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

                                  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 June 30, 2007.

                                       OR

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

                         Commission file number 1-13669


                            TALON INTERNATIONAL, 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)

                              TAG-IT PACIFIC, INC.
              (Former name, former address and former fiscal year,
                          if changed since last report)


         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 AUGUST 14, 2007 THE ISSUER HAD  20,041,433  SHARES OF COMMON  STOCK,
$.001 PAR VALUE, ISSUED AND OUTSTANDING.

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


<PAGE>


                            TALON INTERNATIONAL, INC.
                         (FORMERLY TAG-IT PACIFIC, INC.)

                               INDEX TO FORM 10-Q


PART I   FINANCIAL INFORMATION                                              PAGE
                                                                            ----

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

         Consolidated Balance Sheets as of June30, 2007 (unaudited)
           and December 31, 2006 ............................................  3

         Consolidated Statements of Operations for the Three Months
           and the Six Months Ended June 30, 2007 and 2006 (unaudited).......  4

         Consolidated Statements of Cash Flows for the
           Six Months Ended June 30, 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......................................... 15

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.......... 29

Item 4.  Controls and Procedures............................................. 30


PART II  OTHER INFORMATION

Item 1.  Legal Proceedings................................................... 31

Item 1A. Risk Factors ....................................................... 31

Item 6.  Exhibits ........................................................... 32


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                            TALON INTERNATIONAL, INC.
                         (FORMERLY TAG-IT PACIFIC, INC.)

                           CONSOLIDATED BALANCE SHEETS

                                                      June 30,     December 31,
                                                        2007           2006
                                                    ------------   ------------
Assets
Current Assets:
   Cash and cash equivalents .....................  $  3,822,264   $  2,934,673
   Restricted cash ...............................     9,500,000           --
   Accounts receivable, net ......................     6,040,757      4,664,766
   Note receivable ...............................     1,450,051      1,378,491
   Inventories, net ..............................     2,555,072      3,051,220
   Recoverable legal costs .......................     1,180,748        107,108
   Prepaid expenses and other current assets .....       675,063        433,926
                                                    ------------   ------------
Total current assets .............................    25,223,955     12,570,184

Property and equipment, net ......................     5,575,712      5,623,040
Fixed assets held for sale .......................       826,904        826,904
Note receivable, less current portion ............       677,601      1,420,969
Due from related party ...........................       722,918        675,137
Other intangible assets, net .....................     4,110,751      4,139,625
Other assets .....................................       720,546        437,569
                                                    ------------   ------------
Total assets .....................................  $ 37,858,387   $ 25,693,428
                                                    ============   ============

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable ...............................  $  6,391,504   $  4,006,241
  Accrued legal costs ............................     1,267,167        427,917
  Other accrued expenses .........................     3,289,601      3,359,267
  Demand notes payable to related parties ........        85,176        664,970
  Current portion of capital lease
    obligations ..................................       395,294        432,728
  Current portion of notes payable ...............       405,878      1,107,207
  Secured convertible promissory notes ...........    12,488,490     12,472,622
                                                    ------------   ------------
Total current liabilities ........................    24,323,110     22,470,952

Capital lease obligations, less current
  portion ........................................       351,292        474,733
Notes payable, less current portion ..............     1,000,482      1,061,514
Revolver note payable ............................     1,307,806           --
Term note payable ................................     7,106,260           --
Other long term liabilities ......................        83,651           --
                                                    ------------   ------------
Total liabilities ................................    34,172,601     24,007,199
                                                    ------------   ------------

Commitments and contingencies

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; 20,041,433
     shares issued and outstanding at June 30,
     2007; 18,466,433 at December 31, 2006 .......        20,041         18,466
  Additional paid-in capital .....................    54,341,135     51,792,502
  Accumulated deficit ............................   (50,675,390)   (50,124,739)
                                                    ------------   ------------
Total stockholders' equity .......................     3,685,786      1,686,229
                                                    ------------   ------------
Total liabilities and stockholders' equity .......  $ 37,858,387   $ 25,693,428
                                                    ============   ============

           See accompanying notes to consolidated financial statements


                                       3
<PAGE>


                            TALON INTERNATIONAL, INC.
                         (FORMERLY TAG-IT PACIFIC, INC.)
<TABLE>
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<CAPTION>
                                      Three Months Ended June 30,    Six Months Ended June 30,
                                      ---------------------------   ----------------------------
                                          2007           2006           2007            2006
                                      ------------   ------------   ------------    ------------
<S>                                   <C>            <C>            <C>             <C>
Net sales .........................   $ 13,566,981   $ 14,246,087   $ 22,657,099    $ 24,884,303
Cost of goods sold ................      9,484,488     10,118,850     15,827,411      17,914,341
                                      ------------   ------------   ------------    ------------
   Gross profit ...................      4,082,493      4,127,237      6,829,688       6,969,962

Selling expenses ..................        841,326        674,894      1,547,561       1,220,519
General and administrative expenses      2,406,192      2,557,062      5,017,780       5,296,499
                                      ------------   ------------   ------------    ------------
   Total operating expenses .......      3,247,518      3,231,956      6,565,341       6,517,018

Income from operations ............        834,975        895,281        264,347         452,944
Interest expense, net .............        265,858        229,139        490,574         516,205
                                      ------------   ------------   ------------    ------------
Income (loss) before income taxes .        569,117        666,142       (226,227)        (63,261)
Provision for income taxes ........         78,624         11,500         78,624          11,500
                                      ------------   ------------   ------------    ------------
   Net Income (loss) ..............   $    490,493   $    654,642   $   (304,851)   $    (74,761)
                                      ============   ============   ============    ============

Basic income (loss) per share .....   $       0.03   $       0.04   $      (0.02)   $      (0.00)
                                      ============   ============   ============    ============
Diluted income (loss) per share ...   $       0.02   $       0.04   $      (0.02)   $      (0.00)
                                      ============   ============   ============    ============

