===============================================================================
                       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, 2001

[ ]  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 [ ]

     The issuer's revenues for the fiscal year ended December 31, 2001 were
$43,567,630.

     At March 27, 2002 the aggregate market value of the voting and non-voting
common stock held by non-affiliates of the registrant was $13,224,545.

     At March 27, 2002 the issuer had 9,126,409 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 2002 annual
meeting of stockholders are incorporated by reference into Part III of this
report.

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


<PAGE>


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

                                                                            PAGE
PART I

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

Item 2.    Description of Property............................................ 5

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

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

PART II

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

Item 6.    Selected Financial Data............................................ 9

Item 7.    Management's Discussion and Analysis of Financial Condition
               and Results of Operations......................................10

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk ........26

Item 8.    Financial Statements and Supplementary Data:

           Report of Independent Certified Public Accountants.................27

           Consolidated Balance Sheets........................................28

           Consolidated Statements of Operations..............................29

           Consolidated Statements of Stockholders' Equity and
           Convertible Redeemable Preferred Stock for the
           Years Ended December 31, 2001, 2000 and 1999.......................30

           Consolidated Statements of Cash Flows..............................31

           Notes to Consolidated Financial Statements.........................32

           Independent Certified Public Accountants' Report on Schedule II....51

           Schedule II - Valuation and Qualifying Accounts and Reserves.......52

Item 9.    Changes in and Disagreements With Accountants on Accounting
               and Financial Disclosure.......................................53

PART III

Item 10.   Directors and Executive Officers...................................53

Item 11.   Executive Compensation.............................................53

Item 12.   Security Ownership of Certain Beneficial Owners and Management.....53

Item 13.   Certain Relationships and Related Transactions.....................53

PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K....53


                                     Page i
<PAGE>


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

     We specialize in the distribution of a full range of trim items to
manufacturers of fashion apparel, licensed consumer products, specialty
retailers and mass merchandisers. We act as a full service outsourced trim
management department for manufacturers of fashion apparel such as Tarrant
Apparel Group and Azteca Production International. We also serve as a specified
supplier of trim items to specific brands, brand licensees and retailers,
including Abercrombie & Fitch, A/X Armani Exchange, Express, The Limited, Lerner
and Swank, among others. In addition, we distribute zippers under our TALON
brand name to apparel brands and manufacturers such as VF Corporation, Savane
International and Tropical Sportswear, among others.

     We were incorporated in Delaware in September 1997. We were formed to serve
as the parent holding company of Tag-It, Inc., a California corporation, Tag-It
Printing & Packaging Ltd., 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 January 2000, we formed Tag-It Pacific Limited, a
Hong Kong corporation, and in April 2000, we also formed Talon International,
Inc., a Delaware corporation. Both companies are wholly owned subsidiaries of
Tag-It Pacific, Inc.

BUSINESS STRATEGY

     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, 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.

     In December 2001, we purchased the TALON trademark and trade names.
Previously, we were the exclusive distributor of TALON brand zippers. 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. The TALON acquisition is an important step in our strategy to
offer a complete high quality trim package to apparel manufacturers. Our
transition from a distributor to an owner of the TALON brand name better
positions us to revitalize the TALON brand name and capture increased market
share in the industry. As the owner of the TALON brand name we will be able to
more effectively respond to customer needs and better maintain the quality


                                     Page 1
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and value of the Talon products. We intend to make a significant investment in
the TALON brand in order to re-build it to a position of prominence in the
apparel market place. We have introduced a completely revised high quality line
of zippers, broadened distribution to Asia and Mexico, negotiated with new
distributors and initiated a new sales and marketing effort for this brand.
TALON will be promoted both within our trim packages, as well as a stand-alone
product line.

     We also serve as a specified supplier for a variety of major retail brand
and private label oriented companies. A specified supplier is a suppler 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 and Mexico, Hong Kong, Central
America and the Caribbean. We plan to continue to expand operations in Mexico,
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.

     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, in September of 2001. 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. In addition, Coats America will
introduce us and our services to selected Coats America customers worldwide.
Coats plc operates in more than 65 countries and is the largest manufacturer of
industrial thread and textile-related craft products in the world.

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 and include 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


                                     Page 2
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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. We are continuing to
enhance and upgrade our MANAGED TRIM SOLUTION software.

     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 Miami, El Paso, Tlaxcala, 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 advanced equipment for
efficiently handling and applying TALON zippers 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.

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

DESIGN AND DEVELOPMENT

     We estimate that we design approximately 20% of the products we sell. We
have assembled an in-house creative team to produce products with innovative
designs that we believe distinguish our products from those of our competitors.
We support our skills and expertise in material procurement and
product-manufacturing coordination with product 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.

CUSTOMERS

     We have more than 700 customers. Our customers include well-known apparel
manufacturers, such as Abercrombie & Fitch, A\X Armani Exchange, The Limited
Group, Tarrant Apparel Group, Azteca Production International, Swank, which is a
licensee of Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin,
VF Corporation, Savane International 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.

     Commencing in December 1998, we began to provide trim products to Tarrant
Apparel Group for its operations in Tlaxcala, Mexico. We opened a warehouse,
distribution and partial assembly facility in Tlaxcala, Mexico to service
Tarrant Apparel Group and the increasing number of other garment and apparel


                                     Page 3
<PAGE>


manufacturers operating in the region. The Chief Executive Officer and President
of Tarrant Apparel Group are significant stockholders of Tag-It Pacific, Inc.
Tarrant Apparel Group accounted for approximately 42% of our net sales for the
year ended December 31, 2001.

     On December 22, 2000, we 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 will 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. The first contract year used to compute the
minimum sales requirement is for a period of eighteen months. Azteca Production
International has been a significant customer of ours for many years. This
agreement is structured in a manner that is well suited to allow us to utilize
our MANAGED TRIM SOLUTION system to supply Azteca Production International with
its future trim program requirements. We have expanded our facilities in
Tlaxcala, Mexico, to service Azteca Production International's trim
requirements.

SALES AND MARKETING

     We sell our principal products through our own sales force based in Los
Angeles, New York City, Miami, various other cities in the United States and in
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.

     A significant portion of our sales is to customers based in the United
States. For the year ended December 31, 2001, sales to United States based
customers for shipments to production facilities in Mexico and Asia accounted
for 62.2% and 4.6%, 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 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 which
accounted for 57.6% of our purchases in 2001.

     We are able to create most product artwork and any necessary films, dies
and molds used to design and manufacture our products. All bar-coded printing,
assembly and finishing of high quality paper boxes and custom shopping bags are
performed internally by us. We also assemble multi-part jean buttons. All other
products that we design and sell are produced by third party vendors. We 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 produce and distribute bar-coded hang
tags, distribute 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, Miami and Mexico based
operations. Through our assembly and finishing facility in Tijuana, Mexico, we
complete the assembly and finishing of our packaging products and distribute
products to United States and Mexico-based manufacturers.


                                     Page 4
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     Our Florida facility, which opened in January 2001, distributes zipper and
trim-related products to the East Coast of the United States, the Caribbean
Basin, Mexico and Central America.

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" and "Managed Trim Solution".

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 material 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
will allow us to gain market share in the zipper industry.

