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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


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

                   For the fiscal year ended December 31, 2004

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

                         Commission file number 1-13669

                              TAG-IT PACIFIC, INC.
             (Exact Name of Registrant as Specified in Its Charter)

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

                 21900 BURBANK BLVD., SUITE 270
                   WOODLAND HILLS, CALIFORNIA                    91367
            (Address of Principal Executive Offices)          (Zip Code)

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

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

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

           Securities registered pursuant to Section 12(g) of the Act:

                                      NONE

         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for past 90 days.

                              Yes [X]    No [_]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not 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-K or any
amendment to this Form 10-K [ ]

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Exchange Act Rule 12b-2) Yes [_] No [X]

         At  June  30,  2004  the  aggregate  market  value  of the  voting  and
non-voting   common  stock  held  by   non-affiliates   of  the  registrant  was
$65,632,028. At March 31, 2005 the issuer had 18,241,045 shares of Common Stock,
$.001 par value, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions  of the  issuer's  proxy  statement  with  respect to its 2005
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-K

PART I                                                                      PAGE

Item 1.       Business....................................................     1

Item 2.       Properties..................................................     7

Item 3.       Legal Proceedings...........................................     7

Item 4.       Submission of Matters to a Vote of Security Holders.........     8

PART II

Item 5.       Market for Registrant's Common Equity, Related
                 Stockholder Matters and Issuer Purchases of
                 Equity Securities........................................     9

Item 6.       Selected Financial Data.....................................    10

Item 7.       Management's Discussion and Analysis of Financial
                 Condition and Results of Operations......................    11

Item 7A.      Quantitative and Qualitative Disclosures about
                 Market Risk .............................................    28

Item 8.       Financial Statements and Supplementary Data:

              Report of Independent Registered Public Accounting Firm.....    30

              Consolidated Balance Sheets.................................    31

              Consolidated Statements of Operations.......................    32

              Consolidated Statements of Stockholders' Equity and
              Convertible Redeemable Preferred Stock......................    33

              Consolidated Statements of Cash Flows.......................    34

              Notes to Consolidated Financial Statements..................    35

              Independent Registered Public Accounting Firm's Report
                 on Schedule II...........................................    62

              Schedule II - Valuation and Qualifying Accounts
                 and Reserves.............................................    63

Item 9.       Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure......................    64

Item 9A.      Controls and Procedures.....................................    64

Item 9B.      Other Information...........................................    64

PART III

Item 10.      Directors and Executive Officers of the Registrant..........    65

Item 11.      Executive Compensation......................................    65

Item 12.      Security Ownership of Certain Beneficial Owners and
                 Management and Related Shareholder Matters...............    65

Item 13.      Certain Relationships and Related Transactions..............    65

Item 14.      Principal Accounting Fees and Services......................    65

PART IV

Item 15.      Exhibits and Financial Statement Schedules..................    65


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                                     PART I

       This  Annual  Report on Form  10-K  contains  forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the  Securities  Exchange Act of 1934,  as amended.  We use words
such as "believes", "intends", "expects", "anticipates",  "plans", "may", "will"
and similar  expressions  to identify  forward-looking  statements.  Discussions
containing  forward-looking  statements  may be found in the  material set forth
under "Business,"  "Management's  Discussion and Analysis of Financial Condition
and  Results  of  Operations"   and  in  other  sections  of  the  report.   All
forward-looking  statements,  including,  but not  limited  to,  projections  or
estimates  concerning  our  business,  including  demand  for our  products  and
services,  mix of revenue  streams,  ability to control and/or reduce  operating
expenses, anticipated gross margins and operating results, cost savings, product
development efforts, general outlook of our business and industry, international
businesses,  competitive position, adequate liquidity to fund our operations and
meet our other cash requirements,  are inherently uncertain as they are based on
our expectations and assumptions concerning future events. These forward-looking
statements  are subject to numerous  known and unknown risks and  uncertainties.
You should not place undue  reliance on these  forward-looking  statements.  Our
actual  results  could  differ   materially   from  those   anticipated  in  the
forward-looking  statements  for many  reasons,  including  the  success  of our
product offerings,  our ability to expand our customer base, and all other risks
described below in the section entitled "Cautionary Statements and Risk Factors"
appearing in  "Management's  Discussion and Analysis of Financial  Condition and
Risk of Operations" and elsewhere in this report. All forward-looking statements
in this document are made as of the date hereof, based on information  available
to us as of  the  date  hereof,  and we  assume  no  obligation  to  update  any
forward-looking statement.

ITEM 1.       BUSINESS

GENERAL

         Tag-It  Pacific,  Inc. is an apparel  company that  specializes  in the
distribution of a full range of trim items to  manufacturers of fashion apparel,
specialty retailers and mass merchandisers.  We act as a full service outsourced
trim  management  department  for  manufacturers  of  fashion  apparel  such  as
Abercrombie & Fitch, Kellwood and Azteca Production International. We also serve
as a  specified  supplier  of trim  items to owners of  specific  brands,  brand
licensees and  retailers,  including Levi Strauss & Co.,  Express,  The Limited,
Lerner,  Motherworks  and  Miller's  Outpost,  among  others.  In  addition,  we
manufacture and distribute  zippers under our TALON brand name to  manufacturers
for apparel  brands and  retailers  such as Levi Strauss & Co.,  Wal-Mart and JC
Penny,  among others.  In 2002, we created a new division under the TEKFIT brand
name.  This  division  develops and sells  apparel  components  that utilize the
patented Pro-Fit technology, including a stretch waistband.

         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.,  which  changed  its name in 1999 to Tag-It
Pacific  (HK) LTD, a BVI  corporation,  Tagit de Mexico,  S.A.  de C.V.,  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 in October 1997.  These companies  became our wholly
owned subsidiaries immediately prior to the effective date of our initial public
offering in January 1998. In 2000,  we formed two wholly owned  subsidiaries  of
Tag-It Pacific, Inc: Tag-It Pacific Limited, a Hong Kong corporation,  and Talon
International,    Inc.,    a    Delaware    corporation.    Our    website    is
www.tagitpacific.com.

BUSINESS SUMMARY

         We  have  positioned  ourselves  as a  fully  integrated  single-source
supplier of a full range of trim items for manufacturers of fashion apparel. Our
business  focuses on servicing all of the trim  requirements of our customers at
the manufacturing  and retail brand level of the fashion apparel industry.  Trim
items include


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thread, zippers, stretch waistbands,  labels, buttons, rivets, printed marketing
material,  polybags,  packing  cartons,  and  hangers.  Trim  items  comprise  a
relatively small part of the cost of most apparel products but comprise the vast
majority of  components  necessary to fabricate a typical  apparel  product.  We
offer   customers  what  we  call  our  MANAGED  TRIM  SOLUTION,   which  is  an
Internet-based  supply-chain  management system covering the complete management
of development,  ordering,  production,  inventory  management and  just-in-time
distribution   of  their  trim  and   packaging   requirements.   Traditionally,
manufacturers  of apparel  products  have been  required  to  operate  their own
apparel trim  departments,  requiring the manufacturer to maintain a significant
amount of  infrastructure to coordinate the buying of trim products from a large
number of vendors. By acting as a single source provider of a full range of trim
items, we allow  manufacturers  using our MANAGED TRIM SOLUTION to eliminate the
added   infrastructure,   trim   inventory   positions,   overhead   costs   and
inefficiencies  created  by  in-house  trim  departments  that deal with a large
number of vendors for the  procurement  of trim items.  We also seek to leverage
our position as a single source  supplier of trim items as well as our extensive
expertise in the field of trim  distribution and procurement to more efficiently
manage the trim assembly  process  resulting in faster  delivery times and fewer
production  delays for our  manufacturing  customers.  Our MANAGED TRIM SOLUTION
also helps to eliminate a manufacturer's  need to maintain a trim purchasing and
logistics department.

         We  manufacture  and distribute  zippers under our TALON  trademark and
trade names to apparel brands and  manufacturers.  TALON enjoys tremendous brand
recognition  and brand  equity in the  apparel  industry  worldwide.  TALON is a
100-year-old  brand,  which is well known for quality  and  product  innovation.
TALON was the  original  pioneer of the formed  wire metal  zipper for the jeans
industry and is a specified zipper brand for manufacturers in the sportswear and
outerwear markets.  We have introduced a completely revised high quality line of
zippers,  broadened  distribution  to  Asia,  Mexico  and  Central  America  and
initiated  a new  sales  and  marketing  effort  for this  brand.  We have  also
developed,  and are now  implementing,  what we refer to as our TALON  franchise
strategy,  whereby  we  appoint  suitable  distributors  in  various  geographic
international regions to finish and sell zippers under the TALON brand name. Our
distributors  purchase and install  locally  equipment  for dying and  producing
finished zippers.  We expect this program to dramatically  expand the geographic
footprint of our TALON division.  To date, we have entered into six distribution
agreements for the sale of TALON zippers. TALON is promoted both within our trim
packages, as well as a stand-alone product line.

         We also serve as a  specified  supplier  for a variety of major  retail
brand and private label oriented  companies.  A specified supplier is a supplier
that has been  approved  for  quality  and  service by a major  retail  brand or
private label company.  Contractors  manufacturing for the major retail brand or
private label company must purchase their trim requirements from a supplier that
has been  specified.  We seek to expand our services as a vendor of select lines
of trim items for such customers to being a preferred or single source  provider
of all of such brand  customer's  authorized trim  requirements.  Our ability to
offer  brand name and  private  label  oriented  customers  a full range of trim
products is attractive because it enables our customers to address their quality
and  supply  needs  for all of their  trim  requirements  from a single  source,
avoiding  the time and  expense  necessary  to monitor  quality  and supply from
multiple  vendors and  manufacturer  sources.  Becoming a specified  supplier to
brand  customers  gives us an opportunity to become the preferred or sole vendor
of trim items for all manufacturers of apparel under that brand name.

         Our team of sales  representatives,  program managers,  creative design
personnel and global production and distribution  coordinators at our facilities
located in the United States,  Mexico,  Hong Kong and the Caribbean enable us to
take advantage of and address the increasingly  complicated  requirements of the
large and expanding  demand for complete trim  packages.  We plan to continue to
expand  operations in Asia,  Central and South America and the Caribbean to take
advantage of the large apparel manufacturing markets in these regions.

         A significant portion of a typical trim package is comprised of zippers
and thread. In order to secure a stable high-quality source of supply for thread
products,  we  entered  into a supply  and  co-marketing  agreement  with  Coats
America,  an affiliate of Coats,  plc,  which is a leading thread company in the
apparel


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industry  and  operates  in more than 65  countries  worldwide.  The  supply and
co-marketing  agreement was  accompanied by an equity  investment by Coats North
America Consolidated, Inc., also an affiliate of Coats, plc, in the amount of $3
million.

PRODUCTS

         COMPLETE  TRIM  PACKAGES.  We market  and  supply  our  customers  with
complete trim packages on a per-garment basis which we assemble on behalf of our
customers.  Each trim package  includes  all items of trim that a customer  will
need in the  manufacture  of a particular  item of apparel.  Our  complete  trim
packages  include a variety of trim items  including  thread,  zippers,  labels,
buttons, rivets,  polybags,  packing cartons and hangers. We also provide in our
complete  trim  packages  printed  marketing   materials  including  hang  tags,
bar-coded hang tags,  pocket flashers,  waistband tickets and size stickers that
are attached to products to identify and promote the 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 consider a high level of customer service  essential to our success.
We combine our high level of customer  service with our MANAGED TRIM SOLUTION to
offer  our  customers  a  complete  trim  service   product.   We  believe  this
full-service  product gives us a competitive edge over companies that only offer
selected trim  components  because our MANAGED TRIM SOLUTION saves our customers
time and employee  work hours in ordering and managing  trim orders from several
different  suppliers.  Our  MANAGED  TRIM  SOLUTION  is  a  business-to-business
e-commerce  system that allows us to provide our  customers  with a  customized,
comprehensive  system  for the  management  of  various  aspects  of their  trim
programs. Our MANAGED TRIM SOLUTION is an Internet-based supply-chain management
system which provides  customers with assistance in their ordering,  production,
inventory  management and just-in-time  distribution of their trim and packaging
requirements.

         The launch of TRIMNET,  our Oracle based e-sourcing  system has allowed
us to seamlessly supply complete trim packages to apparel brands,  retailers and
manufacturers around the world,  expanding upon our success in offering complete
trim packages to customers in Mexico over the past several years.  TRIMNET is an
upgrade  of  our  MANAGED  TRIM  SOLUTION  software  and  allows  us to  provide
additional services to customers on a global platform.

         SEPARATE TRIM COMPONENTS.  Separate from our marketing of complete trim
packages,  we also provide  individual items of trim to certain of our customers
who only need to source a portion of their trim  requirements  from us. Further,
for selected customers,  we also produce customized woven,  leather,  synthetic,
embroidered and novelty labels and tapes,  which can be printed on or woven into
a wide range of fabrics and other  materials  using  various types of high-speed
equipment.  As an  additional  service,  we lease to our customers the machinery
used to attach the buttons, rivets and snaps we distribute.

         TALON  BRAND  ZIPPERS.  We  offer a full  line of metal  and  synthetic
zippers  bearing the TALON  brand name.  TALON  zippers  are used  primarily  by
manufacturers  in  the  apparel   industry  and  are  distributed   through  our
distribution  facilities in the United States,  Mexico and Hong Kong and through
distributors, who we refer to as franchisees, in other international markets. We
have negotiated with  distributors that service local markets in Asia and Africa
and have signed six franchise agreements to date. We are continuing to negotiate
with distributors that service local apparel manufacturing regions in the United
States and overseas. We offer manufacturers  technologically  advanced equipment
for  efficiently  handling  TALON zippers and applying them into  garments.  The
branded  apparel  zipper  market is dominated  by one  company;  YKK (R). We are
positioning  TALON to be a viable  alternative  to YKK (R),  and to  capture  an
increased  market share  position.  We also plan to leverage the brand equity in
the TALON name by branding other products in our line with the TALON name.

         TEKFIT.  We  distribute  a  proprietary  stretch  waistband  under  our
Exclusive  License and  Intellectual  Property  Rights  agreement  with  Pro-Fit
Holdings  Limited.  The  agreement  gives  us the  exclusive  rights  to sell or
sublicense  stretch  waistbands   manufactured  under  the  patented  technology
developed by Pro-Fit for


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garments  manufactured  anywhere  in the world for the U.S.  market and all U.S.
brands,  for the life of the patent and related  know-how.  We now offer apparel
manufacturers  advanced,  patented  fabric  technologies  to  utilize  in  their
garments under the TEKFIT name. This revolutionary  technology allows fabrics to
be altered through the addition of stretch characteristics  resulting in greatly
improved fit and comfort.  Currently,  we are supplying  Levi Strauss & Co. with
TEKFIT   waistbands  for  their  Dockers(R)   programs.   Our  exclusive  supply
arrangement  with Levi  Strauss & Co. is for twill  type  pants  only.  This new
technology allows pant  manufacturers to build in a stretch factor into standard
waistbands that does not alter the appearance of the garment, but will allow the
waist to stretch out and back by as much as two waist sizes.

         We are  presently in  litigation  with  Pro-Fit  relating to our rights
under the  agreement,  as described more fully  elsewhere in this report.  As we
derive a significant  amount of revenue from the sale of products  incorporating
the stretch  waistband  technology,  our  business,  results of  operations  and
financial  condition could be materially  adversely affected if our dispute with
Pro-Fit is not resolved in a manner favorable to us.

DESIGN AND DEVELOPMENT

         Our in-house creative team produces products with innovative technology
and  designs  that  we  believe  distinguish  our  products  from  those  of our
competitors.  We support our skills and  expertise in material  procurement  and
product-manufacturing  coordination with product technology and designs intended
to meet  fashion  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 due to difficulties in the  manufacturing  process,  the expenses of
required  materials,  or a lack of  functionality in the resulting  product.  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 supporting our material  procurement  and product  manufacturing
services  with  design  services,  we  believe  that we reduce  development  and
production  costs and deliver  products to our customers sooner than many of our
competitors.  Our  development  costs  are low,  most of which  are borne by our
customers.  Our  design  teams  are based  out of our  California  and Hong Kong
facilities.

CUSTOMERS

         We  have  more  than  300  active  customers.   Our  customers  include
well-known apparel manufacturers, such as Levi Strauss & Co., The Limited Group,
Motherworks, Kellwood, Azteca Production International and VF Corporation, among
others. Our customers also include  contractors for specialty  retailers such as
Miller's Outpost and mass merchant retailers such as Wal-Mart.

         In July 2002,  we entered into an exclusive  supply  contract with Levi
Strauss & Co. Under the terms of the supply agreement, Levi Strauss & Co. agreed
to purchase a minimum of $10 million of TEKFIT stretch waistbands, various other
trim  products,  garment  components  and services over the two-year term of the
agreement. On July 16, 2004, we amended our exclusive supply agreement with Levi
Strauss & Co. to provide for an additional  two-year term through November 2006.
Levi Strauss & Co. also appointed TALON as an approved zipper supplier.

         Two major customers  accounted for approximately 21.9% of our net sales
on a  consolidated  basis for the year ended  December  31,  2004.  Three  major
customers, two of which were related parties,  accounted for approximately 64.1%
of our net sales on a  consolidated  basis for the year ended December 31, 2003.
Two major customers, both related parties,  accounted for approximately 69.7% of
our net sales on a consolidated  basis for the year ended December 31, 2002. Our
results of operations  will depend to an extent upon the  commercial  success of
these  customers.   If  these  customers  fail  to  purchase  trim  products  at
anticipated  levels,  or the  relationship  terminates,  it may have an  adverse
affect on our results of operations.


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If the financial condition of these customers were to deteriorate,  resulting in
an impairment of their ability to purchase inventories or repay receivables,  it
may also have an adverse affect on our results of operations.

SALES AND MARKETING

         We sell our principal products through our own sales force based in Los
Angeles,  various other cities in the United  States,  Hong Kong and Mexico.  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 trim requirements,  we position
ourselves as if we are an in-house department of the customer's trim procurement
operation.

SOURCING AND ASSEMBLY

         We have  developed  expertise in  identifying  high quality  materials,
competitive  prices  and  approved  vendors  for  particular  products  and  raw
materials.  This expertise  enables us to produce a broad range of packaging and
trim products at various price points.  The majority of products that we procure
and distribute are purchased on a finished good basis. Raw materials,  including
paper products and metals used to manufacture  zippers,  used in the assembly of
our trim kits are available from numerous sources and are in adequate supply. We
purchase products from several  qualified  material  suppliers,  including Coats
North America and its affiliates  which  accounted for 11.4% of our purchases in
2004.

         We are able to create most  product  artwork and any  necessary  films,
dies and molds used to design and manufacture  our products.  All other products
that we design and sell are produced by third party vendors. We are confident in
our ability to secure high quality alternative  manufacturing sources. We intend
to continue to outsource  production  to qualified  vendors,  particularly  with
respect to  manufacturing  activities  that require  substantial  investment  in
capital equipment.

         Through our Hong Kong facility, we distribute TALON zippers, trim items
and apparel  packaging and coordinate the  manufacture  and  distribution of the
full range of our products.  Our Hong Kong facility supplies several significant
packaging  programs,  services customers located in Asia and the Pacific Rim and
sources products for our Los Angeles and Mexico based operations.

         During  2004,  we  set  up a  TALON  manufacturing  facility  in  Kings
Mountain,  North Carolina.  This facility  manufactures TALON zippers for use in
the  Western  Hemisphere  and will  reduce  our  reliance  on our  major  zipper
supplier. The facility began production in January 2005.

INTELLECTUAL PROPERTY RIGHTS AND LICENSES

         We have trademarks as well as copyrights, software copyrights and trade
names for which we rely on common law protection, including the TALON trademark.
Several of our other  trademarks  are the  subject of  applications  for federal
trademark  protection  through  registration  with the United  States Patent and
Trademark Office,  including "Tag-It",  "Managed Trim Solution" and "TekFit". We
also rely on our Exclusive  License and  Intellectual  Property Rights agreement
with  Pro-Fit  Holdings  Limited  to sell our  TEKFIT  Stretch  waistbands.  The
agreement gives us the exclusive rights to sell or sublicense stretch waistbands
manufactured  under the  patented  technology  developed by Pro-Fit for garments
manufactured  anywhere in the world for the U.S. market and all U.S. brands, for
an indefinite term that extends for the duration of the patent and trade secrets
licensed under the agreement.


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SEASONALITY

         We typically  experience seasonal  fluctuations in sales volume.  These
seasonal  fluctuations  result in sales volume decreases in the first and fourth
quarters  of each  year  due to the  seasonal  fluctuations  experienced  by the
majority of our customers.  The apparel industry  typically  experiences  higher
sales volume in the second quarter in preparation for back-to-school  purchases,
and the third quarter in preparation for year-end holiday purchases.

INVENTORIES

         In  order  to meet  the  rapid  delivery  requirements  of our  TRIMNET
customers,  we may be required to carry a  substantial  amount of  inventory  on
their behalf.  Included in inventories at December 31, 2004 are inventories that
are subject to buyback  arrangements  with some of these customers.  The buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is  required,  as provided by the buyback  agreements,  to purchase the
inventories from us under normal invoice and selling terms.

COMPETITION

         We compete in highly competitive and fragmented industries that include
numerous  local and regional  companies that provide some or all of the products
we offer. We also compete with United States and international design companies,
distributors and  manufacturers of tags, trim,  packaging  products and zippers.
Some of our competitors, including Paxar Corporation, YKK (R), Universal Button,
Inc., Avery Denison  Corporation and Scovill  Fasteners,  Inc. have greater name
recognition,  longer  operating  histories  and,  in many  cases,  substantially
greater financial and other resources.

         Because  of  our   integrated   materials   procurement   and  assembly
capabilities and our full service MANAGED TRIM SOLUTION,  we believe that we are
able to effectively compete for our customers' business,  particularly where our
customers require  coordination of separately sourced production  functions.  We
believe  that to  successfully  compete in our  industry we must offer  superior
product pricing, quality,  customer service, design capabilities,  delivery lead
times and complete supply-chain management. We also believe the TALON brand name
and the quality of our TALON brand zippers will allow us to gain market share in
the zipper  industry.  The unique stretch quality of our TEKFIT  waistbands will
also allow us to compete effectively in the market for waistband components.

SEGMENT INFORMATION

         We operate  primarily in one industry  segment,  the  distribution of a
full  range of apparel  trim  products  to  manufacturers  of  fashion  apparel,
specialty  retailers  and mass  merchandisers.  For  information  regarding  the
revenues and assets associated with our geographic segments,  see Note 18 of the
Notes  to the  Consolidated  Financial  Statements  included  in  Item 8 of this
Report.

INTERNATIONAL

         We sell the majority of our products to U.S.  based  brands,  retailers
and  manufacturers.  The majority of these  customers  produce their products or
contract  out the  production  of their  products  in  manufacturing  facilities
located outside of the U.S.,  primarily in Mexico,  Asia, the Dominican Republic
and Central and South America.

         A summary of our domestic and  international net revenue and long-lived
assets  is set  forth  in Note 18 of the  Notes  to the  Consolidated  Financial
Statements in Item 8 of this Report. Approximately 91% of


                                       6
<PAGE>


our overall net revenue came from sales to U.S. based or contract manufacturers'
facilities  located  outside of the United States during the year ended December
31, 2004.

         For a discussion of risks attendant to our foreign operations,  see "IF
WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN FACILITIES,  WE WILL NOT BE ABLE
TO MEET OUR OBLIGATIONS  AND MAY LOSE SALES AND  CUSTOMERS.",  under  Cautionary
Statements  and  Risk  Factors  in  Item 7 of  this  Report,  "Quantitative  and
Qualitative  Disclosure about Market Risk" in Item 7A of this Report and Note 18
of the Notes to the Consolidated Financial Statements in Item 8.

EMPLOYEES

         As of December 31, 2004, we had approximately 206 full-time  employees,
with approximately 43 employees in Los Angeles,  10 employees in North Carolina,
8 employees in various  other  cities,  60 employees in Asia, 7 employees in the
Dominican  Republic,  and 78 employees in Mexico and Central America.  Our labor
forces in the United  States and Hong Kong are  non-union.  The employees at our
Mexico facility are represented by a collective  bargaining unit, the Federacion
De  Trabajadores  Del Estado de Tlaxcala.  We believe that we have  satisfactory
employee and labor relations.

