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

                                  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 September 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)



         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 NOVEMBER 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

            Consdensed Consolidated Balance Sheets as of September 30,
            2007 (unaudited) and December 31, 2006 ............................3

            Condensed Consolidated Statements of Operations for the
            Three Months and the Nine Months Ended September 30, 2007
            and 2006 (unaudited)...............................................4

            Condensed Consolidated Statement of Stockholders Equity
            for the Nine Months Ended September 30, 2007 (unaudited)...........5

            Condensed Consolidated Statements of Cash Flows for the
            Nine Months Ended September 30, 2007 and 2006 (unaudited)..........6

            Notes to the Condensed Consolidated Financial Statements...........7

Item 2.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations.........................................19

Item 3.     Quantitative and Qualitative Disclosures about Market Risk........34

Item 4.     Controls and Procedures...........................................34


PART II     OTHER INFORMATION

Item 1.     Legal Proceedings.................................................35

Item 1A.    Risk Factors .....................................................35

Item 4.     Submission of Matters to a Vote of Security Holders ..............36

Item 6.     Exhibits .........................................................36


                                       2
<PAGE>


PART I
FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS

<TABLE>
                            TALON INTERNATIONAL, INC.
                         (FORMERLY TAG-IT PACIFIC, INC.)
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                             (unaudited)
                                                            September 30,    December 31,
                                                                2007            2006
                                                            ------------    ------------
<S>                                                         <C>             <C>
Assets
Current assets:
   Cash and cash equivalents ............................   $  2,318,712    $  2,934,673
   Accounts receivable, net .............................      3,866,355       4,664,766
   Note receivable, net .................................           --         1,378,491
   Inventories, net .....................................      2,710,051       3,051,220
   Prepaid expenses and other current assets ............        449,743         541,034
                                                            ------------    ------------
Total current assets ....................................      9,344,861      12,570,184

Property and equipment, net .............................      5,418,095       5,623,040
Fixed assets held for sale ..............................        826,904         826,904
Note receivable, less current portion ...................           --         1,420,969
Due from related party ..................................        736,557         675,137
Intangible assets, net ..................................      4,110,751       4,139,625
Other assets, net .......................................        592,971         437,569
                                                            ------------    ------------
Total assets ............................................   $ 21,030,139    $ 25,693,428
                                                            ============    ============


Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable ......................................   $  5,363,432    $  4,533,145
  Accrued legal costs ...................................        226,507         427,917
  Other accrued expenses ................................      2,246,344       2,832,363
  Demand notes payable to related parties ...............         85,176         664,970
  Current portion of capital lease obligations ..........        383,090         432,728
  Current portion of notes payable ......................        294,259       1,107,207
  Secured convertible promissory notes ..................           --        12,472,622
                                                            ------------    ------------
Total current liabilities ...............................      8,598,808      22,470,952

Capital lease obligations, less current portion .........        247,763         474,733
Notes payable, less current portion .....................        925,104       1,061,514
Revolver note payable ...................................      3,807,806            --
Term note payable, net of discount ......................      7,289,480            --
Other long term liabilities .............................         83,651            --
                                                            ------------    ------------
Total liabilities .......................................     20,952,612      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 September 30, 2007; 18,466,433 at
     December 31, 2006 ..................................         20,041          18,466
  Additional paid-in capital ............................     54,394,342      51,792,502
  Accumulated deficit ...................................    (54,357,221)    (50,124,739)
  Accumulated other comprehensive income-foreign currency         20,365            --
                                                            ------------    ------------
Total stockholders' equity ..............................         77,527       1,686,229
                                                            ------------    ------------
Total liabilities and stockholders' equity ..............   $ 21,030,139    $ 25,693,428
                                                            ============    ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>


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

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<CAPTION>
                                                 Three Months Ended             Nine Months Ended
                                                    September 30,                 September 30,
                                            ----------------------------   ----------------------------
                                                2007            2006           2007            2006
                                            ------------    ------------   ------------    ------------
<S>                                         <C>             <C>            <C>             <C>
Net sales ...............................   $  9,013,135    $ 13,366,945   $ 31,670,234    $ 38,251,248
Cost of goods sold ......................      6,486,659       9,218,539     22,422,412      27,132,880
                                            ------------    ------------   ------------    ------------
   Gross profit .........................      2,526,476       4,148,406      9,247,822      11,118,368

Selling expenses ........................        722,447         910,996      2,161,666       2,131,515
General and administrative expenses .....      2,731,665       2,606,936      7,749,445       7,903,435
Reserve for impairment of note receivable      2,127,653            --        2,127,653            --
                                            ------------    ------------   ------------    ------------
   Total operating expenses .............      5,581,765       3,517,932     12,038,764      10,034,950

Income (loss) from operations ...........     (3,055,289)        630,474     (2,790,942)      1,083,418
Interest expense, net ...................        647,514         236,500      1,138,088         752,705
                                            ------------    ------------   ------------    ------------

Income (loss) before income taxes .......     (3,702,803)        393,974     (3,929,030)        330,713
Provision for income taxes ..............        (20,972)         54,857         57,652          66,357
                                            ------------    ------------   ------------    ------------
   Net income (loss) ....................   $ (3,681,831)   $    339,117   $ (3,986,682)   $    264,356
                                            ============    ============   ============    ============


Basic income (loss) per share ...........   $      (0.18)   $       0.02   $      (0.21)   $       0.01
                                            ============    ============   ============    ============
Diluted income (loss) per share .........   $      (0.18)   $       0.02   $      (0.21)   $       0.01
                                            ============    ============   ============    ============

Weighted average number of common
   shares outstanding:
   Basic ................................     20,041,433      18,440,927     19,060,664      18,347,509
                                            ============    ============   ============    ============
   Diluted ..............................     20,041,433      19,279,648     19,060,664      18,719,531
                                            ============    ============   ============    ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>


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

            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<CAPTION>

                                                                                Preferred Stock
                                                   Common Stock                    Series A
                                            ---------------------------   ---------------------------
                                               Shares         Amount         Shares         Amount
                                            ------------   ------------   ------------   ------------
<S>                                           <C>          <C>                    <C>    <C>
BALANCE, JANUARY 1, 2007 ................     18,466,433   $     18,466           --     $       --

   Common stock and warrants issued in
     private placement transaction ......      1,500,000          1,500           --             --

   Common stock issued upon exercise of
     options and warrants ...............         75,000             75           --             --

   Stock based compensation .............           --             --             --             --

   Cumulative Effect of Prior Period
     Adjustments  (FIN 48) ..............           --             --             --             --

   Accumulated other comprehensive
     income: foreign currency translation           --             --             --             --

   Net loss .............................           --             --                            --
                                            ------------   ------------   ------------   ------------
BALANCE, SEPTEMBER 30, 2007 .............     20,041,433   $     20,041           --     $       --
                                            ============   ============   ============   ============


<CAPTION>

                                                             Retained       Accumulated
                                             Additional      Earnings/        Other            Total
                                               Paid-In      Accumulated   Comprehensive    Stockholders'
                                               Capital       (Deficit)        Income          Equity
                                            ------------   ------------    ------------    ------------
<S>                                         <C>            <C>             <C>             <C>
BALANCE, JANUARY 1, 2007 ................   $ 51,792,502   $(50,124,739)   $       --      $  1,686,229

   Common stock and warrants issued in
     private placement transaction ......      2,374,169           --              --         2,375,669

   Common stock issued upon exercise of
     options and warrants ...............         42,671           --              --            42,746

   Stock based compensation .............        185,000           --              --           185,000

   Cumulative Effect of Prior Period
     Adjustments  (FIN 48) ..............           --         (245,800)           --          (245,800)