EMPLOYEES

     As of December 31, 2001, we had approximately 370 full-time employees, with
approximately 54 employees in Los Angeles, 14 employees in Miami, 3 employees in
New York, 11 employees in various other cities, 15 employees in Hong Kong, 189
employees in Tijuana, Mexico and 84 employees in Tlaxcala, Mexico. Our remaining
Tijuana, Mexico, facility was closed in the first quarter of 2002. Our labor
forces in the United States and Hong Kong are non-union. The employees at our
Mexico facilities are represented by two collective bargaining units, the
Sindicato "Mexico Moderno" De Trabajadores De La Baja California, C.R.O.M., and
Sindicato de Trabajadores y Empleados en General de la Confeccion de Ropa,
Fabricacion, Venta y Distribucion, Maquilas, Conexos y Similares del Estado de
Pueblo. In addition to our salaried and hourly workforce, we employ additional
workers at our Mexico facilities on a temporary basis when necessary to meet
production and assembly requirements. Our temporary work force ranges from zero
to approximately 60 workers at any one time throughout the year. We believe that
we have satisfactory employee and labor relations.

ITEM 2. DESCRIPTION OF PROPERTY

     Our headquarters 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 2,600 square feet of office
space in New York, 2,500 square feet of warehouse space in Gardena, California,
21,500 square feet of office and warehouse space in Miami, Florida, 17,000
square feet of warehouse space in Dallas, North Carolina, 1,950 square feet of
warehouse space in El Paso, Texas, 5,900 square feet of office and warehouse
space in Kwun Tong, Hong Kong, 55,000 square feet of production and warehouse
facilities in Tijuana, Mexico, and 22,000 square feet of warehouse, distribution
and administration space in Tlaxcala, Mexico.


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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

     None.


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                                     PART II

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

COMMON STOCK

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

<TABLE>
<CAPTION>
                                                       HIGH            LOW
                                                      -------        --------
         <S>                                          <C>            <C>
         YEAR ENDED DECEMBER 31, 2000
              First Quarter........................   $  6.25        $   4.63
              Second Quarter.......................      5.12            4.25
              Third Quarter........................      4.67            3.75
              Fourth Quarter.......................      4.50            3.34

         YEAR ENDED DECEMBER 31, 2001
              First Quarter........................   $  4.25        $   3.69
              Second Quarter.......................      4.05            3.25
              Third Quarter........................      4.05            3.60
              Fourth Quarter.......................      3.99            3.60
</TABLE>

     On March 27, 2001, the closing sales price of our Common Stock as reported
on the American Stock Exchange was $3.84 per share. As of March 27, 2001, there
were 36 record holders of our Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

     On September 10, 2001, we issued an aggregate of 35,000 warrants to
purchase our common stock to various private parties in exchange for services
provided on our behalf. The options were issued at or slightly above the market
value of our common stock on the date of grant, vest immediately and have a term
of four years.

     On December 21, 2001, we issued 500,000 shares of our common stock pursuant
to an asset purchase agreement, which we entered into with Talon, Inc. and Grupo
Industrial Cierres Ideal, S.A. de C.V.

     In a series of sales on December 28, 2001, January 7, 2002 and January 8,
2002, we entered into stock and warrant purchase agreements with three private
investors, including Mark Dyne, the chairman of our board of directors. Pursuant
to the stock and warrant purchase agreements, we issued an aggregate of 516,665
shares of common stock at a price per share of $3.00 for aggregate proceeds of
$1.5 million. The stock and warrant purchase agreements also include 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 October 1, 2002 for additional
proceeds of $1,200,000. Pursuant to the stock and warrant purchase agreements,
258,332 warrants to purchase common stock were issued. The warrants are
exercisable immediately after closing, one half of the warrants at 110% and the
second half at an exercise price of 120% of the market value of our common stock
on the date of closing. The exercise price for the warrants shall be adjusted
upward by 25% of the amount, if any, that the market price of our common stock
on the exercise date exceeds the initial exercise price (as adjusted) up to a
maximum exercise price of $5.25. The warrants have a term of four years. The
shares contain restrictions related to the sale or transfer of the shares,
registration and voting rights. In March 2002, one of the non-related investors
purchased 100,000 shares of common stock at a price per share of $3.00 pursuant
to the second closing provisions of the stock and warrant purchase agreement for
total proceeds of $300,000. The remaining commitment under the stock and warrant
purchase agreement is for an additional 300,000 shares


                                     Page 7
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with aggregate proceeds of $900,000. Pursuant to the second closing provisions
of the stock and warrant purchase agreement, 50,000 warrants were issued to the
investor.

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.


                                     Page 8
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                               Fiscal Year Ended December 31,
                                                      -------------------------------------------------
                                                         (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
                                                       1998 (1)        1999          2000       2001(2)
                                                      ----------    ----------    ----------  ----------
<S>                                                   <C>           <C>           <C>         <C>
OPERATIONS:
Total revenue                                         $ 18,808       $ 32,385      $ 49,362    $ 43,568

Income (loss) from operations                         $    824       $  2,406      $  2,547    $   (253)

Net income (loss)                                     $    527       $  1,731      $  1,539    $ (1,226)

Net income (loss) per share - basic                   $   0.12       $   0.26      $   0.23    $  (0.16)

Net income (loss) per share - diluted                 $   0.11       $   0.23      $   0.21    $  (0.16)

Weighted average shares outstanding - basic              4,419          6,734         6,838       8,017

Weighted average shares outstanding - diluted            4,960          7,399         7,283       8,017

FINANCIAL POSITION (AT PERIOD END):

Cash, cash equivalents and short-term investments     $  2,065       $    101      $    128    $     47

Total assets                                          $ 14,643       $ 19,855      $ 39,099    $ 40,794

Capital lease obligations and notes payable           $    508       $  1,031      $  3,873    $  6,024

Convertible redeemable preferred stock                $      -       $      -      $      -    $  2,895

Stockholders' equity                                  $  7,090       $  8,861      $ 14,791    $ 15,428

Total liabilities and stockholders equity             $ 14,643       $ 19,855      $ 39,099    $ 40,794

PER SHARE DATA (AT END OF PERIOD):

Net book value per common share                       $   1.05       $   1.31      $   1.88    $   1.76

Common shares outstanding                                6,727          6,778         7,863       8,770

<FN>
(1)  We completed our initial public offering in January of 1998.

(2)  We incurred restructuring charges of $1,561,623 during the year ended
     December 31, 2001.
</FN>
</TABLE>


                                     Page 9
<PAGE>


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

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

     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, 2001, 2000 and
1999. Except for historical information, the matters discussed in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control.

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.

     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.

          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 their 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.

OVERVIEW

     We specialize in the distribution of trim items to manufacturers of fashion
apparel, licensed consumer products, specialty retailers and mass merchandisers.
We act as a full service outsourced trim management department for manufacturers
of fashion apparel such as Tarrant Apparel Group and Azteca Production
International. We also serve as a supplier of trim items to specific brands,
brand licensees and retailers, including Abercrombie & Fitch, A/X Armani
Exchange, Express, The Limited, Lerner and Swank, among others. In addition, we
distribute zippers under our TALON brand name to apparel brands and
manufacturers such as VF Corporation, Savane International and Tropical
Sportswear, among others.


                                    Page 10
<PAGE>


     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, 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 also serve as specified supplier for a variety of major retail brand and
private label oriented companies. 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. In addition, by becoming a
specified supplier to brand customers, we have an opportunity to become the
preferred or sole vendor of trim items for all manufacturers of apparel under
that brand name.

     On December 21, 2001, we entered into an asset purchase agreement with
Talon, Inc. and Grupo Industrial Cierres Ideal, S.A. de C.V. whereby we
purchased certain TALON zipper assets, including the TALON(R) zipper brand name,
trademarks, patents, technical field equipment and inventory. Since July 2000,
we have been the exclusive distributor of TALON brand zippers. TALON is an
American brand with significant name recognition and brand equity. 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. The TALON acquisition is an important step in our strategy to offer a
complete high quality trim package to apparel manufacturers. Our transition from
a distributor to an owner of the TALON brand name better positions us to
revitalize the TALON brand name and capture increased market share in the
industry. As the owner of the TALON brand name, we will be able to more
effectively respond to customer needs and better maintain the quality and value
of the TALON products.

