceptable  to us and  ensuing
litigation is not resolved in a manner  favorable to us.  Additionally,  we have
incurred  significant  legal  fees in this  litigation,  and  unless the case is
settled,  we will continue to incur additional legal fees in increasing  amounts
as the case accelerates to trial.

         IF WE LOSE OUR LARGER CUSTOMERS OR THEY FAIL TO PURCHASE AT ANTICIPATED
LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.  Our results
of operations will depend to a significant extent upon the commercial success of
our larger  customers.  If these  customers  fail to  purchase  our  products at
anticipated levels, or our relationship with these customers terminates,  it may
have an adverse effect on our results because:

         o        We will lose a primary  source of revenue  if these  customers
                  choose not to purchase our products or services;

         o        We  may  not  be  able  to  reduce  fixed  costs  incurred  in
                  developing the  relationship  with these customers in a timely
                  manner;

         o        We may not be able to recoup setup and inventory costs;

         o        We may be left holding  inventory that cannot be sold to other
                  customers; and

         o        We may not be able to collect our receivables from them.

         In October 2006,  our exclusive  supply  agreement  with Levi Strauss &
Co., pursuant to which we supplied Levi with TEKFIT waistbands for their Dockers
programs,  expired.  With the  expiration  of this  contract we now have broader
access to other customers and we intend to actively expand this product offering
to other  brands.  Sales of this  product to Levi are expected to end during the
second quarter of 2007 and to be significantly  lower than in the previous year,
and orders from new brands are not expected to fully  offset these  declines for
several  quarters,  if at all. The revenues we derived from the sale of products
incorporating the stretch waistband technology represented  approximately 19% of
our  consolidated  revenues  for the years ended  December  31, 2005 and 2006. A
failure to attract new customers for our TEKFIT waistbands could have a material
adverse effect on our sales and results of operations.

         IF WE ARE NOT ABLE TO REGAIN COMPLIANCE WITH LISTING REQUIREMENTS,  OUR
SHARES MAY BE REMOVED FROM LISTING ON AMEX.  In May 2006 we were advised by AMEX
that we were non-compliant with the minimum net equity listing  requirements and
we were  afforded  an  opportunity  to submit a plan to AMEX that  provided  for
increases  in our equity  beyond the minimum  $4.0  million  equity  requirement
within an  eighteen-month  timeframe  from the date of the notice from AMEX.  On
August 3, 2006 AMEX accepted our plan to regain  compliance  and has given us an
extension  until  November 16, 2007 to become  compliant with the AMEX continued
listing standards.  During this period, we will be subject to periodic review by
the AMEX  staff and  failure  to make  progress  consistent  with the plan or to
regain  compliance with continued  listing standards by the end of the extension
period  could result in being  delisted  from the American  Stock  Exchange.  In
addition we have suffered  substantial  recurring  losses and may fail to comply
with other listing requirements of AMEX. We may not be able to regain compliance
with these matters  within the time allowed by the  exchange,  and our shares of
common stock may be removed from the listing on AMEX.


                                       21
<PAGE>


         IF WE ARE NOT ABLE TO RESTRUCTURE THE $12.5 MILLION SECURED CONVERTIBLE
PROMISSORY  NOTES  PAYABLE TO EXTEND  THE  MATURITY  OF THIS DEBT,  OR TO SECURE
ALTERNATE FINANCING TO REPLACE THESE NOTES, WE MAY DEFAULT ON THEIR PAYMENT. The
$12.5 million in  convertible  notes  payable  mature in November 2007 and it is
more likely than not that we will not be able to generate  sufficient  cash flow
from  operations in time to pay these notes.  The debt holders have a conversion
option at $3.65 per share and we can require conversion only if the market price
of our stock  exceeds  120% of the  conversion  price for a minimum  of  fifteen
trading  days  just  prior  to  their   maturity  and  certain   trading  volume
requirements  are met. In the event that the shares are not converted,  in order
to obtain  an  extension  of the note  term we may have to lower the  conversion
price of the debt  resulting in additional  dilution of the current  shareholder
value,  or we may default on their payment and the note holders,  in addition to
pursuing  other  remedies,  may take action to secure the  collateral  for these
notes, the TALON brand name, resulting in substantial disruption to our business
operations and adversely affecting the financial operating results and financial
position of the company going forward.