   Accumulated other comprehensive
     income: foreign currency translation           --             --            20,365          20,365

   Net loss .............................           --             --        (3,986,682)     (3,986,682)
                                            ------------   ------------    ------------    ------------
BALANCE, SEPTEMBER 30, 2007 .............   $ 54,394,342   $(54,357,221)   $     20,365    $     77,527
                                            ============   ============    ============    ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>


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

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<CAPTION>
                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                          ----------------------------
                                                                              2007            2006
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .....................................................   $ (3,986,682)   $    264,356
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
   Depreciation and amortization ......................................        878,834         914,053
   Amortization of deferred financing cost and debt discounts .........        496,264         233,013
   Increase (decrease) in allowance for doubtful accounts .............      2,331,018      (1,046,500)
   Decrease in inventory valuation reserves ...........................        (52,000)     (5,844,532)
   Disposal of assets .................................................           --           108,184
   Stock based compensation ...........................................        185,000         283,024
Changes in operating assets and liabilities:
     Accounts receivable ..............................................        670,046       1,644,550
     Note receivable ..................................................        671,807         317,170
     Inventories ......................................................        393,169       8,267,568
     Prepaid expenses and other current assets ........................         91,291         (63,273)
     Due from related party ...........................................        (61,420)         86,716
     Other assets .....................................................        (22,649)       (174,292)
     Accounts payable .................................................        830,287      (1,790,968)
     Accrued legal costs ..............................................       (306,250)       (147,561)
     Other accrued expenses ...........................................       (795,881)       (229,756)
                                                                          ------------    ------------
 Net cash provided by operating activities ............................      1,322,834       2,821,752
                                                                          ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of property and equipment .............................       (585,470)       (325,702)
    Proceeds from sale of equipment ...................................           --             2,500
                                                                          ------------    ------------
 Net cash used by investing activities ................................       (585,470)       (323,202)
                                                                          ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from exercise of stock options and warrants ..............         42,746            --
    Proceeds from issuance of stock and warrants, net of issuance costs      2,306,918            --
    Revolver note borrowings ..........................................      4,307,806            --
    Term note borrowings, net of issuance costs .......................      6,849,582            --
    Payments for capital lease obligations ............................       (334,401)       (434,676)
    Repayment of demand notes payable to related parties ..............       (579,794)           --
    Repayment of notes payable ........................................       (949,358)       (615,037)
    Payment of revolver note ..........................................       (500,000)           --
    Payment of secured convertible promissory notes ...................    (12,500,000)           --
                                                                          ------------    ------------
   Net cash from (used by) financing activities .......................     (1,356,501)     (1,049,713)
                                                                          ------------    ------------

Net increase (decrease) in cash and cash equivalents ..................       (619,137)      1,448,837
Net effect of foreign currency exchange translation on cash ...........          3,176            --
Cash at beginning of period ...........................................      2,934,673       2,277,397
                                                                          ------------    ------------
Cash and cash equivalents at end of period ............................   $  2,318,712    $  3,726,234
                                                                          ============    ============

Supplemental disclosures of cash flow information:
    Income taxes paid during the period ...............................   $    172,542    $       --
    Non-cash financing activities:
      Capital lease obligation ........................................   $     57,793    $    348,451
      Deferred financing cost .........................................   $    238,491    $       --
      Accounts payable & accrued legal converted to notes payable .....   $       --      $  1,775,000
      Effect of foreign currency translation on net assets ............   $     17,189    $       --
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       6
<PAGE>


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

            NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 1.     PRESENTATION OF INTERIM INFORMATION

         The accompanying  unaudited condensed 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  condensed   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  and related notes included in the Company's
Annual Report on Form 10-K (and amendments  thereto) 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.

NOTE 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A complete description of the Company's Significant Accounting Policies
is included in the Company's Annual Report on Form 10-K (and amendments thereto)
for the year ended  December 31, 2006,  and should be read in  conjunction  with
these unaudited condensed  consolidated  financial  statements.  The Significant
Accounting  Policies  noted  below are only  those  policies  that have  changed
materially or have supplemental  information  included for the periods presented
here.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

        We are required to make judgments as to the  collectability  of accounts
receivable based on established aging policy,  historical  experience and future
expectations.  The  allowance  for  doubtful  accounts  represents  amounts  for
customer  trade  accounts  receivable  that are  estimated  to be  partially  or
entirely  uncollectible.  These  allowances  are  used  to  reduce  gross  trade
receivables to their net realizable  value. We record these  allowances based on
estimates related to the following  factors:  (i) customer specific  allowances;
(ii) amounts based upon an aging schedule;  and (iii) an estimated amount, based
on our historical experience,  for issues not yet identified.  Bad debt expense,
including the impairment of note  receivable for the three and nine months ended
September 30, 2007 are  $2,307,446  and  $2,349,568,  respectively,  compared to
recoveries of bad debts of $133,780 and $531,121,  for the three and nine months
ended  September 30, 2006.  Total  provisions for doubtful  accounts  during the
third  quarter of 2007  includes a  provision  reserved  against the Azteca note
receivable as explained in Note 4.

INTANGIBLE ASSETS

        Intangible  assets  consist of our trade name and exclusive  license and
intellectual property rights.  Intangible assets acquired in a purchase business
combination and determined to have an indefinite  useful life are not amortized,
but instead are tested for impairment at least  annually in accordance  with the
provisions of FASB  Statement  No. 142,  GOODWILL AND OTHER  INTANGIBLE  ASSETS.
Intangible   assets  with  estimable  useful  lives  are  amortized  over  their
respective  estimated  useful  lives,  which  average 5 years,  and reviewed for


                                       7
<PAGE>


impairment  in  accordance  with  the  provisions  of FASB  Statement  No.  144,
ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Amortization expense
for these  assets for the nine months  ended  September  30,  2006 was  $86,625.
During  the first  quarter  of 2007,  the  exclusive  license  and  intellectual
property rights became fully amortized with amortization expense of $28,875.

OTHER ACCRUED EXPENSES

        Other accrued expenses consist of incurred  obligations that are not yet
payable,  such as deferred  compensation  and accrued  benefits,  interest,  and
advance customer payments and deposits.  As of September 30, 2007, other accrued
expenses  included  $582,670  in advance  customer  payments  and  deposits  (as
compared to $512,339 at December 31, 2006).

CLASSIFICATION OF EXPENSES

         COSTS OF SALES - Cost of goods sold primarily includes expenses related
to inventory purchases,  customs, duty, freight,  overhead expenses and reserves
for obsolete  inventory.  Overhead  expenses  primarily consist of warehouse and
operations salaries, and other warehouse expense.

         SELLING EXPENSES - Selling expenses  primarily include royalty expense,
sales salaries and commissions,  travel and  entertainment,  marketing and other
sales related costs.  Marketing and advertising efforts are expensed as incurred
and for the three and nine months  ended  September  30,  2007 were  $17,465 and
$146,551, respectively, compared to $198,319 and $198,393 for the three and nine
months ended September 30, 2006, respectively.

         GENERAL  AND  ADMINISTRATIVE  EXPENSES  -  General  and  administrative
expenses   primarily  include   administrative   salaries,   employee  benefits,
professional  service fees,  facility  expenses,  information  technology costs,
investor relations, travel and entertainment, depreciation and amortization, bad
debts and other general corporate expenses.

         INTEREST EXPENSE, NET - Interest expense reflects the cost of borrowing
and amortization of deferred financing costs and discounts. Interest expense for
the  three and nine  months  ended  September  30,  2007  totaled  $677,717  and
$1,354,723, respectively, (compared to $340,965 and $1,017,044 for the three and
nine months ended September 30, 2006, respectively). Interest income consists of
earnings  from  outstanding  amounts  due to the  Company  under notes and other
interest bearing receivables.  For the three and nine months ended September 30,
2007 the Company recorded interest income of $30,203 and $216,635  respectively,
compared to $104,465 and $264,339 for the same periods in 2006.