     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 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. Coats was selected for its quality, service, brand
recognition and global reach. Prior to entering into the co-marketing and supply
agreement, we were a long-time customer of Coats, distributing their thread to
sewing operations under our MANAGED TRIM SOLUTION program. This exclusive
agreement will allow Coats to offer its customer base of contractors in Mexico,
Central America and the Caribbean full-service trim management under our MANAGED
TRIM SOLUTION program.


                                    Page 11
<PAGE>


     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. London-based Coats, plc is the world's largest manufacturer of industrial
thread and textile-related craft products. Coats has operations in 65 countries
and has a North American presence in the U.S., Canada, Mexico, Central America
and the Caribbean.

     On January 2, 2001, we purchased assets including customer lists of a
Florida-based distributor of trim products in the apparel industry. As an
element in our strategy to expand in the Caribbean basin and Central America, we
are developing our customer base in this region, including converting selected
customers to complete trim packages via our MANAGED TRIM SOLUTION program.

     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. The
first contract year used to compute the minimum sales requirement is for a
period of eighteen months. Azteca Production International has been a
significant customer of ours for many years. This agreement is structured in a
manner that has allowed us to utilize our MANAGED TRIM SOLUTION system to supply
Azteca Production International with all of its trim program requirements. We
expanded our facilities in Tlaxcala, Mexico, to service Azteca Production
International's trim requirements.

     We also have an exclusive supply agreement with Tarrant Apparel Group and
have been supplying Tarrant Apparel Group with all of its trim requirements
under our MANAGED TRIM SOLUTION system since 1998.

     Sales under our exclusive supply agreements with Azteca Production
International and Tarrant Apparel Group amounted to approximately 63% of our
total sales for the year ended December 2001. We will continue to rely on these
two customers for a significant amount of our sales for the year ended December
2002. Our results of operations will depend to a significant 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.

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

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                  DECEMBER 31,
                                                      ---------------------------------
                                                       2001        2000         1999
                                                      --------    --------     -------
<S>                                                   <C>         <C>          <C>
Net sales.........................................      100.0 %     100.0 %     100.0 %
Cost of goods sold................................       72.7        72.6        67.3
                                                      --------    --------     -------
Gross profit......................................       27.3        27.4        32.7
Selling expenses..................................        3.8         4.2         5.0
General and administrative expenses...............       20.5        18.0        20.2
Restructuring charges.............................        3.6           -           -
                                                      --------    --------     -------
Operating (loss) income...........................      (0.6) %       5.2 %       7.5 %
                                                      ========    ========     =======
</TABLE>


                                    Page 12
<PAGE>


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. We believe
these restructuring measures will significantly reduce our overhead, sales and
marketing and general and administrative expenses in the future.

RESULTS OF OPERATIONS

     Net sales decreased approximately $5,800,000 (or 11.7%) to $43,600,000 for
the year ended December 31, 2001 from $49,400,000 for the year ended December
31, 2000. The decrease in net sales was primarily a result of a reduction of
sales from our Hong Kong operations. Our restructuring plan implemented in the
first quarter of 2001, included the reduction of our sales force and operations
in our Hong Kong facility in order to increase profitability and also included
the reduction of the number of small dollar volume customers with lower gross
margins. The decrease in net sales was also due to a decrease in zipper sales
under our exclusive license and distribution agreement of TALON products, which
began in July 2000. Our exclusive vendor of TALON products discontinued
manufacturing these products in December 2000. We have successfully negotiated
with alternative vendors for TALON products and do not anticipate any further
reductions of TALON sales from present levels. The decrease in net sales for the
year was partially offset by an increase in sales as a result of our January
2001 acquisition of a Florida-based distributor of trim products in the apparel
industry. The overall decrease in sales compared to the prior year is due to a
general slow down of the economy and consumer spending and a further slow down
as a result of the terrorist attacks on September 11, 2001. Management
estimates, based on current customer orders, that there will be a rebound in our
net sales through fiscal 2002 and we estimate that we will exceed 2001 sales
levels.

     Net sales increased approximately $17,000,000 (or 52.5%) to $49,400,000 for
the year ended December 31, 2000 from $32,400,000 for the year ended December
31, 1999. The increase in net sales was the result of an increase in
trim-related sales under our exclusive license and distribution agreement of
TALON products, which began in July 2000, as well as an increase in trim-related
sales from our Tlaxcala, Mexico operations to our largest customer, Tarrant
Apparel Group.

     Gross profit decreased approximately $1,600,000 (or 11.9%) to $11,900,000
for the year ended December 31, 2001 from $13,500,000 for the year ended
December 31, 2000. Gross margin as a percentage of net sales decreased to
approximately 27.3% for the year ended December 31, 2001 as compared to 27.4%
for the year ended December 31, 2000. The decrease in gross profit as a
percentage of net sales for the year ended December 31, 2001 was primarily due
to an increase in the proportion of sales of trim products with lower gross
margins that were included within the complete trim package we offered to our
customers through our MANAGED TRIM SOLUTION. The decrease in gross margin for
the year ended December 31, 2001 was offset by a decrease in manufacturing and
facility costs which was a direct result of the implementation of our
restructuring plan in the first quarter of 2001. The decrease in gross profit as
a percentage of net sales for the year ended December 31, 2001 was also offset
by an increase in gross profit due to a decrease in net sales of TALON products
during the year. Talon products have a lower gross margin than the overall
margin for products included within the complete trim packages we offer to our
customers through our MANAGED TRIM SOLUTION.


                                    Page 13
<PAGE>


     Gross profit increased approximately $2,900,000 to $13,500,000 (or 27.4%)
for the year ended December 31, 2000 from $10,600,000 for the year ended
December 31, 1999. Gross margin as a percentage of net sales decreased to
approximately 27.4% for the year ended December 31, 2000 as compared to 32.7%
for the year ended December 31, 1999. The reduction for the year ended December
31, 2000 was primarily due to an increase in the proportion of sales of trim
products with lower gross margins that were included within the complete trim
package we offered to our customers through our MANAGED TRIM SOLUTION, which
accounted for in excess of 75% of net sales for the year ended December 31,
2000, compared to 50% of net sales in the year ended December 31, 1999. In
addition, sales of TALON products, with lower gross margins, accounted for a
significant percentage of net sales for the year ended December 31, 2000.

     Selling expense decreased approximately $500,000 (or 23.8%) to $1,600,000
for the year ended December 31, 2001 from $2,100,000 for the year ended December
31, 2000. As a percentage of net sales, these expenses decreased to 3.8% for the
year ended December 31, 2001 compared to 4.2% for the year ended December 31,
2000. This decrease was due to a reduction of our sales force which was part of
our restructuring plan that was implemented in the first quarter of 2001.

     Selling expense increased approximately $500,000 to $2,100,000 (or 31.3%)
for the year ended December 31, 2000 from $1,600,000 for the year ended December
31, 1999. As a percentage of net sales, these expenses decreased to 4.2% for the
year ended December 31, 2000 compared to 5.0% for the year ended December 31,
1999. This decrease was primarily due to a reduction of selling expenses
associated with the increased sales volume under MANAGED TRIM SOLUTION, offset
by a slight increase in non-recurring selling expenses due to the introduction
of the TALON product line.