         WE MAY NOT BE ABLE TO COLLECT OUR NOTE RECEIVABLE.  On April 11, 2007 a
favorable  verdict was  awarded to the  plaintiff  in a  trademark  infringement
lawsuit in which Azteca Production  International,  Inc. is a defendant. We have
an  outstanding  note from  Azteca at March 31,  2007 of $2.5  million  and this
adverse  ruling  against  them  may  impact  their  ability  to  repay  our note
receivable.  The outcome of this event or an estimate of the potential impact if
any, on the  collectibility  of our note receivable  cannot be predicted at this
time. The failure to collect  payments under this note as scheduled could have a
material  adverse  effect on our financial  position,  results of operations and
cash flow. At March 31, 2007 Azteca had met all payment  requirements  under the
note as scheduled.

         IF CUSTOMERS DEFAULT ON INVENTORY PURCHASE COMMITMENTS WITH US, WE WILL
BE LEFT HOLDING  NON-SALABLE  INVENTORY.  We hold  significant  inventories  for
specific customer programs,  which the customers have committed to purchase.  If
any customer  defaults on these  commitments,  or insists on  markdowns,  we may
incur a charge in connection with our holding significant amounts of non-salable
inventory and this would have a negative impact on our operations and cash flow.

         OUR REVENUES MAY BE HARMED IF GENERAL ECONOMIC  CONDITIONS  WORSEN. Our
revenues depend on the health of the economy and the growth of our customers and
potential future customers.  When economic  conditions  weaken,  certain apparel
manufacturers  and  retailers,  including  some of our customers may  experience
financial  difficulties  that  increase  the risk of  extending  credit  to such
customers.  Customers  adversely  affected  by  economic  conditions  have  also
attempted to improve their own operating  efficiencies  by  concentrating  their
purchasing  power among a narrowing group of vendors.  There can be no assurance
that we will remain a preferred vendor to our existing customers.  A decrease in
business from or loss of a major customer  could have a material  adverse effect
on our results of operations.  Further, if the economic conditions in the United
States  worsen  or if a  wider  or  global  economic  slowdown  occurs,  we  may
experience a material  adverse impact on our business,  operating  results,  and
financial condition.

         BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS,  WE MAY NOT BE ABLE
TO  ALWAYS  OBTAIN  MATERIALS  WHEN WE  NEED  THEM  AND WE MAY  LOSE  SALES  AND
CUSTOMERS.  Lead times for materials we order can vary  significantly and depend
on many factors,  including the specific  supplier,  the contract  terms and the
demand for  particular  materials  at a given  time.  From time to time,  we may
experience  fluctuations  in the  prices,  and  disruptions  in the  supply,  of
materials. Shortages or disruptions in the supply of materials, or our inability
to procure  materials  from alternate  sources at acceptable  prices in a timely
manner, could lead us to miss deadlines for orders and lose sales and customers.

         WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO  SIGNIFICANT  FLUCTUATIONS
IN OPERATING  RESULTS THAT MAY RESULT IN  UNEXPECTED  REDUCTIONS  IN REVENUE AND
STOCK PRICE VOLATILITY. We operate in an industry that is subject to significant
fluctuations  in operating  results  from quarter to quarter,  which may lead to
unexpected  reductions in revenues and stock price volatility.  Factors that may
influence our quarterly operating results include:

         o        The volume and timing of customer  orders  received during the
                  quarter;

         o        The timing and magnitude of customers' marketing campaigns;


                                       22
<PAGE>


         o        The loss or addition of a major customer;

         o        The availability and pricing of materials for our products;

         o        The  increased   expenses  incurred  in  connection  with  the
                  introduction of new products;

         o        Currency fluctuations;

         o        Delays caused by third parties; and

         o        Changes in our product mix or in the relative  contribution to
                  sales of our subsidiaries.

