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

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

                   For the fiscal year ended December 31, 2003

[_]      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,  2003  the  aggregate  market  value  of the  voting  and
non-voting   common  stock  held  by   non-affiliates   of  the  registrant  was
$46,426,706. At March 23, 2004 the issuer had 18,035,316 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 2004
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.......       7

PART II

Item 5.       Market for Registrant's Common Equity, Related
                Stockholder Matters and Issuer Purchases of Equity......       7

Item 6.       Selected Financial Data...................................      11

Item 7.       Management's Discussion and Analysis of Financial
                Condition and Results of Operations.....................      12

Item 7A.      Quantitative and Qualitative Disclosures about
                Market Risk ............................................      29

Item 8.       Financial Statements and Supplementary Data:

              Report of Independent Certified Public Accountants........      32

              Consolidated Balance Sheets...............................      33

              Consolidated Statements of Operations.....................      34

              Consolidated Statements of Stockholders' Equity and
                Convertible Redeemable Preferred Stock..................      35

              Consolidated Statements of Cash Flows.....................      36

              Notes to Consolidated Financial Statements................      37

              Independent Certified Public Accountants' Report
                on Schedule II..........................................      63

              Schedule II - Valuation and Qualifying Accounts
                and Reserves............................................      64

Item 9.       Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure.....................      65

Item 9A.      Controls and Procedures...................................      65

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 Accountant Fees and Services....................      66

PART IV

Item 15.      Exhibits, Financial Statement Schedules and
                Reports on Form 8-K.....................................      66


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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,  Tarrant  Apparel  Group,  Kentucky  Apparel  and  Azteca
Production International. We also serve as a specified supplier of trim items to
owners of specific brands, brand licensees and retailers,  including Abercrombie
& Fitch, Levi Strauss & Co., Express, The Limited,  Lerner and Miller's Outpost,
among others. In addition,  we distribute  zippers under our TALON brand name to
manufacturers  for  apparel  brands and  retailers  such as Levi  Strauss & Co.,
Wal-Mart, JC Penny and Tropical Sportswear,  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 market these products to the same customers  targeted by
our MANAGED TRIM SOLUTION and TALON zipper divisions.

         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.


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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 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  distribute  zippers  under our TALON  trademark  and trade names to
apparel brands and manufacturers.  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, negotiated with new distributors and initiated a new
sales and  marketing  effort for this brand.  TALON is promoted  both within our
trim packages,  as well as a stand-alone  product line. TALON enjoys  tremendous
brand recognition and brand equity in the apparel industry worldwide.

         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.

         We have assembled a 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.  We plan to  continue  to expand  operations  in Hong  Kong,  Central
America and the Caribbean to take  advantage of the large apparel  manufacturing
markets in these regions.  We believe our marketing  strategy and  international
distribution  operations  will  enable us to take  advantage  of and address the
increasingly  complicated  requirements  of the large and  expanding  demand for
complete trim packages.


                                       2
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         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  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. Pursuant to the supply and co-marketing agreement, we have agreed
to exclusively promote Coats brand thread in our trim packages.

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 upcoming launch of TRIMNET, our Oracle based e-sourcing system will
allow  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 will
allow 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. In addition,
we are negotiating 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.


                                       3
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         TEKFIT.  We have  entered into an  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 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 actively  working with other large  apparel
manufacturers  to develop and release  the TEKFIT  technology  in other types of
garments.

DESIGN AND DEVELOPMENT

         We have  assembled an in-house  creative team to produce  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, including our design team related to our TEKFIT division.

CUSTOMERS

         We have more  than 300  customers.  Our  customers  include  well-known
apparel  manufacturers,  such as Levi Strauss & Co.,  Abercrombie  & Fitch,  The
Limited  Group,  Tarrant  Apparel Group,  Kentucky  Apparel,  Azteca  Production
International,  VF  Corporation  and  Tropical  Sportswear,  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. has
agreed to purchase a minimum of $10 million of stretch waistbands, various other
trim  products,  garment  components  and services over the two-year term of the
agreement.  Levi  Strauss  & Co.  also  appointed  TALON as an  approved  zipper
supplier.

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.


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         A significant  portion of our sales is to customers based in the United
States.  For the year ended  December  31,  2003,  sales to United  States based
customers  for  shipments  to  production  facilities  in  Mexico,  Asia and the
Dominican  Republic  accounted  for  44.7%,  19.1% and 23.9%,  of our  revenues,
respectively.  We also market our  products to customers  in Mexico,  Asia,  the
Caribbean basin and Central America.

SOURCING AND ASSEMBLY

         We have developed  expertise in identifying the best materials,  prices
and vendors for particular products and raw materials. This expertise enables us
to produce a broad range of packaging 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 19.3% of our purchases in 2003.

         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.

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.

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.


                                       5
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INVENTORIES

         In order to meet the rapid  delivery  requirements  of our MANAGED TRIM
SOLUTION  customers,  we are required to carry a substantial amount of inventory
on their behalf.  Included in inventories  at December 31, 2003 are  inventories
that are  subject to buyback  arrangements  with 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 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 15 of the
Notes  to the  Consolidated  Financial  Statements  included  in  Item 8 of this
Report, which is incorporated herein by reference.

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 America.

         A summary of our domestic and  international net revenue and long-lived
assets  is set  forth  in Note 15 of the  Notes  to the  Consolidated  Financial
Statements in Item 8 of this Report,  which is incorporated herein by reference.
Approximately  88% of 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, 2003.

         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 15
of the  Notes to the  Consolidated  Financial  Statements  in Item 8,  which are
incorporated herein by reference.


                                       6
<PAGE>


EMPLOYEES

         As of December 31, 2003, we had approximately 188 full-time  employees,
with  approximately 45 employees in Los Angeles,  9 employees in North Carolina,
10 employees in various other cities,  30 employees in Hong Kong, 8 employees in
the Dominican Republic and 86 employees in Tlaxcala, Mexico. 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,  168 square feet of office space in Columbus,  Ohio, 54,000
square feet of warehouse space in Gastonia,  North Carolina,  17,000 square feet
of warehouse space in Dallas,  North  Carolina,  5,900 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.

ITEM 3.  LEGAL PROCEEDINGS

         We currently have pending a number of claims, suits and complaints that
arise  in  the  ordinary  course  of our  business.  We  believe  that  we  have
meritorious  defenses to these claims and that the claims are either  covered by
insurance or, after taking into account the insurance in place, would not have a
material effect on our consolidated  financial condition if adversely determined
against us.

ITEM 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 2003.

                                     PART II

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

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, 2002
              First Quarter......................         $  3.99        $  3.50
              Second Quarter.....................            4.24           3.45
              Third Quarter......................            4.20           3.60
              Fourth Quarter.....................            3.99           3.40

         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


                                       7
<PAGE>


         On March 19,  2004,  the  closing  sales  price of our Common  Stock as
reported on the American  Stock  Exchange  was $5.84 per share.  As of March 19,
2004, there were 69 record holders of our Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

CONVERTIBLE PREFERRED STOCK FINANCING

         In December 2003, we sold shares of our Series D Convertible  Preferred
Stock to the following investors:  Apogee Fund, L.P.; Atlas Capital (Q.P.) L.P.;
Atlas Capital  Management Master Fund, Ltd.;  George L. Ball;  Bellfield Capital
Partners,  L.P.; Bonanza Master Fund, Ltd; Rodger A. Clemens, Special Retirement
Account;  Richard Perlman;  B.L. Corley,  Jr.; Flyline  Holdings,  Ltd.; John H.
Gray; Incline Capital, L.P.; Tom and Nancy Juda Living Trust; Richard D. Kinder;
Robert Larry Kinney;  Luke J. Drury Non-Exempt  Trust;  Mark J. Drury Non-Exempt
Trust;  Matthew J. Drury Non-Exempt Trust;  Michaelyn J. Drury Non-Exempt Trust;
Tanya Drury;  John S. Lemak;  Ben T.  Morris;  John I. Mundy;  Pequot  Navigator
Offshore Fund Inc.; Pequot Navigator Onshore Fund LP; Pequot Scout Fund, LP; The
Pinnacle Fund, L.P.;  Precept Capital Master Fund,  G.P.; James Price;  Portside
Growth and Opportunity  Fund; RAM Trading,  Ltd.; David May; Nolan Ryan; Brad D.
Sanders;  Bret D. Sanders;  Christine M. Sanders;  Don A. Sanders;  Katherine U.
Sanders;  Laura K. Sanders;  Sanders Opportunity Fund, L.P.; Sanders Opportunity
Fund (Institutional),  L.P.; Sandor Capital Master Fund, L.P.; Grant E. Sims and
Patricia Sims;  Southwell Partners,  L.P.; Susan Sanders Todd; Paul Tate & Laura
M. Tate TIC; Walker Smith Capital Master Fund; Walker Smith  International Fund,
Ltd.; Don Weir and Julie Ellen Weir;  Eric Glen Weir;  Lisa Dawn Weir;  Westpark
Capital,  L.P.; WS  Opportunity  Fund  International,  Ltd.;  and WS Opportunity
Master Fund.  Pursuant to the terms of the subscription  agreements,  we sold to
the  investors  an  aggregate  of  572,818  shares of our  Series D  Convertible
Preferred  Stock at a price  per share of $44.00  for  gross  proceeds  to us of
approximately $25,200,000 before commissions and expenses. Except as required by
law, the preferred  shares had no voting rights.  Commencing  June 1, 2004, each
preferred  share  would have begun to accrue a  quarterly  dividend of $0.55 (as
adjusted for stock dividends,  combinations,  splits or similar events), payable
March 31,  June 30,  September  30, and  December 31 of each year with the first
payment due September 30, 2004. 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
$44.00 per  preferred  share (as  adjusted  for stock  dividends,  combinations,
splits or similar events) plus all accrued and unpaid dividends.

         At a  special  meeting  of  stockholders  on  February  11,  2004,  our
stockholders  approved the issuance of 5,728,180 shares of our common stock upon
conversion of the Series D Convertible Preferred Stock held by the investors. At
the conclusion of this meeting,  each preferred  share  automatically  converted
into 10 shares of our common  stock,  for an aggregate  of  5,728,180  shares of
common stock.

         Sanders Morris Harris Inc. acted as placement  agent in connection with
the December 2003 private placement financing transaction. For their services as
placement  agent,  we paid Sanders  Morris  Harris Inc. a fee equal to 7.5%,  or
approximately $1,890,000, of our gross proceeds from the financing. We also paid
for the  out-of-pocket  expenses  incurred  by Sanders  Morris  Harris  Inc.  of
$45,000.  In  addition,  we issued to Sanders  Morris  Harris  Inc. a warrant to
purchase  572,818  shares of our common stock at an exercise  price of $4.74 per
share. The warrant has a term of 5 years,  and vests and becomes  exercisable in
full on June 18, 2004.

         Pursuant to the  purchase  agreements,  each of the  recipients  of the
securities represented,  and we reasonably believed, that such recipient (i) was
acquiring the securities  for his or its own account with the present  intention
of holding such securities for investment  purposes only and not with a view to,
or for sale in connection with, any distribution of such securities  (other than
a distribution  in compliance with all applicable  federal and state  securities
laws); (ii) was an experienced and sophisticated investor and has such knowledge
and  experience  in  financial  and  business  matters  that  it is  capable  of
evaluating the relative merits


                                       8
<PAGE>


and the risks of an investment in the  securities  and of protecting  his or its
own interests in connection with the transaction;  (iii) was willing to bear and
was capable of bearing the economic risk of an investment in the securities; and
(iv) was an  "accredited  investor" as that term is defined under Rule 501(a)(8)
of Regulation D promulgated  by the  Securities  Exchange  Commission  under the
Securities Act of 1933.  Each of the  certificates  representing  the securities
contained a customary legend restricting resale of the securities.  The issuance
and sale of these  securities  was exempt from the  registration  and prospectus
delivery  requirements of the Securities Act of 1933 pursuant to Section 4(2) of
the Securities  Act of 1933 (in  accordance  with Rule 506 of Regulation D) as a
transaction not involving any public offering.

STOCK GRANT AGREEMENTS

         Pursuant to Stock Grant  Agreements  between us and Herman Roup,  dated
December 1, 2001,  January 1, 2002 and July 17,  2002,  we 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.  Pursuant to the agreements,  Mr. Roup  represented,  and we reasonably
believed,  that he (i) was acquiring the  securities  for his or its own account
with the present  intention of holding such  securities for investment  purposes
only and not with a view to, or for sale in connection with, any distribution of
such  securities  (other than a distribution  in compliance  with all applicable
federal and state securities  laws);  (ii) was an experienced and  sophisticated
investor and has such knowledge and experience in financial and business matters
that it is  capable  of  evaluating  the  relative  merits  and the  risks of an
investment  in the  securities  and of  protecting  his or its own  interests in
connection  with the  transaction;  (iii) was willing to bear and was capable of
bearing the economic risk of an investment  in the  securities;  and (iv) was an
"accredited investor" as that term is defined under Rule 501(a)(8) of Regulation
D promulgated by the Securities  Exchange Commission under the Securities Act of
1933. Each of the certificates representing the securities contained a customary
legend  restricting  resale of the  securities.  The  issuance and sale of these
securities was exempt from the registration and prospectus delivery requirements
of the  Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of
1933  (in  accordance  with  Rule  506 of  Regulation  D) as a  transaction  not
involving any public offering.