Weighted average number of common
  shares outstanding:
   Basic ..........................     18,590,884     18,358,360     18,562,151      18,300,027
                                      ============   ============   ============    ============
   Diluted ........................     20,058,682     18,598,442     18,562,151      18,300,027
                                      ============   ============   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                         (FORMERLY TAG-IT PACIFIC, INC.)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<CAPTION>
                                                                                    Six Months Ended June 30,
                                                                                   ----------------------------
                                                                                       2007            2006
                                                                                   ------------    ------------
<S>                                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss ...................................................................   $   (304,851)   $    (74,761)
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
     Depreciation and amortization .............................................        592,011         606,960
     Amortization of deferred financing cost and debt discounts ................        163,593         155,254
      Increase (decrease) in allowance for doubtful accounts ...................         61,500        (919,312)
      Decrease in inventory valuation reserves .................................       (165,280)     (3,433,267)
     Disposal of asset .........................................................           --             8,502
     Stock based compensation ..................................................        125,000         165,377
   Changes in operating assets and liabilities:
     Receivables, including related party ......................................     (1,485,273)        214,518
     Inventories ...............................................................        661,428       5,453,233
     Recoverable legal costs ...................................................     (1,073,640)           --
     Prepaid expenses and other current assets .................................       (241,137)         74,016
     Other Assets ..............................................................         35,207        (104,029)
     Accounts payable and accrued expenses .....................................      2,560,129         (94,087)
     Accrued legal .............................................................        769,467         129,020
       Income taxes payable ....................................................         77,931          11,500
                                                                                   ------------    ------------
      Net cash provided by operating activities ................................      1,776,085       2,192,924
                                                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of property and equipment ......................................       (514,812)        (28,883)
     Proceeds from sale of equipment ...........................................           --             2,500
                                                                                   ------------    ------------
      Net cash used by investing activities ....................................       (514,812)        (26,383)
                                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Collection of notes receivable .............................................        671,808          84,514
    Proceeds from exercise of stock options and warrants .......................         42,746            --
    Proceeds from issuance of stock and warrants, net of issuance costs ........      2,313,711            --
    Revolver note borrowings ...................................................      1,307,806            --
    Term note borrowings, net of issuance costs ................................      6,842,789            --
    Repayment of capital leases ................................................       (160,875)       (397,906)
    Repayment of notes payable .................................................     (1,891,667)       (153,630)
                                                                                   ------------    ------------
        Net cash from (used by) financing activities ...........................      9,126,318        (467,022)
                                                                                   ------------    ------------

Net increase in cash and restricted cash .......................................     10,387,591       1,699,519
Cash at beginning of period ....................................................      2,934,673       2,277,397
                                                                                   ------------    ------------
Cash and restricted cash at end of period
                                                                                   $ 13,222,264    $  3,976,916
                                                                                   ============    ============

Supplemental  disclosures of cash flow information:  Cash received (paid) during
    the period for:
      Interest paid ............................................................   $   (477,176)   $   (520,825)
      Interest received ........................................................   $    154,263    $    159,874
      Income tax paid ..........................................................   $     95,056            --
    Non-cash financing activities:
      Capital lease obligation .................................................   $     35,809    $       --
      Deferred financing cost ..................................................   $    203,434    $       --
      Accounts payable & accrued legal converted to notes payable ..............   $       --      $  1,775,000
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


                            TALON INTERNATIONAL, INC.
                         (FORMERLY 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 Talon  International,
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.

        On July 20, 2007 the Company changed its name from Tag-It Pacific,  Inc.
to Talon International, Inc.

        Certain  reclassifications  have been made to the prior  year  financial
statements to conform to the 2007 presentation.


                                       6
<PAGE>


NOTE 2.  EARNINGS (LOSS) PER SHARE

         The following is a reconciliation of the numerators and denominators of
the basic and diluted income (loss) per share computations:

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2007:           INCOME (LOSS)      SHARES        PER SHARE
                                            ------------    ------------    ------------
<S>                                         <C>               <C>           <C>
Basic Income per share:
  Income available to common stockholders   $    490,493      18,590,884    $       0.03

Effect of Dilutive Securities:
  Options ...............................           --         1,463,278           (0.01)
  Warrants ..............................           --             4,520            --
                                            ------------    ------------    ------------
Income available to common stockholders
                                            $    490,493      20,058,682    $       0.02
                                            ============    ============    ============

THREE MONTHS ENDED JUNE 30, 2006:
Basic Income per share:
  Income available to common stockholders   $    654,642      18,358,360    $       0.04

Effect of Dilutive Securities:
Options .................................           --           240,082            --
Warrants ................................           --              --              --
                                            ------------    ------------    ------------
Income available to common stockholders .   $    654,642      18,598,442    $       0.04
                                            ============    ============    ============

SIX MONTHS ENDED JUNE 30, 2007:
Basic loss per share:
  Loss available to common stockholders .   $   (304,851)     18,562,151    $      (0.02)

Effect of Dilutive Securities:
  Options ...............................           --              --              --
  Warrants ..............................           --              --              --
                                            ------------    ------------    ------------
Loss available to common stockholders ...   $   (304,851)     18,562,151    $      (0.02)
                                            ============    ============    ============

SIX MONTHS ENDED JUNE 30, 2006:
Basic loss per share:
  Loss available to common stockholders .   $    (74,761)     18,300,027    $      (0.00)

Effect of Dilutive Securities:
  Options ...............................           --              --              --
  Warrants ..............................           --              --              --
                                            ------------    ------------    ------------
Loss available to common stockholders
                                            $    (74,761)     18,300,027    $      (0.00)
                                            ============    ============    ============
</TABLE>

        Warrants to purchase  3,193,813  shares of common stock  exercisable  at
between  $0.95 and $5.06 per share,  options  to  purchase  4,746,735  shares of
common stock  exercisable at between $0.37 and $5.23 per share,  and convertible
debt of $12,500,000  convertible at $3.65 per share,  were  outstanding  for the
three and six months ended June 30, 2007.  In  connection  with the  Share-Based
Payment  calculation  (see  note  3),  4,880,135  shares  were  included  in the
computation  of diluted  income per share for the three month  period ended June


                                       7
<PAGE>


30, 2007.  These shares were not included in the computation of diluted loss per
share for the six months  ended June 30, 2007  because  exercise  or  conversion
would have an antidilutive effect on the loss per share.