         Due to  these  factors,  it is  possible  that  in  some  quarters  our
operating  results  may be below  our  stockholders'  expectations  and those of
public market analysts.  If this occurs,  the price of our common stock could be
adversely affected.  In the past,  following periods of volatility in the market
price of a company's  securities,  securities class action  litigation has often
been  instituted  against such a company.  In October  2005, a securities  class
action  lawsuit was filed  against us. See Part II, Item 1, "Legal  Proceedings"
for a detailed description of this lawsuit.

         THE OUTCOME OF LITIGATION IN WHICH WE HAVE BEEN NAMED AS A DEFENDANT IS
UNPREDICTABLE  AND AN ADVERSE  DECISION IN ANY SUCH MATTER COULD HAVE A MATERIAL
ADVERSE  EFFECT ON OUR  FINANCIAL  POSITION  AND RESULTS OF  OPERATIONS.  We are
defendants in a number of litigation matters.  These claims may divert financial
and management resources that would otherwise be used to benefit our operations.
Although we believe that we have meritorious defenses to the claims made in each
and all of the  litigation  matters  to which we have  been  named a party,  and
intend to contest each lawsuit  vigorously,  no assurances can be given that the
results of these  matters will be favorable to us. An adverse  resolution of any
of these lawsuits could have a material adverse effect on our financial position
and results of operations.

         We maintain product  liability and director and officer  insurance that
we regard as reasonably adequate to protect us from potential claims; however we
cannot  assure you that it will be adequate to cover any  losses.  Further,  the
costs  of  insurance  have  increased  dramatically  in  recent  years,  and the
availability of coverage has decreased.  As a result,  we cannot assure you that
we will be able to maintain  our current  levels of  insurance  at a  reasonable
cost, or at all.

         OUR CUSTOMERS HAVE CYCLICAL  BUYING PATTERNS WHICH MAY CAUSE US TO HAVE
PERIODS OF LOW SALES VOLUME.  Most of our customers are in the apparel industry.
The apparel  industry  historically  has been  subject to  substantial  cyclical
variations. Our business has experienced, and we expect our business to continue
to  experience,  significant  cyclical  fluctuations  due, in part,  to customer
buying  patterns,  which may result in periods of low sales usually in the first
and fourth quarters of our financial year.

         OUR BUSINESS MODEL IS DEPENDENT ON  INTEGRATION OF INFORMATION  SYSTEMS
ON A GLOBAL  BASIS AND, TO THE EXTENT  THAT WE FAIL TO MAINTAIN  AND SUPPORT OUR
INFORMATION  SYSTEMS,  IT CAN RESULT IN LOST REVENUES.  We must  consolidate and
centralize  the  management of our  subsidiaries  and  significantly  expand and
improve our financial and operating controls.  Additionally, we must effectively
integrate  the  information  systems  of  our  worldwide   operations  with  the
information systems of our principal offices in California. Our failure to do so
could result in lost revenues,  delay financial  reporting or adverse effects on
the information reported.

         THE LOSS OF KEY MANAGEMENT AND SALES PERSONNEL  COULD ADVERSELY  AFFECT
OUR BUSINESS,  INCLUDING OUR ABILITY TO OBTAIN AND SECURE  ACCOUNTS AND GENERATE
SALES. Our success has and will continue to depend to a significant  extent upon
key management and sales personnel,  many of whom would be difficult to replace.
The loss of the services of key employees  could have a material  adverse effect
on our  business,  including  our  ability  to  establish  and  maintain  client
relationships.  Our future success will depend in large part upon our ability to
attract and retain  personnel with a variety of sales,  operating and managerial
skills.