     General and administrative expenses increased approximately $50,000 (or
0.6%) to $8,940,000 for the year ended December 31, 2001 from $8,890,000 for the
year ended December 31, 2000. The increase in these expenses was due to
additional staffing and other expenses related to our new Florida operation,
offset by the reduction of general and administrative expenses in accordance
with the implementation of our first quarter 2001 restructuring plan. As a
percentage of net sales, these expenses increased to 20.5% for the year ended
December 31, 2001 compared to 18.0% for the year ended December 31, 2000, as the
rate of increase in net sales did not exceed that of general and administrative
expenses.

     General and administrative expenses were $8,890,000 for the year ended
December 31, 2000 and $6,550,000 for the year ended December 31, 1999. The
increase of $2,340,000 (or 35.7%) in these expenses was due to additional
staffing (including the addition of TALON customer service and marketing
personnel) and other expenses related to our exclusive license and distribution
agreement of TALON products and the expansion of operations at our Tlaxcala,
Mexico, and Hong Kong facilities. As a percentage of net sales, these expenses
decreased to 18.0% for the year ended December 31, 2000 compared to 20.2% for
the year ended December 31, 1999, due to an increase in net sales that exceeded
the rate of increase in general and administrative expenses.

     Interest expense increased approximately $644,000 (or 85.5%) to $1,397,000
for the year ended December 31, 2001 from $753,000 for the year ended December
31, 2000. Due to expanded operations, we increased our borrowing under our
credit facility with Sanwa Bank, which contributed to the increased interest
expense for the year ended December 31, 2001 as compared to the year ended
December 31, 2000. On May 30, 2001, we replaced our credit facility with Sanwa
Bank with a new facility with UPS Capital Global Trade Finance Corporation which
provides for increased borrowing availability of up to $20,000,000 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 existing Sanwa
credit facility. On May 30, 2001, we began amortizing expenses and fees related
to the replacement of our credit facility. As our borrowings under the new UPS
Capital credit facility increase due to expanding operations, we anticipate that
our interest expense will increase in future periods. This increase in interest
expense will be offset by decreases in the prime rate from prior periods.


                                    Page 14
<PAGE>


     Interest expense increased approximately $496,000 (or 193.0%) to $753,000
for the year ended December 31, 2000 from $257,000 for the year ended December
31, 1999. The proceeds of our January 1998 initial public offering and our
October 1998 private stock sale to KG Investment, LLC allowed us to
substantially reduce our use of factors during 1998 and 1999, which reduced our
cost of funds and bank borrowings during 1999. Due to expanded operations, we
had to increase our borrowing under our credit facility with Sanwa Bank, which
contributed to the increased interest expense for the year ended December 31,
2000.

     The benefit for income taxes amounted to approximately $423,000 for the
year ended December 31, 2001 as compared to a provision for income taxes of
$255,000 for the year ended December 31, 2000. Income taxes decreased for the
year ended December 31, 2001 primarily due to the decreased taxable income as a
result of the net loss incurred for the year ended December 31, 2001. We were
able to utilize net operating loss carry forwards from our subsidiary, AGS
Stationery, Inc. of approximately $430,000 to offset taxable income during 2000.

     The provision for income taxes decreased approximately $163,000 to $255,000
for the year ended December 31, 2000 as compared to $418,000 for the year ended
December 31, 1999. Income taxes decreased for the year ended December 31, 2000
primarily due to decreased taxable income. We were able to utilize net operating
loss carry forwards from our subsidiary, AGS Stationery, Inc. of approximately
$430,000 to offset taxable income during 2000 and 1999.

     Net loss was $1,226,000 for the year ended December 31, 2001 as compared to
net income of $1,539,000 for the year ended December 31, 2000, due primarily to
the restructuring charges incurred during the year of $1.6 million and the
reduction of sales from the prior year of $5.8 million, as discussed above.

     Net income was $1,539,000 for the year ended December 31, 2000 as compared
to net income of $1,731,000 for the year ended December 31, 1999, due primarily
to a decrease in gross margin and increased operating and interest expenses,
offset by an increase in net sales.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

     Cash and cash equivalents decreased to $47,000 at December 31, 2001 from
$128,000 at December 31, 2000. The decrease resulted from $2,051,000 and
$717,000 of cash used by operating and investing activities, offset by
$2,687,000 of cash provided by financing activities.

     Net cash used in operating activities was approximately $2,051,000 and
$3,631,000 for the years ended December 31, 2001 and 2000, respectively. The
decrease in cash used in operations for the year ended December 31, 2001
resulted primarily from increases in inventories and net losses, which was
offset by decreases in accounts receivable. Cash used in operations for the year
ended December 31, 2000 resulted primarily from increased accounts receivables
and inventories, offset by increased accounts payable from accrued expenses.

     Net cash used in operating activities was approximately $3,631,000 and
$3,877,000 for the years ended December 31, 2000 and 1999, respectively. The
decrease in cash used in operations for the year ended December 31, 2000
resulted primarily from increases in accounts receivable and inventories, which
was offset by increases in accounts payable and accrued expenses. Cash used in
operations for the year ended December 31, 1999 resulted primarily from
increases in accounts receivable and inventories, offset by decreased accounts
payable from related parties.

     Net cash used in investing activities was $717,000 and $2,060,000 for the
years ended December 31, 2001 and 2000, respectively. Net cash used in investing
activities for the years ended December 31, 2001 and 2000 consisted primarily of
capital expenditures for computer equipment and upgrades.


                                    Page 15
<PAGE>


     Net cash used in investing activities was $2,060,000 and $1,545,000 for the
years ended December 31, 2000 and 1999, respectively. Net cash used in investing
activities for the years ended December 31, 2000 and 1999 consisted primarily of
capital expenditures for computer equipment upgrades and the procurement of
production equipment.

     Net cash provided by financing activities was approximately $2,687,000 and
$5,719,000 for the years ended December 31, 2001 and 2000, respectively. Net
cash provided by financing activities for the year ended December 31, 2001
primarily reflects funds raised from preferred and common stock issuances,
offset by the repayment of borrowings under our credit facility and the
repayment of capital leases. Net cash provided by financing activities for the
year ended December 31, 2000 primarily reflects increased borrowings under our
credit facility and borrowings from related parties.

     Net cash provided by financing activities was approximately $5,719,000 and
$3,457,000 for the years ended December 31, 2000 and 1999, respectively. Net
cash provided by financing activities for the year ended December 31, 2000
primarily reflects increased borrowings under our credit facility and also
results from borrowings from related parties. Net cash provided by financing
activities for the year ended December 31, 1999 primarily reflects proceeds from
our credit facility, offset by the repayment of loans to related parties.

     On May 30, 2001, we replaced our Sanwa Bank credit facility with a new
facility with UPS Capital Global Trade Finance Corporation which provides for
increased borrowing availability of up to $20,000,000. The initial term of the
agreement is three years 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%.
The credit facility requires the compliance with certain financial covenants
including net worth, fixed charge ratio and capital expenditures. Availability
under the UPS Capital credit facility is determined based on a defined formula
related to eligible accounts receivable and inventory. Eligible accounts
receivable are reduced if our accounts receivable customer balances are
concentrated in excess of the percentages allowed under our agreement with UPS
Capital. If our business becomes further dependant on one or a limited number of
customers, increases in concentration levels of our receivables may limit the
account receivables deemed eligible under our credit facility which could
correspondingly reduce our availability under the UPS Capital credit facility.
At December 31, 2001, outstanding borrowings under the UPS Capital credit
facility amounted to $9,661,000. At December 31, 2000, outstanding borrowings
under the Sanwa Bank facility amounted to $9,956,000. There were no open letters
of credit at December 31, 2001 or 2000.

