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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 1998

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

                         Commission file number 1-13669

                              TAG-IT PACIFIC, INC.
                 (Name of Small Business Issuer In Its Charter)

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

                             3820 SOUTH HILL STREET
                          LOS ANGELES, CALIFORNIA                   91367
                    (Address of Principal Executive Offices)      (Zip Code)

                                 (323) 234-9606
                (Issuer's Telephone Number, Including Area Code)

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

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

        Securities registered under to Section 12(g) of the Exchange Act:
                                      NONE

      Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 
                      ----                   ----

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]

      The issuer's revenues for the fiscal year ended December 31, 1998 were
$18,808,067.

      At March 24, 1999 the aggregate market value of the voting stock held by
non-affiliates of the issuer was $14,713,509.

      At March 24, 1999 the issuer had 6,726,677 shares of Common Stock, $.001
par value, issued and outstanding.

      Transitional Small Business Disclosure Format (check one):  
      Yes         No  X     
          ----      ----

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Issuer's Proxy Statement with respect to its 1999 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Report.

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

PART 1                                                                     PAGE

Item 1.   Description of Business .......................................    3

Item 2.   Description of Property........................................    6

Item 3.   Legal Proceedings .............................................    6

Item 4.   Submission of Matters to a Vote of Security Holders............    6


PART II

Item 5.   Market for Common Equity and Related Stockholder Matters........   7

Item 6.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.....................................   8

Item 7.   Consolidated Financial Statements:

          Report of Independent Auditors..................................  17

          Consolidated Balance Sheets as of December 31, 1998
            and December 31, 1997.........................................  18

          Consolidated  Statements of Income for the Fiscal Years 
            Ended December 31, 1998 and 1997 and Four Months
            Ended December 31, 1997.......................................  19

          Consolidated Statements of Stockholders' Equity(Deficiency) 
            for the Fiscal Years Ended December 31, 1998 and 1997 and 
            the Four Months Ended December 31, 1997.......................  20

          Consolidated Statements of Cash Flows for the Fiscal Years
            Ended December 31, 1998 and 1997 and the Four Months 
            Ended December 31, 1997.......................................  21

          Notes to Consolidated Financial Statements.....................   22

Item 8.   Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure.....................................   33

PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
            Compliance With Section 16(a) of the Exchange Act...........    34

Item 10.  Executive Compensation........................................    34

Item 11.  Security Ownership of Certain Beneficial Owners 
            and Management..............................................    34

Item 12.  Certain Relationships and Related Transactions................    34

Item 13.  Exhibits, List and Reports on Form 8-K........................    34


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                                     PART I

ITEM 1.  DESCRIPTION OF  BUSINESS

GENERAL

      Tag-It Pacific is a single-source provider of complete brand identity
programs to manufacturers of fashion apparel and licensed consumer products and
to specialty retailers and mass merchandisers. We design and produce
high-quality paper, metal and injection molded boxes, woven and leather labels,
paper-hanging and bar-coded tags, metal jean buttons and custom shopping bags.
We also design and manufacture products for a variety of major brand and private
label oriented companies, including Guess?, Calvin Klein, Tommy Hilfiger, Sony
Signatures, Warner Bros. and Carol Little, among others.

      We were incorporated in Delaware in September 1997. We were formed to
serve as the parent holding company of Tag-It, Inc., a California corporation,
Tag-It Printing & Packaging Ltd., a BVI corporation, Tagit de Mexico, SA de CV,
A.G.S. Stationery, Inc., a California corporation, and Pacific Trim & Belt,
Inc., a California corporation. All of these companies were consolidated under a
parent limited liability company on October 17, 1997. These companies became our
wholly-owned subsidiaries immediately prior to the effective date of our initial
public offering in January 1998. In November 1998, we formed Pacific Trim, SA de
CV located in Tehuacan, Mexico, a wholly-owned subsidiary of Tag-It Pacific, to
service the increasing number of garment and apparel manufacturers doing
business in the region. Effective in 1997, we changed our fiscal year end from
August 31 to December 31.

BUSINESS STRATEGY

      Tag-It Pacific has positioned itself as a fully-integrated single-source
provider of complete brand identity programs. We have assembled a team of
creative design personnel, sales representatives, assembly workers, program
managers and global production and distribution coordinators at our facilities
in Los Angeles, New York, Mexico and Hong Kong. We believe our innovative
designs and global manufacturing and distribution operations will enable us to
take advantage of and address the increasingly complicated requirements of the
large and expanding demand for effective brand identity programs.

      Our growth strategy includes the following elements:

      o     to expand our customer base by promoting our single-source solution
            and in-house design, materials procurement and manufacturing and
            distribution coordination capabilities;
      o     to increase customer  penetration by targeting  additional product 
            lines within existing customers;
      o     to expand our marketing programs and network of sales offices;
      o     to broaden our customer base to include  cosmetics  and specialty
            foods manufacturers;
      o     to pursue private label opportunities; and
      o     to pursue strategic acquisitions and alliances.

DESIGN AND DEVELOPMENT

      We estimate that we design approximately 70% of the products we sell. We
have assembled an in-house creative team to produce products with innovative
designs that we believe distinguish our products from those of our competitors.
Our skill in material procurement and product manufacturing coordination is
applied by us to design products intended to meet aesthetic demands, as well as
functional and cost parameters. Many specialty design companies with which we
compete have limited sourcing or manufacturing experience. These companies
create designs that often cannot be implemented because of difficulties in the
manufacturing process, the expenses of required materials, or because the
resulting product is not functional. We attempt to design products to function
within the limitations imposed by the applicable manufacturing framework. Using
our manufacturing and sourcing experience, we attempt to minimize the
time-consuming delays that often arise in coordinating the efforts of
independent design houses and manufacturing facilities. By providing design,
material procurement and product manufacturing services, we believe that we
reduce development and production costs and deliver products to our customers
sooner than many of our competitors.

      We begin our product development by creating a distinctive design that
embodies a customer's corporate image and existing trademarks. While we develop
designs to be consistent with a customer's image, each design is distinct to
each particular product. We typically create a comprehensive design presentation
for a customer that is focused on a discrete 


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product tag, packaging, trim or label assignment, or on an entire packaging or
trim program for a line of products. From this presentation, the client is able
to select a particular design and product style and image from one or more
prototypes that we have developed specifically for the client. We then
coordinate the manufacture, assembly, finishing and distribution of all
packaging, tag, label and trim products to the customer's locations. We believe
that our in-house ability to create customized prototypes for customer marketing
presentations is a significant competitive advantage.

      All of our design work is performed by our Los Angeles team of graphic
artists and prototype fabricators. Our film, die making and pre-production
functions also are completed in Los Angeles. Our design team uses
computer-assisted design techniques that use a Scitex color separating and
control system to produce all color separations for our printed products. We
then provide these color separations to our contract manufacturers throughout
the world. This design process helps to ensure that our finished products,
wherever manufactured, are uniform in color and appearance.

PRODUCTS

      SPECIALTY PACKAGING. Our specialty packaging products include high-quality
paper boxes, metal tins, injection-molded packaging items and high-quality
shopping bags. We design and produce these products individually or as part of a
program involving an entire coordinated packaging line for a client. Our
specialty packaging is used for a wide variety of products, including wallets,
watches, sunglasses, belts, undergarments and gift sets.

      HANG TAGS AND PRINTED APPAREL PACKAGING AND TRIMS. We produce hang tags,
bar-coded hang tags, pocket flashers, waistband tickets and size stickers.
Manufacturers and retailers attach these items to their products to identify and
promote their products, permit automated data collection, provide brand
identification and communicate consumer information such as a product's retail
price, size, fabric content and care instructions.

      We produce customized woven, leather, synthetic, embroidered and novelty
labels and tapes. We design these products to be printed on or woven into a wide
range of fabrics and other materials using various types of high-speed
equipment. Our labels are used primarily for product identification and consumer
information on apparel.

      We also offer our customers a full range of logo and non-logo hardware
trim for their apparel. Our hardware product line includes jean buttons, jean
rivets, snaps, metal sew-on buttons and an assortment of other types of logo
hardware designed specifically for our customers. We believe we are able to
supply our customers with all of their hardware needs. As an additional service,
we will lease to our customers the machinery used to attach the buttons, rivets
and snaps we produce.

      PRIVATE LABEL AND SPECIALTY LICENSE PRODUCTS. During 1998, we discontinued
designing, manufacturing and selling book bags, ring binders, composition books,
stationery, metal pencil tins, date books and other similar products under a
specialty licensing arrangement with Guess?. Due to lower than anticipated sales
levels, the Company and Guess mutually agreed to terminate the license
agreement. We continue to maintain several licensing arrangements with several
high brand recognition companies, including Warner Bros. Consumer Products, Sony
Signatures, Inc., Looney Tunes and Baby Looney Tunes, pursuant to which we
provide hang tags, woven labels and printed labels.

CUSTOMERS

     We have more than 150 customers. Our customers include well-known apparel
manufacturers, such as Guess?, Calvin Klein Jeans, Tommy Hilfiger, A\X Armani
Exchange, Nautica, Quicksilver, Carole Little and Swank, which is a licensee of
Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Peirre Cardin, among
others. Our clients also include specialty retailers such as American Eagle
Outfitters and Miller's Outpost and mass merchant retailers such as J.C.Penny.
We also provide products and services to the promotional arms of large
entertainment companies such as Sony Signatures, Inc. and Warner Bros. Consumer
Products. Guess? and Swank accounted for approximately 8.5% and 9.5%
respectively, of our net sales for the year ended December 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and "--Cautionary Statements and Risk Factors -- We Depend on a Few
Key Customers With Whom We Do Not Have Long-Term Contracts."

      Commencing in December 1998, we began to provide trim products to Tarrant
Apparel Group for its operations in Tehuacan, Mexico. The Chief Executive
Officer and President of Tarrant Apparel Group are significant stockholders of


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Tag-It Pacific. We opened our warehouse, distribution and partial assembly
facility in Tehuacan to service the increasing number of garment and apparel
manufacturers doing business in the region, including Tarrant Apparel Group.


SALES AND MARKETING

      We sell our principal products through our own sales force based in Los
Angeles and New York. We also employ customer service representatives who are
assigned to key customers and provide in-house customer service support. Our
senior executives have developed relationships with our major customers at
senior levels. These executives actively participate in marketing and sales
functions and the development of our overall marketing and sales strategies.
When we become the outsourcing vendor for a customer's packaging or tag
requirements, we attempt to position ourselves as a department of the customer's
procurement operation. In 1998, we hired additional salespersons and customer
service representatives in the Los Angeles office and hired additional
salespersons in the New York office. With the addition of an additional senior
executive, each sales office is now managed by a senior executive. We also
increased our marketing efforts to identify potential new customers with higher
sales potential and distributed new color product brochures to increase our
awareness within the industry.

      We consider a high level of customer service essential to our success.
Accordingly, in 1998 we developed "TAG-IT TURNKEY", our proprietary
internet-based computer software program. TAG-IT TURNKEY allows us to provide
our customers with a customized, comprehensive system for the management of
their brand identity programs. TAG-IT TURNKEY provides our customers with
assistance in the ordering, production, inventory management and just-in-time
worldwide distribution of their trim and packaging requirements. Tarrant Apparel
Group is currently using the TAG-IT TURNKEY system, and we plan to offer the
program to a larger base of existing and new customers commencing in 1999.


SOURCING

      We create most product artwork and any necessary films, dies and molds
used to manufacture our products. All bar-coded printing, assembly and finishing
of high-quality paper boxes, custom shopping bags and point-of-sale packaging
signage is performed internally by us. We also assemble multi-part jean buttons.
All other products that we design and sell are produced by third party vendors.
We intend to continue to outsource some production to qualified vendors,
particularly with respect to manufacturing activities that require substantial
investment in capital equipment.

      Through our Hong Kong facility, we produce and distribute bar-coded hang
tags, distribute apparel packaging and coordinate the manufacture and
distribution of the full range of our products. The Hong Kong facility supplies
several significant packaging programs, services customers located in Asia and
the Pacific Rim and sources products for our Los Angeles operations. Through our
assembly and finishing facility in Tijuana, Mexico, we complete the assembly and
finishing of many of our packaging products and distribute products to
Mexico-based manufacturers. We also distribute "trim packages", which include
hang tags, woven labels, jean buttons, etc., from our warehouse in Tehuacan,
Mexico.

      We purchase raw materials from several qualified material suppliers. We
have developed an expertise in identifying the best materials, prices and
vendors for particular products and raw materials. This expertise enables us to
produce a broad range of packaging styles at various price points that meet a
customer's budget and product pricing parameters.


COMPETITION

      We compete in highly competitive and fragmented industries that include
numerous local and regional companies that provide some or all of the services
we offer. We also compete with United States and international design companies,
distributors and manufacturers of tag, trim and packaging products. Some of our
competitors, including Paxar, Inc., RVL, Inc. Copac International Packaging,
Inc., Universal Button, Inc., and Scovill Fasteners, Inc. have greater name
recognition, longer operating histories and, in many cases, substantially
greater financial and other resources.