         IF WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN FACILITIES,  WE WILL
NOT BE ABLE TO MEET OUR OBLIGATIONS AND MAY LOSE SALES AND CUSTOMERS. Currently,
we do not operate duplicate facilities in different geographic areas. Therefore,
in the


                                       23
<PAGE>


event of a regional  disruption where we maintain one or more of our facilities,
it is unlikely  that we could  shift our  operations  to a different  geographic
region and we may have to cease or curtail our operations.  This may cause us to
lose sales and customers. The types of disruptions that may occur include:

         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention;

         o        Natural disasters; or

         o        Regional pandemics.

         INTERNET-BASED  SYSTEMS  THAT WE RELY UPON FOR OUR ORDER  TRACKING  AND
MANAGEMENT  SYSTEMS  MAY  EXPERIENCE  DISRUPTIONS  AND AS A  RESULT  WE MAY LOSE
REVENUES  AND  CUSTOMERS.  To the extent that we fail to  adequately  update and
maintain the hardware and software  implementing  our  integrated  systems,  our
customers  may be delayed or  interrupted  due to defects in our hardware or our
source code. In addition, since our software is Internet-based, interruptions in
Internet service  generally can negatively impact our ability to use our systems
to monitor and manage various aspects of our customer's trim needs. Such defects
or interruptions could result in lost revenues and lost customers.

         THE REQUIREMENTS OF THE SARBANES-OXLEY  ACT, INCLUDING SECTION 404, ARE
BURDENSOME,  AND OUR FAILURE TO COMPLY  WITH THEM COULD HAVE A MATERIAL  ADVERSE
AFFECT  ON OUR  BUSINESS  AND  STOCK  PRICE.  Effective  internal  control  over
financial  reporting is necessary for us to provide reliable  financial  reports
and effectively  prevent fraud.  Section 404 of the  Sarbanes-Oxley  Act of 2002
requires  us to  evaluate  and report on our  internal  control  over  financial
reporting  beginning  with our annual  report on Form 10-K for the  fiscal  year
ending December 31, 2007. Our independent registered public accounting firm will
need to annually  attest to our  evaluation,  and issue their own opinion on our
internal  control over financial  reporting  beginning with our annual report on
Form 10-K for the fiscal year ending  December 31, 2008.  We are  preparing  for
compliance with Section 404 by  strengthening,  assessing and testing our system
of  internal  control  over  financial  reporting  to provide  the basis for our
report.  The  process of  strengthening  our  internal  control  over  financial
reporting and complying  with Section 404 is expensive and time  consuming,  and
requires  significant  management  attention.   Failure  to  implement  required
controls, or difficulties encountered in their implementation, could cause us to
fail to  meet  our  reporting  obligations.  If we or our  auditors  discover  a
material  weakness  in  our  internal  control  over  financial  reporting,  the
disclosure  of that  fact,  even if the  weakness  is  quickly  remedied,  could
diminish  investors'  confidence in our financial  statements and harm our stock
price.  In  addition,  non-compliance  with  Section  404 could  subject us to a
variety of  administrative  sanctions,  including  the  suspension  of  trading,
ineligibility for listing on one of the national securities  exchanges,  and the
inability of  registered  broker-dealers  to make a market in our common  stock,
which would further reduce our stock price.

         THERE ARE MANY  COMPANIES  THAT OFFER SOME OR ALL OF THE  PRODUCTS  AND
SERVICES WE SELL AND IF WE ARE UNABLE TO SUCCESSFULLY  COMPETE OUR BUSINESS WILL
BE  ADVERSELY  AFFECTED.   We  compete  in  highly  competitive  and  fragmented
industries  with numerous local and regional  companies that provide some or all
of  the  products  and  services  we  offer.   We  compete  with   national  and
international   design  companies,   distributors  and  manufacturers  of  tags,
packaging  products,  zippers and other trim items. Some of our competitors have
greater name recognition,  longer operating  histories and greater financial and
other resources than we do.