ITEM 2.       PROPERTIES

         Our  headquarters  is located in Woodland Hills,  California,  where we
lease  approximately 8,800 square feet of administrative and product development
space. In addition to our Woodland Hills facility, we lease 2,500 square feet of
warehouse  space in Gardena,  California,  2,175  square feet of office space in
Goleta,  California,  675 square feet of office space in Columbus,  Ohio, 54,000
square feet of warehouse space in Gastonia, North Carolina, 5,400 square feet of
office  and  warehouse  space in Kwun  Tong,  Hong Kong,  4,100  square  feet of
warehouse  space in  Santiago,  Dominican  Republic,  and 22,000  square feet of
warehouse,  distribution and administration space in Tlaxcala, Mexico. The lease
agreements  related to these properties  expire at various dates through October
2006.  We also own a building  with  41,650  square  feet of  manufacturing  and
warehouse space in Kings Mountain, North Carolina.

ITEM 3.       LEGAL PROCEEDINGS

         We have  filed  suit  against  Pro-Fit  Holdings  Limited  in the  U.S.
District Court for the Central District of California -- TAG-IT PACIFIC, INC. V.
PRO-FIT HOLDINGS  LIMITED,  CV 04-2694 LGB (RCx) - based on various  contractual
and tort claims  relating to our  exclusive  license and  intellectual  property
agreement,  seeking  declaratory  relief,  injunctive  relief and  damages.  Our
agreement with Pro-Fit gives us exclusive rights in certain  geographic areas to
Pro-Fit's  stretch  and  rigid  waistband  technology.  Pro-Fit  filed an answer
denying the  material  allegations  of the  complaint  and filed a  counterclaim
alleging  various  contractual  and tort claims  seeking  injunctive  relief and
damages.  We  filed  a reply  denying  the  material  allegations  of  Pro-Fit's
pleading.  Pro-Fit has since  purported to terminate our  exclusive  license and
intellectual  property  agreement  based on the  same  alleged  breaches  of the
agreement  that are the  subject of our  existing  litigation,  as well as on an
additional basis unsupported by fact. In February 2005, we amended our pleadings
in the litigation to assert additional breaches by Pro-Fit of its obligations to
us under our agreement and under certain additional letter agreements, and for a
declaratory  judgment  that  Pro-Fit's  patent No.  5,987,721 is invalid and not
infringed by us.  Discovery in this case has commenced.  There have been ongoing
negotiations  with Pro-Fit to attempt to resolve  these  disputes.  We intend to
proceed  with the lawsuit if these  negotiations  are not  concluded in a manner
satisfactory  to us. As we derive a significant  amount of revenue from the sale
of  products  incorporating  the stretch  waistband  technology,  our  business,
results of operations  and  financial  condition  could be materially  adversely
affected if our dispute with  Pro-Fit is not  resolved in a manner  favorable to
us.

         We  currently  have  pending  a  number  of  other  claims,  suits  and
complaints that arise in the ordinary course of our business. We believe that we
have meritorious defenses to these claims and that the claims are


                                       7
<PAGE>


either  covered by insurance  or,  after  taking into  account the  insurance in
place, would not have a material effect on our consolidated  financial condition
if adversely determined against us.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2004.


                                       8
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
              AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

         Tag-It  Pacific's Common Stock is traded on the American Stock Exchange
under the  symbol  "TAG."  The  following  table  sets  forth,  for the  periods
indicated, the high and low sales prices for the Common Stock as reported by the
American Stock Exchange.

                                                           HIGH           LOW
                                                         -------        --------
         YEAR ENDED DECEMBER 31, 2004
              First Quarter.........................     $  6.14        $   4.30
              Second Quarter........................        5.99            4.20
              Third Quarter.........................        4.35            3.09
              Fourth Quarter........................        4.58            2.81

         YEAR ENDED DECEMBER 31, 2003
              First Quarter.........................     $  3.79        $   3.50
              Second Quarter........................        5.80            3.50
              Third Quarter.........................        6.20            4.15
              Fourth Quarter........................        5.25            4.39

         On March 30,  2005,  the  closing  sales  price of our Common  Stock as
reported on the American  Stock  Exchange  was $5.04 per share.  As of March 30,
2005, there were 33 record holders of our Common Stock.

DIVIDENDS

         We have never paid  dividends on our Common Stock.  We intend to retain
any future earnings for use in our business.


                                       9
<PAGE>


ITEM 6.       SELECTED FINANCIAL DATA.

         The following  selected  financial  data should be read in  conjunction
with our consolidated  financial statements.  The information set forth below is
not necessarily  indicative of results of future operations,  and should be read
in conjunction with Item 7,  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated  financial  statements
and notes thereto  included in Item 8, "Financial  Statements and  Supplementary
Data" of this Form 10-K in order to understand fully factors that may affect the
comparability of the financial data presented below.

<TABLE>
                      TAG-IT PACIFIC, INC. AND SUBSIDIARIES
                             SELECTED FINANCIAL DATA

<CAPTION>
                                                                   FISCAL YEARS ENDED DECEMBER 31,
                                                            (in thousands except per share information)
                                                        2000      2001(1)      2002      2003(2)    2004(2,3)
                                                      --------   --------    --------   --------    --------
<S>                                                   <C>        <C>         <C>        <C>         <C>
OPERATIONS:
Total revenue .....................................   $ 49,362   $ 43,568    $ 60,073   $ 64,443    $ 55,109
Income (loss) from operations .....................   $  2,547   $   (253)   $  3,044   $ (5,881)   $(14,527)
Net income (loss) .................................   $  1,539   $ (1,226)   $  1,496   $ (4,745)   $(17,609)
Net income (loss) per share - basic ...............   $   0.23   $  (0.16)   $   0.14   $  (0.46)   $  (1.02)
Net income (loss) per share - diluted .............   $   0.21   $  (0.16)   $   0.14   $  (0.46)   $  (1.02)
Weighted average shares outstanding - basic .......      6,838      8,017       9,232     10,651      17,316
Weighted average shares outstanding - diluted .....      7,283      8,017       9,531     10,651      17,316

FINANCIAL POSITION (AT PERIOD END):
Cash and cash equivalents .........................   $    128   $     47    $    285   $ 14,443    $  5,461
Total assets ......................................   $ 39,099   $ 40,794    $ 54,055   $ 67,770    $ 56,448
Capital lease obligations, line of credit and notes
payable ...........................................   $ 13,828   $ 15,685    $ 21,263   $ 11,759    $ 18,792
Convertible redeemable preferred stock ............   $   --     $  2,895    $  2,895   $  2,895    $   --
Stockholders' equity ..............................   $ 14,791   $ 15,428    $ 18,467   $ 43,564    $ 30,195
Total liabilities and stockholders' equity ........   $ 39,099   $ 40,794    $ 54,055   $ 67,770    $ 56,448

PER SHARE DATA (AT END OF PERIOD):
Net book value per common share ...................   $   1.88   $   1.76    $   1.98   $   3.79    $   1.66
Common shares outstanding .........................      7,863      8,770       9,320     11,508      18,171

----------
<FN>
(1)      We incurred restructuring charges of $1.6 million during the year ended
         December 31, 2001.

(2)      We incurred restructuring charges of $7.7 million during the year ended
         December 31, 2003 and $414,675 during the year ended December 31, 2004.
         See  Note 22 of the  Notes  to the  Consolidated  Financial  Statements
         included in Item 8 of this Report.

(3)      We  incurred  net  charges  of  $4.3  million  from  the  write-off  of
         obligations,  primarily accounts receivable and inventories, due from a
         former  major  customer  (see Note 21 of the Notes to the  Consolidated
         Financial  Statements  included  in Item 8 of this  Report)  and  other
         fourth quarter adjustments  totaling $9.5 million during the year ended
         December 31, 2004.
</FN>
</TABLE>


                                       10
<PAGE>


ITEM 7.       MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
              RESULTS OF OPERATIONS.

         This  discussion  summarizes  the  significant  factors  affecting  the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It  Pacific,  Inc. for the fiscal years ended December 31, 2004, 2003 and
2002.  The following  discussion  and analysis  should be read together with the
Consolidated  Financial Statements of Tag-It Pacific,  Inc. and the notes to the
Consolidated  Financial  Statements included elsewhere in this Form 10-K. 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.

OVERVIEW

         Tag-It  Pacific,  Inc. is an apparel  company that  specializes  in the
distribution  of trim  items to  manufacturers  of  fashion  apparel,  specialty
retailers  and mass  merchandisers.  We act as a full  service  outsourced  trim
management  department for manufacturers,  a specified supplier of trim items to
owners of specific  brands,  brand licensees and retailers,  a manufacturer  and
distributor  of zippers under our TALON brand name and a distributor  of stretch
waistbands  that utilize  licensed  patented  technology  under our TEKFIT brand
name.

         The global apparel industry served by our company  continues to undergo
dramatic change within its traditional supply chain. Large retail brands such as
Levi Strauss & Co. and other major  brands have  largely  moved away from owning
their  manufacturing  operations  and have  increasingly  embraced an outsourced
production model. These brands today are primarily focused on design,  marketing
and sourcing.  As sourcing has gained  prominence in these  organizations,  they
have become  increasingly adept at responding to changing market conditions with
respect to labor costs,  trade policies and other areas, and are more capable of
shifting production to new geographic areas.

         As the  separation  of the retail  brands and  apparel  production  has
grown, the  disintermediation  of the retail brands and the underlying suppliers
of  apparel  component  products  such as trim  has  become  substantially  more
pronounced. The management of trim procurement,  including ordering, production,
inventory management and just-in-time  distribution to a brand's  manufacturers,
has  become an  increasingly  cumbersome  task  given (i) the  proliferation  of
brands, styles and divisions within the major retail brands and (ii) the growing
pace of globalization within the apparel manufacturing industry.

         While the global apparel industry is in the midst of restructuring  its
supply  chain,  the trim  product  industry  has not evolved and remains  highly
fragmented, with no single player providing the global scope, integrated product
set or service focus required for the broader industry evolution to succeed.  We
believe these trends present an attractive  opportunity  for a  fully-integrated
single source  supplier of trim products to successfully  interface  between the
retail brands, their manufacturing  partners and other underlying trim component
suppliers.  Our  objective  is to  provide  the  global  apparel  industry  with
innovative products and distribution  solutions that improve both the quality of
fashion apparel and the efficiency of the industry itself.

         The launch of TRIMNET,  our Oracle based e-sourcing  system has allowed
us to seamlessly supply complete trim packages to apparel brands,  retailers and
manufacturers  around the world,  greatly expanding upon our success in offering
complete  trim  packages to  customers  in Mexico over the past  several  years.
TRIMNET is an upgrade of our MANAGED TRIM  SOLUTION  software and has allowed us
to provide additional services to customers on a global platform.

         On November 10, 2004, we refinanced our working capital credit facility
with UPS Capital Global Trade Finance Corporation with a portion of the proceeds
received from a private placement of $12.5 million


                                       11
<PAGE>


Secured  Convertible Notes Payable.  See further  discussion under the LIQUIDITY
AND CAPITAL RESOURCES section of this document.

         We have developed,  and are now  implementing,  what we refer to as our
TALON franchise  strategy,  whereby we appoint suitable  distributors in various
geographic  international  regions  to finish and sell  zippers  under the TALON
brand name. Our designated  franchisees  purchase and install locally  equipment
for dying and producing  finished  zippers,  thus minimizing our capital outlay.
The  franchisee  will  then  purchase  from us large  zipper  rolls  with  other
materials such as sliders and produce  finished  zippers  locally,  according to
their  customers'  specifications,  in markets  around the  world,  becoming  in
essence a local marketer and  distributor  of the TALON brand.  This strategy is
expected to expand the geographic footprint of our TALON division.

         We have entered  into six  franchise  agreements  for the sale of TALON
zippers.  The agreements  provide for minimum purchases of TALON zipper products
to be received over the term of the agreements as follows:

                                      Agreement
        Region                           Date                        Term
----------------------            -----------------               ---------
Central Asia                      October 21, 2004                42 Months
South East Asia                   November 10, 2004               42 Months
Southern Hemisphere               December 21, 2004               66 Months
Asia                              December 28, 2004               42 Months
South East Asia                   January 7, 2005                 42 Months
Middle East and Africa            February 19, 2005               42 Months


         During  2004,  we  set  up a  TALON  manufacturing  facility  in  Kings
Mountain,  North Carolina.  This facility  manufactures TALON zippers for use in
the Western  Hemisphere and will reduce our reliance on our current major zipper
supplier. The facility began production in January 2005.

         On July 16, 2004, we amended our exclusive  supply  agreement with Levi
Strauss & Co. to provide for an additional  two-year term through November 2006.
In accordance with the supply  agreement,  Levi is to purchase TEKFIT waistbands
for  specific  product  categories  over  the  term  of the  agreement.  Certain
proprietary products,  equipment and technological  know-how will be supplied to
Levi on an exclusive basis for specific product  categories  during the extended
period.

         As described more fully  elsewhere in this report,  we are presently in
litigation with Pro-Fit Holdings  Limited  relating to our exclusively  licensed
rights to sell or sublicense  stretch  waistbands  manufactured  under Pro-Fit's
patented technology. We supply Levi with waistbands in reliance on our agreement
with  Pro-Fit.  As we derive a  significant  amount of revenue  from the sale of
products incorporating the stretch waistband technology,  our business,  results
of operations and financial condition could be materially  adversely affected if
our dispute with Pro-Fit is not resolved in a manner favorable to us.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  On an on-going basis,  we evaluate our estimates,  including those
related to our  valuation  of  inventory  and our  allowance  for  uncollectable
accounts  receivable.  We base our  estimates on  historical  experience  and on
various  other  assumptions  that  are  believed  to  be  reasonable  under  the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions or conditions.


                                       12
<PAGE>


         We believe the following critical  accounting  policies affect our more
significant  judgments and estimates used in the preparation of our consolidated
financial statements:

         o        Inventory  is  evaluated  on a  continual  basis  and  reserve
                  adjustments are made based on management's  estimate of future
                  sales  value,  if any, of specific  inventory  items.  Reserve
                  adjustments  are made for the  difference  between the cost of
                  the inventory and the estimated  market value,  if lower,  and
                  charged  to  operations  in the period in which the facts that
                  give rise to the  adjustments  become known.  A portion of our
                  total inventories is subject to buyback  arrangements with our
                  customers. The buyback arrangements contain provisions related
                  to the  inventory we purchase  and  warehouse on behalf of our
                  customers.  In the event that  inventories  remain  with us in
                  excess of six to nine  months  from our  receipt  of the goods
                  from  our  vendors  or  the  termination  of  production  of a
                  customer's  product  line  related  to  the  inventories,  the
                  customer is required to purchase the inventories from us under
                  normal invoice and selling terms.  If the financial  condition
                  of a customer were to deteriorate,  resulting in an impairment
                  of  its  ability  to  purchase   inventories,   an  additional
                  adjustment  may be required.  These buyback  arrangements  are
                  considered in management's  estimate of future market value of
                  inventories.  See further discussion of inventory  write-downs
                  recorded in the fourth quarter of 2004 below.

         o        Accounts  receivable  balances  are  evaluated  on a continual
                  basis   and   allowances   are   provided   for    potentially
                  uncollectible  accounts based on management's  estimate of the
                  collectibility   of  customer   accounts.   If  the  financial
                  condition of a customer were to  deteriorate,  resulting in an
                  impairment  of its  ability to make  payments,  an  additional
                  allowance may be required.  Allowance  adjustments are charged
                  to  operations in the period in which the facts that give rise
                  to the  adjustments  become known.  See further  discussion of
                  accounts   receivable  reserves  recorded  during  the  fourth
                  quarter of 2004 below.

         o        We record  valuation  allowances  to reduce our  deferred  tax
                  assets to an amount that we believe is more likely than not to
                  be realized.  We consider  estimated future taxable income and
                  ongoing  prudent  and  feasible  tax  planning  strategies  in
                  assessing the need for a valuation allowance.  If we determine
                  that we may not realize all or part of our deferred tax assets
                  in the  future,  we will make an  adjustment  to the  carrying
                  value of the deferred  tax asset,  which would be reflected as
                  an income tax expense.  Conversely,  if we  determine  that we
                  will  realize a deferred  tax  asset,  which  currently  has a
                  valuation  allowance,  we would be  required  to  reverse  the
                  valuation allowance, which would be reflected as an income tax
                  benefit.

         o        Intangible  assets  are  evaluated  on a  continual  basis and
                  impairment   adjustments   are  made  based  on   management's
                  valuation of identified  reporting  units related to goodwill,
                  the valuation of intangible  assets with indefinite  lives and
                  the   reassessment  of  the  useful  lives  related  to  other
                  intangible  assets  with  definite  useful  lives.  Impairment
                  adjustments  are made for the difference  between the carrying
                  value of the intangible asset and the estimated  valuation and
                  charged  to  operations  in the period in which the facts that
                  give rise to the adjustments become known.

         o        Sales are  recorded  at the time of  shipment,  at which point
                  title  transfers  to the  customer,  and  when  collection  is
                  reasonably assured.

2004  WRITE-OFF  OF ACCOUNTS  RECEIVABLE  AND  INVENTORIES  FROM A FORMER  MAJOR
CUSTOMER

         Following  negotiations with United Apparel Ventures and its affiliate,
Tarrant  Apparel Group,  a former major  customer of ours, we determined  that a
significant portion of the obligations due from this


                                       13
<PAGE>


customer,   primarily  related  to  accounts  receivable  and  inventories,  was
uncollectable.  As a result,  we wrote-off a net of $4.3 million of  obligations
due from this customer, with a remaining receivable balance due from UAV of $4.5
million.  Included in general  and  administrative  expenses  for the year ended
December  31,  2004 are  $4,289,436  of  expenses  related to the  write-off  of
obligations  due from  UAV and  Tarrant.  UAV  agreed  to pay the  $4.5  million
receivable  balance  over a  nine-month  period  beginning  May 2005.  We do not
anticipate any further charges as a result of this write-off.

2004 ALLOWANCE FOR DOUBTFUL ACCOUNTS

         Our allowance for doubtful  accounts as of December 31, 2004 includes a
reserve  of $5.0  million  recorded  in the  fourth  quarter  of 2004  based  on
management's  estimate of the  collectability of accounts  receivable  primarily
related to two customers.

2004 RESERVE FOR INVENTORY OBSOLESCENCE

         In the  fourth  quarter  of 2004,  we  recorded  inventory  write-downs
totaling $2.7 million based on management's estimate of the net realizable value
of certain inventories.

2004 NET DEFERRED TAX ASSET

         In 2004, we incurred  additional net operating losses and, as a result,
increased  our  valuation  allowance to $8.9 million  from $1.1  million,  which
reduced the  carrying  value of our net  deferred tax asset to $1.0 million from
$2.8 million at December  31,  2003.  The decrease in the net deferred tax asset
resulted in a charge of $1.8 million  against the  provision for income taxes in
the fourth quarter of 2004.

2003 RESTRUCTURING PLAN

         During the fourth quarter of 2003, we implemented a plan to restructure
certain  business  operations.  In accordance  with the  restructuring  plan, we
incurred costs related to the reduction of our Mexico operations,  including the
relocation of our Florida operations to North Carolina and the downsizing of our
corporate  operations  by  eliminating  certain  corporate  expenses  related to
operations,  sales and marketing and general and  administrative  expenses.  The
reduction of our operations in Mexico was in response to the following:

         o        An  anticipated  reduction  in sales  volume  from our  larger
                  Mexico customers;

         o        Our efforts to  decrease  our  reliance  on our larger  Mexico
                  customers; and

         o        Our  difficulty  obtaining  financing  in  Mexico  due  to the
                  location of assets outside the U.S. and customer concentration
                  and other limits imposed by financial institutions.

         The  reduction of our  operations  in Mexico is estimated to reduce our
working capital requirements and improve our cash flow, among other things.

         Total  restructuring  charges  for the  year  ended  2003  amounted  to
$7,700,047.   Restructuring  charges  included  approximately  $4.3  million  of
inventory write-downs, $1.6 million of additional reserves for doubtful accounts
receivable,  $1 million of costs incurred related to the reduction of operations
in Mexico,  including the  relocation of inventory and  facilities,  $500,000 of
benefits  paid  to  terminated  employees  and  $300,000  of  other  costs.  All
restructuring  costs were  incurred and paid for in the fourth  quarter of 2003,
and we did not anticipate any further charges as a result of this  restructuring
plan.  Therefore,  no liabilities related to restructuring charges were included
in the balance  sheet at December  31, 2003.  During the first  quarter of 2004,
however, we incurred and recorded residual restructuring charges of $414,675.


                                       14
<PAGE>


         Restructuring  charges for the year ended  December 31, 2003 related to
the  following  expense  categories  included  in  the  Company's  statement  of
operations are as follows:

                                                                        Amount
                                                                      ----------

Cost of goods sold ........................................           $4,931,218
Selling expenses ..........................................              143,442
General and administrative expenses .......................            2,625,387
                                                                      ----------

Total restructuring charges ...............................           $7,700,047
                                                                      ==========

RESULTS OF OPERATIONS

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

                                                           YEAR ENDED
                                                          DECEMBER 31,
                                                --------------------------------
                                                2004(1)       2003         2002
                                                -----        -----        -----
Net sales ................................      100.0 %      100.0 %      100.0%
Cost of goods sold .......................       81.3         74.3         74.3
                                                -----        -----        -----
Gross profit .............................       18.7         25.7         25.7
Selling expenses .........................        5.3          5.8          3.5
General and administrative expenses ......       39.0         17.1         17.1
Restructuring charges ....................         .8         11.9         --
                                                -----        -----        -----
Operating (loss) income ..................      (26.4)%       (9.1)%        5.1%
                                                =====        =====        =====
----------
(1)      Included  in general  and  administrative  expenses  for the year ended
         December  31,  2004 are  $4,289,436  (7.8% of net  sales)  of  expenses
         related  to the  write-off  of  obligations  due  from  United  Apparel
         Ventures  and  its  affiliate,   Tarrant  Apparel  Group.  See  further
         discussion  above  and  Notes  5 and 21 to the  Consolidated  Financial
         Statements  included  in Item 8.  Included in cost of sales and general
         and  administrative  expenses for the year ended  December 31, 2004 are
         $2,746,000  (5.0% of net sales) and $5.0 million (9.1% of net sales) of
         expenses  related to fourth quarter  inventory and accounts  receivable
         reserve adjustments.

         The  following  table  sets  forth  for the  years  indicated  revenues
attributed to countries based on customer delivery  locations as a percentage of
net sales:

                                                    Year Ended December 31,
                                              ---------------------------------
                                               2004          2003          2002
                                              -----         -----         -----

United States ........................          8.8%         13.7%         14.5%
Asia .................................         23.2          15.0           9.0
Mexico ...............................         39.0          41.1          73.4
Dominican Republic ...................         17.6          22.1           3.1
Central and South America ............          9.9           5.6          --
Other ................................          1.5           2.5          --
                                              -----         -----         -----
                                              100.0%        100.0%        100.0%
                                              =====         =====         =====

         Net sales decreased approximately  $9,334,000 (or 14.5%) to $55,109,000
for the year  ended  December  31,  2004  from  $64,443,000  for the year  ended
December  31, 2003.  The  decrease in net sales for the year ended  December 31,
2004 was  primarily  due to a decrease in  trim-related  sales of  approximately


                                       15
<PAGE>


$19.1 million from our Tlaxcala, Mexico operations. During the fourth quarter of
2003,  we  implemented  a  plan  to  restructure  certain  business  operations,
including the reduction of our reliance on two significant  customers in Mexico,
Tarrant  Apparel Group (and its affiliate  United  Apparel  Ventures) and Azteca
Production International, which contributed approximately $25.9 million or 40.2%
of revenues for the year ended December 31, 2003.  These  customers  contributed
approximately  $6.8 million or 12.3% of revenues for the year ended December 31,
2004.  We were able to  replace  in excess of 50% of the lost  revenue  from our
Tlaxcala,  Mexico  operations  during the year ended  December 31, 2004 with new
customers  primarily  in Mexico and Asia.  The  reduction of our  operations  in
Mexico was also in  response  to our  efforts to  decrease  our  reliance on our
larger Mexico  customers.  The decrease in net sales from our  Tlaxcala,  Mexico
operations was offset by an increase in sales from our TRIMNET  programs related
to major U.S.  retailers in our Hong Kong and Mexico  facilities and an increase
in zipper  sales  under our TALON  brand  name in Asia.  Fiscal  2004 has been a
transitional  year as we experienced  the effects of  diversifying  our customer
base.