         Warrants to purchase  1,243,813  shares of common stock  exercisable at
between  $3.50 and $5.06 per share,  options  to  purchase  4,434,888  shares of
common stock exercisable at between $0.37 and $5.23 per share,  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 and six
months  ended  June  30,  2006.  In  connection  with  the  Share-Based  Payment
calculation  (see note 3),  2,775,135 shares were included in the computation of
diluted  income per share for the three month period ended June 30, 2006.  These
shares were not  included in the  computation  of diluted loss per share for the
six months  ended June 30, 2006  because  exercise or  conversion  would have an
antidilutive effect on the 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,
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 46,600 options granted to employees  during the three and six
months  ended June 30, 2007 at a weighted  average  exercise  price of $1.02 per
share.  The  estimated  fair value of options  granted  during the three and six
months ended June 30, 2007 was $31,700.  Common shares of 1,500,000 and warrants
to acquire 2,100,000 shares of common stock were issued during the three and six
months ended June 30, 2007 to a non-employee in connection with a debt financing
facility  at a  weighted  average  exercise  price of $1.05  per  share  for the
warrants and $0.001 per share for the common shares issued.  The estimated total
fair value of the warrants and shares of common stock  granted  during the three
and six months was $2,879,020. The relative fair value of warrants and shares of
common stock issued,  less  financing  costs,  is accounted for as debt discount
related to the $9.5 million  Term note  entered  into in June 2007.  Assumptions
used to value  options  granted to employees  were  expected  volatility of 69%,
expected term of 6.1 years,  risk-free interest rate of approximately  5.0%, and
an expected  dividend yield of zero.  Assumptions used to value warrants granted
to  non-employee  were  expected  volatility  of 78%,  expected  term of 5 years
(contractual life), risk-free interest rate of 5.0%, and expected dividend yield
of zero.  In January,  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.

        As  of  June  30,  2007,  the  Company  had  approximately  $537,000  of
unamortized  stock-based  compensation  expense  related  to  options  issued to
employees  and  directors,  which will be recognized  over the weighted  average
period of 2.3 years.  This expected expense will change if any stock options are
granted or cancelled prior to the respective  reporting  periods or if there are
any changes required to be made for estimated forfeitures.

         During the three months ended June 30, 2006,  the Company did not grant
any  stock-based  awards to  employees or  non-employees.  During the six months
ended June 30, 2006,  the Company  granted awards of stock for 225,388 shares at
an average  market  price of $0.45 per share and  options  to acquire  2,685,135
shares at an  average  exercise  price of $0.42  per  share.  Awards to  acquire
1,625,000 shares were granted to employees  outside of the 1997 Plan, and awards
of stock and options to acquire 165,253 shares were granted to a consultant. The
estimated  fair value of all awards  granted during the six months was $666,000,
of which


                                       8
<PAGE>


$70,000  was  accrued for as of December  31,  2005.  Assumptions  used to value
options granted to employees were expected  volatility of 57%,  expected term of
5.3 years to 6.1 years,  risk-free  interest rate of approximately  4.4%, and an
expected  dividend yield of zero.  Assumptions  used to value options granted to
consultants  were  expected  volatility  of  65%,  expected  term  of  10  years
(contractual life), risk-free interest rate of 4.5%, and expected dividend yield
of zero.

        The following table summarizes the activity in the Company's share based
plans during the three and six months ended June 30, 2007.  At June 30, 2007 the
Company may issue additional awards to acquire up to a total of 2,502,877 shares
of common stock under the 1997 Plan.

<TABLE>
<CAPTION>
                                                                          Weighted
                                                                           Average
                                                           Number of      Exercise
                                                             Shares        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
     Granted ...........................................       46,600    $     1.02
     Exercised .........................................         --            --
     Cancelled .........................................       (3,000)   $     1.27
                                                           ----------    ----------
Options and warrants outstanding - June 30, 2007 .......    4,746,735    $     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
     Granted ...........................................    2,100,000    $     1.05
     Exercised .........................................         --            --
     Cancelled .........................................         --            --
                                                           ----------    ----------
Options and warrants outstanding - June 30, 2007 .......    3,193,813    $     2.22
                                                           ==========    ==========
</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.


                                       9
<PAGE>


Inventories consist of the following:             June 30,             December
                                                    2007               31, 2006
                                                 ----------           ----------
Finished goods .......................           $3,631,791           $4,293,220
Less reserves ........................            1,076,720            1,242,000
                                                 ----------           ----------
Total inventories ....................           $2,555,071           $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 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.  For the three
and six months ended June 30, 2007 the Company  recognized  accrued interest for
unrecognized  tax  benefits of  approximately  $4,000.  There was no interest or
penalties  recognized  during the three months or six months ended June 30, 2006
for  unrecognized tax benefits.  At June 30, 2007 the Company had  approximately
$37,875 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. A
lead plaintiff was appointed,  and his amended complaint alleged that defendants
made false and misleading statements about the Company's financial situation and
its relationship with certain of its large customers.  The action was brought on
behalf of all  purchasers of our  publicly-traded  securities  during the period
from November 13, 2003 to August 12, 2005.