         UNAUTHORIZED  USE  OF  OUR  PROPRIETARY  TECHNOLOGY  MAY  INCREASE  OUR
LITIGATION  COSTS AND ADVERSELY  AFFECT OUR SALES.  We rely on trademark,  trade
secret and copyright laws to protect our designs and other proprietary  property
worldwide.  We cannot be certain that these laws will be  sufficient  to protect
our property.  In  particular,  the laws of some countries in which our products
are distributed or may be distributed in the future may not protect our products
and intellectual  rights to the same extent as the laws of the United States. If
litigation is


                                       24
<PAGE>


necessary in the future to enforce our intellectual  property rights, to protect
our trade  secrets or to determine  the  validity  and scope of the  proprietary
rights  of  others,  such  litigation  could  result  in  substantial  costs and
diversion  of  resources.  This  could  have a  material  adverse  effect on our
operating results and financial  condition.  Ultimately,  we may be unable,  for
financial or other reasons,  to enforce our rights under  intellectual  property
laws, which could result in lost sales.

         IF OUR PRODUCTS INFRINGE ANY OTHER PERSON'S  PROPRIETARY RIGHTS, WE MAY
BE SUED AND HAVE TO PAY LEGAL EXPENSES AND JUDGMENTS AND REDESIGN OR DISCONTINUE
SELLING OUR PRODUCTS.  From time to time in our industry,  third parties  allege
infringement of their proprietary  rights. Any infringement  claims,  whether or
not meritorious,  could result in costly  litigation or require us to enter into
royalty or licensing  agreements  as a means of  settlement.  If we are found to
have  infringed the  proprietary  rights of others,  we could be required to pay
damages,  cease sales of the  infringing  products  and redesign the products or
discontinue  their sale. Any of these outcomes,  individually  or  collectively,
could have a material  adverse  effect on our  operating  results and  financial
condition.

         COUNTERFEIT  PRODUCTS ARE NOT UNCOMMON IN THE APPAREL  INDUSTRY AND OUR
CUSTOMERS  MAY MAKE CLAIMS  AGAINST US FOR  PRODUCTS WE HAVE NOT PRODUCED AND WE
MAY BE  ADVERSELY  IMPACTED BY THESE FALSE  CLAIMS.  Counterfeiting  of valuable
trade names is commonplace in the apparel  industry and while there are industry
organizations  and  federal  laws  designed to protect  the brand  owner,  these
counterfeit  products  are not always  detected and it can be difficult to prove
the  manufacturing  source of these products.  Accordingly,  we may be adversely
affected if counterfeit products damage our relationships with customers, and we
incur costs to prove these products are counterfeit, to defend ourselves against
false claims, or we may have to pay for false claims.

         OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS
AND CAUSE OUR STOCKHOLDERS TO SUFFER  SIGNIFICANT  LOSSES. The following factors
could  cause  the  market  price  of  our  common  stock  to  decrease,  perhaps
substantially:

         o        The  failure  of  our  quarterly  operating  results  to  meet
                  expectations of investors or securities analysts;

         o        Adverse  developments  in the financial  markets,  the apparel
                  industry and the worldwide or regional economies;

         o        Interest rates;

         o        Changes in accounting principles;

         o        Intellectual property and legal matters;

         o        Sales of common stock by existing  shareholders  or holders of
                  options;

         o        Announcements of key developments by our competitors; and

         o        The   reaction   of  markets   and   securities   analysts  to
                  announcements and developments involving our company.

         IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH,  OUR STOCKHOLDERS'  OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY  IMPACTED.  Our business strategy may
include expansion through internal growth, by acquiring complementary businesses
or  by  establishing   strategic   relationships  with  targeted  customers  and
suppliers.  In order  to do so or to fund our  other  activities,  we may  issue
additional equity  securities that could dilute our stockholders'  value. We may
also assume additional debt and incur impairment losses to our intangible assets
if we acquire another company.

         WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS.
We may consider strategic  acquisitions as opportunities  arise,  subject to the
obtaining of any  necessary  financing.  Acquisitions  involve  numerous  risks,
including  diversion  of our  management's  attention  away  from our  operating
activities.  We  cannot  assure  you  that we will not  encounter  unanticipated
problems or liabilities relating to the integration of an acquired


                                       25
<PAGE>


company's operations, nor can we assure you that we will realize the anticipated
benefits of any future acquisitions.

         OUR ACTUAL TAX  LIABILITIES  MAY DIFFER FROM ESTIMATED TAX RESULTING IN
UNFAVORABLE ADJUSTMENTS TO OUR FUTURE RESULTS. The amount of income taxes we pay
is subject to ongoing audits by federal, state and foreign tax authorities.  Our
estimate  of the  potential  outcome of  uncertain  tax issues is subject to our
assessment of relevant risks,  facts, and  circumstances  existing at that time.
Our future  results may include  favorable  or  unfavorable  adjustments  to our
estimated tax  liabilities in the period the  assessments  are made or resolved,
which may impact our effective tax rate and our financial results.

         WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our  stockholders'  rights plan, our ability to issue
additional  shares of preferred  stock and some provisions of our certificate of
incorporation  and bylaws and of Delaware law could make it more difficult for a
third party to make an unsolicited  takeover attempt of us. These  anti-takeover
measures may depress the price of our common  stock by making it more  difficult
for third parties to acquire us by offering to purchase shares of our stock at a
premium to its market price.

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of April 10, 2007, our officers and directors and their affiliates  beneficially
owned  approximately 20% of the outstanding shares of our common stock. The Dyne
family,  which includes Mark Dyne,  Colin Dyne, and Jonathan  Burstein,  who are
also our directors; Larry Dyne and the estate of Harold Dyne; beneficially owned
approximately  15% of the  outstanding  shares of our common  stock at March 31,
2007.  As a result,  our officers and  directors and the Dyne family are able to
exert considerable influence over the outcome of any matters submitted to a vote
of the  holders of our common  stock,  including  the  election  of our Board of
Directors.  The voting power of these  stockholders could also discourage others
from seeking to acquire  control of us through the purchase of our common stock,
which might depress the price of our common stock.

         WE MAY FACE  INTERRUPTION  OF PRODUCTION  AND SERVICES DUE TO INCREASED
SECURITY  MEASURES IN RESPONSE TO  TERRORISM.  Our business  depends on the free
flow of products and services  through the channels of commerce.  In response to
terrorists'  activities and threats aimed at the United States,  transportation,
mail,  financial  and  other  services  may be  slowed  or  stopped  altogether.
Extensive  delays or  stoppages  in  transportation,  mail,  financial  or other
services  could  have a  material  adverse  effect on our  business,  results of
operations and financial condition.  Furthermore,  we may experience an increase
in operating costs, such as costs for transportation,  insurance and security as
a result of the activities and potential  delays.  We may also experience delays
in  receiving  payments  from  payers that have been  affected by the  terrorist
activities.  The United States  economy in general may be adversely  affected by
the terrorist  activities and any economic  downturn could adversely  impact our
results  of  operations,  impair  our  ability  to raise  capital  or  otherwise
adversely affect our ability to grow our business.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         All of our  sales  are  denominated  in United  States  dollars  or the
currency  of the  country in which our  products  originate.  We are  exposed to
market risk for fluctuations in the foreign currency  exchange rates for certain
product  purchases that are denominated in Hong Kong dollars,  Chinese yuans and
British pounds. There were no hedging contracts outstanding as of March 31, 2007
or December  31,  2006.  Currency  fluctuations  can  increase  the price of our
products to foreign customers which can adversely impact the level of our export
sales from time to time. The majority of our cash equivalents are held in United
States  dollars  in  various  bank  accounts  and  we do  not  believe  we  have
significant  market risk exposure with regard to our  investments.  At March 31,
2007 none of our indebtedness was subject to interest rate fluctuations.