         Cash paid for interest  charges for the nine months ended September 30,
2007 and 2006  amounted  to  $1,019,831  and  $731,327,  respectively.  Interest
payments  received  during the nine  months  ended  September  30, 2007 and 2006
totaled $170,215 and $228,800, respectively.

SHIPPING AND HANDLING COSTS

         In accordance with Emerging Issues Task Force (EITF) 00-01,  ACCOUNTING
FOR SHIPPING  AND  HANDLING  FEES AND COSTS,  the Company  records  shipping and
handling  costs billed to customers as a component of revenue,  and shipping and
handling  cost  incurred by the Company for  outbound  freight are recorded as a
component of cost of sales.  Total  shipping and  handling  costs  included as a
component of revenue for the nine months ended  September 30, 2007 and 2006 were
$178,435  and  $67,426,  respectively  ($59,383 and $49,006 for the three months
ended  September 30, 2007 and 2006,  respectively).  Total shipping and handling
costs  incurred  as a  component  of cost of  sales  for the nine  months  ended
September 30, 2007 and 2006 were $622,384 and $500,305,  respectively  ($194,145
and  $161,420  for  the  three  months  ended   September  30,  2007  and  2006,
respectively).


                                       8
<PAGE>


FOREIGN CURRENCY TRANSLATION

         The  Company  has  operations  and  holds  assets  in  various  foreign
countries. The local currency is the functional currency for our subsidiaries in
China and India. Assets and liabilities are translated at end-of-period exchange
rates while revenues and expenses are  translated at the average  exchange rates
in effect during the period. The Chinese yuan was translated at an end-of-period
exchange rate of  approximately  7.5176  Chinese yuan per US dollar at September
30, 2007 (7.8175 at December 31,  2006).  The Indian rupee was  translated at an
end-of-period  exchange rate of approximately  44.12 Indian rupees per US dollar
at September  30, 2007 (39.81 at December 31,  2006).  Equity is  translated  at
historical  rates  and the  resulting  cumulative  translation  adjustments  are
included as a component of accumulated other  comprehensive  income (loss) until
the  translation  adjustments  are  realized.   Included  in  other  accumulated
comprehensive  income was a cumulative foreign currency  translation  adjustment
gain of $20,365 at September 30, 2007 (none at December 31, 2006).

COMPREHENSIVE INCOME

         The Company adopted Statement of Financial Standard No. 130, "Reporting
Comprehensive  Income"  ("SFAS  130").  SFAS 130  establishes  standards for the
reporting and display of  comprehensive  income and its  components in financial
statements.

         Comprehensive  income and its  components for the three and nine months
ended September 30, 2006 and 2007 is as follows:

<TABLE>
<CAPTION>
                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
                                    --------------------------   --------------------------
                                        2007           2006          2007           2006
                                    -----------    -----------   -----------    -----------
<S>                                 <C>            <C>           <C>            <C>
Net income (loss) ...............   $(3,681,831)   $   339,117   $(3,986,682)   $   264,356
Other comprehensive income:
Foreign currency translation ....        20,365           --          20,365           --
                                    -----------    -----------   -----------    -----------
Total comprehensive income (loss)   $(3,661,466)   $   339,117   $(3,966,317)   $   264,356
                                    ===========    ===========   ===========    ===========
</TABLE>

         The foreign currency translation adjustment represents the net currency
translation  adjustment  gains  and  losses  related  to  our  China  and  India
subsidiaries,  which  have not been  reflected  in net  income  for the  periods
presented.

RECLASSIFICATIONS

         Certain  reclassifications  have  been made to prior  period  financial
statements  to conform to the current year  presentation.  The  amortization  of
deferred financing costs and discounts are reported as "Interest  Expense,  net"
on the accompanying  unaudited condensed  consolidated  statement of operations.
These items were previously  reported as "General and Administrative  Expenses".
Current trade  liabilities  related to inventory  receipts  without invoices are
reported  as  "Accounts  payable"  on  the  accompanying   unaudited   condensed
consolidated  balance  sheets.  These items were  previously  reported as "Other
accrued expenses".


                                       9
<PAGE>


NOTE 3.     INCOME (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 SEPTEMBER 30, 2007:   INCOME (LOSS)      SHARES      PER SHARE
                                          -----------    -----------   -----------
<S>                                       <C>             <C>          <C>
Basic Loss per share:
  Available to common stockholders ....   $(3,681,831)    20,041,433   $     (0.18)

Effect of Dilutive Securities:
Options ...............................          --             --            --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Loss available to common stockholders .   $(3,681,831)    20,041,433   $     (0.18)
                                          ===========    ===========   ===========

THREE MONTHS ENDED SEPTEMBER 30, 2006:
Basic Income per share:
  Available to common stockholders ....   $   339,117     18,440,927   $      0.02

Effect of Dilutive Securities:
Options ...............................          --          838,721          --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Income available to common stockholders   $   339,117     19,279,648   $      0.02
                                          ===========    ===========   ===========

NINE MONTHS ENDED SEPTEMBER 30, 2007:
Basic Loss per share:
  Available to common stockholders ....   $(3,986,682)    19,060,664   $     (0.21)

Effect of Dilutive Securities:
Options ...............................          --             --            --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Loss available to common stockholders .   $(3,986,682)    19,060,664   $     (0.21)
                                          ===========    ===========   ===========

NINE MONTHS ENDED SEPTEMBER 30, 2006:
Basic Income per share:
  Available to common stockholders ....   $   264,356     18,347,509   $      0.01

Effect of Dilutive Securities:
Options ...............................          --          372,022          --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Income available to common stockholders   $   264,356     18,719,531   $      0.01
                                          ===========    ===========   ===========
</TABLE>

        Warrants to purchase  3,163,813  shares of common stock  exercisable  at
between $0.95 and $5.06 per share,  and options to purchase  4,738,235 shares of
common stock  exercisable at between $0.37 and $5.23 per share, were outstanding
for the three and nine months ended  September 30, 2007.  For the three and nine
months ended September 30, 2007 convertible  debt of $12,500,000  convertible at
$3.65 per share was outstanding  until July 2007 when the debt was fully repaid.
Other  convertible  debt  of  $500,000   convertible  at  $4.50  per  share  was
outstanding during the periods until June 27, 2007 when the debt was fully paid.
Warrants  issued  in  July  2004 to  purchase  30,000  shares  of  common  stock
exercisable at $4.29 per share,  were outstanding  during the periods until they
expired in July 2007.  These  shares  were not  included in the  computation  of
diluted  loss per share for the three or nine months  ended  September  30, 2007
because exercise or conversion would have an antidilutive effect on the loss per
share.


                                       10
<PAGE>


         For the three and nine months  ended  September  30,  2006  warrants to
purchase 1,243,813 shares of common stock exercisable at between $3.50 and $5.06
per share,  options to purchase  4,897,635 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.  In connection with the Share-Based  Payment ("SFAS
123(R)")  calculation  (see note 8) 3,435,135 and 2,775,135 shares were included
in the  computation  of diluted  income per share for the three and nine  months
ended September 30, 2006, respectively.