DIVIDENDS

         We have never paid  dividends on our Common Stock.  We intend to retain
any future earnings for use in our business.  We are restricted from making cash
dividend  payments on our common stock under our senior credit facility with UPS
Capital Global Trade Finance Corporation.

EQUITY COMPENSATION PLAN INFORMATION

         The following  table sets forth certain  information as of December 31,
2003 regarding  equity  compensation  plans (including  individual  compensation
arrangements) under which our equity securities are authorized for issuance:

<TABLE>
<CAPTION>
                                                                                     NUMBER OF SECURITIES
                                   NUMBER OF SECURITIES TO     WEIGHTED-AVERAGE      REMAINING AVAILABLE
                                   BE ISSUED UPON EXERCISE    EXERCISE PRICE OF      FOR FUTURE ISSUANCE
                                   OF OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS,       UNDER EQUITY
                                     WARRANTS AND RIGHTS     WARRANTS AND RIGHTS     COMPENSATION PLANS
                                   -----------------------   --------------------    --------------------
<S>                                       <C>                       <C>                    <C>
Equity compensation plans
approved by security holders.....         1,978,000                 $3.55                  599,500
Equity compensation plans not
approved by security holders.....         1,277,885                 $4.58                        -
                                   -----------------------   --------------------    --------------------
   Total.........................         3,255,885                 $3.95                  599,500
                                   =======================   ====================    ====================
</TABLE>

         See Note 12 to the  Consolidated  Financial  Statements for information
regarding the material features of the above security holders approved plan.


                                       9
<PAGE>


         Warrants issued pursuant to equity  compensation  plans not approved by
security holders are summarized as follows:

         o        20,000  warrants  issued for services in 2001, are exercisable
                  at $5.00 per share and expire in July 2004.

         o        5,000 warrants issued for services in 2001, are exercisable at
                  $4.57 per share and expire in July 2004.

         o        10,000  warrants  issued for services in 2001, are exercisable
                  at $3.65 per share and expire in August 2004.

         o        39,235  warrants  issued for services in 1997, are exercisable
                  at $0.71 per share and expire in December 2007.

         o        172,500  warrants issued for services in 2003, are exercisable
                  at $5.06 per share and expire in May 2008.

         o        572,818  warrants issued for services in 2003, are exercisable
                  at $4.74 per share and expire in December 2008.

         o        229,166 warrant issued in conjunction  with private  placement
                  transaction  in 2001 and 2002,  are  exercisable  at $4.34 per
                  share and expire at various date through February 2007.

         o        229,166 warrant issued in conjunction  with private  placement
                  transaction  in 2001 and 2002,  are  exercisable  at $4.73 per
                  share and expire at various date through February 2007.


         Each of the above plans provides that the number of shares with respect
to which options and warrants may be granted, and the number of shares of Common
Stock  subject to an  outstanding  option or warrant,  shall be  proportionately
adjusted  in the  event of a  subdivisions  or  consolidation  of  shares or the
payment of a stock dividend on Common Stock.


                                       10
<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)
                                                        1999       2000      2001(1)      2002      2003(2)
                                                      --------   --------   --------    --------   --------
<S>                                                   <C>        <C>        <C>         <C>        <C>
OPERATIONS:
-----------
Total revenue .....................................   $ 32,385   $ 49,362   $ 43,568    $ 60,073   $ 64,443
Income (loss) from operations .....................   $  2,406   $  2,547   $   (253)   $  3,044   $ (5,881)
Net income (loss) .................................   $  1,731   $  1,539   $ (1,226)   $  1,496   $ (4,745)
Net income (loss) per share - basic ...............   $   0.26   $   0.23   $  (0.16)   $   0.14   $  (0.46)
Net income (loss) per share - diluted .............   $   0.23   $   0.21   $  (0.16)   $   0.14   $  (0.46)
Weighted average shares outstanding - basic .......      6,734      6,838      8,017       9,232     10,651
Weighted average sharesoutstanding - diluted ......      7,399      7,283      8,017       9,531     10,651

FINANCIAL POSITION (AT PERIOD END):
-----------------------------------
Cash, cash equivalents and short-term investments .   $    101   $    128   $     47    $    285   $ 14,443
Total assets ......................................   $ 19,855   $ 39,099   $ 40,794    $ 54,055   $ 67,770
Capital lease obligations and notes payable .......   $  1,031   $  3,873   $  6,024    $  5,329   $  4,664
Convertible redeemable preferred stock ............   $   --     $   --     $  2,895    $  2,895   $  2,895
Stockholders' equity ..............................   $  8,861   $ 14,791   $ 15,428    $ 18,467   $ 43,564
Total liabilities and stockholders' equity ........   $ 19,855   $ 39,099   $ 40,794    $ 54,055   $ 67,770
PER SHARE DATA (AT END OF PERIOD):
Net book value per common share ...................   $   1.31   $   1.88   $   1.76    $   1.98   $   3.79
Common shares outstanding .........................      6,778      7,863      8,770       9,320     11,508

----------
<FN>
(1) We  incurred  restructuring  charges  of  $1,561,623  during  the year ended
December  31,  2001.  See  Note 18 of the  Notes to the  Consolidated  Financial
Statements included in Item 8 of this Report.

(2) We  incurred  restructuring  charges  of  $7,700,047  during  the year ended
December  31,  2003.  See  Note 18 of the  Notes to the  Consolidated  Financial
Statements included in Item 8 of this Report.
</FN>
</TABLE>


                                       11
<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, 2003, 2002 and
2001.  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.

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 distributor  of
zippers under our TALON brand name and a distributor of stretch  waistbands that
utilize licensed patented technology.

         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 upcoming launch of TRIMNET, our Oracle based e-sourcing system will
allow  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 will
allow us to provide additional services to customers on a global platform.


                                       12
<PAGE>


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  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.  We do not
anticipate  any  further  charges as a result of this  restructuring  plan.  All
restructuring  costs were  incurred  and paid for in the fourth  quarter of 2003
and,  therefore,  there are no  liabilities  related  to  restructuring  charges
included in the balance sheet at December 31, 2003.

         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
                                                                      ==========


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.


                                       13
<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 and charged to
                  operations  in the period in which the facts that give rise to
                  the  adjustments  become known.  A substantial  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.

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

         o        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
                  accessing the need for a valuation allowance.  If we determine
                  that we will  not  realize  all or  part of our  deferred  tax
                  assets  in the  future,  we would  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.


                                       14
<PAGE>


2001 RESTRUCTURING PLAN

         During the first quarter of 2001, we  implemented a plan to restructure
certain of our business  operations.  In accordance with the restructuring plan,
we closed  our  Tijuana,  Mexico,  facilities  and  relocated  our  TALON  brand
operations  to Miami,  Florida.  In addition,  we incurred  costs related to the
reduction  of  our  Hong  Kong  operations,  the  relocation  of  our  corporate
headquarters from Los Angeles,  California,  to Woodland Hills, California,  and
the  downsizing of our corporate  operations by  eliminating  certain  corporate
expenses  related to sales and  marketing,  customer  service  and  general  and
administrative  expenses. Total restructuring charges amounted to $1,561,623 and
were charged to operations primarily in the first quarter of 2001.

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,
                                              --------------------------------
                                                2003         2002        2001
                                              -------      -------     -------
Net sales ..............................        100.0%       100.0%      100.0%
Cost of goods sold .....................         74.3         74.3        72.7
                                              -------      -------     -------
Gross profit ...........................         25.7         25.7        27.3
Selling expenses .......................          5.8          3.5         3.8
General and administrative expenses ....         17.1         17.1        20.5
Restructuring charges ..................         11.9         --           3.6
                                              -------      -------     -------
Operating (loss) income ................         (9.1)%        5.1%       (0.6)%
                                              =======      =======     =======


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

                                                  Year Ended December 31,
                                          -------------------------------------
                                            2003           2002           2001
                                          -------        -------        -------

United States ...................            12.3%          14.5%          33.3%
Asia ............................            19.1            9.0            4.5
Mexico ..........................            44.7           73.4           62.2
Dominican Republic ..............            23.9            3.1            --
                                          -------        -------        -------
                                            100.0%         100.0%         100.0%
                                          =======        =======        =======


         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.


                                       15
<PAGE>


         Net sales increased approximately $16,505,000 (or 37.9%) to $60,073,000
for the year  ended  December  31,  2002  from  $43,568,000  for the year  ended
December 31, 2001. The increase in net sales was primarily due to an increase in
trim-related  sales from our Tlaxcala,  Mexico operations under our MANAGED TRIM
SOLUTION(TM)  trim  package  program.   The  increase  in  net  sales  was  also
attributable  to 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. TALON has been successful in becoming an approved zipper vendor
for major  brands and  retailers  which has allowed us to increase  our sales to
these customers. Our purchase of the TALON brand name and trademarks in December
2001 has enabled us to better control our product offerings,  selling prices and
profit margins.

         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, 2003 resulted
from an increase in net sales during the year.

         Gross  profit   increased   approximately   $3,551,000  (or  29.9%)  to
$15,440,000  for the year ended December 31, 2002 from  $11,889,000 for the year
ended December 31, 2001.  Gross margin as a percentage of net sales decreased to
approximately  25.7% for the year ended  December  31, 2002 as compared to 27.3%
for the year  ended  December  31,  2001.  The  decrease  in gross  profit  as a
percentage  of net sales for the year ended  December 31, 2002 was primarily due
to an  increase in zipper  sales under our TALON brand name to our MANAGED  TRIM
SOLUTION(TM)  customers in Mexico during the year.  Talon  products have a lower
gross margin than other products  included  within the complete trim packages we
offer to our customers  through our MANAGED TRIM  SOLUTION(TM).  The decrease in
gross margin as a percentage  of net sales for the year ended  December 31, 2002
was offset by a further  reduction of manufacturing and facility costs which was
a direct result of the  implementation  of our  restructuring  plan in the first
quarter of 2001.

         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,  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. 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.  Royalties  incurred for the year ended  December 31, 2002  amounted to
approximately $110,000.

         Selling  expense  increased   approximately   $487,000  (or  29.7%)  to
$2,126,000  for the year ended  December 31, 2002 from  $1,639,000  for the year
ended December 31, 2001. As a percentage of net sales,  these expenses decreased
to 3.5% for the year ended December 31, 2002 compared to 3.8% for the year ended
December  31, 2001.  The increase in selling  expenses was due to our efforts to
obtain  approval  from major brands and  retailers of the TALON brand zipper and
the  implementation  of our new sales and marketing plan for the TALON brand. In
addition,  we hired  additional  personnel  to support the  exclusive  waistband
license  agreement we entered into in April 2002.  The increase in these selling
expenses  was  partially  offset by a  reduction  of our sales  force  under our
MANAGED TRIM SOLUTION(TM) program, which was part of our restructuring plan that
we  implemented  in the first quarter of 2001.  For the year ended  December 31,
2002,  selling  expenses  increased  at a slower  rate than the  increase in net
sales, resulting in a decrease in selling expenses as a percentage of net sales.


                                       16
<PAGE>


         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.

         General and administrative expenses increased approximately  $1,329,000
(or 14.9%) to $10,270,000  for the year ended December 31, 2002 from  $8,941,000
for the year ended  December  31, 2001.  The increase in these  expenses was due
primarily to  additional  staffing and other  expenses  incurred  related to our
Tlaxcala, Mexico operations, the amortization of intangible assets incurred as a
result of the exclusive waistband technology license rights we acquired in April
2002 and additional adjustments for bad debts of approximately $633,000 recorded
during the year. As a percentage of net sales, these expenses decreased to 17.1%
for the year  ended  December  31,  2002  compared  to 20.5% for the year  ended
December 31, 2001, as the rate of increase in net sales exceeded that of general
and administrative expenses.

         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.

         Interest  expense  decreased   approximately   $128,000  (or  9.2%)  to
$1,269,000  for the year ended  December 31, 2002 from  $1,397,000  for the year
ended December 31, 2001. On May 30, 2001, we replaced our credit facility with a
new facility with UPS Capital Global Trade Finance  Corporation,  which provided
for increased borrowing availability and a more favorable interest rate of prime
plus 2%. We incurred  financing  charges of  approximately  $570,000,  including
legal,  consulting and closing costs,  in the first two quarters of 2001 related
to our efforts to replace our prior credit  facility.  Our borrowings  under the
new UPS Capital  credit  facility  increased  during the year ended December 31,
2002 due to increased  sales and  expanded  operations  in Mexico and Asia.  The
increase in interest  expense due to  increased  borrowings  during the year was
offset by decreases in the prime rate from prior periods.

         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.

         The provision for income taxes amounted to  approximately  $279,000 for
the year ended  December  31, 2002 as compared to a benefit for income  taxes of
$423,000 for the year ended  December 31, 2001.  Income taxes  increased for the
year ended December 31, 2003 primarily due to the increased  taxable income as a
result of the net loss incurred for the year ended December 31, 2001.