      We believe that to successfully compete in our industry we must offer
superior design capabilities, product pricing, quality, customer service and
delivery lead times. Because of our integrated material procurement and
production


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capabilities, we believe that we are able to effectively compete for our
customers' business, particularly where our customers require coordination of
separately sourced production functions.


EMPLOYEES

      As of December 31, 1998, we had approximately 336 employees, with 70
employees in Los Angeles, 7 employees in New York, 8 employees in Hong Kong and
the balance in Mexico. Our total labor force includes 21 employees in sales, 31
employees in general administration and finance and the remainder in operations.
Our labor force in the United States and Hong Kong are non-union. The employees
at our Mexico facilities are represented by the Sindicato "Mexico Moderno" De
Trabajadores De La Baja California, C.R.O.M., a collective bargaining unit. In
addition to our salaried and hourly workforce, we employ additional workers at
our Mexico facilities on a temporary basis when necessary to meet production and
assembly requirements. Our temporary work force ranges from zero to
approximately 100 workers at any one time throughout the year. We believe that
we have satisfactory employee and labor relations.


ITEM 2.  DESCRIPTION OF PROPERTY

      Our headquarters are located in Los Angeles, California, where we occupy
approximately 24,000 square feet of administrative, production, and warehouse
space. A portion of the space is leased from the President and Director of our
company who is a general partner of the lessor. In addition to our Los Angeles
facilities, we lease 2,600 square feet of office space in New York, 4,500 square
feet of office and warehouse space in Fo Tan, Hong Kong, 13,600 square feet of
production and warehouse space in Tijuana, Mexico, and 20,000 square feet of
warehouse, distribution and partial assembly space in Tehuacan, Mexico. We
opened our Tehuacan, Mexico facility in December 1998 to service the increasing
number of garment and apparel manufacturers doing business in the region,
including Tarrant Apparel Group.


ITEM 3.  LEGAL PROCEEDINGS

      We currently have pending a number of claims, suits and complaints that
arise in the ordinary course of our business. We believe that we have
meritorious defenses to these claims and the claims are 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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.


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                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

COMMON STOCK

      Tag-It Pacific's Common Stock began trading on the American Stock Exchange
on January 23, 1998 under the symbol "TAG". The following table sets forth, for
the periods indicated, the range of high and low sale prices for the Common
Stock as reported by the American Stock Exchange.

                                                            LOW          HIGH
                                                         --------       --------
    YEAR ENDED DECEMBER 31, 1998
       First Quarter, beginning January 23, 1998 ......  $   3.00       $   4.00
       Second Quarter .................................  $   1.44       $   3.88
       Third Quarter ..................................  $   0.94       $   1.81
       Fourth Quarter .................................  $   0.75       $   4.38

      On March 15, 1999, the closing sales price of the Common Stock as reported
on the American Stock Exchange was $6.25 per share. As of March 15, 1999, there
were 24 holders of record of the Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

      Effective on October 15, 1998, we issued to Heathmount International
Limited 266,666 shares of our Common Stock in consideration of the conversion to
equity of $400,000 of indebtedness owed by us to an affiliate of Heathmount
indirectly through NPM Investments, Inc. In connection with the issuance of
these securities, Heathmount represented to us that it was acquiring the
securities for investment purposes only and not with a view to, or for sales in
connection with, any distribution of the securities. Heathmount also represented
to us, and we reasonably concluded based on, in part, our existing relationship
with the affiliate of Heathmount, that Heathmount was an "accredited investor"
as that term is defined under Rule 501(a) of Regulation D under the Securities
Act. We issued the securities in reliance on Section 4(2) of the Securities Act
as a transaction not involving any public offering.

USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

      The Registration Statement on Form SB-2 (File No. 333-38397) relating to
our initial public offering of Common Stock was declared effective by the
Securities and Exchange Commission on January 23, 1998. Of the 1,680,000 shares
of Common Stock sold in the public offering, we sold 1,600,000 shares and one of
our stockholders sold 80,000 shares.

      The public offering closed on January 28, 1998. All of the shares in the
offering were sold at a price to the public of $4.00 per share, which resulted
in aggregate proceeds of $6,400,000 to us and $320,000 to the selling
stockholder. After deducting underwriting discounts and commissions of $0.32 per
share, the selling stockholder received net proceeds of $294,400 and we received
net proceeds equal to $5,888,000 less expenses of approximately $1,222,765 that
we incurred in connection with the offering. Of the $1,222,765 in expenses,
$134,400 was a non-accountable expense payable by us to Cruttenden Roth
Incorporated and Josepthal & Co. Inc., the co-managing underwriters in the
offering.

      In the offering, we received net proceeds of approximately $4,665,000. As
of December 31, 1998, we had applied the entire amount of the net proceeds
approximately as follows:

      o     $2,542,000 to repay certain liabilities and indebtedness, of which
            approximately $597,000 was paid to officers, directors, stockholders
            and other affiliates of Tag-It Pacific;
      o     $650,000 to develop a national  sales and marketing  network,  
            including hiring additional sales personnel;
      o     $450,000 to acquire computer and production equipment; and
      o     $1,023,000 to purchase inventories.


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USE OF PROCEEDS FROM STOCK SALE

      In October 1998, we sold 2,390,000 shares of Common Stock at a purchase
price per share of $1.125 to KG Investments, LLC. We intend to use the
$2,688,750 raised in the private placement to fund a portion of our business
growth plans and operations.


DIVIDENDS

      We have never paid dividends on our Common Stock. We intend to retain any
future earnings for use in our business and do not intend to pay any cash
dividends on our Common Stock in the foreseeable future.


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ITEM 6.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
          RESULTS OF OPERATIONS.

      The following discussion and analysis should be read together with the
Consolidated Financial Statements of Tag-It Pacific and the notes to the
Consolidated Financial Statements included elsewhere in this Form 10-KSB.

      This discussion summarizes the significant factors affecting the 
consolidated operating results, financial condition and liquidity/cash flows of
Tag-It Pacific for the fiscal years ended December 31, 1998 and December 31,
1997. Except for historical information, the matters discussed in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control. Actual results could differ materially from those projected in the
forward looking statements as a result of, among other things, the factors
described below under the caption "Cautionary Statements and Risk Factors."


OVERVIEW

      Tag-It Pacific is a single-source provider of complete brand identity
programs to manufacturers of fashion apparel and licensed consumer products and
to specialty retailers and mass merchandisers.

      Revenues for all of our product lines are recognized at the time of
product shipment. Cost of goods sold consists primarily of raw material
purchases, direct labor, certain overhead, art and design costs associated with
the product development process, die and printing plate charges, finishing costs
and freight-in costs. In addition, during 1998, cost of goods sold also
consisted of royalties associated with the Guess? license. We discontinued
selling products under the Guess? license on December 31, 1998 which constituted
7.5% of net sales for the year ended December 31, 1998.

      We develop photographic films and dies and design art images that are used
for various products. Development costs associated with films, dies and designs
that are deemed to have no future use are expensed as incurred. Development
costs associated with films, dies and designs that are deemed to have future use
are capitalized and amortized over three years on a straight line basis.

      Prior to our initial public offering in January 1998, we were capital
constrained. Our working capital had been provided primarily through related
party loans and factoring arrangements. The factoring of our receivables
substantially increased our costs of funds, restricted our ability to sell to
customers not approved by our factors and, in our opinion, limited our growth.
Following our initial public offering, we repaid a substantial portion of our
debt and have substantially reduced our use of factoring arrangements. This
significantly reduced our interest expense in 1998.

      In 1998, we implemented several strategies designed to continue to
facilitate further growth in net sales. These strategies include the development
and introduction of TAG-IT TURNKEY, our proprietary internet-based computer
software program that enables us to provide our customers with a customized,
comprehensive system for the management of their brand identity programs. In
addition, in December 1998, we opened an additional warehouse, distribution and
partial assembly facility in Tehuacan, Mexico to service the increasing number
of garment and apparel manufacturers doing business in the region.

      In October 1998, we sold 2,390,000 shares of our Common Stock at a
purchase price per share of $1.125 to KG Investment, LLC. We intend to use the
$2,688,750 raised in the private placement to fund a portion of our business
growth plans and operations. KG Investment is owned by Gerard Guez and Todd Kay,
executive officers and significant shareholders of Tarrant Apparel Group.
Tarrant Apparel Group is a leading provider of private label casual apparel,
primarily serving both specialty retail and mass merchandise store chains.
Messrs. Guez and Kay have extensive experience in the apparel industry, having
developed strong relationships with many specialty retail and mass merchandise
store chains. KG Investment has agreed that it will not seek to dispose of its
shares prior to October 16, 2000, except to certain affiliated parties, without
our prior written consent. KG Investment has also agreed to certain additional
restrictions on the transfer and voting of the shares it purchased and has been
granted piggyback registration rights.

      Effective in 1997, we changed our fiscal year end from August 31 to
December 31.


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<PAGE>


RESULTS OF OPERATIONS

      NET SALES. Net sales decreased approximately $248,000 (or 1.3%) to $18.8
million for the year ended December 31, 1998 from $19.1 million for the year
ended December 31, 1997. The decrease in net sales was primarily the result of a
$0.8 million decrease in net sales of specialty licensed stationery products and
general decreases in net sales of our other product lines. The net sales
decrease in tags and specialty packaging was due, in part, to management's
efforts in our initial public offering. The closing of the public offering was
delayed from December 1997 to January 1998, a period that requires substantial
management attention to the development of customer programs.

      GROSS PROFIT. Gross profit decreased approximately $214,000 to $6.7
million (or 3.1%) for the year ended December 31, 1998 from $6.9 million for the
year ended December 31, 1997. Gross margin as a percentage of net sales
decreased to approximately 35.4% as compared to 36.1% for the year ended
December 31, 1997. The decrease in gross margin was primarily attributable to
the decrease in net sales of higher margin specialty licensed stationery
products and sales in the 1998 fourth quarter of our remaining inventory of
discontinued licensed stationery products at decreased gross margins. The
decrease in gross margin was secondarily attributable to lower overhead
absorption, primarily as a result of lower net sales in 1998. These factors were
offset by labor and other cost savings associated with normalized production at
our Tijuana, Mexico facility and lower overhead resulting from termination of
printing operations in February 1997.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $362,000 to $5.8 million for the
year ended December 31, 1998 from $5.5 million for the year ended December 31,
1997. As a percentage of net sales, these expenses increased to 31.1% in the
year ended December 31, 1998 compared to 28.7% for the year ended December 31,
1997. The increase was due to the combination of lower net sales and the
increased expenses of hiring additional salesmen, opening our Tehuacan, Mexico
facility and expanding our advertising and promotion efforts. The increase in
these expenses was offset by a decrease in expenses related to our discontinued
line of specialty licensed stationery products. Furthermore, a one-time
incentive bonus of approximately $38,000 was paid to two salespeople in the
quarter ended March 31, 1998. A similar bonus was not paid in 1997.

      PRINTING DIVISION EXPENSE. For the fiscal year ended December 31, 1997, we
incurred approximately $116,000 of incremental printing costs associated with
our captive printing division. We closed this division in February 1997.

      INTEREST EXPENSE. Interest expense decreased approximately $551,000 (or
64.9%) to $299,000 for the year ended December 31, 1998 from $850,000 for the
year ended December 31, 1997. During 1998, we used the proceeds of our January
1998 initial public offering and our October 1998 private stock sale to KG
Investment, LLC to substantially reduce our use of factors. This has
substantially reduced our cost of funds. We intend to continue to limit our use
of factors in the future and intend to rely upon the $2 million line of credit
that we established in May 1998.

      PROVISION FOR INCOME TAXES. The provision for income taxes decreased
approximately $209,000 to ($2,000) for the year ended December 31, 1998 as
compared to $207,000 for the year ended December 31, 1997. Provision for income
taxes has been made for each of our subsidiaries through October 17, 1997, the
date of the consummation of the consolidation of the subsidiaries under a single
holding company. Income taxes decreased primarily due to the use of net
operating loss carryforwards of approximately $176,000 from AGS Stationery which
were available to offset our taxable income during 1998.

      NET INCOME. Net income was $527,000 for the year ended December 31, 1998
as compared to $227,000 for the year ended December 31, 1997, due to the factors
set forth above.


LIQUIDITY AND CAPITAL RESOURCES

      During fiscal 1997, we satisfied our working capital requirements
primarily through cash flows generated from operations, borrowings under
factoring agreements with Heller Financial, Inc. and Safcor, Inc., and
borrowings from related parties. Generally, our borrowing requirements have been
somewhat seasonal, with peak working capital needs occurring at the end of the
year. We have terminated the use of domestic factoring arrangements with Heller
and Safcor as of December 31, 1998. The Company continues to use Heller for its
Hong Kong subsidiary sales.