                                       26
<PAGE>


ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

         We maintain  disclosure  controls and  procedures  that are designed to
ensure that  information  required  to be  disclosed  in our  reports  under the
Securities  Exchange Act of 1934,  as amended,  or the Exchange Act is recorded,
processed,  summarized  and reported,  within the time periods  specified in the
Securities  Exchange  Commission's  rules and forms,  including  to ensure  that
information  required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is accumulated  and  communicated  to our  management,
including our principal executive and principal  financial officers,  or persons
performing similar functions, as appropriate to allow timely decisions regarding
required  disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act.  Disclosure  controls  and  procedures,  no matter  how well  designed  and
operated,  can provide  only  reasonable,  rather than  absolute,  assurance  of
achieving the desired control objectives.

         As  of  March  31,  2007,   we  conducted  an   evaluation,   with  the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures.  Based on that  evaluation,  our Chief  Executive  Officer and Chief
Financial  Officer  have  concluded  that as of March 31, 2007,  our  disclosure
controls and procedures were effective at a reasonable assurance level.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

         There  were  no  significant  changes  in our  internal  controls  over
financial  reporting that occurred during the first quarter that have materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

PART II
OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         On October 12, 2005, a shareholder class action complaint-- HUBERMAN V.
TAG-IT PACIFIC, INC., ET AL., Case No. CV05-7352 R(Ex)--was filed against us and
certain of our current and former  officers and  directors in the United  States
District  Court for the Central  District of  California  alleging  claims under
Section 10(b) and Section 20 of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5  promulgated  thereunder.  The action is brought on behalf of all
purchasers of our publicly-traded securities during the period from November 14,
2003 to August 12, 2005. On January 23, 2006 the Court heard  competing  motions
for  appointment of lead  plaintiff/counsel  and appointed Seth Huberman as lead
plaintiff. The lead plaintiff thereafter filed an amended complaint on March 13,
2006. The amended  complaint  alleges that  defendants made false and misleading
statements about our company's  financial  situation and our  relationship  with
certain of our large customers  during a purported class period between November
13,  2003 and August  12,  2005.  It  purports  to state  claims  under  Section
10(b)/Rule  10b-5 and Section 20(a) of the  Securities  Exchange Act of 1934. We
filed a motion to dismiss the amended complaint,  which motion was denied by the
Court on July 17, 2006. On December 21, 2006, the Court established a trial date
of May 1,  2007 and  ordered  completion  of  discovery  by March 19,  2007.  On
February 20, 2007, the Court denied class certification. Plaintiff has moved the
court to reconsider the ruling,  and also to intervene a new plaintiff to pursue
class  certification.  Both of those  motions  were denied on April 2, 2007.  In
addition,  the same day the Court granted our and the other  defendants'  motion
for summary  judgment,  and on or about April 5, 2007 the Court entered judgment
in favor of all defendants. On or about April 30, 2007, plaintiff filed a notice
of


                                       27
<PAGE>


appeal.  We believe that this matter will be resolved in trial or in  settlement
within the limits of its insurance coverage, however the outcomes of this action
or an estimate of the potential losses, if any, related to the lawsuit cannot be
reasonably  predicted,  and an adverse  resolution  of any of the lawsuit  could
potentially have a material adverse effect on our financial position and results
of operations.