         Net sales increased  approximately  $4,370,000 (or 7.3%) to $64,443,000
for the year  ended  December  31,  2003  from  $60,073,000  for the year  ended
December 31, 2002.  The increase in net sales was  primarily due to the addition
of sales under our TEKFIT stretch waistband division. In late 2002, we created a
new  division  under the TEKFIT  brand name.  This  division  develops and sells
apparel  components that utilize the patented  Pro-Fit  technology,  including a
stretch  waistband sold under our exclusive supply agreement with Levi Strauss &
Co. The increase in net sales was also attributable to an increase in sales from
our Hong Kong  subsidiary  for programs  related to major U.S.  retailers and an
increase  in zipper  sales  under  our  TALON  brand  name to our  MANAGED  TRIM
SOLUTION(TM)  customers  in Mexico and our other TALON  customers  in Mexico and
Asia. The increase in net sales was offset by a decrease in  trim-related  sales
from our Tlaxcala,  Mexico  operations under our MANAGED TRIM  SOLUTION(TM) trim
package  program.  This  decrease is due in part to our efforts to decrease  our
reliance on certain customers and to further diversify our customer base.

         Gross  profit   decreased   approximately   $6,257,000  (or  37.8%)  to
$10,296,000  for the year ended December 31, 2004 from  $16,553,000 for the year
ended December 31, 2003.  Gross margin as a percentage of net sales decreased to
approximately  18.7% for the year ended  December  31, 2004 as compared to 25.7%
for the year ended December 31, 2003. In the fourth quarter of 2004, we recorded
inventory  write-downs  totaling  $2,746,000  (or  5.0% of net  sales)  based on
management's  estimate of the net  realizable  value of certain  inventory.  The
decrease  in gross  profit  as a  percentage  of net  sales  for the year  ended
December 31, 2004 was also due to a change in our product mix during the year.

         Gross  profit   increased   approximately   $1,113,000   (or  7.2%)  to
$16,553,000  for the year ended December 31, 2003 from  $15,440,000 for the year
ended  December 31, 2002.  Gross  margin as a percentage  of net sales  remained
consistent  at  approximately  25.7% for the years ended  December  31, 2003 and
2002. The increase in gross profit for the year ended December 31, 2004 resulted
from an increase in net sales during the year.

         Selling  expense  decreased   approximately   $807,000  (or  21.8%)  to
$2,899,000  for the year ended  December 31, 2004 from  $3,706,000  for the year
ended December 31, 2003. As a percentage of net sales,  these expenses decreased
to 5.3% for the year ended December 31, 2004 compared to 5.8% for the year ended
December 31, 2003. The decrease in selling expenses during the period was due in
part to a  contractual  decrease in the royalty  rate  related to our  exclusive
license  and  intellectual  property  rights  agreement  with  Pro-Fit  Holdings
Limited.  We  incurred  royalties  related to this  agreement  of  approximately
$411,000 for the year ended  December 31, 2004 compared to $780,000 for the year
ended December 31, 2003.  Over the life of the contract,  we pay royalties of 6%
on related sales of up to $10 million,  4% of related sales from $10-20  million
and 3% on  related  sales  in  excess  of $20  million.  Selling  expenses  also
decreased  due to the  implementation  of our  restructuring  plan in the fourth
quarter of 2003.

         Selling  expense  increased  approximately  $1,580,000  (or  74.3%)  to
$3,706,000  for the year ended  December 31, 2003 from  $2,126,000  for the year
ended December 31, 2002. As a percentage of net sales,


                                       16
<PAGE>


these  expenses  increased to 5.8% for the year ended December 31, 2003 compared
to 3.5% for the year ended December 31, 2002.  The increase in selling  expenses
during the year was due primarily to royalty and other  expenses  related to our
exclusive  license and  intellectual  property  rights  agreement  with  Pro-Fit
Holdings  Limited  incurred  during the year, the addition of sales personnel in
our Hong Kong  facility and increased  marketing  efforts to promote our updated
Oracle-based  MANAGED  TRIM  SOLUTION(TM)  system.  We  are in  the  process  of
completing an update of our MANAGED TRIM  SOLUTION(TM)  system which will enable
us to further sell  complete  trim  packages to new locations on a globAL basis.
Royalty  expense  related to our  exclusive  license and  intellectual  property
rights  agreement  with  Pro-Fit  Holdings  Limited  amounted  to  approximately
$780,000 for the year ended December 31, 2003.  Royalties  incurred for the year
ended December 31, 2002 amounted to approximately $110,000.

         General and administrative expenses increased approximately $10,481,000
(or 95.0%) to $21,509,000 for the year ended December 31, 2004 from  $11,028,000
for the year ended December 31, 2003. Following negotiations with United Apparel
Ventures and its affiliate, Tarrant Apparel Group, a former customer of ours, we
determined that a significant  portion of the obligations due from this customer
were uncollectable. Included in general and administrative expenses for the year
ended December 31, 2004 are charges of $4,289,000 (or 7.8% of net sales) related
primarily to the  write-down of  receivables  due from UAV and Tarrant.  We also
recorded an accounts  receivable  reserve of $5.0 million (or 9.1% of net sales)
in  the  fourth  quarter  of  2004  based  on   management's   estimate  of  the
collectability of accounts receivable  primarily related to two other customers.
The increase in general and  administrative  expenses was also due to the hiring
of  additional  employees  related  to the  expansion  of our Asian  operations,
including our TALON franchising strategy.  Additional  administrative  employees
were also hired for our new TALON manufacturing facility in North Carolina. This
facility  began  production  in January  2005.  In the first quarter of 2004, we
incurred  additional  restructuring  charges of  $414,675  (or .8% of net sales)
related to the final  residual  costs  associated  with our  restructuring  plan
implemented in the fourth quarter of 2003.  This one-time charge was offset by a
decrease in salaries  and  related  benefits  and other costs as a result of the
implementation  of our  restructuring  plan in the fourth  quarter of 2003. As a
percentage  of net  sales,  these  expenses  increased  to 39.0%  (22.2%  before
customer  write-offs  and  other  fourth  quarter  charges)  for the year  ended
December 31, 2004 compared to 17.1% for the year ended December 31, 2003.

         General and administrative  expenses increased  approximately  $758,000
(or 7.4%) to $11,028,000  for the year ended December 31, 2003 from  $10,270,000
for the year ended  December  31, 2002.  The increase in these  expenses was due
primarily  to  expenses  incurred  related to our  exclusive  waistband  license
agreement and the amortization of intangible  assets incurred as a result of the
exclusive  waistband  technology  license rights we acquired in April 2002. As a
percentage of net sales,  these  expenses  remained  consistent at 17.1% for the
years  ended  December  31,  2003 and 2002,  because the rate of increase in net
sales did not exceed that of general and administrative expenses.

         Interest  expense  decreased   approximately  $391,000  (or  32.7%)  to
$805,000 for the year ended December 31, 2004 from $1,196,000 for the year ended
December 31, 2003.  Borrowings  under our UPS Capital credit facility  decreased
during  the year ended  December  31,  2004 due to  proceeds  received  from our
private  placement  transactions  in May and  December  2003 in which we  raised
approximately  $29  million  from the sale of common  and  preferred  stock.  In
November  2004, we raised $12.5 million from the sale of 6% secured  convertible
notes payable.  Borrowings  under our UPS credit  facility were at prime plus 2%
and 4%.

         Interest  expense   decreased   approximately   $73,000  (or  5.8%)  to
$1,196,000  for the year ended  December 31, 2003 from  $1,269,000  for the year
ended  December  31,  2002.  Borrowings  under our UPS Capital  credit  facility
decreased during the year ended December 31, 2003 due to proceeds  received from
our private  placement  transactions in May and December 2003 in which we raised
approximately  $29  million  from the sale of common and  preferred  stock.  The
decrease in  borrowings  under our UPS  Capital  credit  facility  was offset by
increased  borrowings  due to  expanded  operations  in Asia  and the  Dominican
Republic.


                                       17
<PAGE>


         The provision for income taxes amounted to approximately $2,277,000 for
the year ended  December  31, 2004 as compared to a benefit for income  taxes of
$2,333,000  for the year ended  December 31, 2003. The income tax provision as a
percentage  of loss before  income  taxes  increased to 14.9% for the year ended
December  31,  2004  from an income  tax  benefit  of 33.0%  for the year  ended
December  31, 2003 due  primarily  to the increase in the net deferred tax asset
valuation  allowance related to net operating loss carryforwards to $8.9 million
at December 31, 2004 from $1.1 million at December  31,  2003,which  reduced the
carrying  value of our net deferred tax asset to $1.0 million from $2.8 million.
The decrease in the net deferred tax asset  resulted in a charge of $1.8 million
against the provision for income taxes in 2004.

         The benefit for income taxes amounted to  approximately  $2,333,000 for
the year ended  December 31, 2003 as compared to a provision for income taxes of
$279,000 for the year ended  December 31, 2002.  Income taxes  decreased for the
year ended December 31, 2003 primarily due to the decreased  taxable income as a
result of the net loss incurred for the year ended December 31, 2003.

         Net loss was  $17,609,000  for the year ended  December  31,  2004,  as
compared to $4,745,000  for the year ended  December 31, 2003,  due primarily to
the write-off of obligations,  primarily  accounts  receivable and  inventories,
from a former major customer  incurred during the fourth quarter of 2004 of $4.3
million,  other fourth  quarter  losses of $7.7  million,  a decrease in the net
deferred  tax asset of $1.8  million and  decreases  in net sales,  as discussed
above.

         Net loss  was  $4,745,000  for the  year  ended  December  31,  2003 as
compared to net income of $1,496,000  for the year ended  December 31, 2002, due
primarily to the restructuring  charges incurred during 2003 of $7.7 million and
increases  in selling  and  general and  administrative  expenses,  offset by an
increase in net sales of $4.4 million, as discussed above.

         Preferred stock  dividends  amounted to  approximately  $31,000 for the
year ended December 31, 2004 as compared to $194,000 for the year ended December
31, 2003.  Preferred stock  dividends  represent  earned  dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
In February 2004, the holders of the Series C convertible  redeemable  preferred
stock  converted  all  759,494  shares of the  Series C  Preferred  Stock,  plus
$458,707 of accrued dividends, into 700,144 shares of our common stock. Net loss
available to common stockholders  amounted to $17,639,000 and $4,939,000 for the
years ended  December  31, 2004 and 2003.  Basic and diluted  loss per share was
$1.02 and $0.46 for the years ended December 31, 2004 and 2003.

         Preferred stock dividends  amounted to  approximately  $194,000 for the
year ended December 31, 2003 as compared to $184,000 for the year ended December
31, 2002.  Preferred stock  dividends  represent  earned  dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
Net loss  available to common  stockholders  amounted to $4,939,000 for the year
ended December 31, 2003 compared to net income available to common  stockholders
of $1,312,000 for the year ended  December 31, 2002.  Basic and diluted loss per
share was $0.46 for the year ended December 31, 2003. Basic and diluted earnings
per share was $0.14 for the year ended December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents  decreased to $5,461,000 at December 31, 2004
from $14,443,000 at December 31, 2003. The decrease resulted from  approximately
$11,382,000  of cash used by operating  activities,  $3,616,000  of cash used in
investing  activities,  partially  offset  by  $6,016,000  of cash  provided  by
financing activities.

         Net cash used in operating  activities was  approximately  $11,382,000,
$2,086,000 and $5,440,000 for the years ended December 31, 2004,  2003 and 2002,
respectively.  Cash used in operating activities for the year ended December 31,
2004 resulted  primarily from a net loss of approximately  $17.6 million,  which
includes  $4.3  million in  charges  related to the  write-off  of  obligations,
primarily accounts receivable and


                                       18
<PAGE>


inventories,  from a former  major  customer  incurred in the fourth  quarter of
2004, $7.7 million of fourth quarter  adjustments related to accounts receivable
and inventories  and increased  accounts  receivable of $7.6 million,  offset by
decreased  inventories of $7.8 million,  depreciation  and  amortization of $1.5
million,  a $1.8  million  decrease  in the net  deferred  tax asset,  increased
allowance for doubtful accounts of $4.0 million and accounts payable and accrued
expenses of $1.6 million.  The increase in accounts receivable during the period
was  due  primarily  to  slower  customer   collections  of  non-related   party
receivables during the year. Non-related party trade receivables increased by an
additional $6.6 million due to the inclusion of receivables that were previously
classified as related party trade receivables. Cash used by operating activities
for the year ended  December  31,  2003  resulted  primarily  from a net loss of
approximately  $4,745,000,  offset by depreciation and  amortization  expense of
approximately  $1,280,000, a write-down in inventory of approximately $4,266,000
and an increase in allowance for doubtful accounts of approximately  $1,642,000,
both related to our corporate  restructuring.  Cash used by operating activities
further  resulted  from the  realization  of  deferred  income of  approximately
$1,028,000  due to advances  made by a customer in 2002, an increase in deferred
income taxes of  approximately  $2,709,000 due primarily to current year losses,
and a reduction  in  accounts  payable  and  accrued  expenses of  approximately
$1,139,000,  offset by a further decrease in inventory of $1,742,000.  Cash used
in operating  activities for the year ended December 31, 2002 resulted primarily
from  increased  inventories  and  receivables,  which was  partially  offset by
increases in accounts payable and accrued expenses and net income.

         Net cash used in investing  activities  was  approximately  $3,616,000,
$2,516,000 and $1,268,000 for the years ended December 31, 2004,  2003 and 2002,
respectively.  Net cash used in investing activities for the year ended December
31, 2004 consisted primarily of capital expenditures for computer equipment, the
purchase of additional TALON zipper  equipment and building,  land and leasehold
improvements related to our new TALON manufacturing  facility in North Carolina.
The building and land purchase of the TALON  manufacturing  facility was treated
as a non-cash financing  transaction.  Net cash used in investing activities for
the year ended December 31, 2003 consisted primarily of capital expenditures for
equipment  related to the exclusive  supply  agreement we entered into with Levi
Strauss & Co. and the purchase of additional TALON zipper equipment.  During the
period, we also purchased computer equipment and software for the implementation
of a new Oracle-based  computer system.  This purchase was treated as a non-cash
capital lease  obligation.  Net cash used in investing  activities  for the year
ended  December  31,  2002  consisted  primarily  of  capital  expenditures  for
machinery and equipment.

         Net cash provided by financing activities was approximately $6,016,000,
$18,759,000 and $6,947,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.  Net cash  provided  by  financing  activities  for the year ended
December 31, 2004  primarily  reflects  funds  raised from  secured  convertible
promissory  notes of $12.5 million,  the exercise of stock options and warrants,
proceeds  from  notes  payable  and a capital  lease  obligation,  offset by the
repayment of borrowings  under our credit  facility and notes payable.  Net cash
provided by financing  activities for the year ended December 31, 2003 primarily
reflects funds raised from private placement transactions of approximately $29.4
million,  offset by  decreased  borrowings  under our  credit  facility  and the
repayment of notes  payable.  Net cash provided by financing  activities for the
year ended December 31, 2002 primarily reflects  increased  borrowings under our
credit facility and funds raised from private placement transactions,  offset by
the repayment of notes payable.

         We currently satisfy our working capital requirements primarily through
cash flows generated from operations,  sales of equity securities and borrowings
from institutional  investors and individual accredited  investors.  On November
10,  2004,  we paid off our working  capital  credit  facility  with UPS Capital
Global Trade Finance  Corporation with a portion of the proceeds received from a
private placement of $12.5 million of Secured Convertible  Promissory Notes. The
Secured  Convertible  Promissory  Notes are  convertible  into common stock at a
price of $3.65  per  share,  bear  interest  at 6%  payable  quarterly,  are due
November  9,  2007 and are  secured  by the  TALON  trademarks.  The  Notes  are
convertible at the option of the holder at any time after closing.  We may repay
the Notes at any time after one year from the closing date with a 15% prepayment
penalty.  At maturity,  we may repay the Notes in cash or require  conversion if
certain conditions


                                       19
<PAGE>


are met. In  connection  with the  issuance of the Notes,  we issued to the Note
holders  warrants to purchase up to 171,235 shares of common stock. The warrants
have a term of five years,  an  exercise  price of $3.65 per share and vested 30
days after closing.  We have  registered with the SEC, the resale by the holders
of the shares  issuable  upon  conversion  of the  options  and  exercise of the
warrants.

         At December 31, 2004,  there were no outstanding  borrowings  under our
UPS Capital  credit  facility  which was  terminated in November  2004.  Amounts
borrowed under our foreign factoring  agreement as of December 31, 2004 amounted
to approximately  $615,000. At December 31, 2003,  outstanding  borrowings under
our UPS Capital credit  facility,  including  amounts borrowed under our foreign
factoring agreement,  amounted to approximately  $7,096,000.  There were no open
letters of credit at December 31, 2004 and 2003.

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchased our eligible accounts receivable
and assumed the credit risk with respect to those foreign accounts for which UPS
Capital had given its prior  approval.  If UPS Capital did not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remained  with us. We paid a fixed  commission  rate and  borrowed  up to 85% of
eligible  accounts  receivable under our credit  facility.  Included in due from
factor as of December 31, 2003 are trade accounts  receivable  factored  without
recourse of approximately  $65,000.  Included in due from factor are outstanding
advances  due to UPS  Capital  under this  factoring  arrangement  amounting  to
approximately  $55,000 at December  31,  2003.  There were no factored  accounts
receivable of advances from factor under the UPS credit  facility as of December
31, 2004.

         Pursuant  to the  terms of a  factoring  agreement  for our  Hong  Kong
subsidiary,  Tag-It Pacific Limited,  the factor purchases our eligible accounts
receivable  and assumes the credit risk with respect to those accounts for which
the  factor  has given its prior  approval.  If the  factor  does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 80% of
eligible  accounts  receivable.  Interest  is charged at 1.5% over the Hong Kong
Dollar prime rate.  As of December 31, 2004 and 2003,  the amount  factored with
recourse and included in trade accounts receivable was approximately  $1,559,000
and $316,000.  Outstanding advances as of December 31, 2004 and 2003 amounted to
approximately  $615,000  and  $411,000  and are  included  in the line of credit
balance.

         As we continue to respond to the current industry trend of large retail
brands to outsource  apparel  manufacturing to offshore  locations,  our foreign
customers,  though backed by U.S.  brands and retailers,  are  increasing.  This
makes  receivables  based financing with  traditional U.S. banks more difficult.
Our current  borrowings  may not provide the level of  financing  we may need to
expand into  additional  foreign  markets.  As a result,  we are  continuing  to
evaluate non-traditional financing of our foreign assets.

         Our  trade  receivables,   net  of  allowance  for  doubtful  accounts,
increased to $22,390,000  at December 31, 2004 from  $19,253,000 at December 31,
2003. This increase was due primarily to increased non-related party receivables
of  approximately  $3.7  million due to  increased  sales to  non-related  party
customers and slower collections. This increase is net of a $5.0 million reserve
for bad debts  provided  in the fourth  quarter of 2004,  based on  management's
estimate of the collectability of our customer accounts. Non-related party trade
receivables  increased by an  additional  $6.6  million due to the  inclusion of
receivables that were previously  classified as related party trade receivables.
As a result of the sale of its ownership in our common stock,  Azteca Production
International is no longer considered a related party customer.  The increase in
non-related  party  receivables  was offset by a decrease in related party trade
receivables of  approximately  $7.2 million  resulting  from decreased  sales to
related  parties  during  the year and the  write-off  of  outstanding  accounts
receivable  obligations  due from United  Apparel  Ventures  and its  affiliate,
Tarrant Apparel Group.  Following  negotiations with United Apparel Ventures and
its  affiliate,  Tarrant  Apparel  Group,  a former major  customer of ours,  we
determined that a significant  portion of the obligations due from this customer
were  uncollectable.  This  resulted in a write-off  of $6.9 million of accounts
receivable due from Tarrant and


                                       20
<PAGE>


UAV and a net  receivable  balance due from UAV of $4.5  million at December 31,
2004.  UAV agreed to pay the $4.5 million  receivable  balance over a nine-month
period beginning May 2005.

         Our net  deferred  tax asset at  December  31,  2004  amounted  to $1.0
million  compared to $2.8 million at December  31, 2003.  Our deferred tax asset
valuation  allowance  increased  to $8.9  million at December 31, 2004 from $1.1
million at  December  31,  2003.  The  decrease  in the net  deferred  tax asset
resulted in a charge of $1.8 million  against the  provision for income taxes in
the fourth  quarter of 2004.  At December 31, 2004, we had Federal and state net
operating loss  carryforwards of approximately  $21.6 million and $12.9 million,
respectively,  available to offset  future  taxable  income.  Our net  operating
losses may be limited in future periods if the ownership of the Company  changes
by more than 50% within a three-year  period.  As of December 31, 2004,  none of
our net operating losses have been limited.

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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our  contractual  obligations at December 31,
2004 and the effects such obligations are expected to have on liquidity and cash
flow in future periods:

<TABLE>
<CAPTION>
                                                   Payments Due by Period
                            -------------------------------------------------------------------
                                           Less than        1-3           4-5          After
Contractual Obligations        Total        1 Year         Years         Years        5 Years
-------------------------   -----------   -----------   -----------   -----------   -----------
<S>                         <C>           <C>           <C>           <C>           <C>
Note payable ............   $ 1,501,500   $ 1,501,500   $      --     $      --     $      --
Capital lease obligations   $ 2,454,068   $ 1,023,793   $ 1,251,263   $   179,012   $      --
Notes payable to related
parties (1) .............   $   734,021   $   734,021   $      --     $      --     $      --
Operating leases ........   $ 1,145,827   $   724,009   $   421,818   $      --     $      --
Line of credit ..........   $   654,449   $   654,449   $      --     $      --     $      --
Note payable ............   $    27,720   $    27,720   $      --     $      --     $      --
Notes payable ...........   $ 2,060,326   $   276,009   $   828,027   $   956,290   $      --
Convertible notes payable   $14,645,205   $   750,000   $13,895,205   $      --     $      --
----------
<FN>
(1)      The majority of notes payable to related parties are due on demand with
         the  remainder  due and payable on the fifteenth day following the date
         of delivery of written demand for payment.
</FN>
</TABLE>

         At December 31, 2004 and 2003, we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.


                                       21
<PAGE>


RELATED PARTY TRANSACTIONS

         For a description of  transactions to which we were or will be a party,
and in which any director, executive officer, shareholder of more than 5% of our
common stock or any member of their  immediate  family had or will have a direct
or  indirect  material  interest,  see Note 20 of the Notes to the  Consolidated
Financial Statements included in Item 8 of this Report.

NEW ACCOUNTING PRONOUNCEMENTS

         In December  2004,  the FASB issued  Statement of Financial  Accounting
Standard  ("SFAS") No. 123R "Share Based  Payment." This statement is a revision
of SFAS  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
supersedes APB Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
its related  implementation  guidance.  SFAS 123R  addresses  all forms of share
based  payment  ("SBP")  awards  including  shares issued under  employee  stock
purchase plans, stock options,  restricted stock and stock appreciation  rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards'  grant  date,  based on the  estimated  number of awards that are
expected to vest.  This  statement is effective as of the beginning of the first
interim or annual  reporting period that begins after December 15, 2005. We have
evaluated the effects of the adoption of this  pronouncement and have determined
it will not have a material impact on our financial statements.

         In November 2004, the FASB issued SFAS No. 151 "Inventory  Costs" (SFAS
151).  This statement  amends the guidance in ARB No. 43, Chapter 4,  "Inventory
Pricing,"  to clarify  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling  costs,  and wasted material  (spoilage).  SFAS 151
requires that those items be recognized as current-period  charges. In addition,
this Statement  requires that allocation of fixed production  overheads to costs
of conversion be based upon the normal  capacity of the  production  facilities.
The  provisions of SFAS 151 are effective for inventory  cost incurred in fiscal
years  beginning  after June 15, 2005.  As such,  we are required to adopt these
provisions at the beginning of fiscal 2006.  The adoption of this  pronouncement
is not expected to have material effect on our financial statements.