                                       10
<PAGE>


      Pursuant to the terms of our factoring agreements, our factors purchase
our eligible accounts receivable and assume the credit risk with respect to
those accounts for which the factors have given their prior approval. As of
December 31, 1998, the amount factored without recourse was $221,770 and the
amount due from the factor and recorded as a current asset was $221,770. If a
factor does not assume the credit risk for a receivable, the collection risk
associated with the receivable remains with us. If the factor determines, at its
discretion, to advance against the receivable, the customer's payment obligation
is recorded as our receivable and the advance from the factor is recorded as a
current liability.

      In our initial public offering, we received net proceeds of approximately
$4,665,000. As of December 31, 1998, we had used all of the funds raised in the
public offering. We used a portion of the funds to satisfy the majority of our
outstanding obligations under the Heller Financial and Safcor factoring
arrangements. We also used a portion of the funds to repay the senior
subordinated secured notes held by Cruttenden Roth Bridge Fund, LLC and Beta
Research Corporation in the principal amounts of $323,125 and $226,875,
respectively. For a complete description of our use of the funds raised in the
public offering, see "Market for Common Equity and Related Stockholder Matters -
Use of Proceeds From Initial Public Offering."

      In May 1998, we obtained a $2 million line of credit with Sanwa Bank to be
used for working capital purposes. The line of credit expires on May 31, 1999.
The line of credit interest rate is equal to the bank's reference rate, and the
line of credit agreement requires us to meet certain financial covenants
relating to net worth, debt to net worth, current ratio and profitability. At
December 31, 1998, we were in compliance with these covenants. As of December
31, 1998, our outstanding balance on the bank line of credit was $1,489,000.

      In October 1998, we received proceeds of $2,688,750 from the sale of
2,390,000 shares of Common Stock to KG Investments, LLC. We intend to use these
proceeds to fund a portion of our business growth plans and operations.

      As of December 31, 1998, we had outstanding related party debt of $452,000
at a weighted average interest rate of 8.2%, and non-related party debt of
$56,000 at a weighted average interest rate of 2.5%. All related party debt is
due and payable on the fifteenth day following the date of delivery of written
demand for payment. On October 15, 1998, we converted $400,000 of related party
debt into 266,666 shares of our Common Stock.

      Net cash used in operating activities was approximately $3,134,000 and
$896,000 for the year ended December 31, 1998 and 1997, respectively. Cash used
in operations for the year ended December 31, 1997 resulted primarily from
increases in accounts receivables, prepaid expense and inventory, partially
offset by increases in accounts payable and related party and accrued expenses.
Cash used in operations for the year ended December 31, 1998 resulted primarily
from decreases in accounts payable and increases in accounts receivables,
accounts receivable from related parties, inventory and income.

      Net cash used in investing activities was $839,000 and $810,000 for the
year ended December 31, 1998 and 1997, respectively. Net cash used in investing
activities consisted primarily of capital expenditures for production equipment,
leasing of equipment and, in 1998, expenditures for office and assembly
equipment in connection with the establishment of our Tehuacan, Mexico facility.

      Net cash provided by financing activities was approximately $5,994,000 and
$1,745,000 for the year ended December 31, 1998 and 1997, respectively. Net cash
provided by financing activities for the year ended December 31, 1998 reflects
proceeds from our initial public offering, October 1998 private stock sale and
bank line of credit. These amounts were offset by reductions in advances and/or
loans from factors, related parties and non-related parties. Net cash provided
by financing activities for the year ended December 31, 1997 resulted from net
advances and/or loans from related parties and factors.

      We may need to obtain additional financing in order to provide adequate
liquidity to fund our business growth plans and operations during the next 12
months. We are continually evaluating various financing strategies to be used to
expand our business and fund future growth or acquisitions. The extent of our
future capital requirements will depend, however, on many factors, including our
results of operations, the size and timing of future acquisitions, if any, and
the availability of additional financing. We cannot be certain that additional
financing will be available or that, if available, we can obtain it on terms
favorable to us and our stockholders. See "-- Cautionary Statements and Risk
Factors -- We May Need to Raise Additional Funds."


                                       11
<PAGE>


NEW ACCOUNTING PRONOUNCEMENTS

      Statement of Financial Accounting Standard No. 132, Employers' Disclosures
About Pensions and Other Post-retirement Benefits ("SFAS 132"), is effective for
fiscal years beginning after December 15, 1997. SFAS 132 revises employers'
disclosures about pension and other post-retirement benefit plans. We do not
expect adoption of SFAS 132 to have a material impact, if any, on our
consolidated results of operations.

      Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), is effective for
financial statements ending June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. We do not expect adoption of SFAS 133
to have a material impact, if any, on our consolidated results of operations.


YEAR 2000 UPDATE

      GENERAL. We have begun a project to address the potential impact of the
Year 2000 problem on the processing of date-sensitive information by our
information technology systems and the information technology systems used by
our significant customers and vendors. The Year 2000 problem is the result of
computer programs being written using two digits to define the applicable year.
As a result, certain computer programs may recognize a date using "0" as the
year 1900 rather than 2000, which could cause miscalculations or system
failures. The objectives of our Year 2000 project are to determine and assess
the risks of the Year 2000 problem and to plan and institute mitigating actions
to minimize those risks to acceptable level.

      In 1997, we began a systems replacement program to improve access to
business information through common, integrated computing systems. We use
programs primarily from Sage/State of The Art (MAS90), which programs have been
certified BY SAGE/STATE OF THE ART as Year 2000 compliant. These new systems,
scheduled for complete installation by mid-1999, are expected to make
approximately 80% of our business computer systems Year 2000 compliant.
Installation of the MAS90 programs is approximately 80% complete. Our remaining
business software programs either will be made Year 2000 compliant through other
means, or they will be discontinued. We have not delayed implementation of any
information technology projects due to our Year 2000 efforts.

       YEAR 2000 PROJECT. Our Year 2000 project is proceeding on schedule. The
project is divided into three major categories: infrastructure, applications
software and third-party suppliers and customers.

         o INFRASTRUCTURE. Infrastructure consists of hardware and systems
software other than applications software. We must identify and assess those
systems that are material to our business, test the systems and repair or
replace those systems that are not Year 2000 compliant. We estimate that
approximately 75% of the activities related to this category have been completed
as of December 31, 1998. We are currently testing our infrastructure and
upgrading and replacing our systems software and hardware where necessary. We
have engaged a network consultant to assist in managing this aspect of our Year
2000 project. We expect to commence contingency planning in the second quarter
of 1999.

         o APPLICATIONS SOFTWARE. This portion of our Year 2000 project requires
that we identify and assess applications systems that are material to our
business, determine if those systems are Year 2000 compliant and replace those
systems that are not Year 2000 compliant. We estimate that approximately 70% of
the activities related to this category have been completed as of December 31,
1998. The remaining software conversion activities are scheduled for completion
by mid-1999. This includes integrating the Mexico and Hong Kong information
systems to our principal office in Los Angeles. We have engaged a software
consultant to assist in managing this aspect of our Year 2000 project. We expect
to commence contingency planning in the second quarter of 1999.

         o THIRD PARTY SUPPLIERS AND CUSTOMERS. We must identify, prioritize and
communicate with critical suppliers and customers to understand their Year 2000
issues and how they may affect us, and determine what steps they have taken to
prepare and manage their Year 2000 issues as they relate to us. In the fourth
quarter of 1998, we distributed detailed questionnaires to our critical
suppliers and customers about their Year 2000 issues. As of March 1, 1999, we
have received


                                       12
<PAGE>


responses from 24% of the recipients of these questionnaires. We expect to
commence contingency planning in the second quarter of 1999 and continue to
communicate with customers and suppliers through the remainder of 1999.

      COSTS. We do not expect the costs associated with our Year 2000 project to
be material. We estimate that the entire cost of the Year 2000 project will be
approximately $250,000. Of this amount, we expensed approximately $180,000 as of
December 31, 1998 for replacement software and hardware upgrades.

      RISKS. Our failure to correct a material Year 2000 problem could have a
material adverse effect on our results of operations and ability to implement
our business strategy. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, we are unable to determine with any degree
of certainty whether the consequences of Year 2000 failures will have a material
impact on our results of operations and financial condition.


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 document, readers should carefully consider the
following cautionary statements and risks factors:

      WE MAY NOT BE ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH. Our
subsidiaries have been operated under family management since they were formed
and have recently significantly expanded their operations. The growth of our
operations and activities has placed and will continue to place a significant
strain on our management, operational, financial and accounting resources. To
successfully manage our operations, we will need to continue to implement and
improve our financial and management information and reporting systems and
procedures. Our ability to manage future growth, if any, and to increase
production levels and continue to market and distribute our products also will
require us to hire, train, motivate and manage new employees, including
management and operating personnel, and integrate them into our overall
operations and culture. We recently made additions to our management team. We
are also in the process of continuing to improve our financial and management
information and reporting systems. Our failure to successfully implement our
growth strategies and implement and improve our financial and management
information and reporting systems will have a material adverse effect on our
business and financial condition.

      WE MAY EXPERIENCE RISKS ASSOCIATED WITH ACQUISITIONS. In the future, we
may acquire products, technologies or companies that are complimentary to our
business. These acquisitions involve numerous risks, including:

      o     adverse short-term effects on the combined business' reported
            operating results;
      o     diversion of management's attention;
      o     dependence on retention, hiring and training of key personnel;
      o     amortization and/or impairment of goodwill and other intangible
            assets; and
      o     risks associated with unanticipated problems or legal liabilities.

      OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER WHICH COULD IMPACT
OUR STOCK PRICE. Our operating results may vary significantly from quarter to
quarter in the future. Many factors may cause our operating results to
fluctuate, some of which are beyond our control. These factors 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 acquisitions or
            the introduction of new products;
      o     the costs and timing of any future acquisitions;
      o     the timing and magnitude of capital expenditures; and
      o     changes in our product mix or in the relative contribution to sales
            of our subsidiaries.


                                       13
<PAGE>


Due to these factors, it is possible that in some quarters our operating results
may be below the expectations of public market analysts and investors. If this
occurs, the price of our Common Stock would likely be adversely affected.

      In addition, 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 seasonal fluctuations due, in part, to customer
buying patterns. A recession in the general economy or uncertainties regarding
future economic prospects that affect consumer spending habits could have a
material adverse effect on our business and financial condition.

      WE MUST IMPROVE AND INTEGRATE OUR INFORMATION SYSTEMS. To be successful,
we must consolidate and centralize the management of our subsidiaries, implement
our growth strategies and successfully manage the general strains of our new
role as a public company. These efforts will place significant demands on our
financial and management information and reporting systems and require us to
significantly expand and improve our financial and operating controls.
Additionally, we must update our computer systems to become Year 2000 compliant
and effectively integrate the information systems of Hong Kong and Mexico with
the information systems of our principal offices in Los Angeles. We cannot be
certain that we will be successful in doing so.

      WE DEPEND ON A FEW KEY CUSTOMERS WITH WHOM WE DO NOT HAVE LONG-TERM
Contracts. Our two largest customers, Guess? and Swank (a licensee of Yves Saint
Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin), accounted for
approximately 8.5% and 9.5%, respectively, of our net sales (on a consolidated
basis) for the year ended December 31, 1998, and approximately 16.3% and 12.5%,
respectively, of our net sales (on a consolidated basis) for the year ended
December 31, 1997. We may not be able to derive the same level of sales from
these customers in the future. The termination of our business relationship with
these or any of our other significant customers or a material reduction in sales
to a significant customer could have a material adverse effect on our business
and financial condition.

      We generally do not enter into long-term sales contracts with our
customers. Our customers, therefore, are not required to purchase our products.
Our sales are generally evidenced by a purchase order and similar documentation
limited to a specific sale. As a result, a customer from whom we generate
substantial revenue in one period may not be a substantial source of revenue in
a future period. In addition, our customers generally have the right to
terminate their relationships with us without penalty and on little or no
notice. Without long-term contracts with our customers, we cannot be certain
that our existing customers will continue to engage us to design and produce
products. Accordingly, we cannot guarantee that we will be able to maintain a
consistent level of sales.

      WE DEPEND ON KEY PERSONNEL. Our success has and will continue to depend to
a significant extent upon certain key management and design and sales personnel,
many of whom would be difficult to replace, particularly Colin Dyne, our Chief
Executive Officer and Harold Dyne, our President. Neither Colin Dyne nor Harold
Dyne is bound by an employment agreement or the subject of key man insurance.
The loss of the services of either of these key executives or of the services of
other 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 identify, attract,
assimilate, retain and motivate personnel with a variety of design, sales,
operating and managerial skills. We may not be able to do so.

      WE MAY NEED TO RAISE ADDITIONAL FUNDS. We anticipate that we will need to
raise additional funds through debt or equity financings during the next 12
months if our existing resources and future earnings are insufficient to fund
our business growth plans and operations. We cannot guarantee that additional
financing will be available or that, if available, it can be obtained on terms
that we deem favorable. If necessary funds are not available, we may be required
to delay implementation of our growth strategy. Additionally, our stockholders
may be diluted if we raise additional funds through the sale of our stock.