NOTE 4.     NOTE RECEIVABLE

         At September 30, 2007 Azteca  Production  International,  Inc. owes the
Company a balance of  $2,127,653  plus accrued and unpaid  interest from July 1,
2007, under a Note Payable and Settlement Agreement entered into during February
2006.  The note is  payable  in  monthly  installments  over  thirty-one  months
beginning March 1, 2006 with payments ranging from $133,000 - $267,000 per month
until paid in full,  but not later than July 1, 2008.  Azteca failed to make the
scheduled  note  payments  due on  July 1,  2007,  and  all  subsequent  periods
thereafter, triggering a default and exhausting all cure periods under the note,
resulting in the entire note balance  being due and  payable.  On September  10,
2007 after meeting with and conducting extensive discussions with Azteca, Azteca
failed to provide to the Company  certain  security  interests as required under
the note to make the  scheduled  note  payments.  Azteca  further  expressed its
belief that it would not be able to make any note  payments  in the  foreseeable
future.

         Under the terms of the note, a default results in full  acceleration of
the balance  due,  and the maker is also liable for  interest  accruing  and all
costs  associated  with the  collection  of the note  balance.  The  Company has
initiated  legal actions to secure all legal remedies  available to it under the
terms of the note,  and is taking legal steps to secure all assets or collateral
available to the Company under the law. The Company will pursue recovery of this
note and all associated costs to the full extent of the law.

         Despite  the  Company's  legal  remedies,   the  Company  believes  the
likelihood of recovery is remote,  given the circumstances and current financial
conditions of Azteca  Production  International,  Inc. and Diversified  Apparel,
LLC. Accordingly,  in the quarter ended September 30, 2007, the Company recorded
a reserve for impairment of note receivable to operations for an amount equal to
the outstanding balance of the note as of September 30, 2007.

NOTE 5.     INVENTORIES

         Inventories  are  stated  at the  lower of cost,  determined  using the
first-in,  first-out  ("FIFO") basis, or market value and are all categorized as
finished  goods.  The costs of  inventory  include the purchase  price,  inbound
freight and duties,  conversion costs and certain allocated  production overhead
costs. Inventory valuation 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.
Provisions for inventory  valuation  allowances  were $120,654 for the three and
nine months ended September 30, 2007.


                                       11
<PAGE>


         Inventories consist of the following:

                                   September 30,   December 31,
                                        2007           2006
                                    -----------    -----------
                Finished goods ..   $ 3,900,051    $ 4,293,220
                Less reserves ...    (1,190,000)    (1,242,000)
                                    -----------    -----------
                Total inventories   $ 2,710,051    $ 3,051,220
                                    ===========    ===========


NOTE 6.     FIXED ASSETS HELD FOR SALE

         Fixed  assets  held for sale  consist  of the North  Carolina  land and
manufacturing  facility  that was closed in connection  with the Company's  2005
Restructuring  Plan.  The carrying  value of these assets at both  September 30,
2007 and December 31, 2006 is $826,904.  The assets are financed with a mortgage
note payable with  $695,618  outstanding  at September  30, 2007 and $712,950 at
December 31, 2006.

         Management  has the  authority  to approve the disposal of these assets
and is committed to a plan to sell the  facility.  The facility is available for
immediate  sale in its present  condition  and the Company has  initiated and is
pursuing  actions to locate a buyer and list the property with  commercial  real
estate  brokers to complete the sale of the facility.  The Company  believes the
sale of the  facility  is  probable  but has not  concluded  due to  market  and
regional conditions. The Company's plan to dispose of the facility is not likely
to be  changed  or  withdrawn  and the  Company  has no future  plans to use the
facility.

 NOTE  7.   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 the
prime  rate plus  2.0%.  The term loan  bears  interest  at 8.5%  annually  with
quarterly interest payments and repayment in full at maturity.  Borrowings under
both credit facilities are secured by all of the assets of the Company.

         Under the terms of the credit agreement the Company is required to meet
certain  cash flow and coverage  ratios,  among other  restrictions  including a
restriction  from  declaring or paying a dividend  prior to repayment of all the
obligations.  The financial covenants require the Company to maintain at the end
of each fiscal quarter  "EBITDA" (as defined in the Agreement) for the preceding
four quarters in excess of the Company's principal and interest payments for the
same  four-quarter  period.  In the event that the Company  fails to satisfy the
minimum EBITDA  requirement for two consecutive  quarters,  the credit agreement
will be in default and the full amount of the notes outstanding will become due.
For the period ended  September  30, 2007 the Company  believes that this EBITDA
covenant was  satisfied,  but also informed the lender that the Company may fail
to satisfy the EBITDA  covenant  for the  quarters  ending  December 31, 2007 or
March 31, 2008. The Company  requested the lender to amend the loan agreement to
allow for  additional  time to satisfy the  covenant.  On November  19, 2007 the
Company  entered into an  agreement  with  Bluefin  Capital,  LLC to modify this
financial  covenant and to extend until June 30, 2008 (with a further  extension
to March 31, 2009  provided  certain  conditions  are met by June 30,  2008) the
application of the EBITDA  covenant in exchange for  additional  common stock of
the Company and a price adjustment to the lenders outstanding warrants issued in
connection with the loan agreement. See Note 13, Subsequent Events.

         At  closing  on June 27,  2007,  the  proceeds  of the term loan  ($9.5
million) 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  closing  the  Company  also  borrowed  $1,004,306  under  the
revolving  credit  note and used the  proceeds  to pay the  related  party  note
payable  and  accrued  interest  due to Mark Dyne,  Chairman of the Board of the
Company.  Additionally  initial  borrowings under the revolving credit note were
used to pay the loan and legal fees due at closing. As of September 30, 2007 the
Company had borrowed $9.5 million under the term note, and $3,807,806  under the
revolving credit note.


                                       12
<PAGE>


        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  ($2,374,169,  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 amortized  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 $486,000.  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.

        Interest expense related to the Revolving Credit and Term Loan Agreement
for the three and nine  months  ended  September  30,  2007  were  $467,360  and
$484,006,  respectively, which includes $220,503 and $230,382 in amortization of
discounts and deferred financing costs, respectively.

NOTE 8.     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
nine  months  ended  September  30,  2007 (none  during the three  months  ended
September 30, 2007) at a weighted average exercise price of $1.02 per share. The
estimated fair value of options  granted in the nine months ended  September 30,
2007 was $31,700.  Common shares of 1,500,000 and warrants to acquire  2,100,000
shares  of  common  stock  were  issued on June 27,  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 nine months  ended  September  30, 2007 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-employees  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 based upon the intrinsic value amount.

        As of September  30,  2007,  the Company had  approximately  $467,000 of
unamortized  stock-based  compensation  expense  related  to  options  issued to
employees  and  directors,  which will be recognized  over the weighted  average
period of 2.2 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  September 30, 2006,  the Company  granted
options to  acquire  660,000  common  shares at an  exercise  price of $0.69 per
share.  During the nine months ended  September  30, 2006,  the Company  granted
awards of stock for 225,388 shares at an average market price of $0.45 per share
and granted options to acquire  3,345,135 shares at an average exercise price of
$0.47 per share.  Awards to acquire  1,625,000  shares were granted to employees


                                       13
<PAGE>


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 awards granted
during the three months ended  September  30, 2006 was $43,756 and the estimated
fair value of all awards granted during the nine months ended September 30, 2006
was  $353,024  of  which  $70,000  was  accrued  for as of  December  31,  2005.
Assumptions  used to value options  granted to employees  during the nine months
ended September 30, 2006 were expected  volatility of 57% to 64%,  expected term
of 5.0 years to 6.1 years, risk-free interest rate of approximately 4.8%, 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 divided yield
of zero.