         On April 16, 2004,  we filed suit  against  Pro-Fit  Holdings,  Limited
("Pro-Fit") in the U.S. District Court for the Central District of California --
TAG-IT  PACIFIC,  INC. V.  PRO-FIT  HOLDINGS,  LIMITED,  CV 04-2694 LGB (RCx) --
asserting various  contractual and tort claims relating to our exclusive license
and intellectual  property agreement with Pro-Fit,  seeking  declaratory relief,
injunctive  relief and  damages.  It is our  position  that the  agreement  with
Pro-Fit gives us the exclusive  rights in certain  geographic areas to Pro-Fit's
stretch and rigid waistband technology.  On September 17, 2004, Pro-Fit filed an
answer denying the material allegations of the complaint and filed counterclaims
alleging  various  contractual  and tort claims  seeking  injunctive  relief and
damages.  We  filed  a reply  denying  the  material  allegations  of  Pro-Fit's
pleading.  Pro-Fit has since  purported to terminate the  exclusive  license and
intellectual  property  agreement  based on the  same  alleged  breaches  of the
agreement that are the subject of the parties' existing  litigation,  as well as
on an  additional  basis.  On February 9, 2005,  and again on June 16, 2005,  we
amended our pleadings in the litigation to assert additional breaches by Pro-Fit
of its  obligations  under the  agreement and under  certain  additional  letter
agreements,  and for a declaratory  judgment that Pro-Fit's patent No. 5,987,721
is invalid and not infringed by us. Thereafter,  Pro-Fit filed an amended answer
and counterclaims  denying the material allegations of the amended complaint and
alleging  various  contractual  and tort claims  seeking  injunctive  relief and
damages.  Pro-Fit  further  asserted  that we infringed its United States Patent
Nos.  5,987,721  and  6,566,285.  We  filed  a  reply  denying  the  substantive
allegations of the amended counterclaims.  On June 5, 2006, the Court denied our
motion for partial summary judgment holding that summary  adjudification that we
did not breach our agreement  with Pro-Fit by engaging in certain  activities in
Columbia  was  not  appropriate.  The  Court  also  held  that  Pro-Fit  was not
"unwilling  or unable" to fulfill  orders by  refusing to fill orders with goods
produced  in the  United  States.  The Court did not find that we  breached  our
agreement  with Pro-Fit and a trial is required to determine  issues  concerning
our  activities in Columbia and whether other actions by Pro-Fit  constituted an
unwillingness  or inability to fill orders.  As a result of a change in the law,
we dismissed our antitrust claims against  Pro-Fit.  The Court has not yet set a
date for trial of this matter. We have historically derived a significant amount
of  revenue  from the  sale of  products  incorporating  the  stretch  waistband
technology our business,  results of operations and financial condition could be
materially  adversely  affected if the dispute with Pro-Fit is not resolved in a
manner favorable to us. Additionally, we have incurred significant legal fees in
this  litigation,  and unless the case is  settled,  we will  continue  to incur
additional legal fees in increasing amounts as the case accelerates to trial.

         We  currently  have  pending  a  number  of  other  claims,  suits  and
complaints that arise in the ordinary course of its business. We believe that we
has meritorious  defenses to these claims and that the claims are either covered
by insurance  or, after  taking into account the  insurance in place,  would not
have a material  effect on our  consolidated  financial  condition  if adversely
determined against us.

ITEM 1A. RISK FACTORS

         A restated  description of the risk factors associated with the Company
is included  under  "Cautionary  Statements  and Risk  Factors" in  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations,"
contained  in Item 2 of Part I of this  report.  This  description  includes any
material  changes  to  and  supersedes  the  description  of  the  risk  factors
associated with an investment in the Company previously  disclosed in our Annual
Report on Form 10-K for 2006 and is incorporated herein by reference.


                                       28
<PAGE>


ITEM 6.  EXHIBITS

         10.33(1) Consulting  Agreement  dated  January  1, 2007 by and  between
                  Tag-It Pacific,  Inc. and Jonathan  Burstein.  Incorporated by
                  reference  to  Exhibit  10.1 to Form 8-K filed on  January  4,
                  2007.

         10.34(1) Consulting  Agreement effective  April 1, 2007  by and between
                  Tag-It Pacific, Inc. and Colin Dyne.

         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.

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


(1)      Indicates a management contract or compensatory plan.


                                       29
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  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.


Dated:   May 15, 2007                          TAG-IT PACIFIC, INC.

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


                                       30