     We currently satisfy our working capital requirements primarily through
cash flow generated from operations and borrowings under our credit facility
with UPS Capital. Our maximum availability under the credit facility is $20
million. Our borrowing base availability, calculated based on a defined formula
related to eligible accounts receivable and inventory, ranged from approximately
$10,600,000 to $13,300,000 from May 30, 2001 to December 31, 2001. A reduction
in eligible receivables and inventories would reduce our borrowing base
availability below current levels which may not be adequate to satisfy our
working capital requirements.

     Historically we have 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 any decreases in eligible
accounts receivables generated from our sales. The decrease in borrowing
availability under our credit facility may result in our inability to meet our
working capital requirements during the first and fourth quarters of each year.

     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


                                    Page 16
<PAGE>


securities; guarantying third party obligations; repaying subordinated debt; and
making changes in our corporate structure. The UPS credit facility further
requires the compliance with certain financial covenants including net worth,
fixed charge coverage ratio and capital expenditures. As of December 31, 2001,
we were in compliance with these covenants.

     In a series of sales on December 28, 2001, January 7, 2002 and January 8,
2002, we entered into stock and warrant purchase agreements with three private
investors, including Mark Dyne, the chairman of our board of directors. Pursuant
to the stock and warrant purchase agreements, we 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 include 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 October 1, 2002 for additional proceeds of
$1,200,000. In March 2002, one of the non-related investors purchased 100,000
shares of common stock at a price per share of $3.00 pursuant to the second
closing provisions of the stock and warrant purchase agreement for total
proceeds of $300,000. The remaining commitment under the stock and warrant
purchase agreement is for an additional 300,000 shares with aggregate proceeds
of $900,000. Pursuant to the second closing provisions of the stock and warrant
purchase agreement, 50,000 warrants were issued to the investor.

     In accordance with the series C preferred stock purchase agreement entered
into by us and Coats North America Consolidated, Inc. on September 20, 2001, we
issued 759,494 shares of series C convertible redeemable preferred stock to
Coats North America Consolidated, Inc. in exchange for an equity investment from
Coats North America Consolidated of $3 million cash. The series C preferred
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 series C preferred shares are redeemable at the option of the
holder after four years. If the holders elect to redeem the series C preferred
shares, we have the option to redeem for cash at the stated value of $3 million
or in the form of the our common stock at 85% of the market price of our common
stock on the date of redemption. If the market price of our common stock on the
date of redemption is less than $2.75 per share, we must redeem for cash at the
stated value of the series C preferred shares. We can elect to redeem the series
C preferred 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 our common stock. Each holder of the
series C preferred shares has the right to vote with our common stock based on
the number of our common shares that the series C preferred shares could then be
converted into on the record date. Total legal and other costs associated with
this transaction of $105,000 were net against the $3 million proceeds received
from Coats North America Consolidated.

     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 (5.125% and 9.0% at December 31, 2001 and 2000). As of
December 31, 2001, the amount factored without recourse was approximately
$106,000 and the amount due from the factor and recorded as a current asset was
approximately $106,000. If the factor determines, at its discretion, to advance
against the receivable, the customer's payment obligation is recorded as our
receivable and the advance from the factor is recorded as a current liability.
There were no outstanding advances from the factor as of December 31, 2001 and
2000.

     As of December 31, 2001, we had outstanding related-party debt of
approximately $850,000 at a weighted average interest rate of 10.5%, 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. As of December 31, 2000, we had outstanding related-party debt, of
approximately $883,000 and $2,600,000 at a weighted average interest rate of
10.5% and 10%, and additional non-related-party debt of $25,200 at an interest
rate of 10%. The


                                    Page 17
<PAGE>


majority of related-party debt was due and payable on April 1, 2002, with the
remainder due on the fifteenth day following the date of delivery of written
demand for payment.

     Our receivables decreased from $12,500,000 at December 31, 2000 to
$11,100,000 at December 31, 2001. This decrease was due primarily to decreased
sales and decreased related-party trade receivables.

     In October 1998, we sold 2,390,000 shares of our common stock at a purchase
price per share of $1.125 to KG Investment, LLC. We used the $2,688,750 raised
in the private placement to fund a portion of our business growth plans and
operations. KG Investment is owned by Gerard Guez and Todd Kay, executive
officers and significant shareholders of Tarrant Apparel Group. Commencing in
December 1998, we began to provide trim products to Tarrant Apparel Group for
its operations in Mexico. In connection therewith, we purchased $2.25 million of
Tarrant's existing inventory in December 1998 for resale to Tarrant. Total sales
to Tarrant Apparel Group for the years ended December 31, 2001, 2000 and 1999
amounted to approximately $18,438,000, $23,760,000 and $15,500,000. Pricing is
consistent with competitive vendors and terms are net 60 days.

     On December 22, 2000, we entered into a supply agreement with Azteca
Production International, Inc., AZT International SA D RL and Commerce
Investment Group, LLC. The term of the supply agreement is three years, with
automatic renewals of consecutive three-year terms, and provides for a minimum
of $10 million in sales for each contract year beginning April 1, 2001. The
first contract year used to compute the minimum sales requirement is for a
period of eighteen months. In accordance with the agreement, we purchased
existing inventory from Azteca Production International in exchange for
1,000,000 shares of our common stock. Commencing in December 2000, we began to
provide trim products to Azteca Production International, Inc for its operations
in Mexico. In connection therewith, we purchased Azteca Production
International's existing trim inventory in December 2000 for resale to Azteca
Production International. Total sales to Azteca Production International for the
years ended December 31, 2001 and 2000 amounted to approximately $9,016,000 and
$1,878,000. Pricing is consistent with competitive vendors and terms are net 60
days.

     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 through fiscal
2002. If our cash from operations is less than anticipated or our working
capital requirements and capital expenditures are greater than we expect, we
will 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. The extent
of our future capital requirements will depend, however, 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 inventory and our expansion into
foreign markets. 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.

     Our need for additional long-term financing includes the integration and
expansion of our operations to exploit our rights under our TALON trade name and
the expansion of our operations in the Asian, Caribbean and Central America
markets.


                                    Page 18
<PAGE>


CONTRACTUAL OBLIGATIONS

     The following summarizes our contractual obligations at December 31, 2001
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 notes payable        $  4,900,000   $  1,100,000   $  3,800,000    $       -     $        -
Capital lease obligations         $    249,172   $    180,142   $     69,030    $       -     $        -
Subordinated notes payable to
  related parties (1)             $    849,971   $    849,971   $          -    $       -     $        -
Operating leases                  $  2,069,832   $    650,661   $  1,271,451    $ 147,720     $        -
Line of credit                    $  9,660,581   $  9,660,581   $          -    $       -     $        -
Note payable                      $     25,200   $     25,200   $          -    $       -     $        -
<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>


NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that we recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS 142, that we reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

     SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that we 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. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires we complete a transitional goodwill impairment
test nine months from the date of adoption. We also are required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.

     Our previous business combinations were accounted for using the purchase
method. As of December 31, 2001, the net carrying amount of goodwill is $450,000
and other intangible assets is $4,110,750. Amortization expense related to
goodwill and intangibles outstanding at December 31, 2001 amounted to $178,333.
Currently, we are assessing but have not yet determined how the adoption of SFAS
141 and SFAS 142 will impact our financial position and results of operations.

     In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for


                                    Page 19
<PAGE>


fiscal years beginning after June 15, 2002. We believe the adoption of this
Statement will have no material impact on our financial statements.