         The following  table  summarizes  the activity in the  Company's  share
based plans  during the three and nine  months  ended  September  30,  2007.  At
September  30,  2007 the 1997 Stock Plan  expired  and no further  awards may be
issued under this 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
     Granted .............................................         --            --
     Exercised ...........................................         --            --
     Cancelled ...........................................       (8,500)   $     1.27
                                                             ----------    ----------
Options and warrants outstanding - September 30, 2007 ....    4,738,235    $     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
     Granted .............................................         --            --
     Exercised ...........................................         --            --
     Cancelled ...........................................      (30,000)   $     4.29
                                                             ----------    ----------
Options and warrants outstanding - September 30, 2007 ....    3,163,813    $     2.20
                                                             ==========    ==========
</TABLE>


                                       14
<PAGE>


         On July 31, 2007, at the Company's annual meeting of stockholders,  the
2007 Stock Plan was approved  which replaced the 1997 Stock Plan. 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 September 30, 2007 no awards
under the 2007 Stock Plan had been granted.

NOTE 9.     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 nine months ended September 30, 2007 the Company recognized accrued interest
for unrecognized tax benefits of approximately $4,000 and $8,000,  respectively.
There were no interest or penalties  recognized  during the three months or nine
months  ended  September  30,  2006 for  unrecognized  tax  benefits  due to the
provisions of FIN 48 not becoming effective until January 2007. At September 30,
2007 the Company had  approximately  $41,875  accrued in interest and  penalties
associated with the unrecognized tax liabilities.

NOTE 10.    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.

         The Company has not achieved the AMEX minimum equity requirements as of
this filing and the extension  period granted by AMEX has expired.  Accordingly,
the Company expects the AMEX to begin delisting  proceedings  shortly thereafter
and to remove the Company's shares from trading on AMEX.

         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
the Company and certain of its 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 the  Company's  publicly-traded
securities  during the period  from  November  13, 2003 to August 12,  2005.  On
February 20, 2007,  the Court denied class  certification.  On April 2, 2007 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


                                       15
<PAGE>


was filed on October 15, 2007. Our brief is currently due November 28, 2007. The
Company believes that this matter will be resolved  favorably on appeal, or in a
later  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 the Company's
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 the  Company 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 is without merit.  An estimate of the possible loss or range of loss
if any  associated  with these matters  cannot be made at this time. The Company
does not  believe  these  matters  will have a  material  adverse  effect on the
Company.

         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:

         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


                                       16
<PAGE>


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 11.    NEW ACCOUNTING PRONOUNCEMENTS

         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.  The Company does not believe that SFAS No. 159 will have a
material impact on the Company's  financial  position,  results of operations or
cash flows.

         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
(GAAP), 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.  The Company does not
believe that SFAS No. 157 will have a material impact on the Company's financial
position, results of operations or cash flows.

NOTE 12.    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
believes  that  revenue  by each  major  product  class is a  valuable  business
measurement.  The net  revenues  for the three  primary  product  groups  are as
follows:

                           Three Months Ended          Nine Months Ended
                             September 30,               September 30,
                       -------------------------   -------------------------
Product Group net
Revenue:                   2007          2006          2007          2006
                       -----------   -----------   -----------   -----------
    Talon zipper ...   $ 4,280,168   $ 4,136,425   $17,471,285   $13,321,301
    Trim ...........     4,690,037     5,674,366    13,517,895    16,969,322
    Tekfit .........        42,930     3,556,154       681,054     7,960,625
                       -----------   -----------   -----------   -----------
                       $ 9,013,135   $13,366,945   $31,670,234   $38,251,248
                       ===========   ===========   ===========   ===========


                                       17
<PAGE>


         The Company distributes its products  internationally and has reporting
requirements  based on  geographic  regions.  The net book  value of  long-lived
assets  (consisting  of property and equipment,  intangible  assets and property
held for sale) is  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           Nine Months Ended
                                September 30,               September 30,
                         -------------------------   -------------------------
Country / Region             2007          2006          2007          2006
                         -----------   -----------   -----------   -----------
    United States ....   $   944,190   $ 1,205,357   $ 2,835,124   $ 3,143,816
    Asia .............     7,466,034     7,206,857    26,020,853    21,940,718
    Mexico ...........        51,643       722,502       651,069     3,302,242
    Dominican Republic        44,119     3,423,416       698,789     7,695,516
    Other ............       507,149       808,813     1,464,399     2,168,956
                         -----------   -----------   -----------   -----------
                         $ 9,013,135   $13,366,945   $31,670,234   $38,251,248
                         ===========   ===========   ===========   ===========


                                           September 30,    December 31,
                                               2007             2006
                                           -----------      -----------
LONG-LIVED ASSETS, NET:
    United States ......................   $ 9,180,524      $ 9,531,659
    Asia ...............................       587,937          386,516
    Mexico .............................         1,250            5,078
    Dominican Republic .................       586,184          668,067
                                           -----------      -----------
     Net book value of long-lived assets   $10,355,895      $10,591,320
                                           ===========      ===========

NOTE 13.    SUBSEQUENT EVENTS

         On November  19,  2007,  the Company  entered  into an amendment to its
Revolving Credit and Term Loan agreement with Bluefin Capital, LLC (See Note 7).
The amendment  includes a modification  to the loan agreement that extends until
June 30,  2008 (with a further  extension  to March 31,  2009  provided  certain
conditions are met by June 30, 2008) the  application of the EBITDA covenant and
provides  additional time to meet other  non-performance  related covenants.  In
consideration  for the covenant  waiver the Company  agreed to (a) issue Bluefin
Capital,  LLC 250,000 shares of the Company's  common stock; and (b) to re-price
warrants for 2,100,000  shares of the Company's  common stock issued on June 27,
2007 in connection  with the loan  agreement  from a weighted  average  exercise
price of $1.05 to $0.75 per share. In the event the Company  completes an equity
offering prior to June 30, 2008, Bluefin Capital agreed to accept 25% of the net
proceeds of the equity  offering as a prepayment  on the term note, in lieu of a
prepayment  of 50% as  provided  for under the loan  agreement,  and to  further
extend  until  March  31,  2009  the  application  of the  EBITDA  covenant.  In
consideration  for these changes the Company  agreed,  if it completes an equity
offering, to issue Bluefin Capital an additional 500,000 shares of the Company's
common stock,  and to re-price their warrants to the price of warrants issued in
the offering, if lower.

        Under the provisions of Statement of Financial Accounting Standard,  No.
123(R),  the  fair  value  of the  common  stock  issued  in  exchange  for this
modification,  together  with the  difference  in the fair value of the warrants
measured at the date of the re-pricing and the fair value of the warrants before
the re-pricing,  is recognized as an expense in the period the shares are issued
and the price of the warrants is changed. Accordingly, the Company estimates the
loan  modification will result in a charge to earnings during the fourth quarter
of 2007 of approximately  $212,000 for the fair value of the equity  components,
plus  approximately  $110,000 in legal and other  associated  costs, for a total
estimated charge of $322,000.


                                       18
<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 described  more fully in this report
under  Contingencies  and  Guarantees  (see Note 10 to our  unaudited  condensed
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.


                                       19
<PAGE>


         Under the terms of our credit agreement we are required to meet certain
cash flow and coverage ratios. The financial covenant requires us to maintain at
the end of each fiscal  quarter  "EBITDA" (as defined in the  Agreement) for the
preceding four quarters in excess of our principal and interest payments for the
same  four-quarter  period.  In the event  that we fail to satisfy  the  minimum
EBITDA requirement for two consecutive quarters, the credit agreement will be in
default and the full amount of the notes  outstanding  will become due.  For the
period  ended  September  30, 2007 we believed  that this  EBITDA  covenant  was
satisfied,  but also  informed the lender that we may fail to satisfy the EBITDA
covenant  for the  quarters  ending  December  31,  2007 or March 31,  2008.  We
requested the lender to amend the loan agreement to allow for additional time to
satisfy the  covenant.  On November 19, 2007 we entered  into an agreement  with
Bluefin Capital,  LLC to modify this financial covenant and to extend until June
30, 2008 (with a further extension to March 31, 2009 provided certain conditions
are met by June 30, 2008) the application of the EBITDA covenant in exchange for
additional  shares of our common  stock and a price  adjustment  to the lender's
outstanding warrants. See Note 13, Subsequent Events.

         RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED       NINE MONTHS ENDED
                                                 SEPTEMBER 30,            SEPTEMBER 30,
                                             ---------------------    ---------------------
                                               2007         2006        2007         2006
                                             --------     --------    --------     --------
<S>                                             <C>          <C>         <C>          <C>
Net sales ................................      100.0%       100.0%      100.0%       100.0%
Cost of goods sold .......................       72.0         69.0        70.8         70.9
                                             --------     --------    --------     --------
Gross profit .............................       28.0         31.0        29.2         29.1
Selling expenses .........................        8.0          6.8         6.8          5.6
General and administrative expenses ......       30.3         19.5        24.5         20.7
Impairment of note receivable ............       23.6         --           6.7         --
Interest & taxes .........................        7.0          2.2         3.8          2.1
                                             --------     --------    --------     --------
Net income (loss) ........................      (40.9)%        2.5%      (12.6)%        0.7%
                                             ========     ========    ========     ========
</TABLE>

         SALES

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

                                    THREE MONTHS ENDED       NINE MONTHS ENDED
                                       SEPTEMBER 30,           SEPTEMBER 30,
                                   --------------------    --------------------
              REGION                 2007        2006        2007        2006
                                   --------    --------    --------    --------
United States ..................       10.5%        9.0%        9.0%        8.2%
Asia ...........................       82.8%       53.9%       82.1%       57.4%
Mexico .........................        0.6%        5.4%        2.1%        8.6%
Dominican Republic .............        0.5%       25.6%        2.2%       20.1%
Other ..........................        5.6%        6.1%        4.6%        5.7%
                                   --------    --------    --------    --------
                                      100.0%      100.0%      100.0%      100.0%
                                   ========    ========    ========    ========

         Sales for the nine months ended  September  30, 2007 were $31.7 million
or $6.6  million  (17.2%)  less  than  sales for the same  period  in 2006.  The
reduction in sales for the nine months ended  September  30, 2007 as compared to
the same period in 2006 is the net result of an increase of $4.1 million (31.2%)
in our Talon  zipper  sales as we expand  our  operations  throughout  China and
southeast Asia,  offset by lower sales of waistband  products as a result of the
expiration in October of 2006 of our exclusive contract for these products ($7.2


                                       20
<PAGE>


million);  reduced  operations in Mexico as production shifted from this area to
Asia and we closed our operations in 2005 and 2006 ($2.0  million);  as a result
of sales ($0.7 million) recognized in the second quarter of 2006 associated with
a revenue  restatement from a 2005 agreement;  and lower trim sales due to fewer
and smaller programs with our customers ($0.8 million).

         Sales for the three months ended  September  30, 2007 were $9.0 million
or $4.4 million (32.6%) less than sales for the three months ended September 30,
2006.  The  reduction in sales for the three months ended  September 30, 2007 as
compared to the same period in 2006 is principally  the result of lower sales of
waistband  products  from the  expiration  of our  exclusive  contract for these
products  ($3.5  million);  a result of sales ($0.7 million) from Mexico in 2006
and our closure of the Mexican operations; and lower trim sales due to fewer and
smaller  programs with our customers  ($0.3  million);  offset by an increase in
Talon zipper sales ($0.1 million). Talon zipper sales for the three months ended
September  30,  2007  were  partially  impacted  by the  acceleration  of zipper
deliveries  into the  second  quarter of 2007 as  manufacturers  worked to avoid
additional VAT taxes in China  effective July 31, 2007, and by expiring  Chinese
export quotas limiting the exportation of products manufactured in China for our
customers.  Talon  zipper  sales for the  balance  of 2007 will  continue  to be
impacted by limited  export  quotas  until  2008,  and our  continued  expansion
throughout  Southeast Asia into  Thailand,  Vietnam and Indonesia is intended to
partially offset these restrictions.

         GROSS MARGIN

         Gross  margin for the three months  ended  September  30, 2007 was $2.5
million,  as compared to $4.1 million for the same period in 2006.  Gross margin
for the nine months  ended  September  30, 2007 was $9.2  million as compared to
$11.1 million for the same period in 2006. The reduction in gross margin for the
three and nine months ended  September  30, 2007 as compared to the same periods
in 2006 was  principally  attributable  to lower overall sales volumes and lower
direct  margin  resulting  from a change in the mix in sales by  product  group,
partially  offset by 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 nine
months ended  September 30, 2007 as compared with the same periods in 2006 is as
follows:

<TABLE>
<CAPTION>
                                                                  (Amounts in thousands)
                                                      Three Months Ended           Nine Months Ended
                                                         September 30,               September 30,
                                                   ------------------------    ------------------------
                                                     Amount         %(1)         Amount         %(1)
                                                   ----------    ----------    ----------    ----------
<S>                                                <C>                <C>      <C>                <C>
Gross margin (decrease) increase as a result of:
Lower volumes ..................................   $   (1,614)        (38.9)   $   (2,343)        (21.1)
Product margin mix .............................         (265)         (6.4)         (756)         (6.8)
Reduced freight and duty costs .................          163           3.9           480           4.3
Lower manufacturing & assembly costs ...........          118           2.8           248           2.2
Reduced obsolescence & inventory costs .........            6            .2           646           5.8
Other cost of sales charges ....................          (30)          (.7)         (145)         (1.2)
                                                   ----------    ----------    ----------    ----------
Gross margin (decrease) ........................   $   (1,622)        (39.1)   $   (1,870)        (16.8)
                                                   ==========    ==========    ==========    ==========
</TABLE>

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


                                       21
<PAGE>


         SELLING EXPENSES

         Selling  expenses for the three months  ended  September  30, 2007 were
$0.7 million, or 8.0% of sales compared to $0.9 million or 6.8% of sales for the
same period in 2006. The change in selling expense is principally due to reduced
spending for marketing  programs,  lower sales  commissions on the lower volumes
and lower  royalty  fees on Tekfit  sales ($0.3  million),  partially  offset by
increased salaries, facilities and other costs associated with new employees and
offices within Asia ($0.1 million).

         Selling expenses for the nine months ended September 30, 2007 were $2.2
million or 6.8% of sales  compared to $2.1 million or 5.6% of sales for the same
period in 2006.  The  increase  in  selling  expense is  principally  due to the
increased  number  of  sales  offices  and  employees  within  China  and  their
associated  compensation,  facilities  travel  and  administrative  costs  ($0.4
million)  offset by lower  marketing  costs,  lower  royalty  fees on  waistband
products, and reduced commissions on lower volumes ($0.3 million).

         GENERAL AND ADMINISTRATIVE EXPENSES

         General  and  administrative   expenses  for  the  three  months  ended
September  30, 2007 were $2.7 million or $0.1 million more than $2.6 million for
the comparable period in 2006. General and administrative  expenses for the nine
months ended September 30, 2007 were $7.7 million or $0.2 million less than $7.9
million for the comparable period in 2006.

         General and  administrative  expense for the three month  period  ended
September  30, 2007  increased by  approximately  $0.2  million  from  increased
employee  costs  and by $0.3  million  as a result of $0.2  million  in bad debt
provisions  in 2007  compared to bad debt  recoveries  of $0.1  million in 2006.
General and administrative expenses decreased by approximately $0.3 million as a
result of reduced legal and  professional  fees,  lower facility costs and other
lower overall general and administrative expenses.