      OUR OFFICERS AND DIRECTORS AND CERTAIN STOCKHOLDERS OWN A SIGNIFICANT
AMOUNT OF OUR COMMON STOCK. As of December 31, 1998, our officers and directors
(and their affiliates) owned approximately 27.2% of the outstanding shares of
our Common Stock. The Dyne family (Harold Dyne, Mark Dyne, Colin Dyne, Larry
Dyne and Jonathan Burstein) owned approximately 27.5% of the outstanding shares
of our Common Stock. KG Investments, LLC, a significant stockholder, owned
approximately 35.5% of the outstanding shares of our Common Stock with certain
transfer and voting restrictions. As a result, our officers and directors, the
Dyne family and KG Investments, LLC are able to exert influence over the outcome
of all matters submitted to a vote of the holders of our Common Stock, including
the election of our Board of 


                                       14
<PAGE>

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 HAVE LIMITED ASSEMBLY FACILITIES. Some of our products are assembled or
finished at our foreign assembly facilities. Currently, we do not operate
duplicate facilities in different geographic areas. Therefore, we cannot shift
manufacturing operations to a different geographic region in the event of a
disruption in the region in which we maintain our facilities. The types of
disruptions that may occur include:

      o     human error;
      o     foreign trade disruptions;
      o     import restrictions;
      o     labor disruptions;
      o     embargoes.
      o     government intervention; and
      o     natural disaster.

If we experience a disruption in our manufacturing operations, we may be
required to cease or limit our assembly or finishing operations, which would
have a material adverse effect on our business and financial condition.

      WE HAVE LIMITED SOURCES OF SUPPLY. Generally, we do not have long-term
agreements with our key sources of supply. 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 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
customers.

      WE ARE SUBJECT TO FLUCTUATING PAPER COSTS AND PAPER SHORTAGES. The cost of
paper is a principal component of the price we charge for our paper products,
including our high quality paper boxes, custom shopping bags, hang tags and
packaging. Historically, we have been able to pass on to our customers any
increase or decrease in the cost of paper. This has allowed us to maintain our
gross margins on paper products during fluctuations in the cost of paper. We
cannot be certain, however, that we will continue to be able to pass increases
in paper costs to our customers. If our customers are unwilling to absorb these
price increases, our gross margins may decrease. A decrease in our gross margins
would have an adverse effect on our operating results.

      The capacity in the paper industry has remained relatively stable in
recent years. During this time, increases and decreases in the demand for paper
have led to corresponding pricing changes. In periods of high demand, certain
grades of paper, including grades that we use in our paper products, have been
unavailable or only available in limited quantities. Although we actively manage
our paper supplies and have established strong relationships with our paper
suppliers, we do not have long-term agreements with our key paper suppliers. We
cannot be certain that our sources of paper supply will be adequate or, if they
are not adequate, that we will be able to develop alternative sources of paper
supply in a timely manner.

      WE FACE SUBSTANTIAL COMPETITION IN OUR INDUSTRIES. We compete in highly
competitive and fragmented industries with numerous local and regional companies
that provide some or all of the services we offer. We compete with United States
and international design companies, distributors and manufacturers of tags,
packaging products and trims. Some of our competitors, including Paxar, Inc.,
RVL, Inc, Copac International Packaging, Inc., Universal Button, Inc., and
Scovill Fasteners, Inc., have greater name recognition, longer operating
histories and, in many cases, substantially greater financial and other
resources than us.

      In addition, new competitors may enter our industry and develop products
that compete with our products. Our competitors may introduce proprietary
technology that may make some of our products or services obsolete. While we
believe that we compete effectively within the value-added design and packaging
industry, these and other factors may reduce our ability to compete effectively
in the future.


                                       15
<PAGE>


      OUR PRODUCTS MAY BE RETURNED. We incur expenses when customers return our
products. Products are returned for a number of reasons, including as a result
of:

      o     sale or return arrangements;
      o     defective goods;
      o     inadequate performance relative to customer expectations;
      o     shipping errors; and
      o     other causes which are outside of our control.

Generally, returned items have limited or no value and we are forced to bear the
cost of their return. Product returns could result in lost revenue, delays in
market acceptance, diversion of development resources and damage to our
reputation. Returns also may increase our service and warranty costs. Any
significant increase in the rate of product returns could have a material
adverse effect on our financial position, operating results and cash flows.

      WE ARE SUBJECT TO RISKS RELATING TO OUR INTERNATIONAL BUSINESS. For the
years ended December 31, 1998 and 1997, approximately 40% of our products were
purchased, assembled or finished outside of the United States, principally in
Hong Kong and Mexico. We currently intend to continue to purchase, assemble
and/or finish a similar or greater percentage of our products outside of the
United States in the future. Our international business is subject to numerous
risks, including:

      o     the need to comply with a wide variety of foreign and United States
            export and import laws;
      o     changes in export or import controls, tariffs and other regulatory
            requirements;
      o     the imposition of governmental controls;
      o     political and economic instability;
      o     trade restrictions;
      o     the difficulty of administering business overseas; and
      o     the general economic conditions of the countries in which we due
            business.

      In addition, we could miss our customers' delivery requirements if our
overseas contractors or suppliers do not ship orders to us in a timely manner.
If we fail to deliver products on time, our customers could cancel orders,
refuse to accept deliveries or require us to reduce the sales price of the
delivered products. Although our international operations are denominated
principally in United States dollars, purchases from foreign vendors and sales
to foreign customers also may be affected by changes in demand resulting from
fluctuations in interest and currency exchange rates. We cannot predict the
effects the above risks will have on our business arrangements with customers,
contractors or suppliers. If any of the above risks were to render the conduct
of business in a particular country undesirable or impractical, or if our
current contractors or suppliers ceased doing business with us for any reason,
our financial position, operating results and cash flows could be adversely
affected.

      WE ARE A HOLDING COMPANY AND MUST RELY ON LOANS AND DIVIDENDS FROM OUR
SUBSIDIARIES. Tag-It Pacific is a holding company with no substantial
operations. Our only material asset is the stock of our subsidiaries. All of our
operations are conducted by our subsidiaries, which subsidiaries own
substantially all of our consolidated assets. We depend on dividends and other
payments from our subsidiaries for virtually all of our cash flow, including
cash flow for management salaries and overhead, to service debt, to make equity
investments and to finance our growth. The ability of our subsidiaries to make
payments to us depends on applicable law and restrictions under present and
future debt instruments and other agreements to which our subsidiaries are
parties.

      WE ARE SUBJECT TO EARTHQUAKE RISKS. Our principal executive offices are
located in Los Angeles, California, an area that often experiences earthquakes.
If an earthquake occurs, we may experience uninsured property damage and/or
sustain interruption of our business and operations. We currently do not carry
insurance against earthquake-related risks.

      PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED. We rely on trademark,
trade secret and copyright laws to protect our designs and other proprietary
property. We do not have United States or foreign patents or patent applications
currently pending. 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. The laws 


                                       16
<PAGE>


of certain 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.

      We believe that our products do not infringe any valid existing
proprietary rights of third parties. Although we have received no communication
from third parties alleging infringement of any of their proprietary rights, we
cannot be certain that any infringement claims will not be made in the future.
Any infringement claims, whether or not meritorious, could result in costly
litigation or require us to enter into royalty or licensing agreements. 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.

      WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS. Some of our subsidiaries use
hazardous materials in their manufacturing operations. As a result, we are
subject to federal, state and local regulations governing the storage, use and
disposal of such materials. The use and disposal of hazardous materials involves
the risk that we could be required to incur substantial expenditures for
preventive or remedial action, reduction of chemical exposure or waste treatment
or disposal. The liability in the event of an accident or the costs of such
actions could exceed our resources or otherwise have a material adverse effect
on our operating results and financial condition.

      WE HAVE ADOPTED A NUMBER OF ANTI-TAKE OVER MEASURES. Our Board of
Directors can issue up to 3,000,000 shares of preferred stock and determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by our stockholders.
Our Board of Directors could issue the preferred stock with voting, liquidation,
dividend and other rights superior to the rights of our Common Stock. In October
1998, we adopted a stockholder's rights plan. Under the rights plan we
distributed one preferred share purchase right for each outstanding share of our
Common Stock outstanding on November 6, 1998. Upon the occurrence of certain
triggering events related to an unsolicited takeover attempt of Tag-It Pacific,
each purchase right not owned by the party or parties making the unsolicited
takeover attempt will entitle its holder to purchase shares of our Series A
Preferred Stock at a value below the then market value of the Series A Preferred
Stock. The rights of holders of our Common Stock will be subject to, and may be
adversely affected by, the rights of holders of the share purchase rights, the
Series A Preferred Stock and any other preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of our
outstanding voting stock. Further, certain provisions of our Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving Tag-It Pacific.


                                       17
<PAGE>


                 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


    The Board of Directors
    Tag-It Pacific, Inc.
    Los Angeles, California


    We have audited the accompanying consolidated balance sheets of Tag-It
Pacific, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity (deficiency) and cash flows for the
years then ended and the four months ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

          We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement are free of material
misstaement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tag-It
Pacific, Inc. at December 31, 1998 and 1997, and the results of their operations
and their cash flow for each of the years then ended and the four months ended
December 31, 1997, in conformity with generally accepted accounting principles.


                              /s/ BDO Seidman, LLP


Los Angeles, California
March 8, 1999


                                       18
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS.

                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                         DECEMBER 31,  DECEMBER 31,
                     Assets                                  1998          1997 
                                                         ------------  ------------
<S>                                                      <C>             <C>       
Current Assets:
     Cash and cash equivalents.........................  $  2,065,331    $   44,109
     Due from factor, net..............................       221,770             -
       Accounts receivable, trade, net.................     3,629,338     3,017,391
       Due from related parties........................       752,602       138,418
       Inventories.....................................     5,700,196     2,331,131
       Prepaid expenses and other current assets.......       892,853       273,468
                                                         ------------  ------------
        Total current assets...........................    13,262,090     5,804,517

Property and Equipment, net of accumulated             
  depreciation and amortization........................     1,335,066       974,309
Other Assets...........................................        46,684       392,238
                                                         ------------  ------------
Total Assets...........................................  $ 14,643,840    $7,171,064
                                                         ============   ===========

             Liabilities and Stockholders' Equity (Deficiency)

Current Liabilities:
    Bank overdraft.....................................  $         --    $  306,565
    Due to factor, net.................................            --     1,404,133
    Accounts payable...................................     2,638,448     3,977,568
    Accounts payable, related party....................     2,250,626            --
    Accrued expenses...................................       668,240       628,086
    Line of credit.....................................     1,489,000            --
    Current portion of long-term debt..................        56,040       463,708
    Current portion of notes payable to related parties       451,626       277,003
                                                         ------------  ------------
      Total current liabilities........................     7,553,980     7,057,063

Long-term debt, less current portion...................            --        55,315
Notes payable to related parties, less current portion.            --     1,249,698
                                                         ------------  ------------
Total Liabilities......................................     7,553,980     8,362,076
                                                         ------------  ------------

Commitments and Contingencies (Note 14)

Stockholders' Equity (Deficiency):
    Preferred stock, $0.001 par value; 3,000,000 
      shares authorized; no shares issued or 
      outstanding......................................            --            --
    Common stock, $0.001 par value; 15,000,000
      shares authorized; 6,726,677 shares issued 
      and outstanding at December 31, 1998; 
      2,470,011 at December 31, 1997...................         6,727         2,470

    Additional paid-in capital.........................     8,707,258       957,530
    Accumulated deficit................................    (1,624,125)   (2,151,012)
                                                         ------------  ------------

      Total Stockholders' Equity (Deficiency)..........     7,089,860    (1,191,012)
                                                         ------------  ------------
Total Liabilities and Stockholders' Equity.............  $ 14,643,840    $7,171,064
                                                         ============  ============
</TABLE>

            See accompanying notes to consolidated financial statements.