         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.

         Net  income was  $1,496,000  for the year ended  December  31,  2002 as
compared to a net loss of $1,226,000  for the year ended  December 31, 2001, due
primarily  to an  increase  in net sales,  offset by  increases  in selling  and
general and administrative expenses and a decrease in gross margin, as discussed
above.


                                       17
<PAGE>


         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.
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  $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.

         Preferred stock dividends  amounted to  approximately  $184,000 for the
year ended  December 31, 2002 as compared to $50,000 for the year ended December
31, 2001.  Preferred stock  dividends  represent  earned  dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
Net income available to common stockholders  amounted to $1,312,000 for the year
ended December 31, 2002 compared to net loss available to common stockholders of
$1,276,000 for the year ended December 31, 2001.  Basic and diluted earnings per
share was $0.14 for the year ended December 31, 2002. Basic and diluted loss per
share was $0.16 for the year ended December 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents increased to $14,443,000 at December 31, 2003
from $285,000 at December 31, 2002.  The increase  resulted from  $18,759,000 of
cash provided by financing  activities,  offset by $2,086,000  and $2,516,000 of
cash used in operating and investing activities, respectively.

         Net cash used in operating  activities  was  approximately  $2,086,000,
$5,440,000 and $2,100,000 for the years ended December 31, 2003,  2002 and 2001,
respectively.  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.  Cash used in  operations  for the year ended
December 31, 2001 resulted  primarily from increased  inventories,  other assets
and net losses, and decreased accounts payable and accrued expenses.

         Net cash used in investing  activities  was  approximately  $2,516,000,
$1,268,000  and $667,000 for the years ended  December 31, 2003,  2002 and 2001,
respectively.  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 used in investing activities for the year ended December 31,
2001  consisted  primarily of capital  expenditures  for computer  equipment and
upgrades and additional loans to related parties.


                                       18
<PAGE>


         Net  cash   provided  by   financing   activities   was   approximately
$18,759,000,  $6,947,000  and  $2,687,000 for the years ended December 31, 2003,
2002 and 2001,  respectively.  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.  Net cash provided by financing  activities for the year ended December
31, 2001 primarily reflects funds raised from private placement transactions and
proceeds from the issuance of Series C Convertible  Redeemable  preferred stock,
offset by the repayment of a bank overdraft.

         We currently satisfy our working capital requirements primarily through
cash flows generated from operations,  sales of equity securities and borrowings
under our credit facility with UPS Capital.  Our maximum  availability under the
credit  facility  is $13  million.  At December  31, 2003 and 2002,  outstanding
borrowings  under our UPS Capital credit  facility,  including  amounts borrowed
under the term loan and foreign factoring  agreement,  amounted to approximately
$7,096,000 and $15,934,000,  respectively.  There were no open letters of credit
under our UPS Capital  credit  facility at December  31,  2003.  Open letters of
credit amounted to approximately $1,5370,000 at December 31, 2002.

         The initial  term of our  agreement  with UPS  Capital is three  years,
expiring May 30, 2004, and the facility is secured by  substantially  all of our
assets. The interest rate of the credit facility is at the prime rate plus 2% on
advances and the prime rate plus 4% on the term loan. On November 17, 2003,  the
credit facility was amended to provide for a term loan of $6 million in addition
to the revolving credit facility with a maximum  availability of $7 million. The
term loan  provides  for monthly  payments  beginning  December 15, 2003 through
March 1, 2004. We are currently  pursuing  alternative  working  capital  credit
arrangements to replace the UPS Capital credit facility upon its expiration.

         The credit  facility  requires  that we comply with  certain  financial
covenants including net worth, fixed charge ratio and capital  expenditures.  We
were in compliance with all financial covenants at December 31, 2003. The amount
we can  borrow  under  the  credit  facility  is  determined  based on a defined
borrowing base formula related to eligible accounts  receivable and inventories.
Our  borrowing  base  availability  ranged  from  approximately   $4,192,000  to
$18,829,000 from January 1, 2003 to December 31, 2003. A significant decrease in
eligible  accounts  receivable  and  inventories  due to customer  concentration
levels and the aging of  inventories,  among other factors,  can have an adverse
effect  on  our  borrowing   capabilities  under  our  credit  facility,   which
thereafter,  may not be adequate to satisfy  our working  capital  requirements.
Eligible  accounts  receivable are reduced if our accounts  receivable  customer
balances  are  concentrated  with  a  particular   customer  in  excess  of  the
percentages allowed under our agreement with UPS Capital.  In addition,  we have
typically  experienced  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.  During  these  quarters,  borrowing  availability  under our  credit
facility may decrease as a result of decreases in eligible accounts  receivables
generated  from our sales.  As a result of our  concentration  of business  with
Tarrant  Apparel  Group  and  Azteca  Production  International,   our  eligible
receivables have been limited under the UPS Capital facility over the past year.
If  our  business  becomes  further  dependant  on one or a  limited  number  of
customers  or  if  we  experience  future  significant  seasonal  reductions  in
receivables,  our  availability  under the UPS Capital credit  facility would be
correspondingly  reduced.  If this were to occur,  we would be  required to seek
additional financing which may not be available on attractive terms and, if such
financing  is  unavailable,  we  may be  unable  to  meet  our  working  capital
requirements.


                                       19
<PAGE>


         The  UPS  Capital  credit   facility   contains   customary   covenants
restricting  our  activities  as well as  those of our  subsidiaries,  including
limitations  on  certain  transactions  related  to the  disposition  of assets;
mergers;  entering  into  operating  leases or  capital  leases;  entering  into
transactions  involving subsidiaries and related parties outside of the ordinary
course of business; incurring indebtedness or granting liens or negative pledges
on  our  assets;  making  loans  or  other  investments;   paying  dividends  or
repurchasing  stock or other securities;  guarantying  third party  obligations;
repaying subordinated debt; and making changes in our corporate structure.

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital 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 85% of
eligible  accounts  receivable under our credit  facility.  Included in due from
factor as of December 31, 2003 and 2002 are trade accounts  receivable  factored
without  recourse of  approximately  $65,000 and $292,000.  Included in due from
factor  are  outstanding  advances  due  to UPS  Capital  under  this  factoring
arrangement amounting to approximately $55,000 and $248,000 at December 31, 2003
and 2002.

         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, 2003 and 2002,  the amount  factored with
recourse and included in trade accounts  receivable was  approximately  $316,000
and  $241,000.  Outstanding  advances  as  of  December  31,  2003  amounted  to
approximately  $411,000  and are included in the line of credit  balance.  There
were no outstanding advances as of December 31, 2002.

         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  credit  facility 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.

         On  December  18,  2003,  we 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. We received net proceeds of $23,083,693 after commissions
and  other  offering  expenses.  As  of  December  31,  2003,  we  have  applied
approximately  $9.2 million of the proceeds against our credit facility with UPS
Capital and vendor payables.  Each share of Series D Convertible Preferred Stock
was automatically  converted into 10 shares of common stock, for an aggregate of
5,728,180  shares of common stock,  following  approval of the conversion by our
stockholders  at a special meeting held on February 11, 2004. We have 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,  we  issued  572,818
warrants to the placement agent. The warrants are exercisable beginning June 18,
2004 through December 18, 2008 and have a per share exercise price of $4.74.


                                       20
<PAGE>


         On May 30,  2003,  we  raised  approximately  $6,037,500  in a  private
placement  transaction  with  five  institutional   investors.   Pursuant  to  a
securities  purchase  agreement  with  these  institutional  investors,  we sold
1,725,000  shares of our  common  stock at a price  per  share of  $3.50.  After
commissions  and  expenses,  we  received  net  proceeds of  approximately  $5.5
million.  We have  applied  the  proceeds  against  vendor  payables,  equipment
purchases and other working capital requirements.  We have 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,
we issued 172,500  warrants 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.

         Our trade  receivables  decreased to  $19,253,000  at December 31, 2003
from  $20,468,000  at December 31,  2002.  This  decrease  was due  primarily to
decreased  related  party  trade  receivables  of  approximately   $3.0  million
resulting from decreased  sales to related parties during the year. The decrease
in related  party  receivables  was offset by an increase in  non-related  party
receivables of approximately  $1.8 million due to increased sales to non-related
party  customers,   offset  by  increased  collections  from  non-related  party
customers.

         During the year ended 2003,  we increased our net deferred tax asset to
$2,800,000  from $91,000 at December 31, 2002.  The increase in our net deferred
tax asset results  primarily from current year losses.  At December 31, 2003, we
had Federal and state net operating loss  carryforwards  of  approximately  $9.2
million and $5.1  million,  respectively,  available  to offset  future  taxable
income.

         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. We expect to receive quarterly cash payments of
a minimum of $1.25  million under our supply  agreement  with Levi Strauss & Co.
through August 2004. 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,  our  borrowing  base
availability limitations related to eligible accounts receivable and inventories
and our  expansion  into  foreign  markets.  Our need for  additional  long-term
financing  includes the  integration  and expansion of our operations to exploit
our rights under our TALON trade name,  the  expansion of our  operations in the
Asian, Central 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.


                                       21
<PAGE>


CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our  contractual  obligations at December 31,
2003 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>
Subordinated note payable ...   $2,600,000   $1,200,000   $1,400,000   $    --     $     --
Capital lease obligations ...   $1,213,933   $  562,742   $  651,191   $    --     $     --
Subordinated notes payable to
related parties (1) .........   $  849,971   $  849,971   $     --     $    --     $     --
Operating leases ............   $1,660,855   $  721,211   $  939,644   $    --     $     --
Line of credit ..............   $7,095,514   $7,095,514   $     --     $    --     $     --
Note payable ................   $   25,200   $   25,200   $     --     $    --     $     --
Royalty Payments ............   $  369,315   $     --     $  369,315   $    --     $     --

----------
<FN>
(1)      The majority of  subordinated  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>

         On December 31, 2002, we indirectly  guaranteed the indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment  totaling $1.5 million.  Financing costs due to the
related party amounted to approximately  $15,000.  The letters of credit expired
on March 27, 2003 and June 26, 2003. There were no outstanding letters of credit
at December 31, 2003.

         At December 31, 2003 and 2002, we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

         On September  20, 2001,  we entered  into a ten-year  co-marketing  and
supply  agreement with Coats American,  Inc., an affiliate of Coats plc, as well
as a preferred stock purchase  agreement with Coats North America  Consolidated,
Inc.,  also an  affiliate of Coats plc. The  co-marketing  and supply  agreement
provides  for  selected  introductions  into  Coats'  customer  base and has the
potential  to  accelerate  our growth  plans and to  introduce  our MANAGED TRIM
SOLUTION(TM) to apparel  manufacturers on a broader basis. Pursuant to the terms
of the  co-marketing  and supply  agreement,  our trim packages will exclusively
offer thread manufactured by Coats. Pursuant to the terms of the preferred stock
purchase agreement, we received a cash investment of $3 million from Coats North
America  Consolidated  in exchange  for 759,494  shares of series C  convertible
redeemable preferred stock. In February 2004, Coats converted all 759,494 shares
of Series C Preferred Stock,  plus $458,707 of accrued  dividends,  into 700,144
shares of our common stock.


                                       22
<PAGE>


         We  have  entered  into  an  exclusive  supply  agreement  with  Azteca
Production  International,   Inc.,  AZT  International  SA  D  RL  and  Commerce
Investment  Group,  LLC.  Pursuant  to this  supply  agreement,  we provide  all
trim-related  products for certain  programs  manufactured by Azteca  Production
International.  The  agreement  provides  for a minimum  aggregate  total of $10
million  in  annual  purchases  by  Azteca  Production   International  and  its
affiliates  during each year of the three-year term of the agreement,  if and to
the extent,  we are able to provide trim products on a basis that is competitive
in terms of price and  quality.  In  accordance  with the supply  agreement,  we
issued 1,000,000 shares of our common stock to Commerce Investment Group, LLC.

         We also have a supply  agreement  with Tarrant  Apparel  Group and have
been supplying Tarrant Apparel Group with all of its trim requirements under our
MANAGED TRIM SOLUTION(TM) system since 1998. The exclusive supply agreement with
Tarrant Apparel Group has an indefinite  term.  Pricing and terms are consistent
with competitive vendors. At the time we entered into this supply agreement,  we
also sold 2,390,000 shares of our common stock to KG Investment,  LLC, an entity
then  owned by Gerard  Guez and Todd Kay,  executive  officers  and  significant
shareholders of Tarrant Apparel Group.

         Sales under our supply agreements with Azteca Production  International
and Tarrant Apparel Group, and their affiliates, amounted to approximately 40.2%
and  69.7% of our  total  sales  for the  years  ended  December  2003 and 2002,
respectively. Sales under these supply agreements as a percentage of total sales
for the year  ending  December  2004 are  anticipated  to be lower than the year
ended December 2003. This decrease is due in part to our efforts to decrease our
reliance on these  customers  and to further  diversify our customer  base.  Our
results of operations  will depend to an extent upon the  commercial  success of
Azteca Production  International and Tarrant Apparel Group. If Azteca Production
International  and Tarrant  Apparel  Group fail to purchase our trim products at
anticipated levels, or our relationship with Azteca Production  International or
Tarrant Apparel Group  terminates,  it may have an adverse affect on our results
of  operations.  Included  in trade  accounts  receivable,  related  parties  at
December 31, 2003, is approximately $11.7 million due from Tarrant Apparel Group
and Azteca Production International, and their affiliates.