                                       10
<PAGE>


On February 20, 2007, the Court denied class certification.  Plaintiff 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,
and his opening appellate brief is due on October 15, 2007. The Company believes
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 the lawsuit could  potentially  have a
material  adverse  effect on the  Company's  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 June 5, 2006 the Court
denied the Company's motion for partial summary judgment,  but did not find that
the  Company  breached  its  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.  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 has
not yet set a date for  trial  of this  matter.  The  Company  has  historically
derived a significant amount of revenue from the sale of products  incorporating
the  stretch  waistband  technology  and  the  Company's  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 the  Company.
Additionally,   the  Company  has  incurred   significant  legal  fees  in  this
litigation,  and unless the case is settled,  the Company 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.,  operated  under the
Mexican  government's  Maquiladora  Program,  which entitled 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.

         The Company  currently has pending a number of other claims,  suits and
complaints  that  arise in the  ordinary  course of our  business.  The  Company
believes 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 the Company's  consolidated financial
condition if adversely determined against the Company.

         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:


                                       11
<PAGE>


         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.


                                       12
<PAGE>


NOTE 8.  GEOGRAPHIC INFORMATION

         The Company  specializes in the distribution of a full range of apparel
zipper and trim items to manufacturers of fashion apparel,  specialty  retailers
and mass  merchandisers.  There is not enough  difference  between  the types of
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            Six Months Ended
                                   June 30,                     June 30,
                           -------------------------   -------------------------
Country / Region              2007          2006          2007          2006
                           -----------   -----------   -----------   -----------
United States ..........   $ 1,048,400   $ 1,025,100   $ 1,890,900   $ 1,938,400
Asia ...................    11,531,500     8,418,400    18,554,800    14,738,800
Mexico .................       319,400     1,444,200       599,400     2,579,700
Dominican Republic .....       269,600     2,631,300       654,700     4,272,100
Other ..................       398,100       727,100       957,300     1,355,300
                           -----------   -----------   -----------   -----------
                           $13,567,000   $14,246,100   $22,657,100   $24,884,300
                           ===========   ===========   ===========   ===========


                                                   June 30,         December 31,
                                                     2007              2006
                                                 -----------        -----------
LONG-LIVED ASSETS:
  United States ........................         $ 9,459,100        $ 9,531,659
  Asia .................................             439,500            386,516
  Mexico ...............................               1,400              5,078
  Dominican Republic ...................             613,500            668,067
                                                 -----------        -----------
                                                 $10,513,500        $10,591,320
                                                 ===========        ===========

NOTE 9.  DEBT FACILITY

         On June 27, 2007 the Company  entered into a Revolving  Credit and Term
Loan  Agreement  with  Bluefin  Capital,  LLC that  provides  for a $5.0 million
revolving  credit  loan and a $9.5  million  term loan for a three  year  period
ending June 30, 2010.  The  revolving  credit  portion of the  facility  permits
borrowings based upon a formula including 75% the Company's eligible receivables
and 55% of eligible  inventory,  and provides for monthly  interest  payments at
prime plus 2%. The term loan bears  interest at 8 1/2% annually  with  quarterly
interest  payments.  Both of the notes are  secured  by all of the assets of the
Company and mature on June 30,  2010.  At closing the  proceeds of the term loan
were  deposited  into a restricted  cash escrow  account and $3.0 million of the
borrowings  available under the revolving credit note were reserved and held for
payment of the Company's $12.5 million convertible  promissory notes maturing in
November  2007.  During July 2007 waivers were  obtained from all holders of the
convertible  promissory  notes allowing for early payment of their notes without
penalty,  and as of July 31, 2007 all of the note holders had been paid in full.
At June 30, 2007 the  convertible  promissory  notes  payable are  reflected  in
current liabilities.


                                       13
<PAGE>


         As of June 30, 2007 the Company had  borrowed  $9.5  million  under the
term note, and $1,307,806  under the revolving  credit note. The proceeds of the
term note were held in a  restricted  cash  escrow  for  future  payment  of the
convertible  promissory  notes,  and the  proceeds of the  borrowings  under the
revolving  credit  note were used to pay the  related  party  note  payable  and
accrued interest due to Mark Dyne,  Chairman of the Board of the Company, in the
amount of $1,004,306, and to pay the initial loan and legal fees due at closing.

         In connection with the Revolving  Credit and Term Loan  Agreement,  the
Company  issued  1,500,000  shares of common  stock to the lender for $0.001 per
share,  and issued  2,100,000  warrants  for the purchase of common  stock.  The
warrants  are  exercisable  over a  five-year  period and 700,000  warrants  are
exercisable at $0.95 per share;  700,000  warrants are  exercisable at $1.05 per
share;  and 700,000  warrants are  exercisable at $1.14 per share.  The relative
fair value of the equity  ($2,380,962,  which includes a reduction for financing
costs)  of  the  equity   issued  with  this  debt  facility  was  allocated  to
paid-in-capital  and  reflected as a debt discount to the face value of the term
note. This discount will be accreted over the term of the note and recognized as
additional  interest cost as amortized.  Costs associated with the debt facility
included  debt  fees,   commitment  fees,   registration  fees,  and  legal  and
professional  fees of $548,000.  The costs allocable to the debt instruments are
reflected in other assets as deferred  financing  costs and are being  amortized
over the term of the notes.

NOTE 10. SUBSEQUENT EVENTS

         During  July  2007  the  Company  obtained  waivers  from  all  of  the
convertible  promissory  note holders to accept  payment of their notes  without
penalty.  All of the restricted  cash escrow funds,  together with an additional
$3.0 million borrowed under the revolving credit note at July 31, 2007 were used
during the month to pay the convertible promissory notes in full.

         On July 31, 2007, at the Company's annual meeting of stockholders,  the
2007  Stock  Plan was  approved  which  replaces  the 1997  Stock  Plan upon its
expiration  on October 1, 2007.  The 2007 Stock Plan  authorizes up to 2,600,000
shares of common stock for issuance  pursuant to awards  granted to  individuals
under the plan. At June 30, 2007  2,502,877  shares were  available for issuance
under the 1997 Stock Plan which expires on October 1, 2007 if not issued.

