TLN Talon International,

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.

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.

 THREE MONTHS ENDED NINE MONTHS ENDED
 SEPTEMBER 30, SEPTEMBER 30,
 --------------------- ---------------------
 2007 2006 2007 2006
 -------- -------- -------- --------
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%
 ======== ======== ======== ========

 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

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:

 (Amounts in thousands)
 Three Months Ended Nine Months Ended
 September 30, September 30,
 ------------------------ ------------------------
 Amount %(1) Amount %(1)
 ---------- ---------- ---------- ----------
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)
 ========== ========== ========== ==========

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

SELLING EXPENSES

Selling expenses for the three months ended 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.

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

 THREE MONTHS ENDED NINE MONTHS ENDED
 SEPTEMBER 30, SEPTEMBER 30,
 -------------------------- --------------------------
 2007 2006 2007 2006
 ----------- ----------- ----------- -----------
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
 =========== =========== =========== ===========

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.

 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

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

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.

 PAYMENTS DUE BY PERIOD
 -------------------------------------------------------------------
 LESS THAN 1 TO 3 4 TO 5 AFTER
 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------------------- ----------- ----------- ----------- ----------- -----------
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 --
 =========== =========== =========== =========== ===========

(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

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

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

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.

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

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

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.

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

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.