         Included  in  inventories  at  December  31,  2003 are  inventories  of
approximately $6.5 million that are subject to buyback arrangements with Tarrant
Apparel  Group and Azteca  Production  International.  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 to purchase the inventories from us under normal invoice and selling
terms.  During the year ended  December 31,  2003,  we sold  approximately  $4.6
million  in  inventory   to  Tarrant   Apparel   Group  and  Azteca   Production
International pursuant to these buyback arrangements. If the financial condition
of  Tarrant  Apparel  Group  and  Azteca   Production   International   were  to
deteriorate, resulting in an impairment of their ability to purchase inventories
or pay receivables, it may have an adverse affect on our results of operations.

         As of December 31, 2003 and 2002, we had outstanding related-party debt
of  approximately  $850,000  and  $1,350,000,  respectively,  at interest  rates
ranging from 7% to 11%, and additional  non-related-party  debt of $25,200 at an
interest rate of 10%. The majority of related-party debt is due on demand,  with
the  remainder  due and  payable  on the  fifteenth  day  following  the date of
delivery of written  demand for payment.  On October 4, 2002,  we entered into a
note payable  agreement  with a related  party in the amount of $500,000 to fund
additional working capital requirements.  The note payable was unsecured, due on
demand,  accrued interest at 4% and was  subordinated to UPS Capital.  This note
was re-paid on February 28, 2003.


                                       23
<PAGE>


NEW ACCOUNTING PRONOUNCEMENTS

         In December 2003, the Securities and Exchange  Commission  issued Staff
Accounting  Bulletin  No.  104  (SAB  No.  104),  "REVENUE  RECOGNITION",  which
codifies,  revises  and  rescinds  certain  sections  of SAB No.  101,  "REVENUE
Recognition",  in order  to make  this  interpretive  guidance  consistent  with
current  authoritative  accounting  and  auditing  guidance  and SEC  rules  and
regulations.  The changes noted in SAB No. 104 did not have a material effect on
our  consolidated  results of  operations,  consolidated  financial  position or
consolidated cash flows.

         In May 2003, the Financial  Accounting  Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards  No. 150,  ACCOUNTING  FOR CERTAIN
INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES AND EQUITY ("FAS 150"),
which  establishes  standards for  classifying and measuring  certain  financial
instruments  with  characteristics  of  both  liabilities  and  equity.  FAS 150
requires an issuer to classify a financial  instrument that is within its scope,
which may have previously  been reported as equity,  as a liability (or an asset
in some  circumstances).  This  statement is  effective at the  beginning of the
first interim  period  beginning  after June 15, 2003 for public  companies.  We
adopted this  Statement as of July 1, 2003 and it had no material  impact on our
financial statements.

         In April 2003,  the FASB issued SFAS No. 149,  "AMENDMENT  OF STATEMENT
133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES" ("FAS No. 149"). FAS No.
149 amends and  clarifies  the  accounting  guidance on  derivative  instruments
(including  certain  derivative  instruments  embedded in other  contracts)  and
hedging  activities  that fall within the scope of FAS No. 133,  "Accounting for
Derivative  Instruments and Hedging Activities." FAS No. 149 also amends certain
other existing pronouncements, which will result in more consistent reporting of
contracts  that are  derivatives  in their  entirety  or that  contain  embedded
derivatives  that warrant separate  accounting.  This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. We do not have any
contracts that are derivatives or that contain embedded derivatives.

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
CONSOLIDATION OF VARIABLE  INTEREST  ENTITIES,  an  interpretation of Accounting
Research Bulletins ("ARB") No. 51, CONSOLIDATED FINANCIAL STATEMENTS ("FIN 46").
FIN 46  clarifies  the  application  of ARB No. 51 to certain  entities in which
equity  investors do not have the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The adoption of FIN 46 did not have a material impact on our financial  position
and results of operations.

         In December  2002,  the FASB issued  Statement of Financial  Accounting
Standards No. 148,  ACCOUNTING FOR  STOCK-BASED  COMPENSATION  -- TRANSITION AND
DISCLOSURE ("FAS 148"), which amends Statement of Financial Accounting Standards
No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION ("FAS 123"). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require more prominent and more
frequent  disclosures  in  financial  statements  of the effects of  stock-based
compensation.  The transition  guidance and annual disclosure  provisions of FAS
148 are effective for fiscal years ending after  December 15, 2002.  The interim
disclosure  provisions are effective for financial reports containing  condensed
financial  statements for interim periods beginning after December 15, 2002. The
adoption of FAS 148 did not have a material impact on our  consolidated  balance
sheet or results  of  operations  as we intend to  continue  to account  for our
equity  based  compensation  plans using the  intrinsic  value  method.  We have
provided  the interim  disclosures  required by FAS 148  beginning  in the first
quarter of 2003.


                                       24
<PAGE>


         In November 2002, the FASB issued  Interpretation  No. 45,  GUARANTOR'S
ACCOUNTING  AND  DISCLOSURE  REQUIREMENTS  FOR  GUARANTEES,  INCLUDING  INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS,  an  interpretation of FASB Statements No.
5,  57  and  107  and  a  rescission  of  FASB   Interpretation   No.  34.  This
interpretation  elaborates on the  disclosures  to be made by a guarantor in its
interim and annual financial  statements about its obligations  under guarantees
issued.  The  interpretation  also  clarifies  that a  guarantor  is required to
recognize,  at inception of a guarantee,  a liability  for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation  are  applicable to guarantees  issued or modified after December
31,  2002  and are not  expected  to have a  material  effect  on our  financial
statements.  The disclosure  requirements are effective for financial statements
of interim and annual  periods  ending after  December 31, 2002. We adopted this
Statement as of January 1, 2003 and it had no material  impact on our  financial
statements.

         In June  2002,  the FASB  issued  FAS No.  146,  ACCOUNTING  FOR  COSTS
ASSOCIATED  WITH EXIT OR DISPOSAL  ACTIVITIES,  which  addresses  accounting for
restructuring  and similar  costs.  FAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging  Issues Task Force  ("EITF") Issue No. 94-3. We
have  adopted  the  provisions  of SFAS  No.  146 for  restructuring  activities
initiated  after  December 31, 2002. FAS No. 146 requires that the liability for
costs  associated  with an exit or  disposal  activity  be  recognized  when the
liability  is incurred.  Under EITF No.  94-3, a liability  for an exit cost was
recognized at the date of a company's  commitment  to an exit plan.  FAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value.  Accordingly,  FAS No. 146 affects the timing of recognizing current
and future restructuring costs as well as the amount recognized.

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.

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

         CONCENTRATION   OF  RECEIVABLES   FROM  OUR  LARGEST   CUSTOMERS  MAKES
RECEIVABLE BASED FINANCING  DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGEST
CUSTOMERS FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY AFFECTED. Our business
relies heavily on a relatively small number of customers, including Levi Strauss
& Co., Tarrant Apparel Group and its affiliate, United Apparel Ventures, LLC and
Azteca Production  International Inc. and its affiliates.  This concentration of
our business reduces the amount we can borrow from our lenders under receivables
based financing  agreements.  Under our credit  agreement with UPS Capital,  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,  UPS Capital will not lend against the receivables that exceed the
specified


                                       25
<PAGE>


percentage.  Gerard Guez, the founder, Chairman and Chief Executive Officer, and
a significant stockholder of Tarrant Apparel Group and Hubert Guez, the founder,
Chief Executive Officer and President,  and a significant  stockholder of Azteca
Production International,  are brothers. In addition,  Tarrant Apparel Group and
Azteca Production  International combined own United Apparel Ventures, LLC. This
relationship  between our customers  further  concentrates  our receivables risk
significantly among this family group.  Further, if we are unable to collect any
large receivables due us, our cash flow would be severely impacted.

         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.

         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.


                                       26
<PAGE>


         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.

         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


                                       27
<PAGE>


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.

         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,  the
customer must purchase the 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,  we may incur a
charge  in  connection  with  our  holding   significant  amounts  of  unsalable
inventory.

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

         IF OUR PRODUCTS INFRINGE ANY OTHER PERSON'S  PROPRIETARY RIGHTS, WE MAY
BE SUED AND HAVE TO PAY 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


                                       28
<PAGE>


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 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 1, 2004, our officers and directors and their  affiliates  beneficially
owned  approximately  19.1% 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  21.2% of the
outstanding  shares of our common  stock at March 1, 2004.  The number of shares
beneficially  owned by the Dyne family  includes the shares of common stock held
by Azteca Production International,  which are voted by Colin Dyne pursuant to a
voting  agreement.   The  Azteca  Production   International  shares  constitute
approximately  3.3% of the outstanding  shares of common stock at March 1, 2004.
Gerard Guez and Todd Kay, significant stockholders of Tarrant Apparel Group, own
approximately  5.6% of the  outstanding  shares of our common  stock at March 1,
2004. As a result, our officers and directors,  the Dyne family, Gerard Guez and
Todd Kay 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 and, accordingly,  we do
not enter into  hedging  transactions  with  regard to any  foreign  currencies.
Currency  fluctuations  can,  however,  increase  the price of our  products  to
foreign  customers


                                       29
<PAGE>


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 2003, we had approximately $10.5 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.


                                       30
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                TABLE OF CONTENTS
                                                                            PAGE

Report of Independent Certified Public Accountants...................        32
Consolidated Balance Sheets..........................................        33
Consolidated Statements of Operations................................        34
Consolidated Statements of Stockholders' Equity and Convertible
   Redeemable Preferred Stock........................................        35
Consolidated Statements of Cash Flows................................        36
Notes to Consolidated Financial Statements...........................        37
Independent Certified Public Accountants' Report on Schedule II......        63
Schedule II - Valuation and Qualifying Accounts and Reserves.........        64


                                       31
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

         We have audited the accompanying  consolidated balance sheets of Tag-It
Pacific, Inc. and subsidiaries as of December 31, 2003 and 2002, 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,  2003.   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 auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the  financial  position of Tag-It
Pacific, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2003, in conformity  with  accounting  principles  generally
accepted in the United States of America.



                                                     /s/ BDO Seidman, LLP

Los Angeles, California
March 8, 2004


                                       32
<PAGE>


                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                      December 31,  December 31,
                                                          2003         2002
                                                      -----------   -----------
Assets
Current assets:
   Cash and cash equivalents ......................   $14,442,769   $   285,464
   Due from factor ................................         9,743        43,730
   Trade accounts receivable, net .................     7,531,079     5,697,655
   Trade accounts receivable, related parties, net     11,721,465    14,770,466
   Refundable income taxes ........................          --         212,082
   Inventories, net ...............................    17,096,879    23,105,267
   Prepaid expenses and other current assets ......     2,124,366       599,543
   Deferred income taxes ..........................     2,800,000        90,928
                                                      -----------   -----------
Total current assets ..............................    55,726,301    44,805,135

Property and equipment, net of accumulated
   depreciation and amortization ..................     6,144,863     2,953,701
Tradename .........................................     4,110,750     4,110,750
Goodwill ..........................................       450,000       450,000
License Rights ....................................       375,375       490,875
Due from related parties ..........................       762,076       870,251
Other assets ......................................       200,949       374,106
                                                      -----------   -----------
Total assets ......................................   $67,770,314   $54,054,818
                                                      ===========   ===========

Liabilities, Convertible Redeemable Preferred
  Stock and Stockholders' Equity
Current liabilities:
  Line of credit ..................................   $ 7,095,514    $15,934,257
  Accounts payable and accrued expenses ...........     9,552,196     10,401,187
  Deferred income .................................          --        1,027,984
  Subordinated demand notes payable to
    related parties ...............................       849,971      1,349,971
  Current portion of capital lease obligations ....       562,742         71,928
  Current portion of subordinated note payable ....     1,200,000      1,200,000
                                                      -----------    -----------
Total current liabilities .........................    19,260,423     29,985,327

Capital lease obligations, less current portion ...       651,191        107,307
Subordinated note payable, less current portion ...     1,400,000      2,600,000
                                                      -----------    -----------
Total liabilities .................................    21,311,614     32,692,634
                                                      -----------    -----------

Commitments and contingencies (Note 14)

Convertible  redeemable  preferred  stock
  Series C,  $0.001 par value; 759,494
  shares authorized; 759,494 shares issued
  and outstanding at December 31, 2003
  and 2002 (stated value $3,000,001) ..............     2,895,001      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 B, $0.001
     par value; 850,000 shares authorized; no
     shares issued or outstanding .................          --             --
   Convertible preferred stock Series D, $0.001
     par value; 572,818 shares authorized;
     572,818 shares issued and outstanding at
     December 31, 2003 ............................    22,918,693           --

   Common stock,  $0.001 par value, 30,000,000
     shares  authorized;  11,508,201 shares
     issued and outstanding at December 31, 2003;
     9,319,909 at December 31, 2002 ...............        11,510          9,321
  Additional paid-in capital ......................    23,890,356     16,776,012
  (Accumulated deficit) retained earnings .........    (3,256,860)     1,681,850
                                                      -----------    -----------
Total stockholders' equity ........................    43,563,699     18,467,183
                                                      -----------    -----------
Total liabilities, convertible redeemable
  preferred stock and stockholders' equity ........   $67,770,314    $54,054,818
                                                      ===========    ===========

          See accompanying notes to consolidated financial statements.