         At June 30, 2007 we have an  outstanding  note  receivable  from Azteca
Production International,  Inc. of $2,127,652. The note is receivable in monthly
installments  over  thirty-one  months  beginning March 1, 2006 and the payments
currently range from $133,000 - $267,000 per month until paid in full.  Accounts
receivable  at June 30, 2007  includes  $219,900 due from Azteca,  against which
$119,800 in checks from  Azteca  were being held.  At August 1, 2007  $47,900 of
these  checks had been  collected.  On April 11,  2007 a  favorable  verdict was
awarded to the plaintiff in a trademark  infringement lawsuit in which Azteca is
a defendant and is now appealing.  This adverse ruling against Azteca may impact
their ability to repay our note  receivable.  On July 1, 2007 we did not receive
the July 1st note payment on our note  receivable from Azteca and we submitted a
notice of default. On July 23, 2007 we received an election from Azteca to defer
the July 1st  payment  for an  additional  30 days  from our  default  notice in
accordance with terms allowing this deferral in the note agreement. Accordingly,
the July 1st note payment is now due  September  14, 2007.  On August 1, 2007 we
did not receive the August 1st note payment and  accordingly  submitted a notice
of default to Azteca Production International, Inc. In accordance with the terms
of the note  agreement,  Azteca has a 30 day cure period to correct the existing
default.  The outcome of these events or an estimate of the potential  impact if
any, on the collectibility of our note receivable cannot be reasonably predicted
at this  time.  The  failure to  collect  payments  under this note could have a
material adverse effect on our financial position and results of operations.

         On July 20, 2007 the Company changed its name from Tag-It Pacific, Inc.
to Talon  International,  Inc. and changed its AMEX  trading  symbol from TAG to
TLN.


                                       14
<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.

         On July 20, 2007,  we changed our corporate  name from Tag-It  Pacific,
Inc.  to  Talon  International,  Inc.  in order to  reflect  our core  marketing
strategy of focusing on growth  opportunities  in the global  zipper market with
our Talon(R) brand zippers.

         Talon  International,  Inc.  designs,  sells  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 locations,  distribution relationships,  and
joint ventures.  The network of global manufacturing and distribution  locations
are expected to improve our global  footprint  and allow us to more  effectively
serve apparel brands and manufacturers globally.

         Our  trim  business  focus  is 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 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.

         Our Tekfit services provide manufacturers with the patented technology,
manufacturing  know-how and materials required to produce garments incorporating
an  expandable  waistband.  These  products  historically  have been produced by
several  manufacturers  for one single brand under an exclusive supply contract.
This  contract  expired in October 2006 and we now intend to expand this product
to other  brands.  Our  expansion  has been limited to date due to the exclusive
contract as well as licensing dispute. As


                                       15
<PAGE>


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  regarding our  exclusively  licensed
rights to sell or sublicense  stretch  waistbands  manufactured  under Pro-Fit's
patented technology. As we have 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 our dispute with  Pro-Fit is not  resolved in a manner  favorable to
us.

         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          SIX MONTHS
                                          ENDED JUNE 30,       ENDED JUNE 30,
                                         ----------------    -----------------
                                          2007      2006      2007       2006
                                         ------    ------    ------     ------
Net sales ............................    100.0%    100.0%    100.0%     100.0%
Cost of goods sold ...................     69.9      71.0      69.9       72.0
                                         ------    ------    ------     ------
Gross profit .........................     30.1      29.0      30.1       28.0
Selling expenses .....................      6.2       4.7       6.8        4.9
General and administrative expenses ..     17.7      18.5      22.1       21.9
Interest & taxes .....................      2.5       1.1       2.5        1.5
                                         ------    ------    ------     ------
Net income (loss) ....................      3.7%      4.7%     (1.3)%     (0.3)%
                                         ======    ======    ======     ======

         SALES

         For the three months and six months ended June 30, 2007 and 2006, sales
by  geographic  region based on the location of the customer as a percentage  of
sales were:

                                          THREE MONTHS           SIX MONTHS
                                         ENDED JUNE 30,         ENDED JUNE 30,
                                        -----------------     -----------------
                                         2007       2006       2007       2006
                                        ------     ------     ------     ------
United States ......................       7.7%       7.2%       8.3%       7.8%
Asia ...............................      85.0%      59.1%      81.9%      59.2%
Mexico .............................       2.4%      10.1%       2.6%      10.4%
Dominican Republic .................       2.0%      18.5%       2.9%      17.2%
Other ..............................       2.9%       5.1%       4.3%       5.4%
                                        ------     ------     ------     ------
                                         100.0%     100.0%     100.0%     100.0%
                                        ======     ======     ======     ======

         Sales for the three  months  ended June 30, 2007 were $13.6  million or
$0.7  million  (4.8%) less than sales for the three  months ended June 30, 2006.
Sales for the six months ended June 30, 2007 were $22.7  million or $2.2 million
(8.9%) less than sales for the same period in 2006.  The  reduction in sales for
the three and six months  ended June 30,  2007 as compared to the same period in
2006 is primarily  attributable to lower sales of waistband products as a result
of the  termination in October of 2006 of our exclusive sales contract for these
products.  For the three and six months ended June 30, 2007 sales  included $0.2
million and $0.6 million,  respectively of waistband  product sales, as compared
to sales of $2.5 million and $4.4 million,  respectively  of these  products for
comparable periods in 2006.

         Sales within Asia increased  $3.1 million,  or 37% for the three months
ended June 30, 2007 and $3.8  million,  or 26% for the six months ended June 30,
2007 as compared to the same periods in 2006. The


                                       16
<PAGE>


increase in sales within Asia is  principally  the result of increased  sales of
Talon zippers and our continued expansion in China.

         Sales of trim  products  for the three months and six months ended June
30, 2007 declined $1.4 million and $2.3 million, respectively as compared to the
same periods in 2006  principally as a result of lower sales of trim products to
our customers in Mexico and the U.S. as  production  shifted from these areas to
Asia and  other  worldwide  markets,  and as a result  of sales of $0.8  million
recognized in the second quarter of 2006 associated  with a revenue  restatement
from a 2005 agreement.