                                       19
<PAGE>


                                TAG-IT PACIFIC, INC.
                         CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                           FISCAL       FOUR MONTHS     FISCAL YEAR
                                         YEAR ENDED       ENDED            ENDED
                                         DECEMBER 31,   DECEMBER 31,    DECEMBER 31,
                                           1998           1997             1997
                                        ------------  --------------  -------------
<S>                                     <C>            <C>            <C>
Net Sales.............................. $ 18,808,067   $   6,006,457  $  19,056,498
Cost of goods sold.....................   12,143,143       4,007,973     12,177,147
                                        ------------  --------------  -------------
  Gross profit.........................    6,664,924       1,998,484      6,878,901

Selling expenses.......................    1,730,035         289,336      1,537,645
General and administrative expenses....    4,110,800       1,276,184      3,940,811
Write-off of printing division.........            0               0        116,000
                                        ------------  --------------  -------------
  Total operating expenses.............    5,840,835       1,565,520      5,594,456

Income from operations.................      824,089         432,964      1,284,445
Interest expense.......................      298,889         300,851        850,346
                                        ------------  --------------  -------------
Income before income taxes.............      525,200         132,113        434,099
Provision (benefit) for income taxes...       (1,687)         57,288        207,000
                                        ------------  --------------  -------------
  Net Income .......................... $    526,887   $      74,825  $     227,099
                                        ============  ==============  =============

Basic earnings per share............... $       0.11   $        0.03  $        0.10
                                        ============   =============  =============
Diluted earnings per share............. $       0.11   $        0.03  $        0.10
                                        ============  ==============  =============
</TABLE>


            See accompanying notes to consolidated financial statements


                                       20
<PAGE>


                                TAG-IT PACIFIC, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                       YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                    
                                            COMMON STOCK           PREFERRED STOCK     ADDITIONAL           
                                       ----------------------    ------------------     PAID-IN    ACCUMULATED            
                                         SHARES      AMOUNT       SHARES     AMOUNT     CAPITAL      DEFICIT         TOTAL
                                       ---------   ----------    -------   --------  -----------  ------------   ------------
<S>                                    <C>         <C>           <C>       <C>       <C>          <C>            <C>
Balance, January 1, 1997..........     2,085,609   $    2,086         --         --  $    82,914  $ (2,378,111)  $ (2,293,111
  Net Income - eight months ......                                                                     152,274        152,274
                                       ---------   ----------    -------   --------  -----------  ------------   ------------
Balance, August 31, 1997..........     2,085,609        2,086         --         --       82,914    (2,225,837)    (2,140,837)
  Debt Conversion ................       384,402          384         --         --      874,616                      875,000
  Net Income - four months........                                                                      74,825         74,825
                                       ---------   ----------    -------   --------  -----------  ------------   ------------
Balance, December 31, 1997........     2,470,011        2,470         --         --      957,530    (2,151,012)    (1,191,012)
  Initial Public Offering.........     1,600,000        1,600         --         --    4,663,635                    4,665,235
  Stock Sale .....................     2,390,000        2,390         --         --    2,686,360                    2,688,750
  Debt Conversion ................       266,666          267         --         --      399,733                      400,000
  Net Income .....................                                                                     526,887        526,887
                                       ---------   ----------    -------   --------  -----------  ------------   ------------

Balance, December 31, 1998........     6,726,677   $    6,727         --         --  $ 8,707,258  $ (1,624,125)  $  7,089,860
                                       =========   ==========    =======   ========  ===========  ============   ============
</TABLE>


            See accompanying notes to consolidated financial statements.


                                       21
<PAGE>


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

<TABLE>
<CAPTION>
                                               FISCAL YEAR       FOUR MONTHS    FISCAL YEAR
                                                 ENDED              ENDED          ENDED
                                               DECEMBER 31,      DECEMBER 31,   DECEMBER 31,
                                                 1998               1997            1997
                                               -----------       -----------    -----------
<S>                                            <C>               <C>            <C>        
Increase (decrease) in cash and 
  cash equivalents 
Cash flows from operating activities:
   Net income ...........................      $   526,887       $    74,825    $   227,099
   Adjustments to reconcile net 
     income to net cash
     Used in operating activities:
       Depreciation and amortization.....          443,128           115,000        374,669
       Decrease in deferred income tax             
         liability.......................          (48,513)           49,707         68,657
       Changes in operating assets and
         liabilities:
          Receivables....................       (1,412,930)       (1,027,185)    (1,149,283)
          Inventories....................       (3,369,065)         (313,628)      (828,311)
          Other assets...................          345,554          (343,085)      (291,614)
          Prepaid expenses and other              
            current assets...............         (619,385)          (57,790)       141,387     
          Accounts payable...............       (1,339,120)          683,277        490,839
          Accounts payable, related party        2,250,626                --             --
          Accrued expenses...............           88,667          (991,135)        70,549
                                               -----------       -----------    -----------
   Net cash used in operating activities.       (3,134,151)       (1,810,014)      (896,008)

Cash flows from investing activities:
   Loans to related parties..............          (34,971)          (36,326)       (95,259)
   Acquisition of property and equipment.         (803,885)         (167,047)      (714,626)
                                               -----------       -----------    -----------
   Net cash used in investing activities.         (838,856)         (203,373)      (809,885)

Cash flows from financing activities:
   Bank overdraft........................         (306,565)           55,450        (85,273)
   Net advances from factor..............       (1,404,133)        1,309,347      1,034,823
   Proceeds from IPO, net................        4,665,235                --             --
   Proceeds from stock sale..............        2,688,750                --             --
   Proceeds from bank line of credit.....        1,489,000                --             --
   Proceeds from long-term debt..........                -           305,532        233,343
   Repayment on long-term debt...........         (462,983)               --             --
   Proceeds from notes payable to related
     parties, net .......................                            239,105        562,052
   Repayment on notes payable to related          
     parties, net .......................         (675,075)               --             --
                                               -----------       -----------    -----------
Net cash provided by financing activities.       5,994,229         1,909,434      1,744,945
                                               -----------       -----------    -----------

Net increase (decrease) in cash and cash         
  equivalents............................        2,021,222          (103,953)        39,052
Cash and cash equivalents at            
  beginning of period....................           44,109           148,062          5,057
                                               -----------       -----------    -----------
Cash and cash equivalents at end of period     $ 2,065,331       $    44,109    $    44,109
                                               ===========       ===========    ===========

  Supplemental Disclosures of Cash Flow
    Information:
    Cash paid during the period for:
      Interest...........................      $   298,889       $   300,851    $   604,450
      Income taxes.......................      $    83,951       $        --    $     9,715
    Non-cash financing activity:
      Note payable converted to equity...      $   400,000       $   875,000    $   875,000
</TABLE>

            See accompanying notes to consolidated financial statements.


                                       22
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      ORGANIZATION AND BASIS OF PRESENTATION

      The Company is the parent holding company of Tag-It, Inc., a California
corporation, Tag-It Printing & Packaging Ltd., a BVI corporation, Tagit de
Mexico, SA de CV, A.G.S. Stationery, Inc., a California corporation ("AGS
Stationery") and Pacific Trim & Belt, Inc., a California corporation
(collectively, the "Subsidiaries"), all of which were consolidated under a
parent limited liability company on October 17, 1997 (the "Consolidation") and
became wholly-owned subsidiaries of the Company immediately prior to the
effective date of the Company's initial public offering in January 1998 (the
"Offering"). Immediately prior to the Offering, the outstanding membership units
of Tag-It Pacific LLC were converted to 2,470,001 shares of Common Stock of the
Company (the Exchange and such conversions are referred to as the "Conversion").
In November 1998 the Company formed a wholly-owned subsidiary, Pacific Trim, SA
de CV located in Tehuacan, Mexico (now included in "Subsidiaries").

      The accompanying consolidated financial statements consist of the
Subsidiaries presented on a consolidated basis to give effect to the Conversion
as of the earliest period presented. The Conversion is treated as a
reorganization of entities under common control and is accounted for in a manner
similar to a pooling of interest. Accordingly, all references to shares of
Common Stock and related share prices have assumed the effects of the
Conversion. Effective in 1997, the Company changed its fiscal year-end from
August 31 to December 31. The financial statement presented for 1997 have
recasted financial information on a calendar basis. The unaudited information
related to the four months ended December 31, 1996 is as follows:

                Net sales ................   $ 6,489,747
                Gross profit .............   $ 2,003,372
                Provision for income taxes   $        --
                Net Loss .................   $  (301,000)

      All significant intercompany accounts and transactions have been
eliminated in consolidation. Assets and liabilities of foreign subsidiaries are
translated at rates of exchange in effect at the close of the period. Revenues
and expenses are translated at the weighted average of exchange rates in effect
during the year. The resulting translation gains and losses are deferred and are
shown as a separate component of stockholders' equity and transaction gains and
losses are recorded in the statement of operations in the period incurred.
During 1998 and 1997, foreign currency translation and transaction gains and
losses were not material.

      NATURE OF BUSINESS

     Tag-It Pacific, Inc. (the "Company") is a single-source provider of
complete brand identity programs to manufacturers of fashion driven apparel and
licensed consumer products and to specialty retailers and mass merchandisers.
The Company designs and produces high-quality paper, metal and injection molded
boxes, woven and leather labels, paper-hanging and bar-coded tags, metal jean
buttons and custom shopping bags. The Company also designs and/or manufactures
products for a variety of major brand and private label oriented companies
including Guess?, Calvin Klein, Tommy Hilfiger, A\X Armani Exchange, Sony
Signatures, Warner Bros. and Carol Little, among others.

      REVENUE RECOGNITION

      Sales are recorded at the time of shipment.

      COMPREHENSIVE INCOME

      During the year ended December 31, 1997 the Company adopted Statement of
Financial Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
issued by the FASB and effective for financial statements with fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive 

  
                                     23
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


income and its components in a full set of general-purpose financial statements.
Adoption of SFAS 130 did not have an impact on the Company's financial position
or results of operation.

      SEGMENTS OF AN ENTERPRISE

      During the year ended December 31, 1997 the Company adopted Statement of
Financial Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), issued by the FASB and effective for
financial statements with fiscal years beginning after December 15, 1997. SFAS
131 requires that public companies report certain information about operating
segments, products, services and geographical areas in which they operate and
their major customers. Adoption of SFAS 131 resulted in expanded disclosures.
See Note 15 to the financial statements, Geographic Data.

      CASH AND CASH EQUIVALENTS

      The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.

      INVENTORIES

      Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).

      PROPERTY AND EQUIPMENT

      Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Upon retirement or other disposition of property
and equipment, applicable cost and accumulated depreciation and amortization are
removed from the accounts and any gains or losses are included in results of
operations. The Company capitalizes the cost of films, dies, molds and art
designs. The cost capitalized includes direct material and direct labor cost.

      Depreciation of property and equipment is computed using the straight-line
method based on estimated useful lives ranging from three to seven years.
Leasehold improvements are amortized using the straight-line method over the
term of the lease or the estimated life of the related improvements, whichever
is shorter.

      INCOME TAXES

      The Company uses the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable or benefit for the period and the change
during the year in deferred tax assets and liabilities.

      Income taxes have been provided on a separate company basis for 1997 and
on a consolidated basis for 1998.

      STOCK-BASED COMPENSATION

      Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which a
company acquires goods or services from non-employees in exchange for equity
instruments. SFAS 123 also gives the option to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock issued to Employees," or SFAS 123. The Company has
chosen to account for stock-based compensation utilizing the intrinsic value
method prescribed in APB 25 and not the method established by SFAS 123.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market price of the Company's stock at the measurement date
over the amount an employee must pay to acquire stock.


                                       24
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


      Under SFAS 123 the Company presents, in a footnote, the effect of
measuring the cost of stock-based employee compensation at the grant date based
on the value of the award and recognize this cost over the service period. The
value of the stock-based award is determined using a pricing model whereby
compensation cost is the excess of the fair value of the option as determined by
the model at grant date or other measurement date over the amount an employee
must pay to acquire the stock.

      USE OF ESTIMATES

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.

      FAIR VALUE OF FINANCIAL INFORMATION

      The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. DUE TO FACTOR: Due to the short-term nature and variable interest
rates under the factor agreements, the fair value approximates the carrying
value. ACCOUNTS RECEIVABLE AND DUE FROM FACTOR: Due to the short-term nature of
the receivables, the fair value approximates the carrying value. DUE FROM
RELATED PARTIES AND NOTES PAYABLE TO RELATED PARTIES: Due to the short-term
nature and current market borrowing rates of the loans and notes, the fair value
approximates the carrying value. LONG-TERM DEBT: Estimated based upon current
market borrowing rates for loans with similar terms and maturities.


2.    NEW ACCOUNTING PRONOUNCEMENTS

      Statement of Financial Accounting Standard No. 132, Employers' Disclosures
About Pensions and Other Post-retirement Benefits ("SFAS 132"), is effective for
fiscal years beginning after December 15, 1997. SFAS 132 revises employers'
disclosures about pension and other post-retirement benefit plans. The Company
does not expect adoption of SFAS 132 to have a material impact, if any, on its
consolidated results of operations.

      Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), is effective for
financial statements ending June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption of
SFAS 133 to have a material impact, if any, on its consolidated results of
operations.


3.    EARNINGS PER SHARE

      The Company has adopted Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is effective for financial statements issued for the periods after
December 15, 1997, including interim periods. SFAS 128 requires the restatement
of all prior period earnings per share ("EPS") data presented.


                                       25
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


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

                                                                         PER
     TWELVE MONTHS ENDED DECEMBER 31,       INCOME        SHARES        SHARE
     1998:                                (NUMERATOR)  (DENOMINATOR)    AMOUNT
                                          -----------  -------------  ----------

     BASIC EARNINGS PER SHARE:

     Income available to common   
       stockholders ...................   $526,887       4,418,618    $ 0.11

     EFFECT OF DILUTIVE SECURITIES:

     Options.........................                      498,677
     Warrants..........................                     42,585
     Shares issued.....................                         --
                                          --------      ----------    -------
     Income available to common           
       stockholders....................   $526,887       4,959,880    $  0.11  
                                          ========      ==========    =======

      For the four months and twelve months ended December 31, 1997 basic and
diluted earning per share are the same amount based on weighted average shares
of 2,166,702.

      Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00
and $4.80, respectively, were outstanding for the year ended December 31, 1998
but were not included in the computations of diluted earnings per share because
the effect of exercise would have an antidilutive effect on earnings per share.