                                       33
<PAGE>


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

                                         Year Ended      Year Ended      Year Ended
                                        December 31,    December 31,    December 31,
                                            2003            2002            2001
                                        ------------    ------------    ------------
<S>                                     <C>             <C>             <C>
Net sales to unrelated parties ......   $ 38,560,045    $ 18,179,970    $ 16,114,039
Net sales to related parties ........     25,882,770      41,893,200      27,453,591
                                        ------------    ------------    ------------
Total net sales .....................     64,442,815      60,073,170      43,567,630
Cost of goods sold ..................     47,889,762      44,633,195      31,678,663
                                        ------------    ------------    ------------
Gross profit ........................     16,553,053      15,439,975      11,888,967
Selling expenses ....................      3,706,143       2,126,227       1,639,263
General and administrative expenses .     11,028,291      10,269,672       8,940,593
Restructuring charges (Note 18) .....      7,700,047            --         1,561,623
                                        ------------    ------------    ------------
Total operating expenses ............     22,434,481      12,395,899      12,141,479

(Loss) income from operations .......     (5,881,428)      3,044,076        (252,512)
Interest expense, net ...............      1,196,110       1,269,365       1,396,612
                                        ------------    ------------    ------------

(Loss) income before income taxes ...     (7,077,538)      1,774,711      (1,649,124)
(Benefit) provision for income taxes      (2,332,880)        278,685        (423,373)
                                        ------------    ------------    ------------
Net (loss) income ...................   $ (4,744,658)   $  1,496,026    $ (1,225,751)
                                        ============    ============    ============

Less: Preferred stock dividends .....       (194,052)       (184,200)        (49,950)
                                        ------------    ------------    ------------
Net (loss) income available to common
   shareholders .....................   $ (4,938,710)   $  1,311,826    $ (1,275,701)
                                        ============    ============    ============

Basic (loss) earnings per share .....   $      (0.46)   $       0.14    $      (0.16)
                                        ============    ============    ============
Diluted (loss) earnings per share ...   $      (0.46)   $       0.14    $      (0.16)
                                        ============    ============    ============

Basic weighted average shares
   outstanding ......................     10,650,684       9,232,405       8,017,134
                                        ============    ============    ============

Diluted weighted average shares
   outstanding ......................     10,650,684       9,531,301       8,017,134
                                        ============    ============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       34
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                     CONVERTIBLE REDEEMABLE PREFERRED STOCK
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<CAPTION>
                                                              Preferred Stock         Preferred Stock          Preferred Stock
                                       Common Stock              Series A                Series B                  Series D
                                 -----------------------    -------------------   -----------------------    ----------------------
                                    Shares       Amount      Shares     Amount     Shares       Amount       Shares      Amount
                                 -----------    --------    --------   --------   --------    -----------    -------   ------------
<S>                                <C>          <C>             <C>    <C>         <C>        <C>            <C>       <C>
BALANCE, JANUARY 1, 2001 .....     7,863,244    $  7,864        --     $   --      850,000    $ 1,400,000       --     $       --
   Preferred stock issued
     for equity investment ...          --          --          --         --         --             --         --             --
   Common stock issued upon
     exercise of options .....        15,000          15        --         --         --             --         --             --
   Issuance of warrants ......          --          --          --         --         --             --         --             --
   Common stock issued in
     acquisition of assets ...       125,000         125        --         --         --             --         --             --
   Acquisition of trademarks .       500,000         500        --         --     (850,000)    (1,400,000)      --             --
   Common stock issued in
     private placement
     transactions ............       266,666         267        --         --         --             --         --             --
   Tax benefit from exercise
     of stock options ........          --          --          --         --         --             --         --             --
   Preferred stock dividends .          --          --                                --             --         --             --
   Net loss ..................          --          --          --         --         --             --         --             --
                                 -----------    --------    --------   --------   --------    -----------    -------   ------------
BALANCE, DECEMBER 31, 2001 ...     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 .          --          --          --         --         --             --      572,818     22,918,693
     private placement
     transaction
   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
------------------------------   ===========    ========    ========   ========   ========    ===========    =======   ============


<CAPTION>
                                                                                   Preferred Stock
                                  Additional      Retained                            Series C
                                   Paid-In        Earnings                      --------------------
                                   Capital        (Deficit)        Total        Shares      Amount
                                 ------------    -----------    ------------    -------   ----------

<S>                              <C>             <C>            <C>             <C>       <C>
BALANCE, JANUARY 1, 2001 .....   $ 11,737,810    $ 1,645,725    $ 14,791,399       --     $     --
   Preferred stock issued
     for equity investment ...           --             --              --      759,494    2,895,001
   Common stock issued upon
     exercise of options .....         19,485           --            19,500       --           --
   Issuance of warrants ......          5,170           --             5,170       --           --
   Common stock issued in
     acquisition of assets ...        499,875           --           500,000       --           --
   Acquisition of trademarks .      1,969,500           --           570,000       --           --
   Common stock issued in
     private placement
     transactions ............        799,731           --           799,998       --           --
   Tax benefit from exercise
     of stock options ........         17,400           --            17,400       --           --
   Preferred stock dividends .           --          (49,950)        (49,950)      --           --
   Net loss ..................           --        (1,225,75)      (1,225,75)      --           --
                                 ------------    -----------    ------------    -------   ----------
BALANCE, DECEMBER 31, 2001 ...     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 .        165,000           --        23,083,693       --           --
     private placement
     transaction
   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 ..................           --       (4,744,65)      (4,744,65)       --           --
                                 ------------    -----------    ------------    -------   ----------
BALANCE, DECEMBER 31, 2003 ...   $ 23,890,356    $(3,256,860)     43,563,699    759,494   $2,895,001
------------------------------   ============    ===========    ============    =======   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       35
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                     Year Ended      Year Ended      Year Ended
                                                                    December 31,    December 31,    December 31,
                                                                        2003            2002            2001
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows  from  operating activities:
   Net (loss) income ............................................   $ (4,744,658)   $  1,496,026    $ (1,225,751)
   Adjustments to reconcile net (loss) income to net cash used in
     operating activities:
     Depreciation and amortization ..............................      1,280,380       1,169,247       1,478,055
     (Increase) decrease in deferred income taxes ...............     (2,709,072)         16,671        (220,934)
     Loss on sale of assets .....................................           --            20,804         684,391
     Stock and warrants issued for services .....................        135,023            --             5,170
     Increase (decrease) in allowance for doubtful accounts .....      1,642,086        (167,140)        (80,599)
   Changes in operating assets and liabilities:
     Receivables, including related parties .....................       (392,522)     (9,534,894)        788,022
     Inventories ................................................      6,008,388      (2,654,527)     (2,497,580)
     Prepaid expenses and other current assets ..................     (1,524,823)       (191,396)        330,588
     Other assets ...............................................        (24,976)        (75,580)       (447,618)
     Accounts payable and accrued expenses ......................     (1,138,946)      3,197,895        (604,798)
     Deferred income ............................................     (1,027,984)      1,027,984            --
     Income taxes payable .......................................        411,420         254,663        (309,147)
                                                                    ------------    ------------    ------------
Net cash used in operating activities ...........................     (2,085,684)     (5,440,247)     (2,100,201)
                                                                    ------------    ------------    ------------
Cash flows from investing activities:
   Decrease (increase) in loans to related parties ..............        167,801            --          (251,489)
   Acquisition of property and equipment ........................     (2,683,857)     (1,290,087)       (534,873)
   Proceeds from sale of equipment ..............................           --            22,312         118,880
                                                                    ------------    ------------    ------------
Net cash used in investing activities ...........................     (2,516,056)     (1,267,775)       (667,482)
                                                                    ------------    ------------    ------------
Cash flows from financing activities:
   Bank overdraft ...............................................           --              --          (584,831)
   Proceeds from preferred stock issuance .......................     23,083,693            --         2,895,001
   Proceeds from common stock issuance ..........................      6,335,500       1,029,997         799,998
   Proceeds from exercise of stock options and warrants .........        317,950          64,998          19,500
   (Repayment) proceeds from bank line of credit, net ...........     (8,838,743)      6,521,480        (295,855)
   Proceeds from capital lease obligations ......................           --           125,000         207,240
   Payment of capital lease obligations .........................       (439,355)       (194,937)       (321,516)
   Proceeds from notes payable ..................................           --           500,000         180,000
   Repayment of notes payable ...................................     (1,700,000)     (1,100,000)       (212,999)
                                                                    ------------    ------------    ------------
Net cash provided by financing activities .......................     18,759,045       6,946,538       2,686,538
                                                                    ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents ............     14,157,305         238,516         (81,145)
Cash and cash equivalents, beginning of year ....................        285,464          46,948         128,093
                                                                    ------------    ------------    ------------
Cash and cash equivalents, end of year ..........................   $ 14,442,769    $    285,464    $     46,948
                                                                    ============    ============    ============
Supplemental  disclosures of cash flow information:
   Cash paid (received) during the year for:
     Interest paid ..............................................   $  1,149,357    $  1,203,663    $  1,312,805
     Interest received ..........................................   $       (179)           (180)         (2,430)
     Income taxes paid ..........................................   $    177,455    $      7,984    $     22,780
     Income taxes received ......................................   $   (212,082)   $       --      $    (10,389)
   Non-cash financing activity:
     Common stock issued in acquisition of assets ...............   $       --      $       --      $    500,000
     Common stock issued in acquisition of license rights .......   $       --      $    577,500    $       --
     Capital lease obligation ...................................   $  1,474,053    $       --      $       --
       Acquisition of trademarks:
          Common stock issued ...................................   $       --      $       --      $  1,970,000
          Preferred stock cancelled .............................   $       --      $       --      $  1,400,000
          Net assets acquired ...................................   $       --      $       --      $    670,000
          Cash paid .............................................   $       --      $       --      $    100,000
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       36
<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,  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  2003,  2002  and  2001,  foreign  currency  translation  and
transaction gains and losses were not material.

NATURE OF BUSINESS

         The Company  specializes  in the  distribution  of a full range 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  of fashion  apparel such as Abercrombie & Fitch,
Tarrant Apparel Group, Kentucky Apparel and Azteca Production International. The
Company  also serves as a specified  supplier of trim items to specific  brands,
brand  licensees and retailers,  including  Abercrombie & Fitch,  Express,  Levi
Strauss & Co.,  The Limited,  Lerner and  Miller's  Outpost,  among  others.  In
addition,  the  Company  distributes  zippers  under  the  TALON  brand  name to
manufacturers  for  apparel  brands and  retailers  such as Levi  Strauss & Co.,
Wall-Mart, JC Penny and Tropical Sportswear,  among others. In 2002, the Company
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.  These  products are sold to the same  customers  that are
targeted by the Company's MANAGED TRIM SOLUTION and TALON zipper divisions.

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 our MANAGED TRIM SOLUTION.


                                       37
<PAGE>


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

         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.

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 income
and its components in a full set of general-purpose financial statements.  There
were no additional  comprehensive  income items for the years ended December 31,
2003, 2002 and 2001.

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,  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.

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 15).

CASH AND CASH EQUIVALENTS

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

INVENTORIES

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


                                       38
<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

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,  2003,  the net
carrying  amount of goodwill is  $450,000,  tradename  is  $4,110,750  and other
intangible  assets is $375,375.  Management  has  determined  that  goodwill and
tradename  have  indefinite  lives.   Amortization   expense  related  to  other
intangibles  amounted to $115,500  and $86,625 for the years ended  December 31,
2003 and 2002.

 RECLASSIFICATION

         Certain  reclassifications  have been made to the prior year  financial
statements to conform with 2003 presentation.

INCOME TAXES

         The  Company  uses the asset and  liability  method of  accounting  for
income taxes.  Deferred  income taxes are  recognized  based on the  differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the  differences  are expected
to reverse.  Valuation  allowances are  established,  when necessary,  to reduce
deferred tax assets to the amount  expected to be realized.  The  provision  for
income taxes represents the tax payable or benefit for the period and the change
during the year in deferred tax assets and liabilities.


                                       39
<PAGE>


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

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, 2003, 2002 and 2001.

         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.