         GROSS MARGIN

         Gross margin for the three months ended June 30, 2007 was $4.1 million,
essentially  comparable  to the gross margin of $4.1 million for the same period
in 2006. Gross margin for the six months ended June 30, 2007 was $6.8 million or
$0.1 million (2%) less than gross margin for the same period in 2006. The change
in gross  margin for the three and six months ended June 30, 2007 as compared to
the  same  periods  in  2006  was  principally  attributable  to  reduced  costs
associated with lower overall sales volumes,  lower direct margin resulting from
a change in the mix in product sales,  reduced  distribution  charges since more
products  are now sourced and  delivered  within the same  marketplace,  reduced
manufacturing and assembly  overhead costs and lower inventory  obsolescence and
management  charges as inventory levels have been reduced and turns accelerated.
A brief recap of the change in gross  margin for the three and six months  ended
June 30, 2007 as compared with the same periods in 2006 is as follows:

<TABLE>
<CAPTION>
                                                                      (Amounts in thousands)
                                                         THREE MONTHS                      SIX MONTHS
                                                 ----------------------------     ----------------------------
                                                    AMOUNT           %(1)            AMOUNT           %(1)
                                                 ------------    ------------     ------------    ------------
<S>                                              <C>                     <C>      <C>                     <C>
Gross margin (decrease) increase as a result of:
Lower volumes ................................   $       (234)           (5.6)    $       (791)          (11.3)
Product margin mix ...........................            (20)           (0.5)            (319)           (4.6)
Vendor cost reductions negotiated in 2006 ....           (261)           (6.3)            (261)           (3.7)
Reduced freight and duty costs ...............            151             3.7              316             4.5
Lower manufacturing & assembly costs .........            163             3.9              130             1.9
Reduced obsolescence & inventory costs .......            109             2.7              639             9.2
Other cost of sales charges ..................             47             1.1              146             2.0
                                                 ------------    ------------     ------------    ------------
Gross margin (decrease) ......................   $        (45)           (1.0)%   $       (140)           (2.0)%
                                                 ============    ============     ============    ============
</TABLE>

(1)      Represents the percentage change in the 2007 period, as compared to the
         same period in 2006.

         SELLING EXPENSES

         Selling  expenses  for the three  months  ended June 30, 2007 were $0.8
million, or 6.2% of sales compared to $0.7 million or 4.7% of sales for the same
period in 2006.  The  increase  in  selling  expense is  principally  due to the
increased  number  of sales  offices  and  salespersons  within  China and their
associated  compensation and travel costs,  offset in part by lower royalty fees
on waistband products.

         Selling  expenses  for the six  months  ended  June 30,  2007 were $1.5
million or 6.8% of sales  compared to $1.2 million or 4.9% of sales for the same
period in 2006.  The  increase  in  selling  expense is  principally  due to the
increased number of sales offices and salesmen within China and their associated
compensation  and travel costs and increased  marketing cost associated with the
Talon brand offset in part by lower royalty fees on waistband products.


                                       17
<PAGE>


         GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative expenses for the three months ended June 30,
2007 were $2.4  million or $0.2  million  less than for the same period in 2006.
General and administrative  expenses for the six months ended June 30, 2007 were
$5.0 million or $0.3 million less than for the same period in 2006.

         General and  administrative  expense for the three month  period  ended
June 30, 2007 increased by approximately  $217,000 as a result of $53,000 in bad
debt  provisions in 2007 compared to bad debt recoveries of $164,000 in 2006; by
$133,000 due to additional  consulting fees on contracts with former  employees;
and general and administrative  expense decreased by approximately $156,000 as a
result of lower facility costs;  by $275,000 in lower legal,  audit and investor
costs;  and  by  approximately  $64,000  in  other  lower  overall  general  and
administrative expenses.

         For the six month period ended June 30, 2007 general and administrative
expenses as compared to the same period of 2006 declined by  approximately  $0.3
million.  The net  reduction  reflected  an  increase of $439,000 as a result of
$42,000  in bad debt  provisions  in 2007  compared  to bad debt  recoveries  of
$397,000 in 2006; offset by decreases in general and administrative  expenses by
$164,000  resulting from lower facility costs; by $459,000 in lower legal, audit
and investor  costs,  and by  approximately  $95,000 in other lower  general and
administrative costs.

         INTEREST EXPENSE

         Interest expense increased by approximately $37,000 to $266,000 for the
three months ended June 30,  2007,  as compared to the same period in 2006.  The
increase  principally  reflects  lower  interest  earnings  on cash and the note
receivable,  in addition to higher debt amortization costs. Interest expense for
the six  months  ended  June 30,  2007  decreased  by  approximately  $25,000 to
$491,000, as compared to the same period in 2006. The change for the period from
2006 is due mainly to lower  borrowings  under a bank line of credit and certain
notes.  Interest expense for the remaining term of the new debt facility entered
into in June 2007  will  include  approximately  $0.2  million  per  quarter  in
non-cash charges for debt accretion and deferred financing costs amortization.

         INCOME TAXES

         Income tax expense for the three and six months  ended June 30 2007 was
$78,624  and for the three and six  months  ended  June 30,  2006 the income tax
expense was $11,500.  The tax expense in both 2007 and 2006 is  associated  with
foreign  income taxes from earnings  within our Asian  facilities.  Due to prior
operating  losses  incurred within the year no benefit for domestic income taxes
has been recorded  since there is not  sufficient  evidence to determine that we
will be able to utilize our net operating  loss  carryforwards  to offset future
taxable income.