         In  December  2004,  the  FASB  issued  Statement  Accounting  Standard
("SFAS") No. 153  "Exchanges  of  Nonmonetary  Assets."  This  Statement  amends
Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
Statement are  effective for  nonmonetary  asset  exchanges  occurring in fiscal
periods  beginning  after June 15, 2005.  Earlier  application  is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December
16, 2004. The provisions of this Statement should be applied prospectively.  The
adoption of this  pronouncement  is not expected to have material  effect on our
financial statements.

         In October  2004,  the American  Jobs Creation Act of 2004 (Act) became
effective  in the  U.S.  Two  provisions  of the Act may  impact  the  provision
(benefit)  for  income  taxes in future  periods,  namely  those  related to the
Qualified   Production   Activities   Deduction   (QPA)  and  Foreign   Earnings
Repatriation (FER).

         The QPA  will be  effective  for  our  U.S.  federal  tax  return  year
beginning after December 31, 2004. In summary, the Act provides for a percentage
deduction  of  earnings  from  qualified  production  activities,   as  defined,
commencing  with an initial  deduction  of 3 percent for tax years  beginning in
2005 and increasing to 9 percent for tax years  beginning  after 2009,  with the
result that the Statutory federal tax rate currently applicable to our qualified
production  activities of 35 percent could be reduced initially to 33.95 percent
and ultimately to 31.85 percent.  However,  the Act also provides for the phased
elimination of the Extraterritorial  Income Exclusion provisions of the Internal
Revenue  Code,  which have  previously  resulted in tax benefits to both CCN and
IMC. Due to the  interaction  of the law  provisions  noted above as well as the
particulars  of our tax position,  the ultimate  effect of the QPA on our future
provision  (benefit) for income taxes has not


                                       22
<PAGE>


been  determined  at this time.  The FASB issued FASB Staff  Position FAS 109-1,
Application of FASB Statement  No.109,  Accounting for Income Taxes,  to the Tax
Deduction  on Qualified  Production  Activities  Provided by the  American  Jobs
Creation Act of 2004,  (FSP 109-1) in December 2004. FSP 109-1 requires that tax
benefits resulting from the QPA should be recognized no earlier than the year in
which they are reported in the  entity's tax return,  and that there is to be no
revaluation of recorded deferred tax assets and liabilities as would be the case
had there been a change in an applicable statutory rate.

         The FER  provision  of the Act  provides  generally  for a one-time  85
percent  dividends  received  deduction for qualifying  repatriations of foreign
earnings to the U.S. Qualified  repatriated funds must be reinvested in the U.S.
in certain  qualifying  activities and  expenditures,  as defined by the Act. In
December  2004,  the FASB issued FASB Staff  Position FAS 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-2 allows additional time
for entities  potentially impacted by the FER provision to determine whether any
foreign  earnings will be repatriated  under said  provisions.  At this time, we
have not  undertaken an evaluation of the  application  of the FER provision and
any potential benefits of effecting repatriations under said provision. Numerous
factors,  including previous actual and deemed  repatriations  under federal tax
law provisions,  are factors impacting the availability of the FER provision and
its potential benefit to the us, if any. We intend to examine the issue and will
provide updates in subsequent periods.

CAUTIONARY STATEMENTS AND RISK FACTORS

         Several   of  the   matters   discussed   in  this   document   contain
forward-looking  statements  that  involve  risks  and  uncertainties.   Factors
associated with the  forward-looking  statements that could cause actual results
to differ from those projected or forecast are included in the statements below.
In  addition to other  information  contained  in this  report,  readers  should
carefully consider the following cautionary statements and risk factors.

         OUR  GROWTH  AND  OPERATING  RESULTS  COULD  BE  MATERIALLY,  ADVERSELY
EFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING
OUR RIGHTS  UNDER OUR  EXCLUSIVE  LICENSE AND  INTELLECTUAL  PROPERTY  AGREEMENT
("AGREEMENT")  WITH PRO-FIT  HOLDINGS.  Pursuant to our  Agreement  with Pro-Fit
Holdings  Limited,  we have  exclusive  rights in  certain  geographic  areas to
Pro-Fit's stretch and rigid waistband technology. By letter dated April 6, 2004,
Pro-Fit alleged various  breaches of the Agreement which we dispute.  To prevent
Pro-Fit in the future from  terminating the Agreement based on alleged  breaches
that we do not regard as meritorious,  we filed a lawsuit against Pro-Fit in the
U.S.  District Court for the Central  District of  California,  based on various
contractual and tort claims seeking  declaratory  relief,  injunctive relief and
damages.  Pro-Fit  filed an  answer  denying  the  material  allegations  of the
complaint and filed a counterclaim  alleging various contractual and tort claims
seeking  injunctive  relief and damages.  We filed a reply  denying the material
allegations of Pro-Fit's pleading.  Pro-Fit has since purported to terminate our
exclusive license and intellectual  property agreement based on the same alleged
breaches of the agreement  that are the subject of our existing  litigation,  as
well as on an additional basis unsupported by fact. In February 2005, we amended
our pleadings in the litigation to assert additional  breaches by Pro-Fit of its
obligations  to us under our  agreement  and  under  certain  additional  letter
agreements,  and for a declaratory  judgment that Pro-Fit's patent No. 5,987,721
is invalid and not infringed by us. Discovery in this case has commenced.  There
have been  ongoing  negotiations  with  Pro-Fit  to  attempt  to  resolve  these
disputes.  We intend to proceed with the lawsuit if these  negotiations  are not
concluded in a manner satisfactory to us.

         We derive a  significant  amount of revenues  from the sale of products
incorporating  the  stretch  waistband  technology.  Our  business,  results  of
operations and financial condition could be materially  adversely affected if we
are unable to conclude our present negotiations in a manner acceptable to us and
ensuing litigation is not resolved in a manner favorable to us.

         IF WE LOSE OUR LARGER CUSTOMERS OR THEY FAIL TO PURCHASE AT ANTICIPATED
LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.  Our results
of operations will depend to a significant extent upon the commercial success of


                                       23
<PAGE>


our larger  customers.  If these customers fail to purchase our trim products at
anticipated levels, or our relationship with these customers terminates,  it may
have an adverse affect on our results because:

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

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

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

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

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

         WE MAY NOT BE ABLE TO ENFORCE THE  MINIMUM  PURCHASE  REQUIREMENTS  AND
OTHER  OBLIGATIONS  OF OUR TALON  DISTRIBUTORS.  Expansion  of our TALON  zipper
business  depends  in a large  part on what we refer to as our  TALON  franchise
strategy. We appoint distributors in various geographic international regions to
finish and sell zippers  under the TALON brand name. In return for the exclusive
right to finish  and sell  zippers in  selected  territories,  each  distributor
agrees to purchase a minimum quantity of zipper components from us over the term
of our agreement.  These  distributors are foreign entities located primarily in
emerging markets in Asia, Latin America,  the Middle East and Africa.  Despite a
distributor's  contractual  commitments  to us, we may be unable to enforce  the
distributor's  minimum  purchase  guarantee  or recover  damages or other relief
following a default, which could result in lower than projected revenues for our
TALON division.

         CONCENTRATION OF RECEIVABLES FROM OUR LARGER CUSTOMERS MAKES RECEIVABLE
BASED  FINANCING  DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGER  CUSTOMERS
FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY  AFFECTED.  Our business  relies
heavily on a relatively  small number of customers.  This  concentration  of our
business  reduces the amount we can borrow from our  lenders  under  receivables
based  financing  agreements.  Under a  borrowing  base  credit  agreement,  for
instance,  if accounts  receivable  due us from a particular  customer  exceed a
specified  percentage of the total eligible accounts receivable against which we
can borrower,  the lender will not lend against the receivables  that exceed the
specified percentage.  If we are unable to collect any large receivables due us,
our cash flow would be severely impacted.

         IF  CUSTOMERS  DEFAULT ON BUYBACK  AGREEMENTS  WITH US, WE WILL BE LEFT
HOLDING  UNSALABLE  INVENTORY.  Inventories  include  goods that are  subject to
buyback agreements with our customers.  Under these buyback agreements,  some of
our customers are required to purchase  inventories from us under normal invoice
and selling terms, if any inventory which we purchase on their behalf remains in
our hands longer than agreed by the customer from the time we received the goods
from our  vendors.  If any  customer  defaults on these  buyback  provisions  or
insists  on  markdowns,  we may incur a charge in  connection  with our  holding
significant amounts of unsalable inventory and this would have a negative impact
on our income.

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


                                       24
<PAGE>


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

         IF WE ARE NOT ABLE TO MANAGE OUR RAPID  EXPANSION AND GROWTH,  WE COULD
INCUR  UNFORESEEN  COSTS OR DELAYS AND OUR  REPUTATION  AND  RELIABILITY  IN THE
MARKETPLACE  AND OUR  REVENUES  WILL BE  ADVERSELY  AFFECTED.  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. If we
cannot  implement  and improve our  financial  and  management  information  and
reporting  systems,  we may not be  able  to  implement  our  growth  strategies
successfully  and our revenues will be adversely  affected.  In addition,  if we
cannot hire, train, motivate and manage new employees,  including management and
operating personnel in sufficient  numbers,  and integrate them into our overall
operations and culture, our ability to manage future growth, increase production
levels and effectively  market and distribute our products may be  significantly
impaired.

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

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

         o        The timing and magnitude of customers' marketing campaigns;

         o        The loss or addition of a major customer;

         o        The availability and pricing of materials for our products;

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

         o        Currency fluctuations;

         o        Delays caused by third parties; and

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

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

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

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


                                       25
<PAGE>


         THE LOSS OF KEY MANAGEMENT AND SALES PERSONNEL  COULD ADVERSELY  AFFECT
OUR BUSINESS,  INCLUDING OUR ABILITY TO OBTAIN AND SECURE  ACCOUNTS AND GENERATE
SALES. Our success has and will continue to depend to a significant  extent upon
key management and sales personnel,  many of whom would be difficult to replace,
particularly Colin Dyne, our Chief Executive Officer. Colin Dyne is not bound by
an employment agreement.  The loss of the services of Colin Dyne or 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  attract  and  retain
personnel with a variety of sales, operating and managerial skills.

         IF WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN FACILITIES,  WE WILL
NOT BE ABLE TO MEET OUR OBLIGATIONS AND MAY LOSE SALES AND CUSTOMERS. Currently,
we do not operate duplicate facilities in different geographic areas. Therefore,
in the  event of a  regional  disruption  where we  maintain  one or more of our
facilities,  it is unlikely  that we could shift our  operations  to a different
geographic  region and we may have to cease or curtail our operations.  This may
cause us to lose sales and customers.  The types of  disruptions  that may occur
include:

         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention; and

         o        Natural disasters.

         INTERNET-BASED   SYSTEMS  THAT  HOST  OUR  MANAGED  TRIM  SOLUTION  MAY
EXPERIENCE  DISRUPTIONS AND AS A RESULT WE MAY LOSE REVENUES AND CUSTOMERS.  Our
MANAGED  TRIM  SOLUTION  is an  Internet-based  business-to-business  e-commerce
system. To the extent that we fail to adequately continue to update and maintain
the hardware and software implementing the MANAGED TRIM SOLUTION,  our customers
may  experience  interruptions  in service due to defects in our hardware or our
source code.  In addition,  since our MANAGED TRIM  SOLUTION is  Internet-based,
interruptions in Internet service generally can negatively impact our customers'
ability to use the MANAGED TRIM SOLUTION to monitor and manage  various  aspects
of their trim needs. Such defects or interruptions could result in lost revenues
and lost customers.

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

         UNAUTHORIZED  USE  OF  OUR  PROPRIETARY  TECHNOLOGY  MAY  INCREASE  OUR
LITIGATION  COSTS AND ADVERSELY  AFFECT OUR SALES.  We rely on trademark,  trade
secret and copyright laws to protect our designs and other proprietary  property
worldwide.  We cannot be certain that these laws will be  sufficient  to protect
our property.  In  particular,  the laws of some countries in which our products
are distributed or may be distributed in the future may not protect our products
and intellectual  rights to the same extent as the laws of the United States. If
litigation  is  necessary  in the future to enforce  our  intellectual  property
rights,  to protect our trade  secrets or to determine the validity and scope of
the proprietary  rights of others,  such litigation  could result in substantial
costs and diversion of resources.  This could have a material  adverse effect on
our operating results and financial condition. Ultimately, we may be unable, for
financial or other reasons,  to enforce our rights under  intellectual  property
laws, which could result in lost sales.


                                       26
<PAGE>


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

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

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

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

         o        Interest rates;

         o        Changes in accounting principles;

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

         o        Announcements of key developments by our competitors; and

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

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

         WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS.
We may consider strategic  acquisitions as opportunities  arise,  subject to the
obtaining of any  necessary  financing.  Acquisitions  involve  numerous  risks,
including  diversion  of our  management's  attention  away  from our  operating
activities.  We  cannot  assure  our  stockholders  that we will  not  encounter
unanticipated problems or liabilities relating to the integration of an acquired
company's  operations,  nor can we assure our stockholders  that we will realize
the anticipated  benefits of any future  acquisitions.  We currently do not have
any plans to pursue any potential acquisitions.

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

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of March 9, 2005, our officers and directors and their  affiliates  beneficially
owned  approximately  15.1% of the outstanding  shares of our common stock.  The
Dyne family, which includes Mark Dyne, Colin Dyne, Larry Dyne, Jonathan Burstein
and the estate of Harold Dyne,  beneficially  owned  approximately  17.6% of the
outstanding shares of our common stock at March 9, 2005. As a result,


                                       27
<PAGE>


our officers and  directors  and the Dyne family are able to exert  considerable
influence over the outcome of any matters  submitted to a vote of the holders of
our common stock,  including the election of our Board of Directors.  The voting
power of these stockholders could also discourage others from seeking to acquire
control of us through the purchase of our common stock,  which might depress the
price of our common stock.

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

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         All of our  sales  are  denominated  in United  States  dollars  or the
currency  of the  country in which our  products  originate.  We are  exposed to
market risk for fluctuations in the foreign currency  exchange rates for certain
product  purchases  that are  denominated  in British  Pounds.  During 2004,  we
purchased forward exchange contracts for British Pounds to hedge the payments of
product  purchases.  We intend to  purchase  additional  contracts  to hedge the
British  Pound  exposure  for future  product  purchases.  There were no hedging
contracts  outstanding  as of  December  31,  2004.  Currency  fluctuations  can
increase  the price of our  products to foreign  customers  which can  adversely
impact the level of our export sales from time to time. The majority of our cash
equivalents  are held in United  States bank  accounts  and we do not believe we
have significant market risk exposure with regard to our investments.

         We are also  exposed  to the  impact of  interest  rate  changes on our
outstanding  borrowings.  At December 31 2004, we had approximately $1.0 million
of indebtedness  subject to interest rate  fluctuations.  These fluctuations may
increase our interest expense and decrease our cash flows from time to time. For
example,  based on average bank  borrowings of $10 million  during a three-month
period, if the interest rate indices on which our bank borrowing rates are based
were to increase 100 basis points in the three-month  period,  interest incurred
would increase and cash flows would decrease by $25,000.


                                       28
<PAGE>


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                TABLE OF CONTENTS
                                                                            PAGE
                                                                            ----

Report of Independent Registered Public Accounting Firm...................    30
Consolidated Balance Sheets...............................................    31
Consolidated Statements of Operations.....................................    32
Consolidated Statements of Stockholders' Equity and Convertible
   Redeemable Preferred Stock.............................................    33
Consolidated Statements of Cash Flows.....................................    34
Notes to Consolidated Financial Statements................................    35
Independent Registered Public Accounting Firm's Report on Schedule II.....    62
Schedule II - Valuation and Qualifying Accounts and Reserves..............    63


                                       29
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

         We have audited the accompanying  consolidated balance sheets of Tag-It
Pacific, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated  statements of  operations,  stockholders'  equity and  convertible
redeemable  preferred  stock and cash  flows for each of the three  years in the
period  ended   December  31,  2004.   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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements  and  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. and subsidiaries at December 31, 2004 and 2003, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2004, in conformity  with  accounting  principles  generally
accepted in the United States of America.



                                                     /s/ BDO Seidman, LLP
                                                     --------------------

Los Angeles, California
March 31, 2005


                                       30
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                       December 31,    December 31,
                                                           2004            2003
                                                       ------------    ------------
<S>                                                    <C>             <C>
Assets
Current assets:
   Cash and cash equivalents .......................   $  5,460,662    $ 14,442,769
   Due from factor .................................           --             9,743
   Trade accounts receivable, net ..................     17,890,044       7,531,079
   Trade accounts receivable, related parties, net .      4,500,000      11,721,465
   Inventories, net ................................      9,305,819      17,096,879
   Prepaid expenses and other current assets .......      2,326,245       2,124,366
   Deferred income taxes ...........................      1,000,000       2,800,000
                                                       ------------    ------------
Total current assets ...............................     40,482,770      55,726,301

Property and equipment, net of accumulated
   depreciation and amortization ...................      9,380,026       6,144,863
Due from related parties ...........................        556,550         762,076
Tradename ..........................................      4,110,750       4,110,750
Goodwill ...........................................        450,000         450,000
License rights .....................................        259,875         375,375
Other assets .......................................      1,207,885         200,949
                                                       ------------    ------------
Total assets .......................................   $ 56,447,856    $ 67,770,314
                                                       ============    ============

Liabilities, Convertible Redeemable Preferred
  Stock and Stockholders' Equity
Current liabilities:
  Line of credit ...................................   $    614,506    $  7,095,514
  Accounts payable and accrued expenses ............      7,460,916       9,552,196
  Demand notes payable to related parties ..........        664,971         849,971
  Current portion of capital lease obligations .....        859,799         562,742
  Current portion of notes payable .................        174,975            --
  Note payable .....................................      1,400,000       1,200,000
                                                       ------------    ------------
Total current liabilities ..........................     11,175,167      19,260,423

Capital lease obligations, less current portion ....      1,220,969         651,191
Notes payable, less current portion ................      1,447,855            --
Note payable, less current portion .................           --         1,400,000
Secured convertible promissory notes ...............     12,408,623            --
                                                       ------------    ------------
Total liabilities ..................................     26,252,614      21,311,614
                                                       ------------    ------------

Commitments and contingencies (Note 17)

Convertible redeemable preferred stock Series
  C, $0.001 par value; 759,494 shares authorized;
  no shares issued and outstanding at December 31,
  2004; 759,494 shares issued and outstanding at
  December 31, 2003 (stated value $3,000,001) ......           --         2,895,001

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

   Convertible preferred stock Series D, $0.001
     par value; 572,818 shares authorized; no
     shares issued and outstanding at December 31,
     2004, 572,818 shares issued and outstanding
     at December 31, 2003 ..........................           --        22,918,693

   Common stock, $0.001 par value, 30,000,000
     shares authorized; 18,171,301 shares issued
     and outstanding at December 31, 2004;
     11,508,201 at December 31, 2003 ...............         18,173          11,510
  Additional paid-in capital .......................     51,073,402      23,890,356
  Accumulated deficit ..............................    (20,896,333)     (3,256,860)
                                                       ------------    ------------
Total stockholders' equity .........................     30,195,242      43,563,699
                                                       ------------    ------------
Total liabilities, convertible redeemable
  preferred stock and stockholders' equity .........   $ 56,447,856    $ 67,770,314
                                                       ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       31
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                      Year Ended      Year Ended      Year Ended
                                                     December 31,    December 31,    December 31,
                                                         2004            2003            2002
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
Net sales to unrelated parties ...................   $ 54,351,108    $ 38,560,045    $ 18,179,970
Net sales to related parties .....................        758,373      25,882,770      41,893,200
                                                     ------------    ------------    ------------
Total net sales ..................................     55,109,481      64,442,815      60,073,170
Cost of goods sold ...............................     44,813,736      47,889,762      44,633,195
                                                     ------------    ------------    ------------
Gross profit .....................................     10,295,745      16,553,053      15,439,975

Selling expenses .................................      2,899,329       3,706,143       2,126,227
General and administrative expenses (Note 21) ....     21,508,607      11,028,291      10,269,672
Restructuring charges (Note 22) ..................        414,675       7,700,047            --
                                                     ------------    ------------    ------------
Total operating expenses .........................     24,822,611      22,434,481      12,395,899

(Loss) income from operations ....................    (14,526,866)     (5,881,428)      3,044,076
Interest expense, net ............................        804,888       1,196,110       1,269,365
                                                     ------------    ------------    ------------

(Loss) income before income taxes ................    (15,331,754)     (7,077,538)      1,774,711
Provision (benefit) for income taxes .............      2,277,214      (2,332,880)        278,685
                                                     ------------    ------------    ------------
Net (loss) income ................................   $(17,608,968)   $ (4,744,658)   $  1,496,026
                                                     ============    ============    ============

Less: Preferred stock dividends ..................        (30,505)       (194,052)       (184,200)
                                                     ------------    ------------    ------------
Net (loss) income available to common shareholders   $(17,639,473)   $ (4,938,710)   $  1,311,826
                                                     ============    ============    ============

Basic (loss) earnings per share ..................   $      (1.02)   $      (0.46)   $       0.14
                                                     ============    ============    ============
Diluted (loss) earnings per share ................   $      (1.02)   $      (0.46)   $       0.14
                                                     ============    ============    ============

Basic weighted average shares outstanding ........     17,316,202      10,650,684       9,232,405
                                                     ============    ============    ============

Diluted weighted average shares outstanding ......     17,316,202      10,650,684       9,531,301
                                                     ============    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       32
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                     CONVERTIBLE REDEEMABLE PREFERRED STOCK
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


<CAPTION>
                                                                     Preferred Stock               Preferred Stock
                                       Common Stock                     Series A                       Series D
                               ----------------------------    ---------------------------   ----------------------------
                                  Shares          Amount         Shares          Amount         Shares          Amount
                               ------------    ------------    ------------   ------------   ------------    ------------

<S>                               <C>          <C>                     <C>    <C>                    <C>     <C>
BALANCE, JANUARY 1, 2002 ...      8,769,910    $      8,771            --     $       --             --      $       --
   Common stock issued upon
     exercise of options ...         50,000              50            --             --             --              --
   Acquisition of license
     rights ................        150,000             150            --             --             --              --
   Common stock issued in
     private placement
     transactions ..........        349,999             350            --             --             --              --
   Tax benefit from exercise
     of stock options ......           --              --              --             --             --              --
   Preferred stock dividends           --              --              --             --             --              --
   Net income ..............           --              --              --             --             --              --
                               ------------    ------------    ------------   ------------   ------------    ------------
BALANCE, DECEMBER 31, 2002 .      9,319,909           9,321            --             --             --              --
   Preferred stock issued in
     private placement
     transaction ...........           --              --              --             --          572,818      22,918,693
   Common stock cancelled in
     settlement agreement ..         (5,208)             (5)           --             --             --              --
   Common stock issued upon
     exercise of options ...        126,500             127            --             --             --              --
   Common stock issued in
     private placement
     transactions ..........      2,025,000           2,025            --             --             --              --
   Common stock issued for
     services ..............         42,000              42            --             --             --              --
   Tax benefit from exercise
     of stock options ......           --              --              --             --             --              --
   Preferred stock dividends           --              --              --             --             --              --
   Net loss ................           --              --              --             --             --              --
                               ------------    ------------    ------------   ------------   ------------    ------------
BALANCE, DECEMBER 31, 2003 .     11,508,201          11,510            --             --          572,818      22,918,693
   Conversion of preferred
     stock Series C and
     accrued dividends .....        700,144             700            --             --             --              --
   Conversion of preferred
     stock Series D ........      5,728,180           5,728            --             --         (572,818)    (22,918,693)
   Warrants issued in
     private placement
     transaction ...........           --              --              --             --             --              --
   Common stock issued upon
     exercise of options and
     warrants ..............        214,276             214            --             --             --              --
   Common stock and warrants
     issued for services ...         20,500              21            --             --             --              --
   Tax benefit from exercise
     of stock options ......           --              --              --             --             --              --
   Preferred stock dividends           --              --              --             --             --              --
   Net loss ................           --              --              --             --             --              --
                               ------------    ------------    ------------   ------------   ------------    ------------
BALANCE, DECEMBER 31, 2004 .     18,171,301    $     18,173            --     $       --             --      $       --
                               ============    ============    ============   ============   ============    ============