         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, 2003, 2002 and 2001. 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, 2003,  2002 and 2001 would have  amounted to the pro forma  amounts
presented below:

<TABLE>
<CAPTION>
                                                       2003            2002              2001
                                                  -------------    -------------    -------------
<S>                                               <C>              <C>              <C>
Net (loss) income, as reported ................   $  (4,744,658)   $   1,496,026    $  (1,225,751)
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 ......................        (139,796)        (121,073)        (295,898)
                                                  -------------    -------------    -------------

Pro forma net (loss) income ...................   $  (4,884,454)   $   1,374,953    $  (1,521,649)
                                                  =============    =============    =============

(Loss) earnings per share:
     Basic - as reported ......................   $       (0.46)   $        0.14    $       (0.16)
     Basic - pro forma ........................   $       (0.48)   $        0.13    $       (0.20)

     Diluted - as reported ....................   $       (0.46)   $        0.14    $       (0.16)
     Diluted - pro forma ......................   $       (0.48)   $        0.13    $       (0.20)
</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,  2002 and 2001;  expected
life of option of 1.5 years,  expected  volatility  of 19% for 2003 and 2002 and
17% for 2001,


                                       40
<PAGE>


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

risk  free  interest  rate of 3% for  2003  and  2002  and 5% for  2001 and a 0%
dividend  yield.  The  weighted  average  fair  value at the grant date for such
options is $.37, $.38 and $.37 per option for the years ended December 31, 2003,
2002 and 2001.

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.

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 2003, the Securities and Exchange  Commission  issued Staff
Accounting  Bulletin  No.  104  (SAB  No.  104),  "REVENUE  RECOGNITION",  which
codifies,  revises  and  rescinds  certain  sections  of SAB No.  101,  "REVENUE
Recognition",  in order  to make  this  interpretive  guidance  consistent  with
current  authoritative  accounting  and  auditing  guidance  and SEC  rules  and
regulations.  The changes noted in SAB No. 104 did not have a material effect on
our  consolidated  results of  operations,  consolidated  financial  position or
consolidated cash flows.


                                       41
<PAGE>


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

         In May 2003, the Financial  Accounting  Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards  No. 150,  ACCOUNTING  FOR CERTAIN
INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES AND EQUITY ("FAS 150"),
which  establishes  standards for  classifying and measuring  certain  financial
instruments  with  characteristics  of  both  liabilities  and  equity.  FAS 150
requires an issuer to classify a financial  instrument that is within its scope,
which may have previously  been reported as equity,  as a liability (or an asset
in some  circumstances).  This  statement is  effective at the  beginning of the
first interim period  beginning  after June 15, 2003 for public  companies.  The
Company  adopted this Statement as of July 1, 2003 and it had no material impact
on its financial statements.

         In April 2003,  the FASB issued SFAS No. 149,  "AMENDMENT  OF STATEMENT
133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES" ("FAS No. 149"). FAS No.
149 amends and  clarifies  the  accounting  guidance on  derivative  instruments
(including  certain  derivative  instruments  embedded in other  contracts)  and
hedging  activities  that fall within the scope of FAS No. 133,  "Accounting for
Derivative  Instruments and Hedging Activities." FAS No. 149 also amends certain
other existing pronouncements, which will result in more consistent reporting of
contracts  that are  derivatives  in their  entirety  or that  contain  embedded
derivatives  that warrant separate  accounting.  This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging  relationships  designated after June 30, 2003. The Company does
not  have  any  contracts  that  are   derivatives  or  that  contain   embedded
derivatives.

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
CONSOLIDATION OF VARIABLE  INTEREST  ENTITIES,  an  interpretation of Accounting
Research Bulletins ("ARB") No. 51, CONSOLIDATED FINANCIAL STATEMENTS ("FIN 46").
FIN 46  clarifies  the  application  of ARB No. 51 to certain  entities in which
equity  investors do not have the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The adoption of FIN 46 did not have a material impact on the Company's financial
position and results of operations.

         In December  2002,  the FASB issued  Statement of Financial  Accounting
Standards No. 148,  ACCOUNTING FOR  STOCK-BASED  COMPENSATION  -- TRANSITION AND
DISCLOSURE ("FAS 148"), which amends Statement of Financial Accounting Standards
No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION ("FAS 123"). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require more prominent and more
frequent  disclosures  in  financial  statements  of the effects of  stock-based
compensation.  The transition  guidance and annual disclosure  provisions of FAS
148 are effective for fiscal years ending after  December 15, 2002.  The interim
disclosure  provisions are effective for financial reports containing  condensed
financial  statements for interim periods beginning after December 15, 2002. The
adoption of FAS 148 did not have a material impact on the Company's consolidated
balance  sheet or results of  operations  as the Company  intends to continue to
account  for its equity  based  compensation  plans  using the  intrinsic  value
method.  The  Company  provided  the  interim  disclosures  required  by FAS 148
beginning in the first quarter of 2003.

         In November 2002, the FASB issued  Interpretation  No. 45,  GUARANTOR'S
ACCOUNTING  AND  DISCLOSURE  REQUIREMENTS  FOR  GUARANTEES,  INCLUDING  INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS,  an  interpretation of FASB Statements No.
5,  57  and  107  and  a  rescission  of  FASB   Interpretation   No.  34.  This
interpretation  elaborates on the  disclosures  to be made by a guarantor in its
interim and annual financial  statements about its obligations  under guarantees
issued.  The  interpretation  also  clarifies  that a  guarantor  is required to
recognize,  at inception of a guarantee,  a liability  for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation  are  applicable to guarantees  issued or modified after December
31,  2002  and are not  expected  to have a  material  effect  on the  Company's
financial  statements.  The disclosure  requirements are effective for financial
statements of interim and annual  periods  ending after  December 31, 2002.  The
Company  adopted  this  Statement  as of January 1, 2003 and it had no  material
impact on its financial statements.


                                       42
<PAGE>


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

         In June  2002,  the FASB  issued  FAS No.  146,  ACCOUNTING  FOR  COSTS
ASSOCIATED  WITH EXIT OR DISPOSAL  ACTIVITIES,  which  addresses  accounting for
restructuring  and similar  costs.  FAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging  Issues Task Force ("EITF") Issue No. 94-3. The
Company  adopted the  provisions  of SFAS No. 146 for  restructuring  activities
initiated  after  December 31, 2002. FAS No. 146 requires that the liability for
costs  associated  with an exit or  disposal  activity  be  recognized  when the
liability  is incurred.  Under EITF No.  94-3, a liability  for an exit cost was
recognized at the date of a company's  commitment  to an exit plan.  FAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value.  Accordingly,  FAS No. 146 affects the timing of recognizing current
and future restructuring costs as well as the amount recognized.

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, 2003                 December 31, 2002                     December 31, 2001
                      ----------------------------------   --------------------------------   ----------------------------------
Years ended:                                      Per                                Per                                  Per
                         Loss         Shares      Share      Income       Shares     Share       Loss         Shares      Share
                      (Numerator)  (Denominator)  Amount   (Numerator) (Denominator) Amount   (Numerator)  (Denominator)  Amount
                      -----------   ----------    ------   ----------    ---------   ------   -----------    ---------    ------
<S>                   <C>           <C>           <C>      <C>           <C>         <C>      <C>            <C>          <C>
Basic earnings per
share:
    (Loss) income
    to common
    stockholders...   $(4,938,710)  10,650,684    $(0.46)  $1,311,826    9,232,405   $ 0.14   $(1,275,701)   8,017,134    $(0.16)

Effect of dilutive
securities:
    Options........         --          --          --          --         244,706      --          --           --          --
    Warrants.......         --          --          --          --          54,191      --          --           --          --

                      -----------   ----------    ------   ----------    ---------   ------   -----------     ---------   ------

(Loss) income
available to common
stockholders.......   $(4,938,710)  10,650,684    $(0.46)  $1,311,826    9,531,302   $ 0.14   $(1,275,701)   8,017,134    $(0.16)
                      ===========   ==========    ======   ==========    =========   ======   ===========    =========    ======
</TABLE>


         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.

         Warrants to purchase  433,122  shares of common stock at between  $0.71
and $6.00, options to purchase 1,546,000 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, 2001, 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.

                                       43
<PAGE>


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

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% and 5% at December 31, 2003 and
2002).  As of December 31, 2003 and 2002, the amount  factored with recourse and
included in trade accounts  receivable was approximately  $316,000 and $241,000.
Outstanding advances as of December 31, 2003 amounted to approximately  $411,000
and are  included  in the line of  credit  balance.  There  were no  outstanding
advances as of December 31, 2002.

         The Company  also has a  factoring  agreement  with UPS Capital  Global
Trade  Finance  Corporation,  whereby UPS Capital  purchases  eligible  accounts
receivable  and assumes the credit risk with respect to those  foreign  accounts
for which UPS Capital  has given its prior  approval.  If UPS  Capital  does not
assume the credit risk for a receivable, the collection risk associated with the
receivable  remains  with us. The Company pays a fixed  commission  rate and may
borrow up to 85% of  eligible  accounts  receivable  under the credit  facility.
Included in due from factor as of December 31, 2003 and 2002 are trade  accounts
receivable  factored  without  recourse of  approximately  $65,000 and $292,000.
Included in due from factor are  outstanding  advances due to UPS Capital  under
this factoring  arrangement  amounting to approximately  $55,000 and $248,000 at
December 31, 2003 and 2002.

         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  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, 2003 and 2002.

NOTE 4--TRADE ACCOUNTS RECEIVABLE

         Trade accounts receivable and trade accounts receivable related parties
are net of allowances  for doubtful  accounts and  subsequent  returns.  For the
years  ended  December  31,  2003 and 2002,  the total  allowance  for  doubtful
accounts and subsequent returns was $2,043,571 and $401,485.

NOTE 5--INVENTORIES

         Inventories consist of the following:

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

Raw materials ........................          $    11,210          $    10,937
Work-in-process ......................                 --                 83,105
Finished goods .......................           17,085,669           23,011,225
                                                -----------          -----------

Total inventories ....................          $17,096,879          $23,105,267
                                                ===========          ===========


                                       44
<PAGE>


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

         Inventories  at  December  31,  2003 and 2002  include  goods  that are
subject  to buy  back  agreements  with 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 the inventories  from the Company
under normal invoice and selling terms.  Included in inventories at December 31,
2003 are inventories of  approximately  $6.5 million that are subject to buyback
arrangements  with Levi Strauss & Co., Tarrant Apparel Group,  Azteca Production
International (Note 17) and other customers.

NOTE 6--PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:

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

Furniture and fixtures .........................     $   627,826     $   571,923
Machinery and equipment ........................       5,032,427       2,752,352
Computer equipment .............................       2,861,459       1,251,050
Leasehold improvements .........................         259,789         168,785
Films, dies, molds and art designs .............       1,958,883       1,838,364
                                                     -----------     -----------
                                                      10,740,384       6,582,474
Accumulated depreciation and amortization ......       4,595,521       3,628,773
                                                     -----------     -----------

Net property and equipment .....................     $ 6,144,863     $ 2,953,701
                                                     ===========     ===========

NOTE 7--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, 2003,
the Company  evaluated its goodwill and tradename  assets and determined that no
impairment adjustment was necessary.  Amortization expense of $50,000 recognized
in 2001, would not have been recognized under SFAS No. 142.


                                       45
<PAGE>


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

         Goodwill and other  intangible  assets as of December 31, 2003 and 2002
are as follows:

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

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 ...................         (202,125)          (86,625)
                                                  -----------       -----------
Exclusive license and intellectual
   property rights, net ....................          375,375           490,875
                                                  -----------       -----------
Intangible assets, net .....................      $ 4,936,125       $ 5,051,625
                                                  ===========       ===========

         There were no  changes in the net  carrying  amounts  of  goodwill  and
tradename for the years ended December 31, 2003 and 2002.

         Amortization expense consists of the following:

                                                     Year Ended December 31,
                                              ----------------------------------
                                                2003         2002         2001
                                              --------     --------     --------

Goodwill ................................     $   --       $   --       $ 50,000
Tradename ...............................         --           --           --
Exclusive license and intellectual
   property rights ......................      115,500       86,625         --
Other intangible assets .................         --           --        128,333
                                              --------     --------     --------
                                              $115,500     $ 86,625     $178,333
                                              ========     ========     ========

         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
-------------------------                                               --------

2004 ......................................................             $115,500
2005 ......................................................              115,500
2006 ......................................................              115,500
2007 ......................................................               28,875
                                                                        --------
Total amortization expense ................................             $375,375
                                                                        ========


                                       46
<PAGE>


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

              Had SFAS No. 142 been in effect  prior to  January  1,  2002,  the
Company's  reported net (loss) income and net (loss) income per share would have
been as follows:

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                              ----------------------------------------------
                                                   2003             2002            2001
                                              -------------    -------------   -------------
<S>                                           <C>              <C>             <C>
Net (loss) income:
   Reported ...............................   $  (4,744,658)   $   1,496,026   $  (1,225,751)
   Goodwill amortization ..................            --               --            50,000
                                              -------------    -------------   -------------
   Adjusted ...............................   $  (4,744,658)   $   1,496,026   $  (1,175,751)
                                              =============    =============   =============

Basic net (loss) income per common share:
   Reported ...............................   $       (0.46)   $        0.14   $       (0.16)
   Effect of goodwill amortization ........            --               --              0.01
                                              -------------    -------------   -------------
   Adjusted ...............................   $       (0.46)   $        0.14   $       (0.15)
                                              =============    =============   =============

Diluted net (loss) income per common share:
   Reported ...............................   $       (0.46)   $        0.14   $       (0.16)
   Effect of goodwill amortization ........            --               --              0.01
                                              -------------    -------------   -------------
   Adjusted ...............................   $       (0.46)   $        0.14   $       (0.15)
                                              =============    =============   =============
</TABLE>

NOTE 8--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 17, 2003, the credit facility was amended to provide for a term loan of
$6  million  in  addition  to the  revolving  credit  facility  with  a  maximum
availability  of $7  million.  The  term  loan  provides  for  monthly  payments
beginning  December  15, 2003  through  March 1, 2004.  The initial  term of the
Agreement  is three  years and the  facility  is  secured  by all  assets of the
Company.  The interest rate for the credit facility is at the prime rate plus 2%
(6% at  December  31,  2003) on  advances  and the prime  rate plus 4% (8.25% at
December 31, 2003) on the term loan. The credit facility requires 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 its  financial  covenants.  Availability  under the UPS Capital
credit  facility is determined  based on a defined  formula  related to eligible
accounts  receivable  and  inventory.  There  were no open  letters of credit at
December 31, 2003.  There were  $1,537,416 of open letters of credit at December
31, 2002.