         For the nine months ended September 30, 2007 general and administrative
expenses  increased by approximately  $0.1 million from increased employee costs
and by $0.6 million as a result of $0.1 million in bad debt  provisions  in 2007
compared  to bad debt  recoveries  of $0.5  million in 2006.  Reduced  legal and
professional  fees ($0.6 million) and lower  facility and other overall  general
and  administrative  expenses  ($0.6  million)  offset  the cost  increases  and
resulted in the net reduction of costs.

         IMPAIRMENT OF NOTE RECEIVABLE

         Operating  expenses for the three and nine months ended  September  30,
2007 include $2.1 million in bad debt  reserve  provisions  associated  with the
note receivable due the Company from Azteca Production  International,  Inc. See
Note 4 of the unaudited condensed consolidated financial statements.

         INTEREST EXPENSE AND INTEREST INCOME

         Interest  expense  for  the  three  months  ended  September  30,  2007
increased  $337,000 from the same period in 2006.  Interest expense for the nine
months ended September 30, 2007 increased $338,000 from the same period in 2006.
The increase for the quarter and nine months ended  September  30, 2007 over the
same periods in 2006 was  principally as a result of increased  amortization  of
deferred  financing  costs  and  discounts,  and  higher  interest  costs on the
revolving credit and term notes as compared to the previous secured  convertible
notes  payable.  During the third  quarter  2007,  we charged off  approximately
$111,000 in unamortized deferred financing costs and discounts related to and in
conjunction with the early payment of the secured  convertible  promissory notes
in July 2007.

         Interest  income for the three months and nine months  ended  September
30, 2007 decreased from the same period in 2006,  primarily  related to the note
receivable discussed in Note 4 to the unaudited condensed consolidated financial
statements.


                                       22
<PAGE>


         A brief  summary of interest  expense and interest  income is presented
below:

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED           NINE MONTHS ENDED
                                                  SEPTEMBER 30,                 SEPTEMBER 30,
                                           --------------------------    --------------------------
                                               2007           2006           2007           2006
                                           -----------    -----------    -----------    -----------
<S>                                        <C>            <C>            <C>            <C>
Interest expense .......................   $   345,045    $   263,206    $   858,458    $   784,031
Amortization of deferred financing costs
   & debt discounts ....................       332,672         77,759        496,265        233,013
                                           -----------    -----------    -----------    -----------
    Interest expense ...................       677,717        340,965      1,354,723      1,017,044
Interest income ........................       (30,203)      (104,465)      (216,635)      (264,339)
                                           -----------    -----------    -----------    -----------
Interest expense, net ..................   $   647,514    $   236,500    $ 1,138,088    $   752,705
                                           ===========    ===========    ===========    ===========
</TABLE>

         INCOME TAXES

         Income tax provisions for the three and nine months ended  September 30
2007  reflected  a  tax  benefit  of  $20,972  and  a tax  expense  of  $57,652,
respectively. For the three and nine months ended September 30, 2006, income tax
expense was $54,857 and $66,357,  respectively. The tax expense in both 2007 and
2006 is  associated  with  foreign  income  taxes  from  earnings  of 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
carry-forwards to offset future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

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

                                                     SEPTEMBER 30,  DECEMBER 31,
                                                         2007           2006
                                                     ------------   ------------
Cash and cash equivalents ........................   $      2,319   $      2,935
Total assets .....................................   $     21,030   $     25,693
Current debt .....................................   $      8,599   $     22,471
Non-current debt .................................   $     12,354   $      1,536
Stockholders' equity .............................   $         78   $      1,686

         CASH AND CASH EQUIVALENTS

         Cash provided by operating  activities is our primary  recurring source
of funds, and was approximately $1.3 million for the nine months ended September
30,  2007.  The cash  provided by  operating  activities  during the nine months
resulted  principally  from a net loss  before  non-cash  charges  of  $148,000;
collections on the note receivable of $672,000; an decrease in operating capital
(accounts receivable,  inventories, accounts payable and other accrued expenses)
of  $1,098,000;  and other  increases in  operating  assets and  liabilities  of
$299,000.

         Net  cash  used in  investing  activities  for the  nine  months  ended
September  30, 2007 was  $585,000  as  compared to $323,000  for the nine months
ended September 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 $1,356,000  was used in financing  activities  for the nine
months  ended  September  30,  2007.  $13,507,000  (net of  issuance  costs) was
provided by the issuance of common stock and warrants, and by borrowings under a
new debt facility  (see Note 7)  designated to pay off our existing  convertible


                                       23
<PAGE>


promissory notes and to provide funds for future growth.  The proceeds from this
debt facility were used to pay the $12,500,000 of secured convertible promissory
notes,  and  $1,004,000  was used to pay a related  party  note  ($580,000)  and
associated accrued interest. Approximately $1,284,000 was used primarily for the
repayment of borrowings  under  capital  leases and notes payable and during the
quarter  ended  September  30,  2007  $500,000 in initial  borrowings  under the
revolving note were repaid.

         Our Revolving Credit and Term Loan Agreement with Bluefin Capital,  LLC
requires us to maintain at the end of each fiscal quarter,  "EBITDA" (as defined
in the Agreement) for the preceding four quarters in excess of our principal and
interest payments for the same four-quarter period. In the event that we fail to
satisfy the minimum EBITDA requirement for two consecutive quarters,  the credit
agreement will be in default and the full amount of the notes  outstanding  will
become due. For the period ended  September 30, 2007 we believe that this EBITDA
covenant was satisfied.

         We have also  informed  our lender  that we may not  satisfy the EBITDA
covenant  for the  quarters  ending  December  31, 2007 or March 31,  2008,  and
accordingly  we  requested  our lender to amend the loan  agreement to allow for
additional time to satisfy the covenant. On November 19, 2007 we entered into an
agreement with Bluefin  Capital,  LLC to modify this  financial  covenant and to
extend until June 30, 2008 (with a further  extension to March 31, 2009 provided
certain  conditions  are met by June 30,  2008) the  application  of the  EBITDA
covenant  in  exchange  for  additional  shares of our common  stock and a price
adjustment to the lender's outstanding warrants. See Note 13, Subsequent Events.

         We  believe  that  our  existing  cash and  cash  equivalents,  and our
anticipated cash flows from our operating  activities will be sufficient to fund
our minimum working capital and capital expenditure needs as well as provide for
our scheduled  debt service  requirements  for at least the next twelve  months.
This  conclusion  is based on the belief that our  operating  assets,  strategic
plan,  operating  expectations and operating  expense structure will provide for
sufficient  profitability  from operations  before non-cash  charges to fund our
operating capital requirements and to achieve our debt service requirements, and
that our  existing  cash and cash  equivalents  will be  sufficient  to fund our
expansion and capital requirements.

         We  have  historically   satisfied  our  working  capital  requirements
primarily  through cash flows generated from  operations,  and 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  credit
facility provides limited financing secured by our accounts receivable,  and our
current  borrowing  capability may not provide the level of financing we need to
continue in or to expand into additional  foreign markets.  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.

         If we 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 credit agreement.

         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.

         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


                                       24
<PAGE>


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 September 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) ................   $   211,300   $   211,300          --            --            --

Capital lease obligations .....   $   694,900   $   419,000   $   275,900          --            --

Operating leases ..............   $ 1,331,800   $   574,600   $   753,300   $     3,900          --

Revolving Credit & Term notes .   $16,601,800   $ 1,197,800   $15,404,000          --            --

Other Notes payable ...........   $ 1,511,200   $   461,000   $ 1,050,200          --            --
                                  -----------   -----------   -----------   -----------   -----------

       Total Obligations ......   $20,351,000   $ 2,863,700   $17,483,400   $     3,900          --
                                  ===========   ===========   ===========   ===========   ===========
</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 September 30, 2007.