<CAPTION>
                                                                                      Preferred Stock
                                Additional      Retained                                 Series C
                                 Paid-In        Earnings                       ----------------------------
                                 Capital        (Deficit)         Total           Shares          Amount
                               ------------    ------------    ------------    ------------    ------------
<S>                            <C>             <C>             <C>                  <C>        <C>
BALANCE, JANUARY 1, 2002 ...   $ 15,048,971    $    370,024    $ 15,427,766         759,494    $  2,895,001
   Common stock issued upon
     exercise of options ...         64,948            --            64,998            --              --
   Acquisition of license
     rights ................        577,350            --           577,500            --              --
   Common stock issued in
     private placement
     transactions ..........      1,029,647            --         1,029,997            --              --
   Tax benefit from exercise
     of stock options ......         55,096            --            55,096            --              --
   Preferred stock dividends           --          (184,200)       (184,200)           --              --
   Net income ..............           --         1,496,026       1,496,026            --              --
                               ------------    ------------    ------------    ------------    ------------
BALANCE, DECEMBER 31, 2002 .     16,776,012       1,681,850      18,467,183         759,494       2,895,001
   Preferred stock issued in
     private placement
     transaction ...........        165,000            --        23,083,693            --              --
   Common stock cancelled in
     settlement agreement ..        (31,712)           --           (31,717)           --              --
   Common stock issued upon
     exercise of options ...        317,823            --           317,950            --              --
   Common stock issued in
     private placement
     transactions ..........      6,333,475            --         6,335,500            --              --
   Common stock issued for
     services ..............        166,698            --           166,740            --              --
   Tax benefit from exercise
     of stock options ......        163,060            --           163,060            --              --
   Preferred stock dividends           --          (194,052)       (194,052)           --              --
   Net loss ................           --        (4,744,658)     (4,744,658)           --              --
                               ------------    ------------    ------------    ------------    ------------
BALANCE, DECEMBER 31, 2003 .     23,890,356      (3,256,860)     43,563,699         759,494       2,895,001
   Conversion of preferred
     stock Series C and
     accrued dividends .....      3,353,008            --         3,353,708        (759,494)     (2,895,001)
   Conversion of preferred
     stock Series D ........     22,912,965            --              --              --              --
   Warrants issued in
     private placement
     transaction ...........        189,815            --           189,815            --              --
   Common stock issued upon
     exercise of options and
     warrants ..............        557,514            --           557,728            --              --
   Common stock and warrants
     issued for services ...         85,710            --            85,731            --              --
   Tax benefit from exercise
     of stock options ......         84,034            --            84,034            --              --
   Preferred stock dividends           --           (30,505)        (30,505)           --              --
   Net loss ................           --       (17,608,968)    (17,608,968)           --              --
                               ------------    ------------    ------------    ------------    ------------
BALANCE, DECEMBER 31, 2004 .   $ 51,073,402    $(20,896,333)   $ 30,195,242            --      $       --
                               ============    ============    ============    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       33
<PAGE>


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

<CAPTION>
                                                             Year Ended      Year Ended      Year Ended
                                                            December 31,    December 31,    December 31,
                                                                2004            2003            2002
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
   Net (loss) income ....................................   $(17,608,968)   $ (4,744,658)   $  1,496,026
   Adjustments to reconcile net (loss) income to net
     cash used in operating activities:
     Depreciation and amortization ......................      1,547,223       1,280,380       1,169,247
     Decrease (increase) in deferred income taxes .......      1,800,000      (2,709,072)         16,671
     Loss on sale of assets .............................           --              --            20,804
     Common stock and warrants issued for services ......         85,731         135,023            --
     Increase (decrease) in allowance for doubtful
       accounts .........................................      4,042,428       1,642,086        (167,140)
   Changes in operating assets and liabilities:
     Receivables, including related parties .............     (7,640,984)       (392,522)     (9,534,894)
     Inventories ........................................      7,791,060       6,008,388      (2,654,527)
     Prepaid expenses and other current assets ..........         13,121      (1,524,823)       (191,396)
     Other assets .......................................        147,046         (24,976)        (75,580)
     Accounts payable and accrued expenses ..............     (1,570,550)     (1,138,946)      3,197,895
     Deferred income ....................................           --        (1,027,984)      1,027,984
     Income taxes payable ...............................         12,032         411,420         254,663
                                                            ------------    ------------    ------------
Net cash used in operating activities ...................    (11,381,861)     (2,085,684)     (5,440,247)
                                                            ------------    ------------    ------------
Cash flows from investing activities:
   Decrease in loans to related parties .................           --           167,801            --
   Acquisition of property and equipment ................     (3,615,899)     (2,683,857)     (1,290,087)
   Proceeds from sale of equipment ......................           --              --            22,312
                                                            ------------    ------------    ------------
Net cash used in investing activities ...................     (3,615,899)     (2,516,056)     (1,267,775)
                                                            ------------    ------------    ------------
Cash flows from financing activities:
   Proceeds from secured convertible promissory notes ...     11,663,685            --              --
   Proceeds from preferred stock issuance ...............           --        23,083,693            --
   Proceeds from common stock issuance ..................           --         6,335,500       1,029,997
   Proceeds from exercise of stock options and warrants .        557,728         317,950          64,998
   (Repayment) proceeds from bank line of credit, net ...     (6,481,007)     (8,838,743)      6,521,480
   Proceeds from capital lease obligation ...............        950,000            --           125,000
   Payment of capital lease obligations .................       (332,583)       (439,355)       (194,937)
   Proceeds from notes payable ..........................        880,000            --           500,000
   Repayment of notes payable ...........................     (1,222,170)     (1,700,000)     (1,100,000)
                                                            ------------    ------------    ------------
Net cash provided by financing activities ...............      6,015,653      18,759,045       6,946,538
                                                            ------------    ------------    ------------
Net (decrease) increase in cash and cash equivalents ....     (8,982,107)     14,157,305         238,516
Cash and cash equivalents, beginning of year ............     14,442,769         285,464          46,948
                                                            ------------    ------------    ------------
Cash and cash equivalents, end of year ..................   $  5,460,662    $ 14,442,769    $    285,464
                                                            ============    ============    ============
Supplemental  disclosures of cash flow information:
   Cash paid (received) during the year for:
     Interest paid ......................................   $    693,045    $  1,149,357    $  1,203,663
     Interest received ..................................   $    (32,340)   $       (179)   $       (180)
     Income taxes paid ..................................   $    495,345    $    177,455    $      7,984
     Income taxes received ..............................   $    (17,903)   $   (212,082)   $       --
   Non-cash financing activity:
     Common stock issued in acquisition of license rights   $       --      $       --      $    577,500
     Capital lease obligation ...........................   $    249,418    $  1,474,053    $       --
     Preferred Series D stock converted to common stock .   $ 22,918,693    $       --      $       --
     Preferred Series C stock converted to common stock .   $  2,895,001    $       --      $       --
     Accrued dividends converted to common stock ........   $    458,707    $       --      $       --
     Mortgage note payable ..............................   $    765,000    $       --      $       --
     Warrants issued to placement agent .................   $     93,815    $       --      $       --
     Accounts receivable converted to notes receivable ..   $    470,799    $       --      $       --
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       34
<PAGE>


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


NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

         Tag-It  Pacific,  Inc. (the "Company") is the parent holding company of
Tag-It,  Inc.,  a  California  corporation,  Tag-It  Pacific  (HK)  Ltd.,  a BVI
corporation,  Tag-It  de  Mexico,  S.A.  de C.V.,  A.G.S.  Stationery,  Inc.,  a
California  corporation 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 and became  wholly-owned
subsidiaries  of the  Company  immediately  prior to the  effective  date of the
Company's  initial  public  offering in January 1998.  Immediately  prior to the
initial public offering,  the outstanding membership units of Tag-It Pacific LLC
were converted to 2,470,001  shares of Common Stock of the Company.  In November
1998,  the Company  formed a  wholly-owned  subsidiary,  Pacific  Trim, SA de CV
located in Tlaxcala, Mexico (now included in "Subsidiaries"). All the activities
of this company were merged into Tag-It de Mexico, SA de CV, in 1999. In January
2000, the Company formed Tag-It Pacific Limited, a Hong Kong corporation, and in
April  2000,   the  Company  formed  Talon   International,   Inc.,  a  Delaware
corporation. All newly formed corporations are 100% wholly-owned Subsidiaries of
Tag-It Pacific, Inc. Pacific Trim & Belt, Inc. was dissolved during 2000.

         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  consolidated  statement  of income in the  period
incurred.   During  2004,  2003  and  2002,  foreign  currency  translation  and
transaction gains and losses were not material.

NATURE OF BUSINESS

         Tag-It  Pacific,  Inc. is an apparel  company that  specializes  in the
distribution  of trim  items to  manufacturers  of  fashion  apparel,  specialty
retailers and mass merchandisers.  The Company acts as a full service outsourced
trim management department for manufacturers, a specified supplier of trim items
to owners of specific brands, brand licensees and retailers,  a manufacturer and
distributor  of zippers under the TALON brand name and a distributor  of stretch
waistbands  that utilize  licensed  patented  technology  under the TEKFIT brand
name.

REVENUE RECOGNITION

         The Company generates revenue primarily from two sources:

         o        Trim product sales, including zippers and waistbands, and

         o        Complete trim package sales under TRIMNET.

         Trim  product  and  trim  package  sales  are  recorded  at the time of
shipment, at which point title transfers to the customer, and when collection is
reasonably  assured.  Our customers are not given  extended  terms or dating and
have return rights with proper prior authorization.

COMPREHENSIVE INCOME

         The  Company has  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


                                       35
<PAGE>


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

income and its components in a full set of general-purpose financial statements.
There were no  material  other  comprehensive  income  items for the years ended
December 31, 2004, 2003 and 2002.

CLASSIFICATION OF EXPENSES

         COST OF SALES - Cost of good sold includes  expenses  primarily related
to inventory purchases,  customs, duty, freight and overhead expenses.  Overhead
expenses primarily consist of warehouse and operations  salaries,  and warehouse
expenses.

         SELLING EXPENSE - Selling expenses  primarily  include royalty expense,
selling salaries,  commissions,  marketing and other selling expenses, including
travel and entertainment.

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

SHIPPING AND HANDLING COSTS

         In accordance with Emerging Issues Task Force (EITF) 00-10,  Accounting
for Shipping  and  Handling  Fees and Costs,  the Company  records  shipping and
handling  costs billed to customers as a component of revenue,  and shipping and
handling  costs  incurred by the Company  for inbound and  outbound  freight are
recorded as a component of cost of sales.  Total  shipping  and  handling  costs
included as component of revenue for the years ended December 31, 2004, 2003 and
2002 amounted to $194,000,  $428,000 and $245,000.  Total  shipping and handling
costs included as a component of cost of sales amounted to $1,002,000,  $827,000
and $813,000.

SEGMENTS OF AN ENTERPRISE

         The  Company has  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.  The Company
believes that it operates  within one segment as there is not enough  difference
between  the types of  products  developed  and  distributed  by the  Company to
justify segmented reporting by product type.  Management decisions regarding the
allocation  of  resources  and  the  assessment  of  performance  are  made on a
company-wide basis and are not specific to the type of product. Adoption of SFAS
131 resulted in expanded disclosures regarding geographical regions (Note 18).

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. The Company had
approximately  $5.4  million at  financial  institutions  in excess of federally
insured limits.

INVENTORIES

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


                                       36
<PAGE>


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

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 costs capitalized include direct material and direct labor costs.

         Depreciation   of  property  and   equipment  is  computed   using  the
straight-line method based on estimated useful lives as follows:

         Furniture and fixtures                    5 years

         Machinery and equipment                   5 to 10 years

         Computer equipment                        5 years

         Leasehold                                 improvements   Term   of  the
                                                   lease or the  estimated  life
                                                   of the related  improvements,
                                                   whichever is shorter.

         Films, dies, molds and art designs        3 to 5 years

         Building                                  39 years

IMPAIRMENT OF LONG-LIVED ASSETS

         On January 1, 2002, the Company adopted SFAS 142 which requires,  among
other things,  that the Company no longer  amortize  goodwill,  but instead test
goodwill for impairment at least annually.  In addition,  SFAS 142 requires that
the Company  identify  reporting  units for the purposes of assessing  potential
future  impairments  of goodwill,  reassess  the useful lives of other  existing
recognized  intangible  assets, and cease amortization of intangible assets with
an indefinite  useful life. The Company's  previous  business  combinations were
accounted  for using the  purchase  method.  As of December  31,  2004,  the net
carrying  amount of goodwill is  $450,000,  tradename  is  $4,110,750  and other
intangible  assets is $259,875 (Note 8). Management has determined that goodwill
and tradename  have  indefinite  lives.  Amortization  expense  related to other
intangibles amounted to $115,500 for the years ended December 31, 2004 and 2003.

 RECLASSIFICATION

         Certain  reclassifications  have been made to the prior year  financial
statements to conform to 2004 presentation.

INCOME TAXES

         Income taxes are accounted  for under the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and tax benefit carry-forwards. Deferred tax liabilities and assets at the
end of each period are determined  using enacted tax rates.  We record  deferred
tax assets arising from temporary timing differences between recorded net income
and  taxable  net income when and if we believe  that  future  earnings  will be
sufficient  to  realize  the tax  benefit.  For  those  jurisdictions  where the
expiration date of tax benefit  carry-forwards or the projected taxable earnings
indicate that realization is not likely, a valuation allowance is provided.


                                       37
<PAGE>


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

         The provisions of SFAS No. 109,  "Accounting for Income Taxes," require
the  establishment of a valuation  allowance when, based on currently  available
information and other factors,  it is more likely than not that all or a portion
of a deferred  tax asset will not be  realized.  SFAS No. 109  provides  that an
important factor in determining whether a deferred tax asset will be realized is
whether there has been sufficient income in recent years and whether  sufficient
income is expected in future years in order to utilize the deferred tax asset.

         The Company  believes  that its  estimate  of  deferred  tax assets and
determination to record a valuation  allowance  against such assets are critical
accounting  estimates  because  they are subject  to,  among  other  things,  an
estimate of future taxable income,  which is susceptible to change and dependent
upon  events that may or may not occur,  and  because the impact of  recording a
valuation  allowance may be material to the assets reported on the balance sheet
and results of operations.

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 employee 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  for  employees  utilizing  the
intrinsic  value  method  prescribed  in APB 25 and not the  fair  value  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.
All stock options  issued to employees  had 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 for
the years ended December 31, 2004, 2003 and 2002.

         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 fair value of the award and recognizes this cost over the service period.
The value of the stock-based  award is determined  using a pricing model whereby
compensation  cost is the fair value of the option as determined by the model at
grant date or other measurement date.


                                       38
<PAGE>


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

         All stock options  issued to employees  had 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
for the years ended December 31, 2004, 2003 and 2002. If  compensation  cost for
stock-based  compensation  had been determined based on the fair market value of
the stock  options  on their  dates of grant in  accordance  with SFAS 123,  the
Company's  net (loss)  income and  (loss)  income per share for the years  ended
December 31, 2004,  2003 and 2002 would have  amounted to the pro forma  amounts
presented below:

<TABLE>
<CAPTION>
                                                       2004              2003             2002
                                                  --------------    --------------   --------------
<S>                                               <C>               <C>              <C>
Net (loss) income, as reported ................   $  (17,608,968)   $   (4,744,658)  $    1,496,026

Add:  Stock-based employee compensation expense
     included in reported net income, net of
     related tax effects ......................             --                --               --

Deduct:  Total stock-based employee
     compensation expense determined under fair
     value based methods for all awards, net of
     related tax effects ......................          (55,228)         (139,796)        (121,073)
                                                  --------------    --------------   --------------

Pro forma net (loss) income ...................   $  (17,664,196)   $   (4,884,454)  $    1,374,953
                                                  ==============    ==============   ==============

(Loss) earnings per share:
     Basic - as reported ......................   $        (1.02)   $        (0.46)  $         0.14
     Basic - pro forma ........................   $        (1.02)   $        (0.48)  $         0.13

     Diluted - as reported ....................   $        (1.02)   $        (0.46)  $         0.14
     Diluted - pro forma ......................   $        (1.02)   $        (0.48)  $         0.13
</TABLE>

         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 2003 and 2002;  expected life of
option of 1.5 years,  expected  volatility of 19%, risk free interest rate of 3%
and a 0% dividend yield.  The weighted  average fair value at the grant date for
such  options is $.37 and $.38 per option for the years ended  December 31, 2003
and 2002. There were no options granted during the year ended December 31, 2004.

USE OF ESTIMATES

         The preparation of consolidated 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.  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.  LINE OF CREDIT AND NOTES PAYABLE:
Estimated to approximate  fair value based upon current market  borrowing  rates
for loans with similar terms and maturities.


                                       39
<PAGE>


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

RESTRUCTURING CHARGES

         Upon  approval  of a  restructuring  plan by  management,  the  Company
records  restructuring  reserves  for certain  costs  associated  with  facility
closures and  business  reorganization  activities  as they are incurred or when
they  become  probable  and  estimable.  Such  costs are  recorded  as a current
liability.  Restructuring  costs associated with initiatives  commenced prior to
January 1, 2003 were recorded in compliance  with Emerging Issues Task Force No.
94-3 as a current liability.

         For  initiatives   after  December  31,  2002,  the  Company   recorded
restructuring reserves in compliance with SFAS 146, resulting in the recognition
of  employee   severance   and  related   termination   benefits  for  recurring
arrangements  when they became  probable and  estimable and on the accrual basis
for one-time  benefit  arrangements.  The Company records other costs associated
with exit  activities as they are incurred.  Employee  severance and termination
benefits  are   estimates   based  on   agreements   with  the  relevant   union
representatives or plans adopted by the Company that are applicable to employees
not  affiliated  with unions.  These costs are not  associated  with nor do they
benefit  continuing  activities.  Inherent in the  estimation of these costs are
assessments  related to the most  likely  expected  outcome  of the  significant
actions to accomplish the restructuring. Changing business conditions may affect
the assumptions related to the timing and extent of facility closure activities.
The Company reviews the status of restructuring  activities on a quarterly basis
and, if appropriate, records changes based on updated estimates.

NEW ACCOUNTING PRONOUNCEMENTS

         In December  2004,  the FASB issued  Statement of Financial  Accounting
Standard  ("SFAS") No. 123R "Share Based  Payment." This statement is a revision
of SFAS  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
supersedes APB Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
its related  implementation  guidance.  SFAS 123R  addresses  all forms of share
based  payment  ("SBP")  awards  including  shares issued under  employee  stock
purchase plans, stock options,  restricted stock and stock appreciation  rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards'  grant  date,  based on the  estimated  number of awards that are
expected to vest.  This  statement is effective as of the beginning of the first
interim or annual  reporting  period that begins after  December  15, 2005.  The
Company has evaluated the effects of the adoption of this  pronouncement and has
determined  it will  not  have a  material  impact  on the  Company's  financial
statements.

         In November 2004, the FASB issued SFAS No. 151 "Inventory  Costs" (SFAS
151).  This statement  amends the guidance in ARB No. 43, Chapter 4,  "Inventory
Pricing,"  to clarify  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling  costs,  and wasted material  (spoilage).  SFAS 151
requires that those items be recognized as current-period  charges. In addition,
this Statement  requires that allocation of fixed production  overheads to costs
of conversion be based upon the normal  capacity of the  production  facilities.
The  provisions of SFAS 151 are effective for inventory  cost incurred in fiscal
years  beginning  after June 15, 2005. As such, the Company is required to adopt
these  provisions  at the  beginning  of  fiscal  2006.  The  adoption  of  this
pronouncement is not expected to have material effect on the Company's financial
statements.

         In  December  2004,  the  FASB  issued  Statement  Accounting  Standard
("SFAS") No. 153  "Exchanges  of  Nonmonetary  Assets."  This  Statement  amends
Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
Statement are  effective for  nonmonetary  asset  exchanges  occurring in fiscal
periods  beginning  after June 15, 2005.  Earlier  application  is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December
16, 2004. The provisions of this Statement should be


                                       40
<PAGE>


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

applied  prospectively.  The adoption of this  pronouncement  is not expected to
have material effect on the Company's financial statements.

         In October  2004,  the American  Jobs Creation Act of 2004 (Act) became
effective  in the  U.S.  Two  provisions  of the Act may  impact  the  provision
(benefit)  for  income  taxes in future  periods,  namely  those  related to the
Qualified   Production   Activities   Deduction   (QPA)  and  Foreign   Earnings
Repatriation (FER).

         The QPA  will be  effective  for  the  U.S.  federal  tax  return  year
beginning after December 31, 2004. In summary, the Act provides for a percentage
deduction  of  earnings  from  qualified  production  activities,   as  defined,
commencing  with an initial  deduction  of 3 percent for tax years  beginning in
2005 and increasing to 9 percent for tax years  beginning  after 2009,  with the
result that the Statutory federal tax rate currently applicable to our qualified
production  activities of 35 percent could be reduced initially to 33.95 percent
and ultimately to 31.85 percent.  However,  the Act also provides for the phased
elimination of the Extraterritorial  Income Exclusion provisions of the Internal
Revenue  Code,  which have  previously  resulted in tax benefits to both CCN and
IMC. Due to the  interaction  of the law  provisions  noted above as well as the
particulars of the Company's tax position, the ultimate effect of the QPA on the
Company's future provision (benefit) for income taxes has not been determined at
this time.  The FASB issued FASB Staff  Position FAS 109-1,  Application of FASB
Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production  Activities  Provided by the American Jobs Creation Act of 2004, (FSP
109-1) in December 2004. FSP 109-1 requires that tax benefits resulting from the
QPA should be  recognized no earlier than the year in which they are reported in
the  entity's  tax return,  and that there is to be no  revaluation  of recorded
deferred tax assets and liabilities as would be the case had there been a change
in an applicable statutory rate.

         The FER  provision  of the Act  provides  generally  for a one-time  85
percent  dividends  received  deduction for qualifying  repatriations of foreign
earnings to the U.S. Qualified  repatriated funds must be reinvested in the U.S.
in certain  qualifying  activities and  expenditures,  as defined by the Act. In
December  2004,  the FASB issued FASB Staff  Position FAS 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-2 allows additional time
for entities  potentially impacted by the FER provision to determine whether any
foreign earnings will be repatriated  under said  provisions.  At this time, the
Company has not undertaken an evaluation of the application of the FER provision
and any  potential  benefits of effecting  repatriations  under said  provision.
Numerous  factors,  including  previous  actual and deemed  repatriations  under
federal tax law provisions,  are factors  impacting the  availability of the FER
provision and its potential benefit to the Company,  if any. The Company intends
to examine the issue and will provide updates in subsequent periods.

NOTE 2--EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                   December 31, 2004                             December 31, 2003
                     ------------------------------------------    ------------------------------------------
                          Loss          Shares        Per Share        Loss            Shares       Per Share
Years ended:           (Numerator)   (Denominator)     Amount       (Numerator)     (Denominator)    Amount
------------------   ------------    ------------   -----------    ------------    ------------   -----------
<S>                   <C>               <C>          <C>            <C>               <C>          <C>
Basic earnings per
share:
    (Loss) income
    available
    to common
    stockholders ..   $(17,639,473)     17,316,202   $     (1.02)   $ (4,938,710)     10,650,684   $     (0.46)

Effect of dilutive
securities:
    Options .......                           --                                           --
    Warrants ......                           --                                           --

                      ------------    ------------   -----------    ------------    ------------   -----------
(Loss) income
available to common
stockholders ......   $(17,639,473)     17,316,202   $     (1.02)   $ (4,938,710)     10,650,684   $     (0.46)
                      ============    ============   ===========    ============    ============   ===========


<CAPTION>
                                  December 31, 2002
                      ------------------------------------------
                         Income         Shares        Per Share
Years ended:           (Numerator)   (Denominator      Amount
------------------    -------------   ------------   -----------
<S>                   <C>                <C>         <C>
Basic earnings per
share:
    (Loss) income
    available
    to common
    stockholders ..   $  1,311,826       9,232,405   $      0.14

Effect of dilutive
securities:
    Options .......                       244,706
    Warrants ......                        54,190

                       ------------   ------------   -----------
(Loss) income
available to common
stockholders ......   $  1,311,826       9,531,301   $      0.14
                      ============    ============   ===========
</TABLE>


                                       41
<PAGE>


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

         Warrants to purchase  1,578,973 shares of common stock at between $3.50
and $5.06, options to purchase 1,742,000 shares of common stock at between $1.30
and $4.63,  convertible debt of $12,500,000  convertible at $3.65 per share, and
other  convertible  debt  of  $500,000  convertible  at  $4.50  per  share  were
outstanding  for the year ended  December 31, 2004, but were not included in the
computation  of diluted  earnings  per share  because  the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

         Warrants to purchase  1,277,885 shares of common stock at between $0.71
and $5.06, options to purchase 1,978,000 shares of common stock at between $1.30
and $4.63,  759,494 shares of preferred Series C stock  convertible at $4.94 per
share,  and  convertible  debt of $500,000  convertible  at $4.50 per share were
outstanding  for the year ended  December 31, 2003, but were not included in the
computation  of diluted  earnings  per share  because  the effect of exercise or
conversion would have an antidilutive effect on earnings per share. For the year
ended December 31, 2003, 572,818 shares of preferred Series D stock, convertible
into 5,728,180 shares of common stock after shareholder approval on February 11,
2004, were not included in the computation of diluted earnings per share because
the conversion contingency related to the preferred shares was not met.