                                       47
<PAGE>


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

NOTE 9--SUBORDINATED DEMAND NOTES PAYABLE TO RELATED PARTIES

         Subordinated notes payable to related parties consist of the following:

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

Sixnotes  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%, 7.5% and 8.5% per annum,
   principal and interest due on demand and
   fifteen days from demand ........................       264,795       764,795
                                                        ----------    ----------

                                                        $  849,971    $1,349,971
                                                        ==========    ==========

         The  notes  are   subordinate  to  UPS  Capital  Global  Trade  Finance
Corporation  under the  Company's  line of  credit  facility.  Interest  expense
related to the subordinated notes payable to related parties for the years ended
December  31,  2003,  2002 and 2001  amounted to $88,102,  $88,102 and  $88,103.
Included  in accrued  expenses at December  31, 2003 and 2002 was  $373,530  and
$285,428 of accrued interest related to these notes.  There was no interest paid
on the subordinated notes for the years ended December 31, 2003 and 2002.

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


                                       48
<PAGE>


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

NOTE 10--CAPITAL LEASE OBLIGATIONS

         The Company financed equipment  purchases through various capital lease
obligations  expiring  through June 2006.  These  obligations  bear  interest at
various rates ranging from 8% to 15% per annum.  Future minimum annual  payments
under these capital lease obligations are as follows:

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

2004 ....................................................           $   632,285
2005 ....................................................               511,545
2006 ....................................................               175,567
                                                                    -----------
Total payments ..........................................             1,319,397
Less amount representing interest .......................              (105,464)
                                                                    -----------
Balance at December 31, 2003 ............................             1,213,933
Less current portion ....................................               562,742
                                                                    -----------

Long-term portion .......................................           $   651,191
                                                                    ===========

         At December  31,  2003,  total  equipment,  included  in  property  and
equipment  (Note 6), under capital  lease  obligations  and related  accumulated
depreciation  amounted to $2,198,390 and $650,878.  At December 31, 2002,  total
equipment,  included in property and equipment,  under capital lease obligations
and related accumulated depreciation amounted to $729,342 and $482,414.

NOTE 11--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  is  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
have no voting rights. The Preferred Shares accrue 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 will be 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.


                                       49
<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 are 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 are  redeemable  at the option of the holder  after four
years. If the holders elect to redeem the Shares,  the Company has 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 is less than $2.75 per share, the Company must redeem for
cash at the stated  value of the  Shares.  The  Company  can elect to redeem the
Shares at any time for cash at the stated value.  The Preferred  Stock  Purchase
Agreement provides 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 are
payable  at  the  earlier  of  the  declaration  of  the  Board,  conversion  or
redemption. Each Preferred Share has 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.


                                       50
<PAGE>


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

         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.

         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% (6.25% at December 31, 2003) and is subordinated to the Company's obligations
under  its  senior  credit  facility  with  UPS  Capital  Global  Trade  Finance
Corporation.  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 annual payments under the subordinated  note payable are
as follows:

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

2004 .....................................................            $1,200,000
2005 .....................................................             1,400,000
                                                                      ----------
Balance at December 31, 2003 .............................             2,600,000
Less current portion .....................................             1,200,000
                                                                      ----------

Long-term portion ........................................            $1,400,000
                                                                      ==========

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


                                       51
<PAGE>


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

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.

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.

         Future minimum  annual royalty  payments due under the Agreement are as
follows:

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

2004 .....................................................              $   --
2005 .....................................................               144,315
2006 .....................................................               225,000
                                                                        --------

Total minimum royalties ..................................              $369,315
                                                                        ========

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.


                                       52
<PAGE>


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

        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 12--STOCK OPTION INCENTIVE PLAN AND WARRANTS

STOCK OPTION INCENTIVE PLAN

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

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

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

         In 1999,  the  Company's  Board of Directors  further  amended its 1997
Stock Incentive Plan to provide for a total of 1,177,500  shares of common stock
to be reserved for  issuance  under the Plan.  On October 20, 1999,  the Company
granted  393,000  options to purchase common stock at an exercise price of $4.31
per share,  the closing sales price of a share of the Company's  common stock on
that date.

         In 2000,  the  Company's  Board of Directors  further  amended its 1997
Stock Incentive Plan to provide for a total of 1,777,500  shares of common stock
to be reserved for issuance  under the Plan.  During the year ended December 31,
2000, the Company  granted  401,500 options to purchase common stock at exercise
prices  ranging  between  $3.75 and $4.625 per share,  the closing  price of the
Company's common stock on the date of grants.

         In 2001,  the  Company's  Board of Directors  further  amended its 1997
Stock Incentive Plan to provide for a total of 2,077,500  shares of common stock
to be reserved for issuance  under the Plan.  During the year ended December 31,
2001, the Company  granted  485,000 options to purchase common stock at


                                       53
<PAGE>


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

exercise prices ranging between $3.64 and $4.32 per share,  the closing price of
the Company's common stock on the date of grants.

         In 2002,  the  Company's  Board of Directors  further  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 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,
2003, 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.

         The following table summarizes the activity in the 1997 Plan:

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

Options outstanding - January 1, 2001 .........        1,160,500        $   3.37
     Granted ..................................          485,000            3.82
     Exercised ................................          (15,000)           1.30
     Canceled .................................          (84,500)           4.24
                                                      ----------        --------

Options outstanding - December 31, 2001 .......        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
                                                      ==========        ========


                                       54
<PAGE>


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

         Additional   information   relating  to  stock   options  and  warrants
outstanding and  exercisable at December 31, 2003,  summarized by exercise price
is as follows:

                        Outstanding Weighted Average        Exercisable
                                                          Weighted Average
                       ------------------------------    -------------------
     Exercise                       Life     Exercise               Exercise
 Price Per Share         Shares     (years)    Price      Shares      Price
------------------     ---------   -------   --------   ---------   --------
$ 0.71 (warrants)         39,235     4.0      $ 0.71       39,235    $ 0.71
$ 1.30                   255,000     4.5      $ 1.30      255,000    $ 1.30
$ 4.31                   317,000     6.0      $ 4.31      317,000    $ 4.31
$ 4.63                   105,000     6.0      $ 4.63      105,000    $ 4.63
$ 3.78                   126,000     7.5      $ 3.78      126,000    $ 3.78
$ 4.25                   130,000     6.5      $ 4.25      127,188    $ 4.25
$ 4.50                    15,000     6.5      $ 4.50       13,125    $ 4.50
$ 3.75                   149,000     7.0      $ 3.75      149,000    $ 3.75
$ 3.63                   230,000     9.0      $ 3.63      207,500    $ 3.63
$ 3.64                   146,000     8.0      $ 3.64      146,000    $ 3.64
$ 3.50                   285,000     9.3      $ 3.50      263,750    $ 3.50
$ 3.70                   220,000     9.3      $ 3.70      120,750    $ 3.70
$ 3.65 (warrants)         10,000     0.6      $ 3.65       10,000    $ 3.65
$ 5.00 (warrants)         20,000     0.5      $ 5.00       20,000    $ 5.00
$ 4.57 (warrants)          5,000     0.5      $ 4.57        5,000    $ 4.57
$ 4.34 (warrants) (1)    229,166     2.3      $ 4.34      229,166    $ 4.34
$ 4.73 (warrants) (1)    229,166     2.3      $ 4.73      229,166    $ 4.73
$ 4.74 (warrants)        572,818     5.0      $ 4.74            -    $ 4.74
$ 5.06 (warrants)        172,500     4.5      $ 5.06      172,500    $ 5.06
                       ---------                        ---------
                       3,255,885     6.0      $ 3.95    2,535,380    $ 3.79
                       =========                        =========
----------
(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.


NOTE 13--INCOME TAXES

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

                                             Year Ended December 31,
                                -----------------------------------------------
                                    2003              2002              2001
                                -----------       -----------       -----------
Current:
     Federal .............      $   360,000       $   222,713       $  (172,073)
     State ...............           16,193            39,301           (30,366)
                                -----------       -----------       -----------
                                    376,193           262,014          (202,439)
Deferred:
     Federal .............       (2,302,711)           14,170          (187,794)
     State ...............         (406,362)            2,501           (33,140)
                                -----------       -----------       -----------
                                 (2,709,073)           16,671          (220,934)
                                -----------       -----------       -----------
                                $(2,332,880)      $   278,685       $  (423,373)
                                ===========       ===========       ===========


                                       55
<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,
                                                    --------------------------
                                                     2003      2002      2001
                                                    ------    ------    ------
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 ....       6.4     (18.2)      1.2
    Utilization of NOL benefit .................       --        --       15.7
    Exercise of stock options ..................       2.3      (3.1)      1.1
    Other ......................................      (1.7)     (3.0)     (3.7)
                                                    ------    ------    ------
                                                     (33.0)%    15.7%    (25.7)%
                                                    ======    ======    ======

         (Loss) income before income taxes are as follows:

                                            Year Ended December 31,
                              -------------------------------------------------
                                  2003               2002               2001
                              -----------        -----------        -----------

Domestic ..............       $(9,303,639)       $   428,473        $(1,400,553)
Foreign ...............         2,226,101          1,346,238           (248,571)
                              -----------        -----------        -----------
                              $(7,077,538)       $ 1,774,711        $(1,649,124)
                              ===========        ===========        ===========

         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,
                                                   ----------------------------
                                                       2003            2002
                                                   -----------      -----------
Net deferred tax asset:
     Net operating loss carryforwards ........     $ 3,447,744      $   334,292
     Dies, film and art library ..............         (22,959)         (37,766)
     Depreciation and amortization ...........         199,629           42,951
     Intangible assets .......................        (347,240)        (173,620)
     Bad debt reserve ........................         584,481          (75,737)
     Related Party Interest ..................          72,165             --
     Other ...................................         (14,820)             808
                                                   -----------      -----------
                                                     3,919,000           90,928
     Less:  Valuation Allowance ..............      (1,119,000)            --
                                                   -----------      -----------
                                                   $ 2,800,000      $    90,928
                                                   ===========      ===========

         At December 31, 2003,  Tag-It  Pacific,  Inc. had Federal and state NOL
carryforwards  of  approximately  $9,243,000 and $5,084,000,  respectively.  The
Federal NOL is available to offset future  taxable  income through 2023, and the
state NOL expires in 2013.  The Company's  ability to utilize NOL  carryforwards
are  dependent  upon the  Company's  ability to generate  taxable  income in the
future.

         Deferred tax assets are initially  recognized for  differences  between
the  financial  statement  carrying  amount  and the tax  bases  of  assets  and
liabilities  which will result in future  deductible  amounts and operating loss
and tax credit  carryforwards.  A valuation  allowance  is then  established  to
reduce  that  deferred  tax asset to the level at which it is "more  likely than
not" that the tax  benefits  will be  realized.  Realization  of tax benefits of
deductible  temporary  differences  and operating  loss or credit  carryforwards
depends on having


                                       56
<PAGE>


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

sufficient  taxable income of an appropriate  character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the  realization  of tax benefits  include (i) taxable income in the current
year or prior years that is available  through  carryback,  (ii) future  taxable
income  that  will  result  from the  reversal  of  existing  taxable  temporary
difference,  and (iii) future  taxable  income  generated by future  operations.
Based  on an  evaluation  of  the  realizability  of  the  deferred  tax  asset,
management has determined  that it is more likely than not that the Company will
realize this tax benefit.

NOTE 14--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.  The supply agreement also appoints Talon as an approved zipper
supplier to Levi.

         The Company recognizes revenue at the time goods are shipped,  at which
point title  transfers to the customer,  and  collection is reasonably  assured.
Total deferred  income at December 31, 2002 amounted to $1,027,984 and was fully
recognized into revenue in 2003.

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  December 2007. 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, 2003 are as
follows:

YEARS ENDING DECEMBER 31,                                               AMOUNT
-------------------------                                             ----------
2004 ....................................................             $  721,211
2005 ....................................................                601,039
2006 ....................................................                324,845
2007 ....................................................                 13,760
                                                                      ----------
   Total minimum payments ...............................             $1,660,855
                                                                      ==========

         Total rental  expense for the years ended  December 31, 2003,  2002 and
2001 aggregated $966,867, $820,194 and $766,962, respectively.