     In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFASB 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, are to be applied
prospectively. We believe the adoption of this Statement will have no material
impact on our financial statements.


                                    Page 20
<PAGE>


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 largest
customer, Tarrant Apparel Group, accounted for approximately 42.0% and 48.1% of
our net sales, on a consolidated basis, for the years ended December 31, 2001
and 2000. In December 2000, we entered into an exclusive supply agreement with
Hubert Guez, Paul Guez, Azteca Production International, AZT International SA D
RL, and Commerce Investment Group, LLC that provides for a minimum of
$10,000,000 in total annual purchases by Azteca Production International and its
affiliates during each year of the three-year term of the agreement. Azteca
Production International is required to purchase from us only if we are able to
provide trim products on a competitive basis in terms of price and quality.

     Our results of operations will depend to a significant 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 because:

     o    We will lose a primary source of revenue if either of Tarrant Apparel
          Group or Azteca Production International choose not to purchase our
          products or services;

     o    We may not be able to reduce fixed costs incurred in developing the
          relationship with Azteca Production International and Tarrant Apparel
          Group 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 Tarrant Apparel
Group and Azteca Production International. This concentration of our business
adversely affects our ability to obtain receivable based financing due to
customer concentration limitations customarily applied by financial
institutions, including UPS Capital and factors. Given the nature of our
business, we do not expect our customer concentration to improve significantly
in the near future. 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 CONTINUE TO
WORSEN. Our revenues are dependent 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


                                    Page 21
<PAGE>


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.

     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.

     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 will 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 will be significantly impaired.

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

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

     o    The timing and magnitude of customers' marketing campaigns;

     o    The loss or addition of a major customer;

     o    The availability and pricing of materials for our products;

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

     o    Currency fluctuations;

     o    Delays caused by third parties; and

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

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


                                    Page 22
<PAGE>


     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 Mexico, Central America and Caribbean
facilities with the information systems of our principal offices in California
and Florida. Our failure to do so could result in lost revenues, delay financial
reporting or adversely affect availability of funds under our credit facilities.

     BECAUSE WE GENERALLY DO NOT ENTER INTO LONG-TERM SALES CONTRACTS WITH ALL
OF OUR CUSTOMERS, OUR SALES MAY DECLINE IF OUR EXISTING CUSTOMERS CHOOSE NOT TO
BUY OUR PRODUCTS OR SERVICES. Very few of our customers are required to purchase
our products on a long-term basis. We usually document sales by a purchase order
or similar documentation limited to the specific sale. As a result, a customer
from whom we generate substantial revenue in one period may not be a substantial
source of revenue in a future period. In addition, our customers generally have
the right to terminate their relationships with us without penalty and with
little or no notice. Without long-term contracts with the majority of our
customers, we cannot be certain that our customers will continue to purchase our
products or that we will be able to maintain a consistent level of sales.

     THE LOSS OF KEY MANAGEMENT, DESIGN 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 design 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 nor is he the subject of key
man insurance. 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 design, 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


                                    Page 23
<PAGE>


implementing the MANAGED TRIM SOLUTION, our customers may experience
interruptions in service due to defects in our hardware or our source code. In
addition, since our MANAGED TRIM SOLUTION is Internet-based, interruptions in
Internet service generally can negatively impact our customers' ability to use
the MANAGED TRIM SOLUTION to monitor and manage various aspects of their trim
needs. Such defects or interruptions could result in lost revenues and lost
customers.

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

     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;


                                    Page 24
<PAGE>


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

     o    Announcements of key developments by our competitors; and

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

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

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

     WE 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
December 31, 2001, our officers and directors and their affiliates owned
approximately 42.4% 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 40.4% of the
outstanding shares of our common stock. 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 11.4% of the
outstanding shares of common stock at December 31, 2001. KG Investment, LLC, a
significant stockholder, owns approximately 27.2% of the outstanding shares of
our common stock at December 31, 2001. As a result, our officers and directors,
the Dyne family and KG Investment, LLC 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.


                                    Page 25
<PAGE>


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

     All of our sales are denominated in U.S. dollars or the currency of the
country of origin 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 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. 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.


                                    Page 26
<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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.


/s/ BDO Seidman, LLP

Los Angeles, California
March 8, 2002



                                    Page 27
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                                                                            December 31,       December 31,
                                                                                2001               2000
                                                                           ---------------    ---------------
<S>                                                                        <C>                <C>
Assets
Current assets:
   Cash and cash equivalents.............................................  $       46,948     $      128,093
   Due from factor.......................................................         105,749             25,140
   Trade accounts receivable, net........................................       3,037,034          3,466,314
   Trade accounts receivable, related parties............................       7,914,838          9,041,752
    Refundable income taxes..............................................         259,605                  -
   Due from related parties..............................................         814,219            513,614
   Inventories...........................................................      20,450,740         19,868,160
   Prepaid expenses and other current assets.............................         408,146            738,735
   Deferred income taxes.................................................         107,599                  -
                                                                           ---------------    ---------------
Total current assets.....................................................      33,144,878         33,781,808

Property and equipment, net of accumulated depreciation
   and amortization......................................................       2,592,965          3,755,127
Tradename................................................................       4,110,750                  -
Other assets.............................................................         944,912          1,562,539
                                                                           ---------------    ---------------
Total assets.............................................................  $   40,793,505     $   39,099,474
                                                                           ===============    ===============
Liabilities, Convertible Redeemable Preferred Stock and
Stockholders' Equity
Current liabilities:
  Bank overdraft.........................................................  $            -     $      584,831
  Line of credit.........................................................       9,660,581          9,956,436
  Accounts payable.......................................................       5,176,436          8,228,677
  Accrued expenses.......................................................       1,609,378          1,484,765
  Income taxes payable...................................................               -             66,942
  Note payable...........................................................          25,200             25,200
  Subordinated notes payable to related parties..........................         849,971            882,970
  Current portion of capital lease obligations...........................         180,142            250,403
   Current portion of subordinated note payable..........................       1,100,000                  -
                                                                           ---------------    ---------------
Total current liabilities................................................      18,601,708         21,480,224

Capital lease obligations, less current portion..........................          69,030            113,046
Deferred income taxes....................................................               -            113,335
Subordinated note payable, less current portion..........................       3,800,000          2,601,470
                                                                           ---------------    ---------------
Total liabilities........................................................      22,470,738         24,308,075
                                                                           ---------------    ---------------
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, 2001(stated value $3,000,001)...........       2,895,001                  -

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

   Convertible preferred stock Series B, $0.001 par value;
     850,000 shares authorized; 850,000 shares issued and
       outstanding at December 31, 2000..................................               -          1,400,000

   Common stock, $0.001 par value, 30,000,000 shares authorized;
     8,769,910 shares issued and outstanding at December 31, 2001;
     7,863,244 at December 31, 2000......................................           8,771              7,864

  Additional paid-in capital.............................................      15,048,971         11,737,810

  Retained earnings .....................................................         370,024          1,645,725
                                                                           ---------------    ---------------
Total stockholders' equity...............................................      15,427,766         14,791,399
                                                                           ---------------    ---------------
Total liabilities, convertible redeemable preferred stock
  and stockholders' equity...............................................  $   40,793,505     $   39,099,474
                                                                           ===============    ===============
</TABLE>


          See Accompanying notes to consolidated financial statements.