         Warrants to purchase  523,332  shares of common stock at between  $4.34
and $6.00,  options to purchase  643,000 shares of common stock at between $4.00
and $4.63,  759,494 shares of preferred Series C stock  convertible at $4.94 per
share,  and  convertible  debt of $500,000  convertible  at $4.50 per share were
outstanding  for the year ended  December 31, 2002, but were not included in the
computation  of diluted  earnings  per share  because  the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

NOTE 3--DUE FROM FACTOR

         The  Company  has entered  into a  factoring  agreement  with East Asia
Heller for the purchase of eligible  receivables  from its Hong Kong subsidiary,
Tag-It  Pacific  Limited.  The  Company's  factor  purchases  eligible  accounts
receivable  and assumes the credit risk with respect to those accounts for which
they have given their prior  approval.  If the 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  accounts  receivable.  Interest is charged at
1.5% over the Hong Kong Dollar  prime rate (6.5% at December 31, 2004 and 2003).
As of December 31, 2004 and 2003, the amount factored with recourse and included
in  trade  accounts  receivable  was  approximately   $1,559,000  and  $316,000.
Outstanding  advances as of December 31, 2004 and 2003 amounted to approximately
$615,000 and $411,000 and are included in the line of credit balance.

         The Company  also had a  factoring  agreement  with UPS Capital  Global
Trade  Finance  Corporation,  whereby UPS Capital  purchased  eligible  accounts
receivable  and assumed the credit risk with respect to those  foreign  accounts
for which UPS  Capital  had given its prior  approval.  If UPS  Capital  did not
assume the credit risk for a receivable, the collection risk associated with the
receivable  remained with the Company.  The Company paid a fixed commission rate
and  borrowed  up to  85% of  eligible  accounts  receivable  under  the  credit
facility. Included in due from factor as of December 31, 2003 are trade accounts
receivable factored without recourse of approximately  $65,000.  Included in due
from factor are  outstanding  advances due to UPS Capital  under this  factoring
arrangement  amounting to  approximately  $55,000 at December 31, 2003.  The UPS
Capital  factoring  agreement  was cancelled in November 2004 as a result of the
Company's debt refinancing. There were no outstanding obligations due under this
agreement as of December 31, 2004.

         The Company measures the value of its retained  interest in receivables
factored without recourse based on the fair value of the factored  receivable at
the time the sale is initiated.  Fair value is determined  based on management's
estimate of the expected  amount to be collected  from the factored  receivable.
Adjustments to the fair value of the Company's retained interest in the factored
receivable are made when


                                       42
<PAGE>


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

management  becomes  aware of factors  that could  result in a reduction  of the
amount paid by the customer. Adjustments are charged to operations in the period
in which the facts that give rise to the adjustments  become known.  The Company
has not recorded any  adjustments to reduce the carrying  amount of its retained
interest in factored receivables for the years ended December 31, 2004 and 2003.

NOTE 4--TRADE ACCOUNTS RECEIVABLE

         Trade accounts receivable are net of an allowance for doubtful accounts
and subsequent  returns.  At December 31, 2004 and 2003, the total allowance for
doubtful accounts and subsequent returns was $6,085,999 and $2,043,571.

NOTE 5--TRADE ACCOUNTS RECEIVABLE RELATED PARTY

         Following  negotiations with United Apparel Ventures and its affiliate,
Tarrant  Apparel Group, a former major customer,  the Company  determined that a
significant portion of the obligations due from this customer, primarily related
to accounts  receivable and inventories,  was  uncollectable.  As a result,  the
Company  wrote-off a net of $4.3 million of obligations  due from this customer,
with a  remaining  receivable  balance due from UAV of $4.5  million  (Note 21).
Included in trade accounts  receivable,  related parties at December 31, 2004 is
$4.5  million  due from  this  customer.  UAV  agreed  to pay the  $4.5  million
receivable  balance over a nine-month  period beginning May 2005. Trade accounts
receivable, related party at December 31, 2003 included amounts due from Tarrant
Apparel Group and its affiliate,  United Apparel Ventures, and Azteca Production
International (a former related party) totaling $11,721,465.

NOTE 6--INVENTORIES

         Inventories consist of the following:

                                                     Year Ended December 31,
                                                --------------------------------
                                                    2004                 2003
                                                -----------          -----------

Raw materials ........................          $   127,270          $    11,210
Work-in-process ......................               11,439                 --
Finished goods .......................            9,167,110           17,085,669
                                                -----------          -----------

Total inventories ....................          $ 9,305,819          $17,096,879
                                                ===========          ===========

         Inventories  at  December  31,  2004 and 2003  include  goods  that are
subject to buy back agreements with some of the Company's customers. The buyback
agreements contain  provisions  related to the inventory  purchased on behalf of
the Company's  customers.  In the event that inventories remain with the Company
in excess of six to nine months from the Company's receipt of the goods from its
vendors,  the  customer  is  required  to  purchase,  as provided by the buyback
agreement,  the  inventories  from the Company under normal  invoice and selling
terms.  Included  in  inventories  at  December  31,  2004  are  inventories  of
approximately  $3.2 million that are subject to buyback  arrangements  with Levi
Strauss & Co., Azteca Production International and other customers.


                                       43
<PAGE>


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

NOTE 7--PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:

                                                        Year Ended December 31,
                                                     ---------------------------
                                                        2004             2003
                                                     -----------     -----------

Furniture and fixtures .........................     $   670,988     $   627,826
Machinery and equipment ........................       7,981,012       5,032,427
Computer equipment .............................       3,337,986       2,861,459
Leasehold improvements .........................         292,273         259,789
Films, dies, molds and art designs .............       2,163,627       1,958,883
Land ...........................................          81,000            --
Building .......................................         748,859            --
                                                     -----------     -----------

                                                      15,275,745      10,740,384
Accumulated depreciation and amortization ......       5,895,719       4,595,521
                                                     -----------     -----------

Net property and equipment .....................     $ 9,380,026     $ 6,144,863
                                                     ===========     ===========

NOTE 8--GOODWILL AND OTHER INTANGIBLE ASSETS

         Intangible assets consist of goodwill,  tradename and exclusive license
and intellectual  property  rights.  In accordance with SFAS No. 142, all of the
Company's  intangible  assets that have definite lives are being  amortized on a
straight-line  basis over  their  estimated  useful  lives.  Goodwill  and other
intangible  assets with indefinite  lives are evaluated to determine if the fair
value of the asset has decreased below its carrying value. At December 31, 2004,
the Company  evaluated its goodwill and tradename  assets and determined that no
impairment adjustment was necessary.

         Goodwill and other  intangible  assets as of December 31, 2004 and 2003
are as follows:

                                                      Year Ended December 31,
                                                  -----------------------------
                                                      2004              2003
                                                  -----------       -----------

Goodwill ...................................      $   500,000       $   500,000
Accumulated amortization ...................          (50,000)          (50,000)
                                                  -----------       -----------
Goodwill, net ..............................          450,000           450,000
                                                  -----------       -----------

Tradename ..................................        4,110,750         4,110,750
Accumulated amortization ...................             --                --
                                                  -----------       -----------
Tradename, net .............................        4,110,750         4,110,750
                                                  -----------       -----------

Exclusive license and intellectual
   property rights .........................          577,500           577,500
Accumulated amortization ...................         (317,625)         (202,125)
                                                  -----------       -----------
Exclusive license and intellectual
   property rights, net ....................          259,875           375,375
                                                  -----------       -----------
Intangible assets, net .....................      $ 4,820,625       $ 4,936,125
                                                  ===========       ===========

         There were no  changes in the net  carrying  amounts  of  goodwill  and
tradename for the years ended December 31, 2004 and 2003.


                                       44
<PAGE>


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

         Amortization expense amounted to $115,500, $115,500 and $86,625 for the
years ended December 31, 2004, 2003 and 2002. The weighted average  amortization
period for intangible assets with definite lives is five years.


         The following table shows the estimated  amortization expense for these
assets for each of the succeeding years:

YEARS ENDING DECEMBER 31,                                                AMOUNT
-----------------------------------------------------------             --------

2005 ......................................................             $115,500
2006 ......................................................              115,500
2007 ......................................................               28,875
                                                                        --------

Total amortization expense ................................             $259,875
                                                                        ========

NOTE 9--LINE OF CREDIT

         On May 30, 2001, the Company entered into a loan and security agreement
with UPS Capital  Global  Trade  Finance  Corporation,  providing  for a working
capital  credit  facility  with a maximum  available  amount of $13 million.  On
November 10, 2004, the Company  refinanced its working  capital credit  facility
with UPS Capital Global Trade Finance Corporation with a portion of the proceeds
received  from a private  placement  of $12.5  million  of  Secured  Convertible
Promissory Notes (Note 12). The initial term of the loan and security  agreement
with UPS Capital was three years and the  facility  was secured by all assets of
the  Company.  The interest  rate for the credit  facility was at the prime rate
plus 2%. The credit  facility  required the  compliance  with certain  financial
covenants   including  net  worth,  fixed  charge  coverage  ratio  and  capital
expenditures.  At December 31, 2003,  the Company was in  compliance  with these
financial  covenants.  Availability  under the UPS Capital  credit  facility was
determined  based on a defined formula related to eligible  accounts  receivable
and inventory. There were no open letters of credit at December 31, 2003.


                                       45
<PAGE>


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

NOTE 10--DEMAND NOTES PAYABLE TO RELATED PARTIES

         Demand notes payable to related parties consist of the following:

                                                      Year Ended December 31,
                                                 -------------------------------
                                                     2004               2003
                                                 -------------      ------------

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..........................   $      85,176      $     85,176

Convertible  secured  note   payable  to   the
  Company's  Chairman  bears  interest at 11%,
  payable  quarterly,  is  due on  demand  and
  convertible   into   common   stock  at  the
  election  of the  holder  at a rate of $4.50
  per share, the market value of the Company's
  common  stock on the date of approval by the
  Company's  Board of  Directors.  The note is
  secured   by   substantially   all   of  the
  Company's assets............................         500,000           500,000

Unsecured  notes   payable  to   shareholders,
  directors and officers of the Company accrue
  interest at 7% and 8.5% per annum, principal
  and  interest due on demand and fifteen days
  from demand.................................          79,795           264,795
                                                 -------------      ------------

                                                 $     664,971      $    849,971
                                                 =============      ============

         As of December 31,  2003,  the demand  notes were  subordinated  to UPS
Capital  Global Trade Finance  Corporation  under the  Company's  former line of
credit facility. Interest expense related to the demand notes payable to related
parties  for the years  ended  December  31,  2004,  2003 and 2002  amounted  to
$81,628, $88,102 and $88,102.  Included in accrued expenses at December 31, 2004
and 2003 was $380,233 and $373,530 of accrued  interest  related to these demand
notes.  There was no  interest  paid on the  demand  notes  for the years  ended
December 31, 2004 and 2003.

         On February 28, 2003, the Company repaid an unsecured note payable to a
shareholder in the amount of $500,000.


                                       46
<PAGE>


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

NOTE 11--CAPITAL LEASE OBLIGATIONS

         The Company financed equipment  purchases through various capital lease
obligations  expiring  through August 2009.  These  obligations bear interest at
various rates ranging from 6.3% to 15% per annum. Future minimum annual payments
under these capital lease obligations are as follows:

YEARS ENDING DECEMBER 31,                                              AMOUNT
---------------------------------------------------------           -----------

2005 ....................................................           $ 1,023,793
2006 ....................................................               592,938
2007 ....................................................               371,878
2008 ....................................................               286,447
2009 ....................................................               179,012
                                                                    -----------
Total payments ..........................................             2,454,068

Less amount representing interest .......................              (373,300)
                                                                    -----------
Balance at December 31, 2004 ............................             2,080,768

Less current portion ....................................               859,799
                                                                    -----------
Long-term portion .......................................           $ 1,220,969
                                                                    ===========

         At December  31,  2004,  total  equipment,  included  in  property  and
equipment  (Note 7), under capital  lease  obligations  and related  accumulated
depreciation  amounted to $3,258,589 and $316,826.  At December 31, 2003,  total
equipment,  included in property and equipment,  under capital lease obligations
and related accumulated depreciation amounted to $2,198,390 and $650,878.

NOTE 12--NOTES PAYABLE

         The Company financed  building,  land and equipment  purchases  through
note payable  obligations  expiring  through June 2011.  These  obligations bear
interest at rates of 6.5% and 6.6% per annum.  Future  minimum  annual  payments
under these note payable obligations are as follows:

YEARS ENDING DECEMBER 31,                                               AMOUNT
--------------------------------------------------------              ----------

2005 ...................................................              $  174,975
2006 ...................................................                 186,837
2007 ...................................................                 199,504
2008 ...................................................                 213,030
2009 ...................................................                 210,218
2010 and thereafter ....................................                 638,266
                                                                      ----------
Total payments .........................................               1,622,830

Less current portion ...................................                 174,975
                                                                      ----------
Long-term portion ......................................              $1,447,855
                                                                      ==========


NOTE 13--SECURED CONVERTIBLE PROMISSORY NOTES

         On November 10, 2004, the Company raised $12.5 million from the sale of
Secured Convertible Promissory Notes (the "Notes") to existing shareholders. The
Notes are  convertible  into  common  stock at a price of $3.65 per share,  bear
interest at 6% payable  quarterly,  are due  November 9, 2007 and are secured by
the TALON  trademarks.  The Notes are convertible at the option of the holder at
any time after  closing.  The  Company may repay the Notes at any time after one
year from the closing date with a 15% prepayment


                                       47
<PAGE>


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

penalty.  At  maturity,  the  Company  may repay  the  Notes in cash or  require
conversion if certain conditions are met. In connection with the issuance of the
Notes,  the  Company  issued to the Note  holders,  warrants  to  purchase up to
171,235  shares of common  stock.  The  warrants  have a term of five years,  an
exercise  price of $3.65 per share and  vested 30 days after  closing.  The fair
value of the  warrants was  estimated at  approximately  $96,000  utilizing  the
Black-Scholes  option-pricing  model and recorded as a discount against the face
value of the Notes.  The discount will be amortized over the three-year  term of
the Notes on a straight-line  basis. The Company has registered with the SEC the
resale by the holders of the shares  issuable  upon  conversion of the Notes and
exercise of the warrants.  In connection with this  financing,  the Company paid
the placement  agent $704,000 in cash, and issued the placement  agent a warrant
to purchase  215,754 common shares at an exercise price of $3.65 per share.  The
warrant is  exercisable  beginning May 10, 2005 through  November 10, 2009.  The
fair value of the warrant was estimated at $93,815  utilizing the  Black-Scholes
option-pricing  model  and  recorded  as  deferred  financing  costs  which  are
amortized over the three- year term of the Notes.

         A portion of the proceeds  from the Secured  Convertible  Notes Payable
was used to pay off all existing indebtedness under our credit facility with UPS
Capital  Global Trade Finance  Corporation  (Note 9). The Company has determined
that this transaction did not result in a beneficial conversion feature.

NOTE 14--STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK

PREFERRED STOCK

SERIES D PREFERRED STOCK PRIVATE PLACEMENT TRANSACTION

         On December 18, 2003,  the Company sold an aggregate of 572,818  shares
of non-voting  Series D Convertible  Preferred  Stock,  at a price of $44.00 per
share,  to  institutional  investors and  individual  accredited  investors in a
private placement transaction.  The Company received net proceeds of $23,083,693
after  commissions  and  other  offering  expenses.  The  Series  D  Convertible
Preferred  Stock  was  convertible  after  approval  at  a  special  meeting  of
stockholders  at a  rate  of 10  common  shares  for  each  share  of  Series  D
Convertible Preferred Stock. Except as required by law, the Preferred Shares had
no voting rights. The Preferred Shares accrued dividends,  commencing on June 1,
2004,  at an annual rate of 5% of the initial  stated value of $44.00 per share,
payable quarterly.  In the event of a liquidation,  dissolution or winding-up of
the Company, the Preferred Shares would have been entitled to receive,  prior to
any distribution on the common stock, a distribution equal to the initial stated
value of the Preferred Shares plus all accrued and unpaid dividends.

         At a special  meeting of  stockholders  held on February 11, 2004,  the
stockholders of the Company  approved the issuance of 5,728,180 shares of common
stock upon conversion of the Series D Preferred  Stock. At the conclusion of the
meeting,  all  of the  shares  of  the  Series  D  Convertible  Preferred  Stock
automatically converted into common shares.

         The Company has registered the common shares issued upon  conversion of
the Series D  Convertible  Preferred  Stock  with the  Securities  and  Exchange
Commission  for  resale  by the  investors.  In  conjunction  with  the  private
placement  transaction,  the Company issued a warrant to purchase 572,818 common
shares to the placement  agent.  The warrant is  exercisable  beginning June 18,
2004 through  December 18, 2008.  The fair value of the warrant was estimated at
approximately $165,000 utilizing the Black-Scholes  option-pricing model and was
recorded as a  reduction  of the  proceeds  from the  placement  of the Series D
Convertible  Preferred  Stock.  The Company has determined that this transaction
did not result in a beneficial conversion feature.


                                       48
<PAGE>


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

SERIES  C  PREFERRED  STOCK  PURCHASE  AGREEMENT  AND  CO-MARKETING  AND  SUPPLY
AGREEMENT

         In  accordance  with the Series C Preferred  Stock  Purchase  Agreement
entered into by the Company and Coats North America Consolidated, Inc. ("Coats")
on September 20, 2001, the Company issued 759,494 shares of Series C Convertible
Redeemable  Preferred Stock (the "Shares") to Coats North America  Consolidated,
Inc. in exchange for an equity  investment  from Coats of $3,000,001  cash.  The
Shares were  convertible  at the option of the holder after one year at the rate
of the closing  price  multiplied by 125% of the ten-day  average  closing price
prior to closing.  The Shares were  redeemable at the option of the holder after
four  years.  If the holders  elected to redeem the Shares,  the Company had the
option to redeem for cash at the stated  value of  $3,000,001  or in the form of
the Company's  common stock at 85% of the market price of the  Company's  common
stock on the date of  redemption.  If the market price of the  Company's  common
stock on the date of redemption  was less than $2.75 per share,  the Company was
required to redeem for cash at the stated value of the Shares. The Company could
elect to  redeem  the  Shares  at any time for  cash at the  stated  value.  The
Preferred Stock Purchase Agreement  provided for cumulative  dividends at a rate
of 6% of the stated  value per annum,  payable in cash or the  Company's  common
stock.  The  dividends  were  payable at the earlier of the  declaration  of the
Board, conversion or redemption.  Each Preferred Share had the right to vote for
each of the Company's common shares that the Shares could then be converted into
on the record date. Total legal and other costs associated with this transaction
of $105,000 were netted  against the  $3,000,001  proceeds  received from Coats.
Dividends  accrued but unpaid at December 31, 2003 and 2002 amounted to $428,202
and $234,150.

         In connection with the Series C Preferred Stock Purchase Agreement, the
Company also  entered  into a 10-year  Co-Marketing  and Supply  Agreement  with
Coats. The Co-Marketing and Supply Agreement provides for selected introductions
into Coats' customer base and the Company's trim packages will exclusively offer
thread manufactured by Coats.

         On February  25,  2004,  the  holders of the Series C  Preferred  Stock
converted  all 759,494  shares of Series C  Preferred  Stock,  plus  $458,707 of
accrued dividends, into 700,144 shares of common stock.

SERIES  B  PREFERRED  STOCK  PURCHASE  AGREEMENT,   DISTRIBUTION  AGREEMENT  AND
TRADENAME PURCHASE AGREEMENT

         On April 3, 2000, the Company entered into a ten-year exclusive license
and  distribution  agreement  with Talon,  Inc.  and its parent  company,  Grupo
Industrial Cierres Ideal, S.A. de C.V. ("GICISA").  Under this agreement, Tag-It
Pacific,  Inc. was the exclusive sales,  marketing,  distribution and e-commerce
arm for "Talon"  products for all customers in the United  States,  Mexico-based
maquiladores, Canada and the Pacific Rim and had the exclusive license to market
trim  products  under the "Talon"  brand name.  In exchange for these  exclusive
distribution  rights,  the Company issued 850,000 shares of Series B Convertible
Preferred  stock to  GICISA.  After a  period  of 30  months,  the  shares  were
convertible  into the Company's common stock once the average price per share of
the Company's  common stock reached or exceeded  $8.00 for a 30-day  consecutive
period.  The preferred stock was  automatically  convertible  into shares of the
Company's  common  stock based on a rate of one minus the fraction of $2.50 over
the average per share closing price of the Company's common stock for the 30-day
period preceding the conversion.

         The Series B Convertible  Preferred stock had a liquidation  preference
of $.001 per share, and was entitled to receive  non-cumulative  dividends on an
as converted  basis,  if and when, such dividends were declared on the Company's
common stock and was  redeemable  by the Company  under  certain  conditions  as
outlined in the agreement.

         The estimated fair value of the Series B Convertible Preferred stock on
April 3, 2000 was $1,400,000.  The Company recorded the value of the license and
distribution  rights as a long-term  asset,  which was being  amortized over the
ten-year period of the agreement. The unamortized balance of the long-term asset
at December 21, 2001 was $1,166,667.


                                       49
<PAGE>


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

         On September 30, 2000, the Company  purchased  inventory from GICISA in
exchange for an unsecured  note  payable in the amount of  $2,830,024.  The note
payable was non-interest  bearing and was due April 1, 2002. The Company imputed
interest for the holding period of the note amounting to $272,000.  The note was
subordinate to the  obligations  due under the credit facility with UPS Capital.
The note  payable  balance at December 21, 2001 was  $2,767,182,  net of imputed
interest of $62,842.

         On December  21,  2001,  the  Company  entered  into an Asset  Purchase
Agreement with Talon, Inc. and GICISA. Pursuant to the Asset Purchase Agreement,
the Company  acquired  from Talon,  Inc. and GICISA:  (1) certain  inventory and
equipment,  (2) all patent  rights  held by Talon,  Inc.  and (3) all of Talon's
rights  to its trade  names  and  trademarks  bearing  the  TALON  (R) name.  In
addition,  the Asset Purchase Agreement terminated the exclusive 10-year license
and distribution agreement,  dated as of April 3, 2000 by and among the Company,
GICISA and Talon, Inc.

         Under the Asset Purchase  Agreement,  the Company issued to Talon, Inc.
500,000 shares of common stock, par value $0.001 per share, a promissory note in
the amount of $4,900,000 and $100,000 in cash held in escrow. The Asset Purchase
Agreement  required Talon,  Inc. to place 50,000 shares of the Company's  common
stock  and  $100,000  in  escrow  for a  period  of 12  months  to  satisfy  any
indemnification  claims the Company may have under the Asset Purchase Agreement.
The common  stock was valued at the market value of the  Company's  stock on the
date of closing. The promissory note is unsecured,  bears interest at prime plus
2%  (7.25%  at  December  31,  2004).  In  connection  with the  Asset  Purchase
Agreement,  the Company also entered into a mutual release with Talon,  Inc. and
GICISA  pursuant to which Talon,  Inc. and GICISA  released the Company from its
obligations  under the unsecured note payable of $2,830,024  dated September 30,
2000 and other current  liabilities under the Exclusive License and Distribution
Agreement.  Further,  850,000  shares  of the  Company's  series  B  convertible
preferred  stock  held by GICISA  were  cancelled  at the  closing  of the Asset
Purchase Agreement.