      On January 23, 1998 the Company completed its initial public offering (the
"IPO"), and issued 1,600,000 shares of common stock at price of $4.00 per share.
In conjunction with the IPO, the Company issued options to directors to purchase
65,000 shares of common stock at $3.20, warrants to legal counsel to purchase
35,555 shares of common stock at $3.60, warrants to underwriters to purchase
110,000 shares of common stock at $4.80 per share, and warrants in connection
with bridge financing to purchase 80,000 shares of common stock at $6.00 per
share. On October 15, 1998 the Company repriced the warrants issued to legal
counsel from $3.60 per share to $1.50 per share in lieu of outstanding amounts
owed for legal fees.

      On October 19, 1998 the Company issued 2,390,000 shares of restricted
common stock at price of $1.125 per share to a strategic investor, KG
Investment, LLC.


4.    WRITE-OFF OF PRINTING DIVISION

      In the fiscal year ended December 31, 1997, the Company incurred
approximately $116,000 of incremental printing costs associated with its captive
printing division. The Company closed this division in February 1997.


                                       26
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


5.    DUE FROM/TO FACTOR

      The Company's factors purchase eligible accounts receivable and assume the
credit risk with respect to those accounts for which have they given their prior
approval. If a factor does not assume the credit risk for a receivable, the
collection risk associated with the receivable remains with the Company. The
Company pays a fixed commission rate and may borrow up to 80% of its eligible
receivable. Interest is charged at 2.5% over the prevailing reference rate
(7.75% and 8.5% at December 31, 1998 and 1997). Factored accounts receivable is
as follows:

                                                         FISCAL YEAR ENDED
                                                            DECEMBER 31,
                                                     -----------------------
                                                         1998        1997
                                                     ---------   -----------

    Advance from factor ..........................   $      --   $(1,877,621)
    Factored accounts receivable, 
      without recourse ...........................     221,770       473,488
                                                     ---------   -----------
      Due from (to) factor, net ..................   $ 221,770   $(1,404,133)
                                                     =========   ===========


6.    ACCOUNTS RECEIVABLE, TRADE, NET

      Accounts receivable, trade is net of allowance for doubtful accounts and
subsequent returns. For the fiscal years ended December 31, 1998 and 1997, the
allowance for doubtful accounts and subsequent returns was $271,113 and
$166,270, respectively, and included provision adjustments of $104,843 and
$166,270, respectively.

7.    INVENTORIES

          Inventories consist of the following:

                                                FISCAL YEAR ENDED
                                                   DECEMBER 31,
                                              ------------------------
                                                 1998         1997
                                              ----------    ----------
     Raw Materials..........................  $  160,672    $  101,000
                                                       
     Work-in-process........................   1,062,416       249,632
     Finished Goods.........................   4,477,108     1,980,499
                                              ==========    ==========
         Total inventories .................  $5,700,196    $2,331,131
                                              ==========    ==========


8.    PROPERTY AND EQUIPMENT

      Property and equipment consist of the following:

                                                         FISCAL YEAR ENDED
                                                            DECEMBER 31,
                                                     ------------------------
                                                        1998         1997
                                                     ----------    ----------
     Furniture and fixtures........................  $  539,569    $  346,509
     Machinery and equipment.......................     792,605       495,137
     Leasehold improvements........................     239,136       207,146
     Films, dies, molds and art designs............     981,553       700,186
                                                     ----------    ----------
                                                      2,552,863     1,748,978

     Accumulated depreciation and amortization.....   1,217,797       774,669
                                                     ============  ==========
     Net property and equipment ...................  $1,335,066    $  974,309
                                                     ==========    ==========


                                       27
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


9.    LINE OF CREDIT

      In May 1998, the Company obtained a $2 million line of credit from Sanwa
Bank to be used for working capital purposes. The line of credit expires on May
31, 1999. The line of credit interest rate is equal to the bank's reference rate
(7.75% at December 31, 1998). The line of credit agreement requires the Company
to meet certain financial covenants relating to net worth, debt to net worth,
current ratio and profitability. At December 31, 1998, the Company was in
compliance with these covenants. The line of credit is collateralized by all
assets of the Company. As of December 31, 1998, the outstanding balance on the
bank line of credit was $1,489,000.

10.   LONG-TERM DEBT

      Long-term debt consist of the following:

                                                        FISCAL YEAR ENDED
                                                           DECEMBER 31,
                                                     -----------------------
                                                        1998         1997
                                                     ---------    ----------

    Payable to a former shareholder,
      dated October 1994, interest imputed
      at 10.75%, fully paid in 1998 ...........     $      --    $   133,424
    Note payable to an unrelated party,
      dated September 1995, payable
      on demand, with interest at 10%  .......          25,200        25,200
    Other  notes .............................          30,840       360,399
                                                     ---------    ----------
                                                        56,040       519,023
    Current portion ..........................          56,040       463,708
                                                     ---------    ----------
    Net long-term debt .......................       $      --    $   55,315
                                                     =========    ==========


The estimated fair value of long term debt is $56,040 and $515,650 at December
31, 1998 and 1997.


                                       28
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


11.   NOTES PAYABLE TO RELATED PARTIES

      Notes payable to related parties consist of the following:

<TABLE>
<CAPTION>
                                                             FISCAL YEAR ENDED
                                                                DECEMBER 31,
                                                           ------------------------
                                                              1998         1997
                                                           ----------    ----------
<S>                                                        <C>           <C>       
Six notes  payable  issued in 1996,  four  notes  payable                          
issued  in 1997,  and two  notes  payable  issued in 1998                          
to officers and  directors of the Company with no monthly                          
payments  and  interest  rates  ranging  from 7.5% to 10%                          
annually,  due and payable on the fifteenth day following                          
delivery  of  written  demand  for  payment  which may be                
delivered at any time following December 31, 1998 .......  $  246,626    $  564,126

Five  notes  payable to  officers  and  directors  of the                          
Company with no monthly  payments  and  interest  ranging                          
from  7.5%  to  prime  plus  3.5%  annually   (11.25%  at                          
December 31, 1998),  due and payable on the fifteenth day                          
following  delivery of written  demand for payment  which                          
may  be  delivered  for  payment  at any  time  following                          
December 31, 1998........................................      15,000       120,603

Notes  payable  to  NPM  Investments,   Inc.,  which  the                          
Chairman of the  Company  holds a  significant  interest.                          
The  notes  require  no  monthly  payments  and  interest                          
accrues  at  7.5%  annually,   due  and  payable  on  the                          
fifteenth  day following  delivery of written  demand for                          
payment  which  may be  delivered  at any time  following                          
December  31,  1998,  collateralized  by  the  assets  of                          
Tag-It,  Inc.  $400,000 of the note payable was converted                          
to 266,666 shares on October 15, 1998....................     190,000       841,972
                                                           ----------    ----------
                                                              451,626     1,526,701

Less: Current portion....................................     451,626       277,003
                                                           ----------    ----------
Net long-term notes payable to related parties ..........  $       --    $1,249,698
                                                           ==========    ==========
</TABLE>


12.   STOCK OPTION INCENTIVE PLAN AND WARRANTS

      STOCK OPTION INCENTIVE PLAN

      On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan
("the 1997 Plan"), which authorized the granting of a variety of stock-based
incentive awards. A total of 562,500 shares of Common Stock have been reserved
for issuance under the 1997 Plan. The 1997 Plan is administered by the Board of
Directors, or a committee appointed by the Board of Directors, which determine
the recipients and terms of the awards granted. In 1997 and 1998, the Company
granted options to purchase 195,000 and 65,000 shares of Common Stock,
respectively, at an exercise price of $3.20 per share, the estimated fair value
of the Common Stock on the grant date. The options vest over four years and are
exercisable through their expiration dates in 2007 and 2008.

      Effective October 10, 1998, the Company's Board of Directors approved an
option exchange program. Under the program, holders of options to purchase
189,500 shares of Common Stock at an exercise price of $3.20 per share (which
represented all of the options outstanding on the date the program was approved)
could exchange these options for new options to purchase shares of Common Stock
at an exercise price of $1.30 per share, which exercise price was above the
$1.1875 closing sales price of a share of Common Stock on the American Stock
Exchange on October 9, 1998. Upon the exchange, the existing options were
canceled and became available for future grant under the 1997 Plan. Each new
option was for the same or fewer number of shares and/or had a longer vesting
schedule than did the option for which it was exchanged. The new options are
exercisable through their expiration dates in 2007 and 2008, which expiration
dates correspond to the expiration dates of the options for which they were
exchanged. At October 10, 1998, options to purchase 70,500 shares of Common
Stock previously granted under the 1997 Plan had been cancelled in accordance
with the terms of the respective option agreements.


                                       29
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


      Effective October 10, 1998, the Company granted options to purchase
392,000 shares of Common Stock at an exercise price of $1.30 per share, which
exercise price was above the $1.1875 closing sales price of a share of Common
Stock on the American Stock Exchange on October 9, 1998. The options have
vesting schedules from immediate to four years and are exercisable through their
expiration in 2008.

      The following table summarizes the activity in the 1997 Plan:

                                                                   WEIGHTED
                                                  NUMBER OF        AVERAGE
                                                   SHARES       EXERCISE PRICE
                                                ------------    --------------

    Options outstanding - January 1, 1997       $         --    $           --
     Granted...........................              195,000              3.20
     Exercised.........................                   --                --
                                                ------------    --------------
    Options outstanding - December 31, 1997          195,000              3.20
     Granted...........................               65,000              3.20
     Exercised.........................                   --                --
     Canceled..........................             (260,000)             3.20
     Granted...........................              562,000              1.30
                                                ------------    --------------
    Options outstanding - December 31, 1998          562,000    $         1.30
                                                ============    ==============

      STOCK BASED COMPENSATION

      All stock options issued to employees have an exercise price not less than
the fair market value of the Company's Common Stock on the date of grant, and in
accounting for such options utilizing the intrinsic value method there is no
related compensation expense recorded in the Company's financial statements. If
compensation cost for stock-based compensation had been determined based on the
fair market value of the stock options on their dates of grand in accordance
with SFAS 123, the Company's net income and income per share for the years ended
December 31, 1998 and 1997 would have been decreased to the pro forma amounts
presented below:

                                                    1998            1997
                                                -----------     -----------
    Net Income:
     As reported ...........................    $   526,887     $   227,099
     Pro forma .............................    $    79,122     $   227,099

    Basic and diluted income per common share:
     As reported ...........................    $      0.11     $      0.10
     Pro forma .............................    $      0.02     $      0.10


      The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted during 1997 and 1998; expected life of
option of 1.5 years, expected volatility of 80%, risk free interest rate of 6%
and a 0% dividend yield. The weighted average fair value at the grant date for
such options is $1.30 per option.


                                       30
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


      Additional information relating to stock options and warrants outstanding
and exercisable at December 31, 1998, summarized by exercise price are as
follows:

                                    OUTSTANDING                EXERCISABLE
                                 WEIGHTED AVERAGE           WEIGHTED AVERAGE
                           ------------------------------  --------------------
      EXERCISE PRICE PER                  LIFE    EXERCISE           EXERCISE
            SHARE            SHARES      (YEARS)   PRICE    SHARES    PRICE
      ------------------   ----------    ------   --------  -------  ---------
            $ 0.71            39,235       1.0      $ 0.71   39,235   $ 0.71
            $ 0.76            22,841       1.0      $ 0.76   22,841   $ 0.76
            $ 1.30           562,000       1.5      $ 1.30  407,000   $ 1.30
            $ 1.50            35,555       1.0      $ 1.50   35,555   $ 1.50
            $ 4.80           110,000       3.1      $ 4.80   27,500   $ 4.80
            $ 6.00            80,000       3.1      $ 6.00   20,000   $ 6.00

                           ----------                      --------
                             849,631                        552,131
                           ==========                      ========

      In 1994, as compensation for employment services, a key employee received
warrants to purchase 14 shares of Tag-It Common Stock which, upon the
Consolidation, became exercisable for 39,235 shares of Common Stock of the
Company at an exercise price of $0.71 per share.