                                    Page 28
<PAGE>


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

                                                             Year Ended          Year Ended        Year Ended
                                                            December 31,        December 31,      December 31,
                                                                2001                2000              1999
                                                           --------------      --------------    -------------
<S>                                                       <C>                <C>                <C>
Net sales to unrelated parties........................    $   16,114,039     $    23,723,666    $  16,740,836
Net sales to related parties..........................        27,453,591          25,638,000       15,644,000
                                                           --------------      --------------    -------------
Total net sales.......................................        43,567,630          49,361,666       32,384,836
Cost of goods sold....................................        31,678,663          35,821,097       21,807,054
                                                           --------------      --------------    -------------
Gross profit..........................................        11,888,967          13,540,569       10,577,782

Selling expenses......................................         1,639,263           2,104,614        1,626,500
General and administrative expenses...................         8,940,593           8,889,272        6,545,252
Restructuring Charges (Note 18).......................         1,561,623                   -                -
                                                           --------------      --------------    -------------
Total operating expenses..............................        12,141,479          10,993,886        8,171,752

(Loss) income from operations.........................          (252,512)          2,546,683        2,406,030
Interest expense......................................         1,396,612             752,902          257,112
                                                           --------------      --------------    -------------
(Loss) income before income taxes.....................        (1,649,124)          1,793,781        2,148,918
(Benefit) provision for income taxes..................          (423,373)            254,596          418,253
                                                           --------------      --------------    -------------
Net (loss) income.....................................    $   (1,225,751)    $     1,539,185    $   1,730,665
                                                           ==============      ==============    =============
Less:  Preferred stock dividends......................           (49,950)                  -                -
                                                           --------------      --------------    -------------
Net (loss) income to common shareholders..............    $   (1,275,701)    $     1,539,185    $   1,730,665
                                                           ==============      ==============    =============
Basic (loss) earnings per share.......................    $        (0.16)    $          0.23    $        0.26
                                                           ==============      ==============    =============
Diluted (loss) earnings per share.....................    $        (0.16)    $          0.21    $        0.23
                                                           ==============      ==============    =============
Basic weighted average shares outstanding.............         8,017,134           6,838,345        6,733,500
                                                           ==============      ==============    =============
Diluted weighted average shares outstanding...........         8,017,134           7,283,261        7,398,838
                                                           ==============      ==============    =============
</TABLE>



          See accompanying notes to consolidated financial statements.


                                    Page 29
<PAGE>


<TABLE>
<CAPTION>
                              TAG-IT PACIFIC, INC.
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                  CONVERTIBLE REDEEMABLE PREFERRED STOCK YEARS
                     ENDED DECEMBER 31, 2001, 2000 AND 1999

                                                   Preferred Stock     Preferred Stock
                                    Common Stock       Series A           Series B           Additional     Retained
                                -----------------  ---------------  ----------------------    Paid-In       Earnings
                                 Shares    Amount  Shares  Amount    Shares      Amount       Capital       (Deficit)      Total
                                ---------  ------  ------  -------  ---------  -----------   -----------   -----------  ------------
<S>                             <C>        <C>     <C>     <C>      <C>        <C>           <C>           <C>          <C>
BALANCE, JANUARY 1, 1999        6,726,677  $6,727      -   $   -           -   $        -    $ 8,707,258   $(1,624,12)  $ 7,089,860
 Common stock issued
   upon exercise of
   options and warrants            50,879      51      -       -           -            -         40,899            -        40,950
   Net income                           -       -      -       -           -            -              -    1,730,665     1,730,665
                                ---------  ------  ------  ------   ---------  -----------   -----------   -----------   -----------
BALANCE, DECEMBER 31, 1999      6,777,556   6,778      -       -           -            -      8,748,157      106,540     8,861,475
 Preferred stock issue for
   distribution rights                  -       -      -       -     850,000    1,400,000             -             -     1,400,000
 Common stock issued
  for supply agreement
   and inventory                1,000,000   1,000      -       -           -            -      2,799,000            -     2,800,000
 Common stock issued
  for settlement
   agreement                       12,999      13      -       -           -            -         57,546            -        57,559
 Common stock issued
  upon exercise of
   options and
     warrants                      72,689      73      -       -           -            -          3,827            -         3,900
 Tax benefit from
  issuance of
   stock options                        -       -      -       -           -            -        129,280            -       129,280
   Net income                           -       -      -       -           -            -              -    1,539,185     1,539,185
                                ---------  ------  ------  ------   ---------  -----------   -----------   -----------   -----------
BALANCE, DECEMBER 31, 2000      7,863,244   7,864      -       -     850,000    1,400,000     11,737,810    1,645,725    14,791,399
 Preferred stock issued
  for equity investment                 -       -      -       -           -            -              -            -             -
 Common stock issued
  upon exercise of options         15,000      15      -       -           -            -         19,485            -        19,500
     Issuance of warrants               -       -      -       -           -            -          5,170            -         5,170
 Common stock issued in
     acquisition of assets        125,000     125      -       -           -            -        499,875            -       500,000
 Acquisition of trademarks        500,000     500      -       -    (850,000)   (1,400,00)     1,969,500            -       570,000
 Common stock issued in
   private placement
    transaction                   266,666     267      -       -           -           -         799,731            -       799,998
 Tax benefit from issuance
  of stock options                      -       -      -       -           -           -          17,400            -        17,400
 Preferred stock dividends              -       -      -       -           -           -               -      (49,950)      (49,950)
   Net loss                             -       -      -       -           -           -               -    (1,225,75)   (1,225,751)
                                ---------  ------  ------  ------   ---------  -----------   -----------   -----------   -----------
BALANCE, DECEMBER 31, 2001      8,769,910  $8,771      -   $   -           -   $       -     $15,048,971   $  370,024    $15,427,766
                                =========  ======  ======  ======   =========  ===========   ===========   ===========   ===========


                                   Preferred Stock
                                       Series C
                                ---------------------
                                 Shares      Amount
                                --------  -----------
BALANCE, JANUARY 1, 1999               -  $         -
 Common stock issued
   upon exercise of
   options and warrants                -            -
   Net income                          -            -
                                --------  -----------
BALANCE, DECEMBER 31, 1999             -            -
 Preferred stock issue for
   distribution rights                 -            -
 Common stock issued
  for supply agreement
   and inventory                       -            -
 Common stock issued
  for settlement
   agreement                           -            -
 Common stock issued
  upon exercise of
   options and
     warrants                          -            -
 Tax benefit from
  issuance of
   stock options                       -            -
   Net income                          -            -
                                --------  -----------
BALANCE, DECEMBER 31, 2000             -            -
 Preferred stock issued
  for equity investment          759,494    2,895,001
 Common stock issued
  upon exercise of options             -            -
     Issuance of warrants              -            -
 Common stock issued in
     acquisition of assets             -            -
 Acquisition of trademarks             -            -
 Common stock issued in
   private placement
    transaction                        -            -
 Tax benefit from issuance
  of stock options                     -            -
 Preferred stock dividends             -            -
   Net loss                            -            -
                                --------  -----------
BALANCE, DECEMBER 31, 2001       759,494  $ 2,895,001
                                ========  ===========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                    Page 30
<PAGE>