         Future  minimum  payments  under the note payable  amount to $1,400,000
through June 1, 2005.

COMMON STOCK

2003 PRIVATE PLACEMENT

         On May 30,  2003,  the Company  raised  approximately  $6,037,500  in a
private placement transaction with five institutional  investors.  Pursuant to a
securities  purchase agreement with these institutional  investors,  the Company
sold 1,725,000  shares of its common stock at a price per share of $3.50.  After
commissions  and expenses,  the Company  received net proceeds of  approximately
$5.5  million.  The  Company  has  registered  the shares  issued in the private
placement  with  the  Securities  and  Exchange  Commission  for  resale  by the
investors.  In conjunction with the private placement  transaction,  the Company
issued  warrants to purchase  172,500  shares of common  stock to the  placement
agent.  The warrants are exercisable  beginning  August 30, 2003 through May 30,
2008 and have a per share exercise price of $5.06.

STOCK GRANT AGREEMENTS

         Pursuant to Stock Grant Agreements between the Company and Herman Roup,
dated December 1, 2001, January 1, 2002 and July 17, 2002, the Company issued to
Mr. Roup an  aggregate  of 42,000  shares of common  stock during the year ended
December  31,  2003 and  20,500  shares  of  common  stock in 2004 for  services
provided  to the  Company  valued  at  $166,740  and  $74,825  in 2003 and 2004,
respectively.


                                       50
<PAGE>


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

EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT

         On April 2, 2002,  the Company  entered into an  Exclusive  License and
Intellectual  Property Rights Agreement (the  "Agreement") with Pro-Fit Holdings
Limited  ("Pro-Fit").  The Agreement  gives the Company the exclusive  rights to
sell or sublicense  waistbands  manufactured under patented technology developed
by Pro-Fit for garments manufactured anywhere in the world for the United States
market and all United States  brands.  In  accordance  with the  Agreement,  the
Company  issued  150,000  shares of its common stock which were  recorded at the
market  value of the  stock on the date of the  Agreement.  The  shares  contain
restrictions  related to the transfer of the shares and registration rights. The
Agreement  has an  indefinite  term that  extends for the  duration of the trade
secrets  licensed  under the  Agreement.  The Company has recorded an intangible
asset  amounting to $577,500  and is  amortizing  this asset on a  straight-line
basis over its estimated  useful life of five years. The Company is currently in
litigation with this supplier (Note 17).

2002 PRIVATE PLACEMENTS

          In a series of sales on December 28, 2001, January 7, 2002 and January
8, 2002, the Company  entered into Stock and Warrant  Purchase  Agreements  with
three  private  investors,  including  Mark Dyne,  the chairman of the Company's
board of directors.  Pursuant to the Stock and Warrant Purchase Agreements,  the
Company  issued an  aggregate  of 516,665  shares of common stock at a price per
share of $3.00 for  aggregate  proceeds  of  $1,549,995.  The Stock and  Warrant
Purchase  Agreements  also included a commitment  by one of the two  non-related
investors to purchase an  additional  400,000  shares of common stock at a price
per share of $3.00 at a second  closing  (subject of certain  conditions)  on or
prior to March 1, 2003,  as amended,  for  additional  proceeds  of  $1,200,000.
Pursuant  to the Stock and  Warrant  purchase  agreements,  258,332  warrants to
purchase common stock were issued at the first closing of the  transactions  and
200,000  warrants  are to be issued at the  second  closing.  The  warrants  are
exercisable  immediately after closing,  one half of the warrants at an exercise
price of 110% and the  second  half at an  exercise  price of 120% of the market
value of the Company's  common stock on the date of closing.  The exercise price
for the warrants shall be adjusted upward by 25% of the amount, if any, that the
market  price of our common  stock on the  exercise  date  exceeds  the  initial
exercise  price (as  adjusted)  up to a  maximum  exercise  price of $5.25.  The
warrants have a term of four years. The shares contain  restrictions  related to
the sale or transfer of the shares, registration and voting rights.

        In March  2002  and  February  2003,  one of the  non-related  investors
purchased an  additional  100,000 and 300,000  shares,  respectively,  of common
stock at a price per share of $3.00 pursuant to the second closing provisions of
the related  agreement for total proceeds of $1,200,000.  Pursuant to the second
closing  provisions  of the Stock and  Warrant  Purchase  Agreement,  50,000 and
150,000  warrants  were issued to the investor in March 2002 and February  2003,
respectively. There are no remaining commitments due under the stock and warrant
purchase agreements.

NOTE 15--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. 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 2002,  the  Company's  Board of  Directors  amended  its 1997  Stock
Incentive Plan to provide for a total of 2,277,500  shares of common stock to be
reserved for issuance  under the Plan.  During the year


                                       51
<PAGE>


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

ended December 31, 2002, the Company  granted 270,000 options to purchase common
stock  at an  exercise  price of  $3.63  per  share,  the  closing  price of the
Company's common stock on the date of grant.

         In 2003,  the  Company's  Board of Directors  further  amended its 1997
Stock Incentive Plan to provide for a total of 2,577,500  shares of common stock
to be reserved for issuance  under the Plan.  During the year ended December 31,
2004, the Company  granted  510,000 options to purchase common stock at exercise
prices of $3.50 and $3.70 per share,  the closing price of the Company's  common
stock on the date of grants.

         In 2004,  the  Company's  Board of Directors  further  amended its 1997
Stock Incentive Plan to provide for a total of 3,077,500  shares of common stock
to be reserved for issuance under the Plan. There were no options granted during
the year ended December 31, 2004.

         The following table summarizes the activity in the 1997 Plan:

                                                                    Weighted
                                                                     Average
                                                  Number of         Exercise
                                                   Shares             Price
                                                  ---------         --------

Options outstanding - January 1, 2002 ........    1,546,000         $   3.39
     Granted .................................      270,000             3.63
     Exercised ...............................      (50,000)            1.30
     Canceled ................................      (32,500)            3.40
                                                  ---------

Options outstanding - December 31, 2002 ......    1,733,500             3.48
     Granted .................................      510,000             3.59
     Exercised ...............................     (126,500)            2.51
     Canceled ................................     (139,000)            3.84
                                                  ---------

Options outstanding - December 31, 2003 ......    1,978,000             3.55
     Granted .................................         --                --
     Exercised ...............................     (115,375)            3.36
     Canceled ................................     (120,625)            4.00
                                                  ---------

Options outstanding - December 31, 2004 ......    1,742,000         $   3.53
                                                  =========


                                       52
<PAGE>


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

         Additional   information   relating  to  stock   options  and  warrants
outstanding and  exercisable at December 31, 2004,  summarized by exercise price
is as follows:

<TABLE>
<CAPTION>
                                                                                  Exercisable
                                    Outstanding Weighted Average               Weighted Average
                             ----------------------------------------     --------------------------
                                              Life         Exercise                        Exercise
Exercise Price Per Share       Shares        (years)        Price           Shares          Price
------------------------     -----------    ---------    ------------     -----------    -----------
      <S>                       <C>            <C>           <C>           <C>              <C>
      $ 1.30                    235,000        3.5           $ 1.30          235,000        $ 1.30
      $ 4.31                    292,000        5.0           $ 4.31          292,000        $ 4.31
      $ 4.63                     90,000        5.0           $ 4.63           90,000        $ 4.63
      $ 3.78                    126,000        6.5           $ 3.78          126,000        $ 3.78
      $ 4.25                    118,000        5.5           $ 4.25          117,063        $ 4.25
      $ 3.75                    120,000        6.0           $ 3.75          120,000        $ 3.75
      $ 3.63                    166,250        8.0           $ 3.63          166,250        $ 3.63
      $ 3.64                    141,000        7.0           $ 3.64          141,000        $ 3.64
      $ 3.50                    285,000        8.3           $ 3.50          285,000        $ 3.50
      $ 3.70                    168,750        8.3           $ 3.70          148,250        $ 3.70
                             -----------                                  -----------
                              1,742,000                                    1,720,563
                             -----------                                  -----------
      $ 3.65 (warrants)         386,989        9.9           $ 3.65          386,989        $ 3.65
      $ 4.29 (warrants)          30,000        2.5           $ 4.29           30,000        $ 4.29
      $ 3.50 (warrants) (1)     150,000        2.1           $ 3.50          150,000        $ 3.50
      $ 4.34 (warrants) (1)     133,333        1.3           $ 4.34          133,333        $ 4.34
      $ 4.73 (warrants) (1)     133,333        1.3           $ 4.73          133,333        $ 4.73
      $ 4.74 (warrants)         572,818        4.0           $ 4.74          572,818        $ 4.74
      $ 5.06 (warrants)         172,500        3.5           $ 5.06          172,500        $ 5.06
                             -----------                                  -----------
                              1,578,973                                    1,578,973
                             -----------                                  -----------

                              3,320,973        5.6           $ 3.92        3,299,536        $ 3.91
                             ===========                                  ===========
----------
<FN>
(1)      The exercise price of these warrants  includes an upward  adjustment of
         25% of the  amount,  if any,  that the  market  price of the  Company's
         common stock on the exercise date exceeds the stated exercise price, up
         to a maximum of $5.25.
</FN>
</TABLE>


NOTE 16--INCOME TAXES

         The components of the provision  (benefit) for income taxes included in
the consolidated statements of operations are as follows:

                                             Year Ended December 31,
                             ---------------------------------------------------
                                 2004               2003                 2002
                             -----------         -----------         -----------
Current:
     Federal ........        $   405,632         $   360,000         $   222,713
     State ..........             71,582              16,193              39,301
                             -----------         -----------         -----------
                                 477,214             376,193             262,014
Deferred:
     Federal ........          1,530,000          (2,302,711)             14,170
     State ..........            270,000            (406,362)              2,501
                             -----------         -----------         -----------
                               1,800,000          (2,709,073)             16,671
                             -----------         -----------         -----------
                             $ 2,277,214         $(2,332,880)        $   278,685
                             ===========         ===========         ===========


                                       53
<PAGE>


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

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

                                                       Year Ended December 31,
                                                  -----------------------------
                                                   2004        2003        2002
                                                  -----       -----       -----
Current:
    Federal statutory rate .................      (34.0)%     (34.0)%      34.0%
    State taxes net of Federal benefit .....       (6.0)       (6.0)        6.0
    Income earned from foreign subsidiaries         3.1         6.4       (18.2)
    Net operating loss valuation allowance .       51.3         2.3        (3.1)
    Other ..................................        0.5        (1.7)       (3.0)
                                                  -----       -----       -----

                                                   14.9%      (33.0)%      15.7%
                                                  =====       =====       =====

         (Loss) income before income taxes are as follows:

                                           Year Ended December 31,
                        --------------------------------------------------------
                            2004                  2003                  2002
                        ------------          ------------          ------------

Domestic ......         $(17,574,926)         $ (9,303,639)         $    428,473
Foreign .......            2,243,172             2,226,101             1,346,238
                        ------------          ------------          ------------

                        $(15,331,754)         $ (7,077,538)         $  1,774,711
                        ============          ============          ============

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

                                                      Year Ended December 31,
                                                 ------------------------------
                                                     2004               2003
                                                 -----------        -----------
Net deferred tax asset:
     Net operating loss carryforwards ....       $ 8,110,000        $ 3,447,744
     Dies, film and art library ..........          (103,894)           (22,959)
     Depreciation and amortization .......            83,078            199,629
      Intangible assets ..................          (494,193)          (347,240)
      Bad debt reserve ...................         2,198,402            584,481
      Related party interest .............           105,824             72,165
     Other ...............................               783            (14,820)
                                                 -----------        -----------
                                                   9,900,000          3,919,000
     Less:  Valuation Allowance ..........        (8,900,000)        (1,119,000)
                                                 -----------        -----------
                                                 $ 1,000,000        $ 2,800,000
                                                 ===========        ===========

         At December 31, 2004,  Tag-It  Pacific,  Inc. had Federal and state NOL
carryforwards  of  approximately  $21.6 and  $12.9  million,  respectively.  The
Federal NOL is available to offset future  taxable  income through 2024, and the
state NOL expires in 2014.  Section 382 ("Section 382") of the Internal  Revenue
Code of 1986, as amended (the "Code"),  places a limitation on the realizability
of net  operating  losses in future  periods if the ownership of the Company has
changed more than 50% within a three-year  period. As of December 31, 2004, some
of our net operating  losses may be limited by the Section 382 rules. The amount
of such limitations, if any, has not yet been determined.

         Income taxes are accounted  for under the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and tax benefit


                                       54
<PAGE>


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

carry-forwards.  Deferred tax  liabilities  and assets at the end of each period
are determined  using enacted tax rates. The Company records deferred tax assets
arising  from  temporary  timing  differences  between  recorded  net income and
taxable  net  income  when  and if it  believes  that  future  earnings  will be
sufficient  to  realize  the tax  benefit.  For  those  jurisdictions  where the
expiration date of tax benefit  carry-forwards or the projected taxable earnings
indicate that realization is not likely, a valuation allowance is provided.

         The provisions of SFAS No. 109,  "Accounting for Income Taxes," require
the  establishment of a valuation  allowance when, based on currently  available
information and other factors,  it is more likely than not that all or a portion
of a deferred  tax asset will not be  realized.  SFAS No. 109  provides  that an
important factor in determining whether a deferred tax asset will be realized is
whether there has been sufficient income in recent years and whether  sufficient
income is expected in future years in order to utilize the deferred tax asset.

         In 2003, the Company determined, based upon its operating loss, that it
was more likely than not that it would not be in a position to fully realize all
of its deferred tax assets in future years.  Accordingly,  in 2003,  the Company
recorded a valuation allowance of $1.1 million, which reduced the carrying value
of its net deferred tax assets to $2.8 million.  In 2004,  the Company  incurred
additional  net  operating  losses and,  as a result,  increased  its  valuation
allowance to $8.9 million,  which reduced the carrying value of its net deferred
tax asset to $1.0 million. The Company intends to maintain a valuation allowance
for its  deferred  tax assets until  sufficient  evidence  exists to support the
reversal or reduction of the allowance.  At the end of each quarter, the Company
will review  supporting  evidence,  including the performance  against sales and
income  projections,  to  determine if a release of the  valuation  allowance is
warranted. If in future periods it is determined that it is more likely than not
that the  Company  will be able to  recognize  all or a greater  portion  of its
deferred  tax  assets,  the  Company  will at that time  reverse  or reduce  the
valuation allowance.

         The Company  believes  that its  estimate  of  deferred  tax assets and
determination to record a valuation  allowance  against such assets are critical
accounting  estimates  because  they are subject  to,  among  other  things,  an
estimate of future taxable income,  which is susceptible to change and dependent
upon  events that may or may not occur,  and  because the impact of  recording a
valuation  allowance may be material to the assets reported on its balance sheet
and results of operations.

         The Company has not provided  withholding and U.S. federal income taxes
on  undistributed  earnings  of its  foreign  subsidiaries  because  the Company
intends to reinvest those earnings  indefinitely  or any taxes on these earnings
will be offset by the  approximate  credits  for foreign  taxes paid.  It is not
practical to determine the U.S.  federal tax  liability,  if any, which would be
payable if such earnings were not invested indefinitely.

NOTE 17--COMMITMENTS AND CONTINGENCIES

EXCLUSIVE SUPPLY AGREEMENT

         On  July  12,  2002,  the  Company  entered  into an  exclusive  supply
agreement  with Levi  Strauss & Co.  ("Levi").  In  accordance  with the  supply
agreement, the Company is to supply Levi with stretch waistbands,  various other
trim  products,  garment  components,   equipment,  services  and  technological
know-how.  The supply  agreement has an exclusive term of two years and provides
for  minimum  purchases  of stretch  waistbands,  various  other trim  products,
garment  components  and  services  from the  Company  of $10  million  over the
two-year  period.  On July 16, 2004,  the Company  amended its exclusive  supply
agreement with Levi to provide for an additional  two-year term through November
2006. The supply agreement also appoints Talon as an approved zipper supplier to
Levi.


                                       55
<PAGE>


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

FRANCHISE AGREEMENTS

         The Company has entered into six franchise  agreements  for the sale of
TALON zippers. The agreements provides for minimum purchases from the Company of
TALON zipper products to be received over the term of the agreements as follows:

                                    Agreement
        Region                         Date                        Term
----------------------          ------------------              ----------
Central Asia                    October 21, 2004                42 Months
South East Asia                 November 10, 2004               42 Months
Southern Hemisphere             December 21, 2004               66 Months
Asia                            December 28, 2004               42 Months
South East Asia                 January 7, 2005                 42 Months
Middle East and Africa          February 19, 2005               42 Months


LEASES

         The Company is a party to a number of  non-cancelable  operating  lease
agreements  involving  buildings  and  equipment  which expire at various  dates
through  November 2008. The Company  accounts for its leases in accordance  with
SFAS No. 13, whereby step provisions,  escalation  clauses,  tenant  improvement
allowances,  increases  based on an  existing  index or rate,  and  other  lease
concessions  are accounted for in the minimum lease  payments and are charged to
the income statement on a straight line basis over the related lease term.

         The future  minimum  lease  commitments  as of December 31, 2004 are as
follows:

         Years Ending December 31,                             Amount
         -----------------------------------------           ----------

         2005 ....................................           $  724,009
         2006 ....................................              362,058
         2007 ....................................               37,760
         2008 ....................................               22,000
                                                             ----------
            Total minimum payments ...............           $1,145,827
                                                             ==========

         Total rental  expense for the years ended  December 31, 2004,  2003 and
2002 aggregated $696,590, $966,867 and $820,194, respectively.

PROFIT SHARING PLAN

         In October 1999, the Company  established a 401(k)  profit-sharing plan
for the benefit of eligible employees. The Company may make annual contributions
to the plan as determined by the Board of Directors. There were no contributions
made during the years ended December 31, 2004, 2003 and 2002.

CONTINGENCIES

         The Company has filed suit against Pro-Fit Holdings Limited in the U.S.
District Court for the Central District of California -- TAG-IT PACIFIC, INC. V.
PRO-FIT HOLDINGS  LIMITED,  CV 04-2694 LGB (RCx) - based on various  contractual
and tort claims  relating to the Company's  exclusive  license and  intellectual
property agreement,  seeking declaratory relief,  injunctive relief and damages.
The  agreement  with  Pro-Fit  gives the  Company  exclusive  rights in  certain
geographic areas to Pro-Fit's  stretch and rigid waistband  technology.  Pro-Fit
filed an answer  denying the material  allegations  of the complaint and filed a
counterclaim


                                       56
<PAGE>


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

alleging  various  contractual  and tort claims  seeking  injunctive  relief and
damages. The Company filed a reply denying the material allegations of Pro-Fit's
pleading.  Pro-Fit has since  purported to terminate the  exclusive  license and
intellectual  property  agreement  based on the  same  alleged  breaches  of the
agreement that are the subject of the parties' existing  litigation,  as well as
on an  additional  basis  unsupported  by fact.  In February  2005,  the Company
amended its pleadings in the litigation to assert additional breaches by Pro-Fit
of its  obligations  to the  Company  under  the  agreement  and  under  certain
additional  letter  agreements,  and for a declaratory  judgment that  Pro-Fit's
patent No.  5,987,721 is invalid and not infringed by the Company.  Discovery in
this case has commenced.  There have been ongoing  negotiations  with Pro-Fit to
attempt to resolve  these  disputes.  The  Company  intends to proceed  with the
lawsuit if these negotiations are not concluded in a manner satisfactory to it.

         The Company is subject to certain  other 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.

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

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

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

NOTE 18--GEOGRAPHIC INFORMATION

         The Company  specializes  in the  distribution  of a full range of trim
items  to  manufacturers  of  fashion  apparel,  specialty  retailers  and  mass
merchandisers.  There is not enough  difference  between  the types of  products
developed  and  distributed  by  the  Company  to  account  for  these  products
separately or to justify segmented reporting by product type.


                                       57
<PAGE>


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

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

                                                  Year Ended December 31,
                                       -----------------------------------------
                                           2004           2003           2002
                                       -----------    -----------    -----------
Sales:
     United States ................    $ 4,822,935    $ 8,836,546    $ 8,709,833
     Asia .........................     12,785,977      9,637,268      5,436,927
     Mexico .......................     21,452,805     26,472,044     44,087,714
     Dominican Republic ...........      9,678,078     14,219,236      1,838,696
     Central and South America ....      5,504,761      3,620,848           --
     Other ........................        864,925      1,656,873           --
                                       -----------    -----------    -----------
                                       $55,109,481    $64,442,815    $60,073,170
                                       ===========    ===========    ===========
Long-lived Assets:
     United States ................    $12,911,377    $ 8,594,804    $ 6,998,595
     Asia .........................        234,746      1,243,388        117,534
     Mexico .......................        187,721        267,704        308,671
     Dominican Republic ...........        866,807        975,092        580,526
                                       -----------    -----------    -----------
                                       $14,200,651    $11,080,988    $ 8,005,326
                                       ===========    ===========    ===========

NOTE 19--MAJOR CUSTOMERS AND VENDORS

         Two major customers  accounted for approximately 21.9% of the Company's
net sales on a consolidated  basis for the year ended  December 31, 2004.  Three
major customers, two of which were related parties,  accounted for approximately
64.1% of the  Company's  net sales on a  consolidated  basis for the year  ended
December 31, 2003.  Two major  customers,  both related  parties,  accounted for
approximately  69.7% of the Company's net sales on a consolidated  basis for the
year ended December 31, 2002.  Included in trade accounts receivable at December
31, 2004 is  $8,133,471  due from these  customers.  Included in trade  accounts
receivable  and  accounts  receivable  related  parties at December  31, 2003 is
$1,524,211 and  $11,721,465  due from these  customers.  Terms are net 30 and 60
days. The Company holds  inventories of  approximately  $3.2 million at December
31,  2004 that are  subject  to buyback  arrangements  with its  customers.  The
Company's  results of  operations  will depend to an extent upon the  commercial
success of these customers. If these customers fail to purchase trim products at
anticipated  levels,  or the  relationship  terminates,  it may have an  adverse
affect on the Company's  results of  operations.  If the financial  condition of
these customers were to deteriorate, resulting in an impairment of their ability
to purchase inventories or repay receivables, it may also have an adverse affect
on the Company's results of operations.

         Four major vendors accounted for  approximately  70.0% of the Company's
purchases for the year ended December 31, 2004. Two major vendors, one a related
party, accounted for approximately 43.2% of the Company's purchases for the year
ended  December 31, 2003.  One major  vendor,  a related  party,  accounted  for
approximately  30.6% of the Company's  purchases for the year ended December 31,
2002. Included in accounts payable and accrued expenses at December 31, 2004 and
2003 is  $2,547,809  and $607,179 due to these  vendors.  Terms are sight and 60
days.

NOTE 20--RELATED PARTY TRANSACTIONS

         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. KG Investment is owned
by Gerard Guez and Todd Kay, executive officers and significant  shareholders of
Tarrant Apparel Group  ("Tarrant").  KG Investment agreed that it would not seek
to dispose of its shares prior to October 16, 2000, except to certain affiliated
parties,  without the Company's prior written consent. KG Investment also agreed
to certain additional


                                       58
<PAGE>


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

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 for its operations in Mexico.  In connection  therewith,  the Company
purchased  $2.25  million of Tarrant's  existing  inventory in December 1998 for
resale to Tarrant.  The  Company has  terminated  its supply  relationship  with
Tarrant.  In December 2004, the Company wrote-off the remaining  obligations due
from Tarrant, see Notes 5 and 21 to the financial statements.

         Commencing in December 2000, the Company began to provide trim products
to Azteca  Production  International,  Inc.  for its  operations  in Mexico.  In
connection  therewith,  the Company  purchased $4.0 million of Azteca's existing
inventory in December 2000 for resale to Azteca.  As a result of the sale of its
ownership in the Company's common stock,  Azteca Production  International is no
longer considered a related party customer for the year ended December 31, 2004.

         Total  sales to Tarrant and Azteca and their  affiliates  for the years
ended  December 31, 2004,  2003 and 2002 amounted to  approximately  $6,784,000,
$25,883,000  and  $41,893,000.  As of December  31,  2004,  accounts  receivable
included  approximately  $6,596,000  due from Azteca and its  affiliates.  As of
December 31, 2004, accounts receivable,  related party included $4.5 million due
from  Tarrant's  affiliate,  Untied Apparel  Ventures.  As of December 31, 2003,
accounts receivable related parties included approximately  $11,721,000 due from
Tarrant and Azteca and their affiliates. Terms are net 60 days.