13.   INCOME TAXES

      The components of the provision (benefit) for income taxes are as follows:


                                FISCAL YEAR     FOUR MONTHS      FISCAL YEAR
                                  ENDED            ENDED            ENDED
                               DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                  1998             1997             1997
                               -----------      -----------      -----------
    Current:
         Federal ..........    $    44,426      $     3,996      $    77,177
         State ............          2,400            3,586           61,166
                               -----------      -----------      -----------
                                    46,826            7,582          138,343
    Deferred:                
         Federal ..........        (44,464)          40,915           52,749
         State ............         (4,049)           8,791           15,908
                               -----------      -----------      -----------
                                   (48,513)          49,706           68,657
                               -----------      -----------      -----------
                               $    (1,687)     $    57,288      $   207,000
                               ===========      ===========      ===========

      A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                                  FISCAL YEAR  FOUR MONTHS  FISCAL YEAR
                                                    ENDED        ENDED         ENDED
                                                  DECEMBER 31, DECEMBER 31, DECEMBER 31,
                                                    1998            1997       1997
                                                  ----------   -----------  -----------
  <S>                                             <C>          <C>          <C>
  Current:
       Federal statutory rate ................    $ 178,570    $  44,918    $ 147,595
       Income earned from foreign subsidiaries      (63,424)          --           --
       State taxes net of  Federal benefit ...       37,760        4,157       45,078
       Utilization of NOL benefit ............     (175,702)          --           --
       Other .................................       21,109        8,213       14,327
                                                  ---------    ---------   ----------
                                                  $  (1,687)   $  57,288    $ 207,000
                                                  =========    =========   ==========
</TABLE>


                                       31
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


      The primary components of temporary differences which give rise to the
Company's deferred assets and deferred tax liabilities are as follows:

                                                          FISCAL YEAR ENDED
                                                             DECEMBER 31,
                                                        ----------------------
                                                           1998         1997
                                                        ---------    ---------
Net Deferred Tax Liability:
     Net operating loss carryforwards ...............   $ 627,118    $ 696,000

     Deferred tax liabilities (dies, film, & art
       library tax over book) .......................    (181,164)    (158,991)
     Depreciation ...................................     (68,213)       1,290
     Other ..........................................          --      (23,998)
     Valuation allowance ............................    (536,000)    (696,000)
                                                        ---------    ---------
                                                        $(158,259)   $(181,699)
                                                        =========    =========


      At December 31, 1998, the Company had net operating loss carryforwards
("NOL's") of approximately $210,000 for Federal and $130,000 for State which are
not limited by IRC section 382 changes in ownership. The NOL's expire in 2018
for Federal and 2003 for State.

      At December 31, 1998, the Company's subsidiary, AGS Stationery, Inc. had
Federal and state NOL carryforwards of approximately $1,200,000 and $1,300,000
respectively. The Federal NOL is available to offset future taxable income
through 2011, and the state NOL expires in 2001. The Company's ability to
utilize the NOL carryforwards are dependent upon the Company's ability to
generate taxable income in future periods and may be limited due to restrictions
imposed under Federal and state laws upon a change in ownership. The NOL's
stated above are subject to separate year loss limitations.


14.   COMMITMENTS AND CONTINGENCIES

      LEASES

      The Company is a party to a number of non-cancelable operating lease
agreements involving buildings and equipment which expire at various dates. The
future minimum lease commitments as of December 31, 1998 are as follows:

                                                   FISCAL YEARS
                                                      ENDING
                                                   DECEMBER 31,
                                                   -----------

                     1999 ..................        $  329,247
                     2000 ..................           216,752
                     2001 ..................           151,131
                     2002 ..................            88,931
                     2003+ .................            68,160
                                                   -----------
                        Total minimum payments      $  854,221
                                                   ===========


      Total rental expense for the years ended December 31, 1998 and 1997
aggregated $400,684 and $250,099, respectively. Total rental expense for the
four months ended December 31, 1997 aggregated $83,366.

      ROYALTIES

      The Company, through its AGS Stationery, manufactures Guess? stationery
products pursuant to an exclusive license with Guess? entered into as of March
1, 1996. Net sales of Guess? stationery products accounted for 7.5% and 3.9% of
the Company's consolidated net sales for the twelve months ended December 31,
1998 and 1997, respectively. The Company is required to pay royalties of 7% on
licensed stationery product sales. A royalty expense of $5,367 and $80,796 is


                                       32
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


included in the statement of income for the years ended December 31, 1998 and
1997, respectively. A royalty credit of $38,433 is included in the statement of
income for the four months ended December 31, 1997. Effective August 7, 1998 the
Company and Guess? mutually agreed to terminate the license. However, the
Company is allowed to sell-off any remaining inventory through December 1998,
which the Company has completed. The termination results in no payoff or
penalties to either party. The Company does not expect termination of the
license to have a material adverse effect on the Company's business, operating
results or financial condition.

      CONTINGENCIES

      The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.


15.   GEOGRAPHIC INFORMATION

      The Company develops, manufactures and distributes complete brand-identity
programs to manufacturers of fashion driven apparel and licensed consumer
products and to specialty retailers and mass merchandisers. There is not enough
difference between the types of products manufactured and distributed by the
Company to account for these products separately or to justify segmented
reporting by product type.

      The Company distributes its products internationally and has reporting
requirements based on geographic areas as follows:

                                               FISCAL YEAR ENDED
                                                  DECEMBER 31,
                                          -------------------------
                                              1998         1997
                                          -----------   -----------
Sales:
     United States .. ...............     $16,063,627   $17,111,048
     Asia ........... ...............       2,175,279     1,945,000
     Mexico and other ...............         569,161            --
                                          -----------   -----------
                                          $18,808,067   $19,056,048
                                          ===========   ===========
Assets:
     United States .. ...............     $11,155,502   $ 6,976,119
     Asia ........... ...............         627,685       194,945
     Mexico and other ...............       2,860,653            --
                                          -----------   -----------
                                          $14,643,840   $ 7,171,064
                                          ===========   ===========


17.   MAJOR CUSTOMERS

      Two major customers accounted for approximately 8.5% and 9.5% of the
Company's net sales on a consolidated basis for the year ended December 31, 1998
and approximately 16.3% and 12.5% of the net sales on a consolidated basis for
the year ended December 31, 1997.


18.   RELATED PARTY TRANSACTIONS

      The President and Director of the Company is the general partner of D.P.S.
Associates, a general partnership, which is the lessor of the Company's
executive offices in Los Angeles, California, pursuant to a lease agreement with
the Company. The lease provides for base rent of $9,072 per month and expires in
April 2000.

      In August 1996, NPM Investments, Inc., made a loan of $875,000 to Tag-It,
Inc.,without interest, pursuant to a convertible secured promissory note (the
"convertible note") which was secured by all of the assets of Tag-It, Inc. The


                                       33
<PAGE>


                              TAG-IT PACIFIC, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


Chairman of the Board of the Company holds a significant equity interest in NPM
Investments, Inc. In October 1997, the convertible note was converted into fully
paid and non-assessable shares of Common Stock of Tag-It, Inc., Tag-It Printing
& Packaging Ltd., and A.G.S. Stationery, Inc., at a conversion price equal to
the fair market value of shares of Common Stock of the the entities on the date
the note was issued, which shares were exchanged for 384,402 shares of Common
Stock of the Company upon the Conversion.

      In October 1998, a portion of notes payable to NPM Investments, Inc.,
which the Chairman of the Board of the Company holds a significant interest,
totaling $400,000 was converted into 266,666 shares of Common Stock of the
Company. The conversion price of $1.50 per share was based on the fair market
price of a share of Common Stock at the date of conversion.

      A Director of the Company controls a financial advisory firm, Averil
Associates, Inc. ("Averil Associates"), which has performed various services for
the Company including investigation of strategic financing and other corporate
growth initiatives. As consideration of such services, AGS Stationery paid
Averil Associates the aggregate amount of $26,123, plus out of pocket expenses.
As additional compensation for such services, in 1997, AGS Stationery granted to
Chloe Holdings, Inc., an affiliate of Averil Associates, warrants to purchase up
to 135 shares of Common Stock of AGS Stationery. Effective upon the Conversion,
the Chloe Warrants became exercisable for 22,841 shares of the Common Stock of
the Company at $0.76 per share and the Company also paid Averil Associates an
additional $175,000 upon consummation of the Company's initial public offering
for services rendered in connection therewith.

      In October 1998, the Company sold 2,390,000 shares of Common Stock at a
purchase price per share of $1.125 to KG Investment, LLC. The Company intends to
use the $2,688,750 raised in the private placement to fund a portion of its
business growth plans and operations. KG Investment is owned by Gerard Guez and
Todd Kay, executive officers and significant shareholders of Tarrant Apparel
Group. KG Investment has agreed that it will not seek to disposed of its shares
prior to October 16, 2000, except to certain affiliated parties, without our
prior written consent. KG Investment has also agreed to certain additional
restrictions on the transfer and voting of the shares it purchased and has been
granted piggyback registration rights.

      Commencing in December 1998, the Company began to provide trim products to
Tarrant Apparel Group for its operations in Tehuacan, Mexico. In connection
therewith, the Company purchased $2.25 million of Tarrant Apparel Group's
existing inventory starting in December 1998 for resale to Tarrant Apparel
Group. As of December 31, 1998, the outstanding balance due from related party
was $580,000 and included in accounts payable related party was in excess of $2
million due to Tarrant Apparel Group for inventory purchased pursuant to the
agreement.

      In June 1997, AGS Stationery entered into a Collection Date Factoring
Agreement (the "Safcor Agreement") with Safcor, Inc. ("Safcor"). An officer and
director of Safcor is a stockholder of the Company. Pursuant to the Safcor
Agreement, AGS Stationery has agreed to sell to Safcor all accounts receivable
related to the sale of goods or the rendering of services by AGS Stationery for
a purchase price equal to the gross amount of each account, less all discounts
and credits and a factoring commission of 1.5% of the net amount of the account.
In addition, Safcor has the right, at its sole discretion to provide customers
of AGS Stationery with the credit lines for the purchase of AGS Stationery's
products. As of December 31, 1997 the amount due Safcor was $261,799. The Safcor
Agreement was terminated in 1998 and as of December 31, 1998, no amounts were
due to Safcor.

      In October 1998, the Company adopted a stockholder's rights plan. Under
the rights plan the Company distributed one preferred share purchase right for
each outstanding share of Common Stock outstanding on November 6, 1998. Upon the
occurrence of certain triggering events related to an unsolicited takeover
attempt of the Company, each purchase right not owned by the party or parties
making the unsolicited takeover attempt will entitle its holder to purchase
shares of the Company's Series A Preferred Stock at a value below the then
market value of the Series A Preferred Stock. The rights of holders of the
Common Stock will be subject to, and my be adversely affected by, the rights of
holders of the share purchase rights, the Series A Preferred Stock and any other
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the Company's outstanding voting stock.


                                       34
<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

              None.

                                      PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

      Information required by this Item 9 will appear in the proxy statement for
the 1999 Annual Meeting of Stockholders, and is incorporated herein by
reference.


ITEM 10. EXECUTIVE COMPENSATION.

      Information regarding executive compensation will appear in the proxy
statement for the 1999 Annual Meeting of Stockholders, and is incorporated
herein by reference.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      Information regarding security ownership of certain beneficial owners and
management will appear in the proxy statement for the 1999 Annual Meeting of
Stockholders, and is incorporated herein by reference.


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Information regarding certain relationships and related transactions will
appear in the proxy statement for the 1999 Annual Meeting of Stockholders, and
is incorporated by this reference.


ITEM 13.    EXHIBITS, LIST AND REPORTS ON FORM 8-K.

      (a)   Exhibits:

            See attached Exhibit List.

      (b)   Reports on Form 8-K.

      Report on Form 8-K, filed as of October 29, 1998, reporting under Item 5
      thereof Registrant's press releases dated October 19, 1998 and October 27,
      1998.

      Report on Form 8-K, filed as of November 4, 1998, reporting under Items 5
      and 7 thereof the adoption of Registrant's Rights Plan.


                                       35
<PAGE>


                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                      TAG-IT PACIFIC, INC.
 
                                      /S/ FRANCIS SHINSATO                
                                      ----------------------------------------
                                      By:  Francis Shinsato
                                      Its: Chief Financial Officer (Principal
                                           Financial and Accounting Officer)

                                POWER OF ATTORNEY

      Each person whose signature appears below constitutes and appoints Colin
Dyne and Francis Shinsato, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-KSB and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

                                   SIGNATURES

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                          TITLE                          DATE
---------                          -----                          -----
<S>                                <C>                            <C>
   /S/ MARK DYNE                   Chairman of the Board of       March 29, 1999
------------------------------     Directors
Mark Dyne                          

   /S/ COLIN DYNE                  Chief Executive Officer and    March 29, 1999
------------------------------     Director
Colin Dyne                         

   /S/ HAROLD DYNE                 President and Director         March 29, 1999
------------------------------
Harold Dyne

   /S/ FRANCIS SHINSATO            Chief Financial Officer        March 29, 1999
------------------------------     (Principal Financial
Francis Shinsato                   and Accounting Officer)
                                     
   /S/ DIANA MARANON               Director                       March 29, 1999
------------------------------
Diana Maranon

   /S/ BRENT COHEN                 Director                       March 29, 1999
------------------------------
Brent Cohen

   /S/MICHAEL KATZ                 Director                       March 29, 1999
------------------------------
Michael Katz

   /S/ PAUL MARKILES               Director                       March 29, 1999
------------------------------
Paul Markiles
</TABLE>


                                       36
<PAGE>


                                   EXHIBIT INDEX

EXHIBIT
NUMBER         EXHIBIT DESCRIPTION
-------        -------------------

2.1            Exchange Agreement, dated October 17, 1997. Incorporated by
               reference to Exhibit 2.1to Form SB-2 filed on October 21, 1997,
               and the amendments thereto.

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

3.2            Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to
               Form SB-2 filed on October 21, 1997, and the amendments thereto.