LIQUIDITY AND CAPITAL RESOURCES

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

                                             JUNE 30, 2007     DECEMBER 31, 2006
                                           -----------------   -----------------
Cash and cash equivalents ...............  $           3,822   $           2,935
Total assets ............................  $          28,358   $          25,693
Current debt ............................  $          11,835   $          22,471
Non-current debt ........................  $          12,838   $           1,536
Stockholders' equity ....................  $           3,686   $           1,686


                                       18
<PAGE>


         CASH AND CASH EQUIVALENTS

         Cash  and cash  equivalents  for the six  months  ended  June 30,  2007
  increased  $887,000  from  December  31, 2006  principally  arising  from cash
  generated by  operating  activities,  and  Restricted  cash  increased by $9.5
  million from borrowings under a term loan agreement.

         Cash provided by operating  activities is our primary  recurring source
of funds, and was  approximately  $1.8 million for the six months ended June 30,
2007. The cash provided by operating  activities  during the six months resulted
principally from net earnings before non-cash  charges of $576,000;  an increase
in trade  accounts  payable  of  $2,560,000;  a net  reduction  of  $496,000  in
inventory (a $661,000 reduction in inventory levels, net of established reserves
of $165,000);  offset by an increase in current  receivables of  $1,424,000;  an
increase in net recoverable  legal fees of $304,000;  and an increase in prepaid
expenses and other of $128,000.

           During the six months  ended June 30, 2006  established  reserves for
uncollectible  accounts receivable were applied to approximately $0.6 million of
accounts written-off, and approximately $0.3 million in reserves were eliminated
following the collection of previously reserved accounts. Cash used by operating
activities for the six months ended June 30, 2005 was $148,000.

         Net cash used in investing activities for the six months ended June 30,
2007 was $515,000 as compared to $26,000 for the six months ended June 30, 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.  In 2006 the cash used
for  investing  activities  consisted  primarily  of  capital  expenditures  for
replacing computer equipment.

         Net cash of $9,126,000 was generated from financing  activities for the
six months ended June 30, 2007. $10,507,000 (net of issuance costs) was provided
by the issuance of common stock and warrants, and by borrowings under a new debt
facility (see Note 9) designated to payoff our existing  convertible  promissory
notes and to  provide  funds for  future  growth.  The  proceeds  from this debt
facility  initially  included  $9,500,000 that was funded to a restricted escrow
account to partially pay the $12,500,000 of outstanding  convertible  promissory
notes,  and  $1,004,000  was used to pay a  related  party  note and  associated
accrued interest. Approximately $374,000 was used primarily for the repayment of
borrowings   under  capital  leases  and  notes  payable   partially  offset  by
collections  on the note  receivable  and the  proceeds of the exercise of stock
options.  Additionally, net cash used by financing activities for the six months
ended June 30, 2006 was $467,000 and  represented the repayment of notes payable
and  capital  leases,   partially  offset  by  funds  collected  from  the  note
receivable.

         We currently satisfy our working capital requirements primarily through
cash flows  generated  from  operations.  As we continue  to expand  globally in
response to the industry trend to outsource  apparel  manufacturing  to offshore
locations,  our foreign  customers,  some of which are backed by U.S. brands and
retailers,  are  increasing.   Our  revolving  debt  facility  provides  limited
financing  secured  by  our  accounts  receivable,  and  our  current  borrowing
capability  may not  provide  the  level of  financing  we need to  expand  into
additional  foreign  markets.  As  a  result,  we  are  continuing  to  evaluate
non-traditional  financing  of our  foreign  assets and equity  transactions  to
provide capital needed to fund our expansion and operations.

         We have incurred  significant legal fees in our litigation with Pro-Fit
Holdings  Limited.  Unless  the  case is  settled,  we will  continue  to  incur
additional legal fees in increasing amounts as the case accelerates to trial.

         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 our


                                       19
<PAGE>


strategic  plan and the  company's  current  structure  will allow for continued
profitability;  and that we will  collect our note and  accounts  receivable  in
accordance with existing terms.

         If we are  unable  to  collect  our note and  accounts  receivable,  or
experience  greater than  anticipated  reductions in sales, we may need to raise
additional  capital,  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  reduce  the  scope of our  business  in  response  to a
substantial decline in sales, we may default on our debt agreement. The event of
a default on the debt agreements 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.

         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,  our  borrowing  base
availability limitations related to eligible accounts receivable and inventories
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
Asian,  Central  and  South  American  and  Caribbean  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 June 30, 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 TO 3        4 TO 5         AFTER
CONTRACTUAL OBLIGATIONS              TOTAL        1 YEAR         YEARS         YEARS        5 YEARS
                                  -----------   -----------   -----------   -----------   -----------
<S>                               <C>           <C>           <C>           <C>           <C>
Demand notes payable to related
  parties (1) .................   $   209,500   $   209,500   $         0   $         0   $         0
Capital lease obligations .....   $   831,600   $   474,000   $   357,600   $         0   $         0
Operating leases ..............   $ 1,282,500   $   492,100   $   782,700   $     7,700   $         0
Notes payable .................   $15,421,500   $ 1,590,300   $13,236,100   $   595,100   $         0
Convertible notes payable (2) .   $ 3,051,700   $ 3,051,700   $         0   $         0   $         0
                                  -----------   -----------   -----------   -----------   -----------
       Total Obligations ......   $20,796,800   $ 5,817,600   $14,376,400   $   602,800   $         0
                                  ===========   ===========   ===========   ===========   ===========
</TABLE>

(1)      The majority of notes payable to related  parties is due on demand with
         the  remainder  due and payable on the fifteenth day following the date
         of  delivery  of  written  demand for  payment,  and  includes  accrued
         interest payable through June 30, 2007.

(2)      Net of $9,500,000 held in escrow for payment of these notes.


                                       20
<PAGE>


         At June 30,  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
and six months ended June 30, 2007 were  $139,900,  and $140,000,  respectively.
Sales to Tarrant for the three and six months  ended June 30, 2006 were zero and
$1,000  respectively.  As of June 30,  2007 there were  accounts  receivable  of
$140,000  due from  Tarrant,  and at December 31, 2006 there were no amounts due
from Tarrant.