PROFIT SHARING PLAN

         In October 1999, the Company  established a 401(k)  profit-sharing plan
for  the  benefit  of   qualified   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, 2003, 2002 and 2001.


                                       57
<PAGE>


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

CONTINGENCIES

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

         On  December  31,  2002,   the  Company   indirectly   guaranteed   the
indebtedness of two of its suppliers  through the issuance by a related party of
letters  of credit  to  purchase  goods and  equipment  totaling  $1.5  million.
Financing costs due to this related party amounted to approximately $15,000. The
letters of credit  expired on March 27,  2003 and June 26,  2003.  There were no
letters of credit outstanding as of December 31, 2003.

         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 15--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.


                                       58
<PAGE>


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

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

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2003            2002            2001
                                     -----------     -----------     -----------
Sales:
     United States .............     $ 7,899,890     $ 8,709,833     $14,494,035
     Asia ......................      12,308,093       5,436,927       1,984,103
     Mexico ....................      28,811,197      44,087,714      27,089,492
     Dominican Republic ........      15,423,635       1,838,696            --
                                     -----------     -----------     -----------
                                     $64,442,815     $60,073,170     $43,567,630
                                     ===========     ===========     ===========
Long-lived Assets:
     United States .............     $ 8,594,804     $ 6,998,595     $ 6,610,522
     Asia ......................       1,243,388         117,534         199,064
     Mexico ....................         267,704         308,671         344,129
     Dominican Republic ........         975,092         580,526            --
                                     -----------     -----------     -----------
                                     $11,080,988     $ 8,005,326     $ 7,153,715
                                     ===========     ===========     ===========

NOTE 16--MAJOR CUSTOMERS & VENDORS

         Three major customers, two of which are 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% and 63.0% of the  Company's  net sales on a
consolidated  basis for the years ended December 31, 2002 and 2001.  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.  Included in
trade accounts  receivable  related  parties at December 31, 2002 is $14,770,466
due from  these  customers.  Terms  are net 30 and 60 days.  The  Company  holds
inventories of approximately  $6.5 million at December 31, 2003 that are subject
to buyback arrangements with its customers.  The Company's results of operations
will  depend  to a  significant  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.

         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% and 57.6% of the
Company's  purchases for the years ended December 31, 2002 and 2001. Included in
accounts  payable and accrued expenses at December 31, 2003 and 2002 is $607,179
and $3,684,660 due to these vendors. Terms are sight and 60 days.

NOTE 17--RELATED PARTY TRANSACTIONS

         The estate of the former  President  and Director of the Company is the
general partner of D.P.S. Associates, a general partnership, which is the lessor
of the Company's former executive offices in Los Angeles,  California,  pursuant
to a lease  agreement  with the  Company.  The lease  provided  for base rent of
$9,072 on a month-to-month basis. The Company relocated its executive offices to
Woodland  Hills,  California in May 2001 and terminated its lease agreement with
D.P.S. Associates.

         A former  Director of the Company  controls a financial  advisory firm,
Averil  Associates,  Inc.  ("Averil  Associates"),  which has performed  various
services for the Company  including  investigation  of strategic  financing  and
other corporate  growth  initiatives.  As consideration  for such services,  AGS
Stationery paid


                                       59
<PAGE>


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

Averil Associates the aggregate amount of $26,123,  plus out of pocket expenses.
As additional compensation for such services, in 1997, AGS Stationery granted to
Chloe Holdings, Inc., an affiliate of Averil Associates, warrants to purchase up
to 135 shares of Common Stock of AGS Stationery.  Effective upon the Conversion,
the Chloe Warrants  became  exercisable for 22,841 shares of the Common Stock of
the Company at $0.76 per share and the Company  also paid Averil  Associates  an
additional  $175,000 upon  consummation of the Company's initial public offering
for services rendered in connection therewith. The Chloe warrants were exercised
in November 1999. On September 10, 2001, the Company issued an additional 20,000
warrants  to Chloe  Holdings,  Inc.  for  consulting  services  provided  to the
Company.  The warrants are exercisable at $5.00 per share and expire on July 18,
2004. Consulting fees paid to Averil Associates for the years ended December 31,
2003, 2002 and 2001 amounted to $0, $0 and $366,000.

         In October 1998, the Company sold 2,390,000 shares of Common Stock at a
purchase price per share of $1.125 to KG  Investment,  LLC. The Company used the
$2,688,750  raised in the private  placement  to fund a portion of its  business
growth plans and operations. KG Investment is owned by Gerard Guez and Todd Kay,
executive  officers  and  significant  shareholders  of  Tarrant  Apparel  Group
("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  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.  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.

         Total  sales to Tarrant and Azteca and their  affiliates  for the years
ended December 31, 2003,  2002 and 2001 amounted to  approximately  $25,883,000,
$41,893,000  and  $27,454,000.  As of  December  31,  2003  and  2002,  accounts
receivable  related parties included  approximately  $11,721,000 and $14,770,000
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,  2003,  2002 and 2001  amounted  to
$210,000, $225,000 and $15,000.

         Included in due from  related  parties at December 31, 2003 and 2002 is
$762,076  and  $870,251,  respectively,  of  unsecured  notes  and  advances  to
officers, members of the Board of Directors and stockholders of the Company. The
notes and advances bear interest at 7.5%, 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,  which 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 a company that has common  ownership  with
Mark Dyne,  Chairman of the Board of Directors,  for the year ended December 31,
2003 amounted to $20,000.

         Consulting fees paid to Diversified  Investments,  a company owned by a
member of the Board of Directors of the Company, amounted to $137,000,  $150,000
and $150,000 for the years ended December 31, 2003, 2002 and 2001.


                                       60
<PAGE>


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

         Consulting fees paid for services  provided by a member of the Board of
Directors amounted to $41,300,  $70,800 and $64,900 for the years ended December
31, 2003, 2002 and 2001.

         On February 1, 2001, options to purchase 15,000 shares of the Company's
common stock held by a former director of the Company were exercised.

         In October 1998, the Company adopted a stockholder's rights plan. Under
the rights plan the Company  distributed  one preferred share purchase right for
each outstanding share of Common Stock outstanding on November 6, 1998. Upon the
occurrence  of certain  triggering  events  related to an  unsolicited  takeover
attempt of the Company,  each  purchase  right not owned by the party or parties
making the  unsolicited  takeover  attempt  will  entitle its holder to purchase
shares  of the  Company's  Series A  Preferred  Stock at a value  below the then
market  value of the  Series A  Preferred  Stock.  The  rights of holders of the
Common Stock will be subject to, and 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 18 -RESTRUCTURING CHARGES

2003 RESTRUCTURING PLAN

         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.

         The  reduction  of  operations  in Mexico is  estimated  to reduce  the
Company's  working capital  requirements  and improve its cash flow, among other
things.

         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.  The Company
does not anticipate any further charges as a result of this restructuring  plan.
All restructuring costs were incurred and paid for in the fourth quarter of 2003
and,  therefore,  there are no  liabilities  related  to  restructuring  charges
included in the balance sheet at December 31, 2003.

         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:


                                       61
<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
                                                                      ==========


2001 RESTRUCTURING PLAN

         During the first  quarter of 2001,  the Company  implemented  a plan to
restructure  certain business  operations.  In accordance with the restructuring
plan, the Company closed its Tijuana, Mexico, facilities and relocated its TALON
brand  operations to Miami,  Florida.  In addition,  the Company  incurred costs
related to the  reduction of its Hong Kong  operations,  the  relocation  of its
corporate  headquarters  from  Los  Angeles,   California,  to  Woodland  Hills,
California,  and the  downsizing  of its  corporate  operations  by  eliminating
certain corporate expenses related to sales and marketing,  customer service and
general and administrative expenses. A total of 221 employees were terminated or
resigned  as part  of the  Company's  restructuring  plan.  Total  restructuring
charges for the year ended 2001 amounted to  $1,561,623,  including  $355,769 of
benefits paid to terminated employees.  Included in accrued expenses at December
31, 2001 was  $114,554 of accrued  restructuring  charges  consisting  of future
payments to former employees.

NOTE 19 - QUARTERLY RESULTS (UNAUDITED)

         Quarterly  results for the years ended  December  31, 2003 and 2002 are
reflected below:

<TABLE>
<CAPTION>
                                       FOURTH(1)        THIRD          SECOND         FIRST
----------------------------------------------------------------------------------------------
<S>                                 <C>             <C>            <C>            <C>
2003
----
Revenue .........................   $ 12,884,512    $ 16,467,896   $ 20,731,573   $ 14,358,834
Operating (loss) income .........   $ (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

2002
----
Revenue .........................   $ 14,604,864    $ 16,349,906   $ 19,793,344   $  9,325,056
Operating income ................   $    198,519    $    803,781   $  1,707,431   $    334,345
Net income ......................   $     51,780    $    343,931   $  1,046,303   $     54,012
Basic earnings per share ........   $       0.00    $       0.03   $       0.11   $       0.00
Diluted earnings per share ......   $       0.00    $       0.03   $       0.10   $       0.00

----------
<FN>
         (1) The Company recorded a Restructuring  Charge of $7.7 million during
the fourth quarter of 2003.
</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.


                                       62
<PAGE>


         INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' 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 8, 2004, included the related
financial  statement schedule as of December 31, 2003, and for each of the three
years in the period ended  December 31, 2003,  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.



                                            BDO Seidman, LLP



Los Angeles, California
March 8, 2004


                                       63
<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>
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
                                       ==========   ==========  ==========   ==========
2001
----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet...............    $  299,224   $  600,200  $  330,799   $  568,625

Reserve for obsolescence
deducted from inventories on
the balance sheet..................             -    1,058,016   1,058,016            -
                                       ----------   ----------  ----------   ----------
                                       $  299,224   $1,658,216  $1,388,815   $  568,625
                                       ==========   ==========  ==========   ==========
</TABLE>


                                       64
<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
believe our  pre-existing  disclosure  controls and  procedures  are adequate to
enable us to comply with our disclosure obligations.

         Within 90 days  prior to the  filing  of this  report,  members  of the
Company's  management,  including the Company's Chief Executive  Officer,  Colin
Dyne, and Chief Financial Officer,  Ronda Ferguson,  evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
Based  upon  that  evaluation,  Mr.  Dyne and Ms.  Ferguson  concluded  that the
Company's  disclosure  controls and procedures are effective in causing material
information to be recorded, processed,  summarized and reported by management of
the Company on a timely basis and to ensure that the quality and  timeliness  of
the Company's public disclosures complies with its SEC disclosure obligations.

CHANGES IN CONTROLS AND PROCEDURES

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

                                    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 2004  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 2004  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 2004  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 2004 Annual Meeting of  Stockholders,
and is incorporated by reference.


                                       65
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         Information  regarding  principal  accountant  fees and  services  will
appear in the proxy statement for the 2004 Annual Meeting of  Stockholders,  and
is incorporated by reference.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a)      FINANCIAL  STATEMENTS  - See Item 8 of this Form  10-K  annual
                  report.

         (b)      Reports on Form 8-K:

                  Current Report on Form 8-K,  reporting item 7 and 12, as filed
                  on November 14, 2003.

                  Current  Report on Form 8-K,  reporting item 5 and 7, as filed
                  on December 22, 2003.

         (c)      Exhibits:

                  See Exhibit Index attached to this Form 10-K annual report.


                                       66
<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 30, 2004
---------------------------        of Directors
Mark Dyne

     /S/ COLIN DYNE                Chief Executive Officer        March 30, 2004
---------------------------        and Director
Colin Dyne

     /S/ RONDA FERGUSON            Chief Financial Officer        March 30, 2004
---------------------------
Ronda Ferguson

                                   Director
---------------------------
Kevin Bermeister

     /S/MICHAEL KATZ               Director                       March 30, 2004
---------------------------
Michael Katz

     /S/JONATHAN BURSTEIN          Director and Vice President    March 30, 2004
---------------------------        of Operations
Jonathan Burstein

                                   Director
---------------------------
Brent Cohen

     /S/ G. MAXWELL PERKS          Director                       March 30, 2004
---------------------------
G. Maxwell Perks


                                       67
<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.

3.5            Certificate  of  Designation  of Series C Convertible  Redeemable
               Preferred  Stock.  Incorporated  by  reference to Exhibit 99.5 to
               Form 8-K filed on October 15, 2001.

3.6            Certificate  of  Designation  of Series D  Convertible  Preferred
               Stock. Incorporated by reference to Exhibit 4.1 to Form 8-K filed
               on December 18, 2003.

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  10.25o 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.


<PAGE>


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

10.7           Registrant's 1997 Stock Incentive Plan, as amended.

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

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.


<PAGE>


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

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.

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.*  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.


<PAGE>


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

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.

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

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

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

10.40          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.


10.41          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.

10.42          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.

10.43          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.

10.44          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.

10.45          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.

10.46          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.

14.1           Code of Ethics.

21.1           Subsidiaries.


<PAGE>


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

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.


         *  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.