3.3            Certificate of Designation of Rights, Preferences and Privileges
               of 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 as of November 4, 1998.

4.1            Specimen Stock Certificate of Common Stock of Registrant.
               Incorporated by reference to Exhibit 4.1to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

4.2            Rights Agreement, dated as of November 4, 1998, between
               Registrant and American Stock Transfer and Trust Company as
               Rights Agent. Incorporated by reference to Exhibit 4.1 to Current
               Report on Form 8-K filed as of November 4, 1998.

4.3            Form of Rights Certificate. Incorporated by reference to Exhibit
               B to the Rights Agreement filed as Exhibit 4.1 to Current Report
               on Form 8-K filed as of November 4, 1998.

10.1           Form of Indemnification Agreement. Incorporated by reference to
               Exhibit 10.1to Form SB-2 filed on October 21, 1997, and the
               amendments thereto

10.2           Intentionally Omitted.

10.3           Collection Date Factoring Agreement, dated June 13, 1997, between
               A.G.S. Stationary, Inc. and Safcor, Inc. Incorporated by
               reference to Exhibit 10.3 to Form SB-2 filed on October 21, 1997,
               and the amendments thereto.

10.4           Lease Agreement, dated May 1, 1994, between D.P.S. Associates and
               Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
               10.4 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.5           Lease Agreement, dated September 6, 1996, between S & S
               Partnership and Tag-It, Inc. Incorporated by reference to Exhibit
               10.5 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.6           Lease Agreement, dated June 8, 1996, between Lea Tai Property
               Development Limited and Tag-It Printing & Packaging Ltd.
               Incorporated by reference to Exhibit 10.6 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

10.7           Lease Agreement, dated March 17, 1997, between Palobueno N.V.
               Ltd. and Pacific Trim & Belt, Inc. Incorporated by reference to
               Exhibit 10.7 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.8           Collection Date Factoring Agreement, dated June 24, 1991, between
               Tag-It, Inc. and Heller Financial, Inc. Incorporated by reference
               to Exhibit 10.8 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.9           Promissory Note, dated June 6, 1997, between Tag-It, Inc. and
               Mercantile National Bank; Commercial Guaranty, dated June 6,
               1997, provided by Harold Dyne for the benefit of Mercantile
               National Bank; and Commercial Guaranty, dated June 6, 1997,
               provided by Colin Dyne for the benefit of Mercantile National
               Bank. Incorporated by reference to Exhibit 10.9 to Form SB-2
               filed on October 21, 1997, and the amendments thereto.

10.10          Promissory Note, dated September 13, 1996, between Harold Dyne
               and Mercantile National Bank; Change in Terms Agreement, dated
               May 16, 1997, between Harold Dyne and Mercantile National Bank;
               and Commercial Guaranty, dated May 16, 1997, provided by Tag-It,
               Inc. for the benefit of Mercantile National Bank. Incorporated by
               reference to Exhibit 10.10 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.11          Domestic Collection Date Factoring Agreement, dated August 6,
               1996, between A.G.S. Stationary, Inc. and Heller Financial, Inc.
               Incorporated by reference to Exhibit 10.11 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.


                                       37
<PAGE>


EXHIBIT
NUMBER         EXHIBIT DESCRIPTION
-------        -------------------

10.12          Tax Indemnification Agreement between Pacific Trim & Belt, Inc.
               and Harold Dyne, Jonathan Burstein, Raymond Spiro and Stan
               Magnus. Incorporated by reference to Exhibit 10.12 to Form SB-2
               filed on October 21, 1997, and the amendments thereto.

10.13          Equipment Lease Guaranty, Lease No. CPL7B17, provided by Colin
               Dyne for the benefit of Quail American Corp. Incorporated by
               reference to Exhibit 10.13 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.14          Equipment Lease Guaranty, Lease No. 09532-0196, provided by
               Harold Dyne for the benefit of Saddleback Financial Corporation.
               Incorporated by reference to Exhibit 10.14 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

10.15          Equipment Lease Guaranty, Lease No. ADV5I02, provided by Harold
               Dyne for the benefit of Quail American Corp. Incorporated by
               reference to Exhibit 10.15 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.16          Equipment Lease Guaranty, Lease No. N6F08B, provided by Harold
               Dyne and Colin Dyne for the benefit of Quail American Corp.
               Incorporated by reference to Exhibit 10.16 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

10.17          Equipment Lease Guaranty, Lease No. CPL7B17, provided by Harold
               Dyne for the benefit of Quail American Corp. Incorporated by
               reference to Exhibit 10.17 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.18          Equipment Lease Guaranty, Lease No. Q6DO1, provided by Harold
               Dyne for the benefit of Quail American Corp. Incorporated by
               reference to Exhibit 10.18 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.19          Equipment Lease Guaranty, Lease No. JLA7H07, provided by Colin
               Dyne for the benefit of Quail American Corp. Incorporated by
               reference to Exhibit 10.19 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.20          Equipment Lease Guaranty, Lease No. JLA7H07, provided by Harold
               Dyne for the benefit of Quail American Corp. Incorporated by
               reference to Exhibit 10.20 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.21          Equipment Lease Guaranty provided by Harold Dyne and Colin Dyne
               for the benefit of Quail American Corp. Incorporated by reference
               to Exhibit 10.21 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.22          Promissory Note, dated September 30, 1996, provided by Tag-It,
               Inc. to Harold Dyne. Incorporated by reference to Exhibit 10.21
               to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.23          Promissory Note, dated June 30, 1991, provided by Tag-It, Inc. to
               Harold Dyne. Incorporated by reference to Exhibit 10.23 to Form
               SB-2 filed on October 21, 1997, and the amendments thereto.

10.24          Promissory Note, dated January 31, 1997, provided by Tag-It Inc.
               to Mark Dyne. Incorporated by reference to Exhibit 10.24 to Form
               SB-2 filed on October 21, 1997, and the amendments thereto.

10.25          Promissory Note, dated February 29, 1996, provided by A.G.S.
               Stationary, Inc. to Monto Holdings Pty. Ltd. Incorporated by
               reference to Exhibit 10.25o Form SB-2 filed on October 21, 1997,
               and the amendments thereto.

10.26          Promissory Note, dated January 19, 1995, provided by Pacific Trim
               & Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
               reference to Exhibit 10.26 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.27          Convertible Promissory Note, dated August 23, 1996, provided by
               Tag-It, Inc. to NPM Investments, Inc. Incorporated by reference
               to Exhibit 10.27 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.28          Promissory Note, dated August 23, 1996, provided by Tag-It, Inc.
               to NPM Investments, Inc. Incorporated by reference to Exhibit
               10.28 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.29          Registrant's 1997 Stock Incentive Plan. Incorporated by reference
               to Exhibit 10.29 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.30          Form of Non-statutory Stock Option Agreement. Incorporated by
               reference to Exhibit 10.30 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.


                                       38
<PAGE>


EXHIBIT
NUMBER         EXHIBIT DESCRIPTION
-------        -------------------

10.31          Promissory Note, dated August 31, 1997, provided by Colin Dyne to
               Tag-It, Inc. Incorporated by reference to Exhibit 10.31 to Form
               SB-2 filed on October 21, 1997, and the amendments thereto.

10.32          Promissory Note, dated August 31, 1997, provided by Harold Dyne
               to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
               10.32 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.33          Promissory Note, dated October 15, 1997, provided by Colin Dyne
               to Tag-It, Inc. Incorporated by reference to Exhibit 10.33 to
               Form SB-2 filed on October 21, 1997, and the amendments thereto.

10.34          Promissory Note, dated October 15, 1997, provided by Harold Dyne
               to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
               10.34 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.35          Formation Agreement of AGS Holdings L.L.C., dated as of October
               17, 1997. Incorporated by reference to Exhibit 10.35 to Form SB-2
               filed on October 21, 1997, and the amendments thereto.

10.36          Promissory Note, dated October 21, 1997, provided by Tag-It, Inc.
               to NPM Investments, Inc. Incorporated by reference to Exhibit
               10.36 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.37          Guaranty of Colin Dyne and Harold Dyne in favor of Frank Peck.
               Incorporated by reference to Exhibit 10.37 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

10.38          Engagement Letter, dated January 1, 1996, between Averil
               Associates, Inc. and A.G.S. Stationary, Inc., d.b.a. Guess
               Stationary, and Indemnification Agreement, dated January 1, 1996,
               between Averil Associates, Inc., and A.G.S. Stationary, Inc.,
               d.b.a. Guess Stationary. Incorporated by reference to Exhibit
               10.38 to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.39          Warrant Agreement, dated June 1, 1994, between Jonathan Markiles
               and Tag-It, Inc. Incorporated by reference to Exhibit 10.39 to
               Form SB-2 filed on October 21, 1997, and the amendments thereto.

10.40          Warrant Agreement, dated February 1, 1996, between A.G.S.
               Stationary, Inc. and Chloe Holdings, Inc. Incorporated by
               reference to Exhibit 10.40 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.41          Form of Warrant Agreement between Registrant and Troop Meisinger
               Steuber & Pasich, LLP. Incorporated by reference to Exhibit 10.41
               to Form SB-2 filed on October 21, 1997, and the amendments
               thereto.

10.42          Promissory Note between  Pacific  Western,  Inc. and Tag-It, 
               Inc. Incorporated  by reference to Exhibit  10.42 to Form SB-2 
               filed on October 21, 1997, and the amendments thereto.

10.43          Promissory Note between Pacific Western, Inc. and Pacific Trim &
               Belt, Inc. Incorporated by reference to Exhibit 10.43 to Form
               SB-2 filed on October 21, 1997, and the amendments thereto.

10.44          Contract for Manufacturing Services between USA and Mexico,
               between Tag-It, Inc. and Tag It de Mexico, S.A. de C.V.
               Incorporated by reference to Exhibit 10.44 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

10.45          Intentionally Omitted.

10.46          Lease Agreement, dated November 15, 1997, between Mr. Abraham
               Beteeh Moussan and Tag It de Mexico, S.A. de CV. Incorporated by
               reference to Exhibit 10.46 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.47          Domestic Labor Regulations of Tagit de Mexico, SA de CV.
               Incorporated by reference to Exhibit 10.47 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

10.48          Promissory Note, dated October 15, 1997, provided by A.G.S.
               Stationary Inc. to Monto Holdings Pty. Ltd. Incorporated by
               reference to Exhibit 10.48 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.49          Promissory Noted, dated November 4, 1997, provided by Pacific
               Trim & Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
               reference to Exhibit 10.49 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.50          Securities Purchase Agreement, dated December 31, 1997, between
               Registrant and Cruttenden 


                                       39
<PAGE>

EXHIBIT
NUMBER         EXHIBIT DESCRIPTION
-------        -------------------

               Roth Bridge Fund, LLC. Incorporated by reference to Exhibit 10.50
               to Form SB-2 filed on October 21, 1997, and the amendments
               thereto. Amendment to Securities Purchase Agreement, dated
               January 20, 1998, among Registrant, Cruttenden Roth Bridge Fund,
               LLC and Beta Research Corporation. Incorporated by reference to
               Exhibit 10.55 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.51          Promissory Note, dated December 31, 1997, delivered Registrant to
               Cruttenden Roth Bridge Fund., LLC. Incorporated by reference to
               Exhibit 10.51 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.52          Security Agreement, dated December 31, 1997, between Registrant
               and Cruttenden Roth Bridge Fund, LLC. Incorporated by reference
               to Exhibit 10.52 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.53          Form of Bridge Warrant granted by Registrant to Cruttenden Roth
               Bridge Fund, LLC and Beta Research Corporation. Incorporated by
               reference to Exhibit 10.53 to Form SB-2 filed on October 21,
               1997, and the amendments thereto.

10.54          Promissory Note, dated January 20, 1998, delivered by Registrant
               to Cruttenden Roth Bridge Fund, LLC. Incorporated by reference to
               Exhibit 10.50 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.55          Intentionally Omitted.

10.56          Promissory Note, dated January 20, 1998, delivered by the Company
               to Beta Research Corporation. Incorporated by reference to
               Exhibit 10.56 to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

10.57          Line of Credit Agreement, dated April 30, 1998, among Sanwa Bank
               of California, Tag-It, Inc. and Pacific Trim & Belt, Inc.
               Incorporated by reference to Exhibit 10.53 to Quarterly Report on
               Form 10-QSB for the quarter ended March 31, 1998.

10.58          Binding Letter of Understanding, dated October 14, 1998.
               Incorporated by reference to Exhibit 99.3 to Current Report on
               Form 8-K filed as of October 29, 1998.

10.59          Side Letter Agreement, dated October 14, 1998. Incorporated by
               reference to Exhibit 99.4 to Current Report Form 8-K filed as of
               October 29, 1998.

21.1           List of Subsidiaries of Registrant. Incorporated by reference to
               Exhibit 21.1to Form SB-2 filed on October 21, 1997, and the
               amendments thereto.

23.1           Consent of BDO Seidman, LLP.

24.1           Power of Attorney (included on signature page).

27.1           Financial Data Schedule.


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