         At September 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

         Todd Kay, a director and  significant  shareholder  of Tarrant  Apparel
Group is also a  stockholder  of the  Company.  Sales to  Tarrant  for the three
months and nine months  ended  September  30, 2007 were  $1,800,  and  $141,800,
respectively. Sales to Tarrant for the three and nine months ended September 30,
2006 were $300 and $1,300 respectively. As of September 30, 2007 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 nine  months  ended  September  30,  2007 we had sales of
$115,500 and $323,000,  respectively,  to subsidiaries  of People's  Liberation,
Inc.  For the three and nine  months  ended  September  30, 2006 we had sales of
$22,100 and $55,100,  respectively,  to subsidiaries of Peoples Liberation, Inc.
At September 30, 2007,  accounts  receivable  included $94,800  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 former director of the Company, purchases products
from the Company  through an entity  operated  by his spouse.  For the three and
nine months  ended  September  30,  2007 sales to this  entity were  $24,800 and
$58,500, respectively.  Sales to this entity for the three and nine months ended


                                       25
<PAGE>


September  30, 2006 were $10,500 and  $21,100,  respectively.  At September  30,
2007,  $7,700  was  included  in  accounts  receivable  from this  entity and at
December 31, 2006 accounts  receivable included $18,400 due from this entity. On
October 25, 2007, Mr. Burstein resigned as a director of the Company.

         Due from related parties at September 30, 2007 includes $736,600 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
September  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 $579,795,  plus
accrued interest of $424,511, 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 September 30, 2007 and
2006. Consulting fees paid for the nine months ended September 30, 2007 and 2006
were $112,500.

         Consulting  fees of  $75,000  and $  200,100  were  paid  for  services
provided by Colin Dyne for the three months and nine months ended  September 30,
2007,  respectively.  For the three and nine  months  ended  September  30, 2006
consulting fees of $36,000 and $108,000,  respectively  were paid to Colin Dyne.
Consulting  fees of $73,800  and  $221,000  were paid for  services  provided by
Jonathan  Burstein,  for the three  months and nine months ended  September  30,
2007, respectively. 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  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 condensed 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,  determined using
                  the  first-in,  first-out  basis,  or market value and are all
                  substantially  finished goods. The costs of inventory  include
                  the purchase  price,  inbound  freight and duties,  conversion
                  costs and certain allocated production overhead.  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


                                       26
<PAGE>


                  partially  or  fully  reserved  for  depending  on the type of
                  product and the length of time the  product has been  included
                  in inventory.  Reserve adjustments are made for the difference
                  between the cost of the  inventory  and the  estimated  market
                  value,  if lower,  and charged to  operations in the period in
                  which the facts  that  give rise to these  adjustments  become
                  known.  Market value of  inventory  is estimated  based on the
                  impact of market trends, an evaluation of economic  conditions
                  and the value of current  orders  relating to the future sales
                  of this type of inventory.

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

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

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

         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


                                       27
<PAGE>


                  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,  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.

         WE DO NOT EXPECT TO REGAIN  COMPLIANCE WITH AMEX LISTING  REQUIREMENTS,
AND WE EXPECT TO BE  DELISTED  BY THE AMEX AND THAT OUR SHARES WILL NO LONGER BE
TRADED  ON THIS  EXCHANGE.  In May  2006 we were  advised  by AMEX  that we were
non-compliant  with the  minimum  net equity  listing  requirements  and we were
afforded an  opportunity to submit a plan to AMEX that provided for increases in
our  equity  beyond  the  minimum  $4.0  million  equity  requirement  within an
eighteen-month  timeframe  from the date of the notice  from AMEX.  On August 3,
2006 AMEX accepted our plan to regain  compliance  and has given us an extension
until  November 16, 2007 to become  compliant  with the AMEX  continued  listing
standards.  We have suffered substantial  operating losses and as of this filing
we have not met the  minimum  listing  requirements  of AMEX.  As a result,  our
shares of common stock may be removed from listing on AMEX.

         WE DO NOT EXPECT TO 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 of $2.1  million and this
adverse  ruling  against  them has  impacted  their  ability  to repay  our note
receivable. On September 10, 2007 we obtained further information from the maker
that further  evidenced  their  inability to pay the note,  and  accordingly  we
recorded an impairment  reserve for the full value  outstanding of $2.1 million.
We will continue to pursue collection  through all legal resources  available to
us. The failure to collect  payments  under this note as  scheduled  will have a
material  adverse  effect on our financial  position,  results of operations and
cash flow.


                                       28
<PAGE>


         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 ended during the third quarter of
2007 and are 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 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


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<PAGE>


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;

         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


                                       30
<PAGE>


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:

         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 and safeguard Company assets.  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.


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<PAGE>


         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 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 INCUR
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


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<PAGE>


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
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  September  30,  2007,  our  officers  and  directors  and  their  affiliates
beneficially  owned  approximately  20% of the outstanding  shares of our common
stock. The Dyne family, which includes Mark Dyne and Colin Dyne who are also our
directors;  Jonathan  Burstein,  Larry  Dyne  and the  estate  of  Harold  Dyne;
beneficially  owned  approximately  13% of the outstanding  shares of our common
stock at September  30,  2007.  Additionally,  at September  30, 2007 our lender
Bluefin Capital,  LLC beneficially owned  approximately 16.3% of the outstanding
shares of our common stock. As a result, our lender,  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.


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<PAGE>


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 September 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 September
30, 2007 the Revolving  Credit Note of $3.8 million was subject to interest rate
fluctuations.  A one percentage point increase in interest rates would result in
an  annualized  increase to  interest  expense of  approximately  $38,000 on our
variable rate borrowings.

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.

         As of  September  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 September 30, 2007, our disclosure
controls and procedures were effective.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

         During  the  fiscal  quarter  ended  September  30,  2007 there were no
changes in our internal  controls over financial  reporting that have materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.


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<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.  On April 2,  2007 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 was filed on October 15,
2007.  Our brief is currently due November 28, 2007. We believe that this matter
will be  resolved  favorably  on appeal,  or in a later  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 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 our 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 as amended and is incorporated herein by reference.


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<PAGE>


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

         On July 31, 2007, we held our 2007 annual meeting of stockholders.  For
the results of voting at the 2007 annual meeting of stockholders,  see Item 8.01
of our  Current  Report  on Form 8-K  filed  with the  Securities  and  Exchange
Commission on August 3, 2007.

ITEM 6.     EXHIBITS

         3.1      Certificate of  Incorporation  of Registrant.  Incorporated by
                  reference  to Exhibit  3.1 to Form SB-2  filed on October  21,
                  1997, and the amendments thereto.

         3.1.2    Certificate  of  Designation   of  Rights,   Preferences   and
                  Privileges  of  Series  A  Preferred  Stock.  Incorporated  by
                  reference  to  Exhibit  A to the  Rights  Agreement  filed  as
                  Exhibit 4.1 to Current Report on Form 8-K filed on November 4,
                  1998.

         3.1.3    Certificate of Amendment of Certificate  of  Incorporation  of
                  Registrant. Incorporated by reference to Exhibit 3.4 to Annual
                  Report on Form 10-KSB, filed March 28, 2000.

         3.1.4    Certificate of Amendment of Certificate  of  Incorporation  of
                  Registrant. Incorporated by reference to Exhibit 3.1.3 to Form
                  8-K filed on August 4, 2006.

         3.1.5    Certificate of Ownership and Merger. Incorporated by reference
                  to Exhibit 3.1 to Form 8-K filed on July 20, 2007.

         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.


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:   November 19, 2007

                                       TALON INTERNATIONAL,  INC.

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


                                       36