         Colin  Dyne,  a  director  and  stockholder  of the  Company  is also a
director,  officer and  significant  stockholder  in People's  Liberation,  Inc.
During the three and six months  ended June 30, 2007 we had sales of $65,600 and
$349,200,  respectively,  to subsidiaries of People's  Liberation,  Inc. For the
three and six months ended June 30, 2006 we had no sales to Peoples  Liberation,
Inc. At June 30, 2007,  accounts  receivable  included $56,500  outstanding from
People's Liberation  subsidiaries.  At December 31, 2006, accounts receivable of
$83,400 was outstanding from subsidiaries of People's Liberation, Inc.

         Jonathan Burstein,  a director of the Company,  purchases products from
the Company  through an entity  operated  by his  spouse.  For the three and six
months  ended June 30,  2007 sales to this  entity  were  $30,000  and  $33,600,
respectively.  Sales to this entity for the three and six months  ended June 30,
2006 were $800 and $10,600, respectively. At June 30, 2007, $19,500 was included
in  accounts  receivable  from this entity and at  December  31,  2006  accounts
receivable included $18,400 due from this entity.

         Due from  related  parties at June 30, 2007  includes  $722,900  and at
December 31, 2006  includes  $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
parties  related to or affiliated  with Mark Dyne,  Chairman of the Board of the
Company.  The principal  balance of Demand notes  payable to related  parties at
June 30, 2007 was $85,200 and at  December  31, 2006 was  $665,000.  On June 27,
2007 a note  payable  to Mark Dyne in the  principal  amount of  $665,000,  plus
accrued interest of $339,000, was paid in full.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted  to $37,500  for the three  months  ended June 30, 2007 and
2006.  Consulting fees paid for the six months ended June 30, 2007 and 2006 were
$75,000.

         Consulting  fees of  $75,000  and $  125,200  were  paid  for  services
provided by Colin Dyne for the three  months and six months ended June 30, 2007,
respectively.  For the three and six months ended June 30, 2006  consulting fees
of $72,000 were paid to Colin Dyne. Consulting fees of $73,800 and $147,200 were
paid for services  provided by Jonathan  Burstein,  for the three months and six
months ended June 30, 2007. No consulting fees were paid to Jonathan Burstein in
2006.

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


                                       21
<PAGE>


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.  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


                                       22
<PAGE>


                  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.

         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,  record
                  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,


                                       23
<PAGE>


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  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


                                       24
<PAGE>


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.

         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 June 30,  2007 of $2.1  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 August 1, 2007 Azteca had deferred its July 1, 2007 payment under
the  terms  of the  agreement  and  was in  default  under  its  August  payment
requirements (See note 10).

         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;

         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;


                                       25
<PAGE>


         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  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:


                                       26
<PAGE>


         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  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


                                       27
<PAGE>


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  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


                                       28
<PAGE>


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 August 1, 2007, our officers and directors and their affiliates  beneficially
owned  approximately 19% 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  13% of the  outstanding  shares of our common  stock at August 1,
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 June 30, 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 June 30,
2007 the  Revolving  Credit Note of $1.3  million  was subject to interest  rate
fluctuations.


                                       29
<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 June 30, 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 June 30, 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 second quarter that have materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.


                                       30
<PAGE>


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. A
lead plaintiff was appointed,  and his amended complaint alleged that defendants
made false and  misleading  statements  about our  financial  situation  and our
relationship  with  certain of our large  customers.  The action was  brought on
behalf of all  purchasers of our  publicly-traded  securities  during the period
from  November  13, 2003 to August 12, 2005.  On February  20,  2007,  the Court
denied class certification.  Plaintiff 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, and his opening appellate brief is due
on October 15, 2007. 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 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 June 5, 2006 the Court  denied our
motion for  partial  summary  judgment,  but 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.  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 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.
         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.


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<PAGE>


ITEM 6.  EXHIBITS

         10.31.2(1) Amendment,  dated May 25, 2007, to  employment  offer letter
                    between Tag-It Pacific, Inc. and Lonnie Schnell.

         10.35      Revolving  Credit  and Tern Loan  Agreement  dated  June 27,
                    2007,  by and  between  Tag-It  Pacific,  Inc.  and  Bluefin
                    Capital, LLC.

         10.36      Guaranty   Agreement,   dated  June  27,   2007,   by  Talon
                    International,  Inc., Tag-It, Inc., A.G.S. Stationary, Inc.,
                    Tag-It Pacific  Limited,  Tag-It Pacific (HK) Ltd., Tagit de
                    Mexico,  S.A. de C. V.,  Talon  Zipper  (Shenzhen)  Company,
                    Ltd., and Talon International, Pvt. Ltd. in favor of Bluefin
                    Capital, LLC.

         10.37      Collateral  Agreement,  dated  June 27,  2007,  by and among
                    Tag-It Pacific,  Inc., Talon  International,  Inc.,  Tag-It,
                    Inc.,  A.G.S.  Stationary,  Inc.,  Tag-It  Pacific  Limited,
                    Tag-It  Pacific (HK) Ltd.,  Tagit de Mexico,  S.A. de C. V.,
                    Talon   Zipper   (Shenzhen)   Company,   Ltd.,   and   Talon
                    International, Pvt. Ltd. in favor of Bluefin Capital, LLC.

         10.38      Registration Rights Agreement, dated June 27, 2007, by Talon
                    International,   Inc.,   for   the   benefit   of   holders.
                    Incorporated  by reference  to Exhibit 4.10 to  Registration
                    Statement on Form S-3 filed on August 10, 2007.

         10.39      Form of Warrant issued to Bluefin Capital, LLC. Incorporated
                    by reference to Exhibit  4.10 to  Registration  Statement on
                    Form S-3 filed on August 10, 2007.

         10.40      Promissory Note, dated June 27, 2007, executed by Colin Dyne
                    in favor of Tag-It Pacific, Inc.

         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.


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<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:   August 14, 2007

                                         TALON INTERNATIONAL,  INC.

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


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