         Transportation  fees paid to a company that has common  ownership  with
Azteca  for the  years  ended  December  31,  2004,  2003 and 2002  amounted  to
$200,000, $210,000 and $225,000.

         Included in due from  related  parties at December 31, 2004 and 2003 is
$556,550 and  $762,076,  respectively,  of unsecured  notes and advances from an
officer and stockholder of the Company.  The notes and advances bear interest at
8.5% and prime and are due on demand.

         In August 1999, Mark Dyne,  Chairman of the Board of Directors,  loaned
the Company $160,000.  This indebtedness is evidenced by an unsecured promissory
note dated August 17, 1999. The principal, that bears an interest rate at 7% per
annum, and interest are due and payable on demand. The Company repaid $95,205 of
the principal balance during the year ended December 31, 2001.

         Transportation  fees paid to or on behalf of a company  that has common
ownership  with Mark Dyne,  Chairman of the Board of Directors,  and Colin Dyne,
Chief  Executive  Officer of the Company,  for the years ended December 31, 2004
and 2003 amounted to $211,000 and $20,000.

         Consulting fees paid to Diversified  Investments,  a company owned by a
member of the Board of Directors of the Company, amounted to $150,000,  $137,000
and $150,000 for the years ended December 31, 2004, 2003 and 2002.

         Consulting fees paid for services  provided by a member of the Board of
Directors amounted to $40,700,  $41,300 and $70,800 for the years ended December
31, 2004, 2003 and 2002.  Consulting fees paid for services  provided by another
member of the Board of Directors amounted to $57,375 for the year ended December
31, 2004.

         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


                                       59
<PAGE>


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

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 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 the Company's
outstanding voting stock.

NOTE 21 -WRITE-OFF OF ACCOUNTS  RECEIVABLE AND  INVENTORIES  FROM A FORMER MAJOR
CUSTOMER

         Following  negotiations with United Apparel Ventures and its affiliate,
Tarrant  Apparel Group, a former major customer,  the Company  determined that a
significant portion of the obligations due from this customer, primarily related
to accounts  receivable and inventories,  was  uncollectable.  As a result,  the
Company  wrote-off a net $4.3 million of obligations due from this customer with
a remaining receivable balance due from UAV of $4.5 million. Included in general
and administrative  expenses for the year ended December 31, 2004 are $4,289,436
of expenses  related to the  write-off of  obligations  due from United  Apparel
Ventures and its affiliate,  Tarrant  Apparel Group.  UAV agreed to pay the $4.5
million receivable over a nine-month period beginning May 2005. The Company does
not anticipate any further charges as a result of this write-off.

NOTE 22 -RESTRUCTURING CHARGES

         During the fourth  quarter of 2003,  the Company  implemented a plan to
restructure  certain business  operations.  In accordance with the restructuring
plan,  the  Company  incurred  costs  related  to the  reduction  of its  Mexico
operations, including the relocation of its Florida operations to North Carolina
and the downsizing of its corporate  operations by eliminating certain corporate
expenses   related  to   operations,   sales  and   marketing  and  general  and
administrative  expenses.  The reduction of operations in Mexico was in response
to the following:

         o        An  anticipated  reduction in sales volume from the  Company's
                  larger Mexico customers;

         o        The  Company's  efforts to decrease its reliance on its larger
                  Mexico customers;

         o        The  difficulty  in  obtaining  financing in Mexico due to the
                  location of assets outside the U.S. and customer concentration
                  and other limits imposed by financial institutions.

         Total  restructuring  charges  for the  year  ended  2003  amounted  to
$7,700,047.   Restructuring   charges  include  approximately  $4.3  million  of
inventory write-downs, $1.6 million of additional reserves for doubtful accounts
receivable,  $1 million of costs incurred related to the reduction of operations
in Mexico,  including the  relocation of inventory and  facilities,  $500,000 of
benefits  paid  to  terminated  employees  and  $300,000  of  other  costs.  All
restructuring  costs were  incurred and paid for in the fourth  quarter of 2003,
and we did not anticipate any further charges as a result of this  restructuring
plan.  Therefore,  no liabilities related to restructuring charges were included
in the balance  sheet at December  31, 2003.  During the first  quarter of 2004,
however, we incurred residual restructuring charges of $414,675.

         Restructuring  charges for the year ended  December 31, 2003 related to
the  following  expense  categories  included  in  the  Company's  statement  of
operations are as follows:


                                       60
<PAGE>


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

                                                                        Amount
                                                                      ----------

Cost of goods sold ........................................           $4,931,218
Selling expenses ..........................................              143,442
General and administrative expenses .......................            2,625,387
                                                                      ----------

Total restructuring charges ...............................           $7,700,047
                                                                      ==========

NOTE 23 - QUARTERLY RESULTS (UNAUDITED)

         Quarterly  results for the years ended  December  31, 2004 and 2003 are
reflected below:

<TABLE>
<CAPTION>
                                        FOURTH          THIRD          SECOND         FIRST
----------------------------------------------------------------------------------------------
<S>                                 <C>             <C>            <C>            <C>
2004
----
Revenue .........................   $ 13,021,287    $ 17,004,775   $ 14,923,121   $ 10,160,298
Operating (loss) income (1,2) ...   $(14,761,124)   $    472,901   $    398,563   $   (637,206)
Net (loss) income (2) ...........   $(17,438,261)        211,004        170,319   $   (552,030)
Basic (loss) earnings per share .   $      (0.96)   $       0.01   $       0.01   $      (0.04)
Diluted (loss) earnings per share   $      (0.96)   $       0.01   $       0.01   $      (0.04)

2003
----
Revenue .........................   $ 12,884,512    $ 16,467,896   $ 20,731,573   $ 14,358,834
Operating (loss) income (1) .....   $ (8,363,491)   $    431,311   $  1,278,819   $    771,933
Net (loss) income ...............   $ (5,949,360)   $     95,170   $    748,664   $    360,868
Basic (loss) earnings per share .   $      (0.52)   $       0.00   $       0.07   $       0.03
Diluted (loss) earnings per share   $      (0.52)   $       0.00   $       0.07   $       0.03
----------
<FN>
(1)      The Company recorded  restructuring  charges of $7.7 million during the
         fourth  quarter of 2003 and $414,675  during the first  quarter of 2004
         (Note 22).
(2)      The Company  recorded net charges of $4.3 million from the write-off of
         obligations,  primarily accounts receivable and inventories, due from a
         former major customer (Note 21), an additional  allowance for bad debts
         of $5.0 million,  inventory  write-downs of $2.7 million and a decrease
         in net deferred tax asset  resulting in a charge to the  provision  for
         income taxes of $1.8 million during the fourth quarter of 2004.
</FN>
</TABLE>

         Quarterly and  year-to-date  computations of per share amounts are made
independently.  Therefore, the sum of per share amounts for the quarters may not
agree with the per share amounts for the year.


                                       61
<PAGE>


      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON SCHEDULE II

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

The audits referred to in our report, dated March 31, 2005, included the related
financial  statement schedule as of December 31, 2004, and for each of the three
years in the period ended  December 31, 2004,  included in the annual  report on
Form 10-K of Tag-It  Pacific,  Inc.  This  financial  statement  schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on this  financial  statement  schedule  based  on our  audits.  In our
opinion,  such financial  statement  schedule  presents fairly,  in all material
respects, the information set forth therein.



                                                     /s/ BDO Seidman, LLP
                                                     -------------------------


Los Angeles, California
March 31, 2005


                                       62
<PAGE>


<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<CAPTION>
                COLUMN A                    COLUMN B     COLUMN C     COLUMN D     COLUMN E
                --------                   ----------   ----------   ----------   ----------
                                           Balance at                             Balance at
                                           Beginning                                End of
               DESCRIPTION                  of Year     Additions    Deductions      Year
----------------------------------------   ----------   ----------   ----------   ----------
<S>                                        <C>          <C>          <C>          <C>
2004
----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet ..................................   $2,043,571   $5,500,000   $1,457,572   $6,085,999
Reserve for obsolescence deducted from
inventories on the balance sheet .......         --      2,240,000    1,945,884      294,116
                                           ----------   ----------   ----------   ----------
                                           $2,043,571   $7,740,000   $3,403,456   $6,380,115
                                           ==========   ==========   ==========   ==========
2003
----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet ..................................   $  401,485   $1,822,116   $  180,030   $2,043,571
Reserve for obsolescence deducted from
inventories on the balance sheet .......      155,500    4,665,000    4,820,500         --
                                           ----------   ----------   ----------   ----------
                                           $  556,985   $6,487,116   $5,000,530   $2,043,571
                                           ==========   ==========   ==========   ==========
2002
----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet ..................................   $  568,625   $  743,113   $  910,253   $  401,485
Reserve for obsolescence deducted from
inventories on the balance sheet .......         --        155,500         --        155,500
                                           ----------   ----------   ----------   ----------
                                           $  568,625   $  898,613   $  910,253   $  556,985
                                           ==========   ==========   ==========   ==========
</TABLE>


                                       63
<PAGE>


ITEM 9.       CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.

         None.

ITEM 9A.      CONTROLS AND PROCEDURES.

EVALUATION OF CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures,  which we have designed
to ensure that material  information related to Tag-it Pacific,  Inc., including
our consolidated  subsidiaries,  is disclosed in our public filings on a regular
basis. In response to recent legislation and proposed  regulations,  we reviewed
our internal control structure and our disclosure controls and procedures.

         We have identified a material  weakness in the controls  related to the
identification of approximately $1.0 million of our inventory located in a third
party warehouse.  We have taken steps and will continue to take additional steps
to remedy this  material  weakness  and believe the risk as to the  existence of
this inventory at December 31, 2004 has been sufficiently mitigated.

         We recorded  fourth  quarter  post-closing  adjustments  related to the
allowance  for  doubtful  accounts  and  deferred  tax  asset  in our  financial
statements  for the year ended  December 31, 2004 which is considered a material
weakness surrounding the controls related to our financial reporting.

         Members of the Company's  management,  including  the  Company's  Chief
Executive Officer, Colin Dyne, and Chief Financial Officer, Ronda Ferguson, have
evaluated  the  effectiveness  of the  design  and  operation  of the  Company's
disclosure  controls and  procedures  as of December  31,  2004,  the end of the
period covered by this report.  Based upon that evaluation,  with the exceptions
discussed  above,  Mr.  Dyne  and Ms.  Ferguson  concluded  that  the  Company's
disclosure controls and procedures are effective.

CHANGES IN CONTROLS AND PROCEDURES

         There were no significant  changes in the Company's  internal  controls
over  financial  reporting or in other factors that could  significantly  affect
these  internal  controls over  financial  reporting  after the date of our most
recent evaluation.

ITEM 9B.      OTHER INFORMATION.

         NONE.


                                       64
<PAGE>


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required by this Item 10 will appear in the proxy statement
for the 2005  Annual  Meeting of  Stockholders,  and is  incorporated  herein by
reference.

ITEM 11.      EXECUTIVE COMPENSATION.

         Information  regarding executive  compensation will appear in the proxy
statement  for the 2005  Annual  Meeting of  Stockholders,  and is  incorporated
herein by reference.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
              RELATED STOCKHOLDER MATTERS.

         Information  regarding  security ownership of certain beneficial owners
and  management  and  related  stockholder  matters  will  appear  in the  proxy
statement  for the 2005  Annual  Meeting of  Stockholders,  and is  incorporated
herein by reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information  regarding certain  relationships and related  transactions
will appear in the proxy statement for the 2005 Annual Meeting of  Stockholders,
and is incorporated by reference.

ITEM 14.      PRINCIPAL ACCOUNTING FEES AND SERVICES.

         Information  regarding  principal  accounting  fees and  services  will
appear in the proxy statement for the 2005 Annual Meeting of  Stockholders,  and
is incorporated by reference.

                                     PART IV

ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

         (a)      FINANCIAL  STATEMENTS  AND SCHEDULES - See Item 8 of this Form
                  10-K Annual Report.

         (b)      Exhibits:

                  See Exhibit Index attached to this Form 10-K Annual Report.


                                       65
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         TAG-IT PACIFIC, INC.

                                         /S/ RONDA FERGUSON
                                         --------------------------------
                                         By:      Ronda Ferguson
                                         Its:     Chief Financial Officer


                                POWER OF ATTORNEY

         Each person whose  signature  appears  below  constitutes  and appoints
Colin  Dyne  and  Ronda  Ferguson,  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-K 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

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE                         TITLE                           DATE
---------                         -----                           ----

     /S/ MARK DYNE                Chairman of the Board           March 31, 2005
---------------------------       of Directors
Mark Dyne

     /S/ COLIN DYNE               Chief Executive Officer         March 31, 2005
---------------------------       and Director
Colin Dyne                        (Principal Executive Officer)

     /S/ RONDA FERGUSON           Chief Financial Officer         March 31, 2005
---------------------------       (Principal Accounting
Ronda Ferguson                    and Financial Officer)

     /S/ KEVIN BERMEISTER         Director                        March 31, 2005
---------------------------
Kevin Bermeister

     /S/MICHAEL KATZ              Director                        March 31, 2005
---------------------------
Michael Katz

     /S/JONATHAN BURSTEIN         Director,Vice President of      March 31, 2005
---------------------------       Operations and Secretary
Jonathan Burstein

     /S/ BRENT COHEN              Director                        March 31, 2005
---------------------------
Brent Cohen


                                       66
<PAGE>


                                  EXHIBIT INDEX

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

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

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

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

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          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.

10.3          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.

10.4          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.

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

10.6          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.

10.7          Registrant's   1997  Stock   Incentive   Plan,  as  amended.   (2)
              Incorporated  by  reference  to Exhibit 10.1 to Form 10-Q filed on
              August 16, 2004.


                                       67
<PAGE>


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

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

10.9          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.

10.10         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.

10.11         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.

10.12         Contract  for  Manufacturing  Services  between  USA  and  Mexico,
              between   Tag-It,   Inc.  and  Tagit  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.

10.13         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.

10.14         Promissory Note, 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.

10.15         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.

10.16         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.

10.17         Guaranty, dated as of October 4, 2000, by A.G.S. Stationery,  Inc.
              in favor or Mark I. Dyne.  Incorporated  by  reference  to Exhibit
              10.40 to Form 10-K filed on April 4, 2001.

10.18         Guaranty, dated as of October 4, 2000, by Tag-It, Inc. in favor of
              Mark I. Dyne.  Incorporated  by reference to Exhibit 10.41 to Form
              10-K filed on April 4, 2001.

10.19         Guaranty,  dated as of October 4,  2000,  by Talon  International,
              Inc.  in favor  of Mark I.  Dyne.  Incorporated  by  reference  to
              Exhibit 10.42 to Form 10-K filed on April 4, 2001.

10.20         Intercreditor Agreement, dated as of October 4, 2000, by and among
              Mark I. Dyne, Sanwa Bank California, the Registrant, Tag-It, Inc.,
              Talon International, Inc. and A.G.S. Stationery, Inc. Incorporated
              by reference to Exhibit 10.43 to Form 10-K filed on April 4, 2001.

10.21         Security  Agreement,  dated as of October 4, 2000,  between A.G.S.
              Stationery,  Inc. and Mark I. Dyne.  Incorporated  by reference to
              Exhibit 10.44 to Form 10-K filed on April 4, 2001. Incorporated by
              reference to Exhibit 10.44 to Form 10-K filed on April 4, 2001.

10.22         Security  Agreement,  dated as of October 4, 2000, between Tag-It,
              Inc. and Mark I. Dyne.  Incorporated by reference to Exhibit 10.45
              to Form 10-K filed on April 4, 2001.


                                       68
<PAGE>


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

10.23         Security  Agreement,  dated as of October 4, 2000,  between  Talon
              International Inc. and Mark I. Dyne.  Incorporated by reference to
              Exhibit 10.46 to Form 10-K filed on April 4, 2001.

10.24         Security  Agreement,  dated as of October 4, 2000,  between Tag-It
              Pacific,  Inc.  and Mark I. Dyne.  Incorporated  by  reference  to
              Exhibit 10.47 to Form 10-K filed on April 4, 2001.

10.25         Convertible Secured Subordinated Promissory Note, dated October 4,
              2000, provided by Mark I. Dyne to the Registrant.  Incorporated by
              reference to Exhibit 10.48 to Form 10-K filed on April 4, 2001.

10.26         Trim Handling Agreement,  dated as of December 29, 1999, among the
              Registrant,  Tarrant  Apparel  Group,  Inc. & Tagmex and Tag-It de
              Mexico S.A.  Incorporated  by reference  to Exhibit  10.51 to Form
              10-K filed on April 4, 2001.

10.27         Supply Agreement entered into on December 22, 2000, by and between
              the  Company,   Hubert  Guez,  Paul  Guez  and  Azteca  Production
              International,  Inc.,  AZT  International  SA D RL,  and  Commerce
              Investment  Group,  LLC. (1)  Incorporated by reference to Exhibit
              10.53 to Form 10-K filed on April 4, 2001.

10.28         Investor  Rights  Agreement  entered into on December 22, 2000, by
              and  between  the  Company and  Commerce  Investment  Group,  LLC.
              Incorporated  by reference to Exhibit  10.54 to Form 10-K filed on
              April 4, 2001.

10.29         Voting Agreement entered into on December 22, 2000, by and between
              the  Company,   Hubert  Guez,  Paul  Guez  and  Azteca  Production
              International,   Inc.,  AZT   International   SA  D  RL,  Commerce
              Investment Group,  LLC, and Colin Dyne.  Incorporated by reference
              to Exhibit 10.55 to Form 10-K filed on April 4, 2001.

10.30         Right of First Refusal and Sale Agreement entered into on December
              22, 2000, by and between the Company,  Hubert Guez,  Paul Guez and
              Azteca Production International,  Inc., AZT International SA D RL,
              Commerce  Investment Group,  LLC, and Colin Dyne.  Incorporated by
              reference to Exhibit 10.56 to Form 10-K filed on April 4, 2001.

10.31         Co-Marketing and Supply Agreement, dated as of September 20, 2001,
              between Tag-It Pacific,  Inc. and Coats America, Inc. Incorporated
              by  reference  to Exhibit  99.3 to Form 8-K filed on  October  15,
              2001.

10.32         Purchase Money Security Agreement, dated as of September 20, 2001,
              between Tag-It Pacific,  Inc. and Coats America, Inc. Incorporated
              by  reference  to Exhibit  99.4 to Form 8-K filed on  October  15,
              2001.

10.33         Promissory Note, dated as of December 21, 2001, by Tag-It Pacific,
              Inc. for the benefit of Talon,  Inc.  Incorporated by reference to
              Exhibit 99.2 to Form 8-K filed on January 7, 2002.

10.34         Form of Warrant to Purchase Common Stock Agreements dated December
              28,  2001.  Incorporated  by reference to Exhibit 99.2 to Form 8-K
              filed on January 23, 2002.

10.35         Form  of   Stockholders   Agreements   dated  December  28,  2001.
              Incorporated  by  reference  to Exhibit  99.3 to Form 8-K filed on
              January 23, 2002.


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<PAGE>


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

10.36         Form of  Investor  Rights  Agreements  dated  December  28,  2001.
              Incorporated  by  reference  to Exhibit  99.4 to Form 8-K filed on
              January 23, 2002.

10.37         Exclusive  Supply  Agreement  dated July 12,  2002,  among  Tag-It
              Pacific, Inc. and Levi Strauss & Co. (1) Incorporated by reference
              to Exhibit 10.68 to Form 10-Q filed on November 15, 2002.

10.37.1       Amendment  to  Exclusive  Supply  Agreement,  dated July 12, 2002,
              between  Tag-It   Pacific,   Inc.  and  Levi  Strauss  &  Co.  (1)
              Incorporated  by reference to Exhibit  10.70 to Form 10-K filed on
              March 28, 2003.

10.37.2       Amendment,  dated June 29, 2004,  to Exclusive  Supply  Agreement,
              dated July 12, 2002, between Tag-It Pacific, Inc. and Levi Strauss
              & Co.

10.38         Intellectual  Property  Rights  Agreement,  dated  April 2,  2002,
              between the Company and Pro-Fit Holdings, Ltd. (1) Incorporated by
              reference  to  Exhibit  10.69 to Form  10-K/A  filed on October 1,
              2003.

10.39         Securities Purchase Agreement dated May 23, 2003, by and among the
              Company  and the  Purchasers  identified  on the  signature  pages
              thereto.  Incorporated  by  reference  to Exhibit 99.2 to Form 8-K
              filed on June 4, 2003.

10.40         Registration Rights Agreement dated May 23, 2003, by and among the
              Company  and the  Purchasers  identified  on the  signature  pages
              thereto.  Incorporated  by  reference  to Exhibit 99.3 to Form 8-K
              filed on June 4, 2003.

10.41         Common  Stock  Purchase  Warrant  dated May 30,  2003  between the
              Company and Roth Capital  Partners LLC.  Incorporated by reference
              to Exhibit 10.15 to Form S-3 Registration  Statement filed on June
              25, 2003.

10.42         Form  of  Subscription  Agreement  between  the  Company  and  the
              Purchaser  to be  identified  therein  dated  December  18,  2003.
              Incorporated  by  reference  to Exhibit  99.1 to Form 8-K filed on
              December 22, 2003.

10.43         Form of  Registration  Rights  Agreement  dated  December 18, 2003
              among  the  Company  and  the   Purchasers   identified   therein.
              Incorporated  by  reference  to Exhibit  99.2 to Form 8-K filed on
              December 22, 2003.

10.44         Placement  Agent  Agreement  dated  December  18, 2003 between the
              Company and Sanders Morris Harris Inc.  Incorporated  by reference
              to Exhibit 99.3 to Form 8-K filed on December 22, 2003.

10.45         Common Stock Purchase  Warrant dated December 18, 2003 between the
              Company and Sanders Morris Harris Inc.  Incorporated  by reference
              to Exhibit 99.4 to Form 8-K filed on December 22, 2003.

10.46         Form of  Subscription  Agreement,  dated as of  November  9, 2004,
              between  the  Company  and  the  Purchaser   identified   therein.
              Incorporated  by  reference  to Exhibit  10.1 to Form S-3 filed on
              December 9, 2004.


                                       70
<PAGE>


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

10.47         Form of Secured Convertible  Promissory Note, dated as of November
              9, 2004.  Incorporated  by  reference  to Exhibit 10.2 to Form S-3
              filed on December 9, 2004.

10.48         Form of Common  Stock  Purchase  Warrant,  dated as of November 9,
              2004.  Incorporated by reference to Exhibit 10.3 to Form S-3 filed
              on December 9, 2004.

10.49         Trademark Security Agreement,  dated as of November 9, 2004, among
              the Registrant and the Secured Parties identified on the signature
              page  thereto.  Incorporated  by reference to Exhibit 10.4 to Form
              S-3 filed on December 9, 2004.

10.50         Registration Rights Agreement, dated as of November 9, 2004, among
              the  Registrant,  Sanders  Morris  Harris Inc. and the  Purchasers
              identified  therein.  Incorporated by reference to Exhibit 10.5 to
              Form S-3 filed on December 9, 2004.

10.51         Placement Agent Agreement,  dated as of November 9, 2004,  between
              the  Registrant  and Sanders  Morris Harris Inc.  Incorporated  by
              reference to Exhibit 10.6 to Form S-3 filed on December 9, 2004.

10.52         Common Stock Purchase Warrant dated as of November 9, 2004, issued
              by  the   Registrant  in  favor  of  Sanders  Morris  Harris  Inc.
              Incorporated  by  reference  to Exhibit  10.7 to Form S-3 filed on
              December 9, 2004.

14.1          Code of Ethics.  Incorporated by reference to Exhibit 14.1 to Form
              10-K filed on March 30, 2004.

21.1          Subsidiaries.  Incorporated  by  reference to Exhibit 14.1 to Form
              10-K filed on March 30, 2004.

23.1          Consent of BDO Seidman, LLP.

24.1          Power of Attorney (included on signature page).

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

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

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

(1)  Certain  portions of this agreement have been omitted and filed  separately
     with the  Securities and Exchange  Commission  pursuant to a request for an
     order granting  confidential  treatment pursuant to Rule 406 of the General
     Rules and Regulations under the Securities Act of 1933, as amended.
(2)  Indicates a management contract or compensatory plan.


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