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

                                                           Year Ended       Year Ended       Year Ended
                                                          December 31,     December 31,     December 31,
                                                              2001             2000             1999
                                                          -------------    -------------    -------------
<S>                                                       <C>              <C>              <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
  Net (loss) income...................................    $ (1,225,751)    $  1,539,185     $  1,730,665
  Adjustments to reconcile net (loss) income to
     net cash used in operating activities:
    Depreciation and amortization.....................       1,478,055        1,039,027          641,953
    (Increase) decrease in deferred income taxes .....        (220,934)          64,517         (109,441)
    Loss (gain) on sale of assets.....................         684,391          (14,584)               -
    Stock issued for services.........................           5,170           57,559                -
    Increase (decrease) in allowance for doubtful
    accounts..........................................         (80,599)         244,226         (216,115)
  Changes in operating assets and liabilities:
    Receivables, including related parties............         788,022       (7,622,086)        (556,238)
    Inventories.......................................      (2,497,580)      (4,408,021)      (4,401,919)
    Prepaid expenses and other current assets.........         330,588          454,338         (240,471)
    Other assets......................................        (447,618)         (48,207)        (172,648)
    Accounts payable..................................        (590,780)       4,003,016        1,587,213
    Accounts payable, related party...................               -                -       (2,250,626)
    Accrued expenses..................................          35,098        1,082,976          (69,191)
    Income taxes payable..............................        (309,147)         (23,088)         180,309
                                                          -------------    -------------    -------------
Net cash used in operating activities.................      (2,051,085)      (3,631,142)      (3,876,509)
                                                          -------------    -------------    -------------
Cash flows from investing activities:
  Additional loans to related parties.................        (300,605)        (244,565)        (108,081)
  Acquisition of property and equipment...............        (534,873)      (1,832,816)      (1,436,826)
  Proceeds from sale of equipment.....................         118,880           17,000                -
                                                          -------------    -------------    -------------
Net cash used in investing activities.................        (716,598)      (2,060,381)      (1,544,907)
                                                          -------------    -------------    -------------
Cash flows from financing activities:
  Bank overdraft......................................        (584,831)         584,831                -
  Proceeds from preferred stock issuance..............       2,895,001                -                -
  Proceeds from common stock issuance.................         799,998                -                -
  Proceeds from exercise of stock options and warrants          19,500            3,900           40,950
  (Repayment) proceeds from bank line of credit, net..        (295,855)       4,889,178        3,578,259
  Proceeds from capital lease obligations.............         207,240                -                -
  Payment of capital lease obligations................        (321,516)        (236,912)         (85,009)
  Repayment of notes payable..........................               -                -          (30,840)
  Proceeds from notes payable to related parties......         180,000          685,000          160,000
  Repayment of notes payable to related parties.......        (212,999)        (207,179)        (206,477)
                                                          -------------    -------------    -------------
Net cash provided by financing activities.............       2,686,538        5,718,818        3,456,883
                                                          -------------    -------------    -------------
Net (decrease) increase in cash and cash equivalents..         (81,145)          27,295       (1,964,533)
Cash and cash equivalents, beginning of year..........         128,093          100,798        2,065,331
                                                          -------------    -------------    -------------
Cash and cash equivalents, end of year................    $     46,948     $    128,093     $    100,798
                                                          =============    =============    =============
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
    Interest paid.....................................    $  1,312,805     $    746,433     $    269,116
    Interest received.................................    $     (2,430)    $          -     $          -
    Income taxes paid.................................    $     22,780     $    237,415     $    174,334
    Income taxes received.............................    $    (10,389)    $    (21,400)               -
  Non-cash financing activity:
    Common stock issued in acquisition of assets......    $    500,000     $          -     $          -
    Capital lease obligations.........................    $          -     $          -     $    685,369
    Preferred stock issued in exchange for
    distribution rights...............................    $                $  1,400,000     $          -
    Note to related party issued in exchange for
    inventory of $2,830,024, less imputed interest of
    $272,000..........................................    $          -     $  2,558,024     $          -
    Common stock issued in exchange for inventory.....    $          -     $  2,800,000     $          -
       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.


                                    Page 31
<PAGE>


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


NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

     The Company is the parent holding company of Tag-It, Inc., a California
corporation, Tag-It Pacific (HK) Ltd., a BVI corporation (formerly Tag-it
Printing & Packaging Ltd.), Tag-it de Mexico, S.A. de C.V., A.G.S. Stationery,
Inc., a California corporation ("AGS Stationery") and Pacific Trim & Belt, Inc.,
a California corporation (collectively, the "Subsidiaries"), all of which were
consolidated under a parent limited liability company on October 17, 1997 (the
"Consolidation") and became wholly-owned subsidiaries of the Company immediately
prior to the effective date of the Company's initial public offering in January
1998 (the "Offering"). Immediately prior to the Offering, the outstanding
membership units of Tag-It Pacific LLC were converted to 2,470,001 shares of
Common Stock of the Company (the Exchange and such conversions are referred to
as the "Conversion"). In November 1998, the Company formed a wholly-owned
subsidiary, Pacific Trim, SA de CV located in Tlaxcala, Mexico (now included in
"Subsidiaries"). All the activities of this company were merged into Tag-It de
Mexico, SA de CV, in 1999. In January 2000, the Company formed Tag-it Pacific
Limited, a Hong Kong corporation, and in April 2000, the Company formed Talon
International, Inc., a Delaware corporation. Both newly formed corporations are
100% wholly-owned Subsidiaries of Tag-it Pacific, Inc. Pacific Trim & Belt, Inc.
was dissolved during 2000.

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

     On July 8, 1999, the Company changed the number of authorized common shares
from 15,000,000 to 30,000,000.

     All significant intercompany accounts and transactions have been eliminated
in consolidation. Assets and liabilities of foreign subsidiaries are translated
at rates of exchange in effect at the close of the period. Revenues and expenses
are translated at the weighted average of exchange rates in effect during the
year. The resulting translation gains and losses are deferred and are shown as a
separate component of stockholders' equity and transaction gains and losses are
recorded in the consolidated statement of income in the period incurred. During
2001, 2000 and 1999, foreign currency translation and transaction gains and
losses were not material.

NATURE OF BUSINESS

     Tag-It Pacific, Inc. (the "Company") specializes in the distribution of a
full range of trim items to manufacturers of fashion apparel, licensed consumer
products, specialty retailers and mass merchandisers. The Company acts as a full
service outsourced trim management department for manufacturers of fashion
apparel such as Tarrant Apparel Group 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, A\X Armani
Exchange, Express, The Limited, Lerner, Swank, VF Corporation, Savane
International and Tropical Sportswear among others. In addition, we distribute
zippers under our TALON brand name to apparel brands and manufacturers such as
VF Corporation, Savane International and Tropical Sportswear, among others.


                                    Page 32
<PAGE>



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


REVENUE RECOGNITION

     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, 2001,
2000 and 1999.

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).

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 ranging from five to seven years.
Leasehold improvements are amortized using the straight-line method over the
term of the lease or the estimated life of the related improvements, whichever
is shorter.


                                    Page 33
<PAGE>



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


IMPAIRMENT OF LONG-LIVED ASSETS

     The Company periodically assesses the recoverability of the carrying
amounts of long-lived assets, including intangible assets. A loss is recognized
when expected undiscounted future cash flows are less than the carrying amount
of the asset. The impairment loss is the difference by which the carrying amount
of the asset exceeds its fair value. The Company did not record any losses due
to impairment of long-lived assets during the years ended December 31, 2001,
2000 and 1999.

RECLASSIFICATION

     Certain reclassifications have been made to the prior year financial
statements to conform with the 2001 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.

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.

     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.

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.


                                    Page 34
<PAGE>



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


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.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

     SFAS 142 requires, among other things, that companies 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. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test nine months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

     The Company's previous business combinations were accounted for using the
purchase method. As of December 31, 2001, the net carrying amount of goodwill is
$450,000 and other intangible assets is $4,110,750. Amortization expense related
to goodwill and other intangibles amounted to $178,333 for the year ended
December 31, 2001. Management has determined that goodwill and other intangible
assets have indefinite lives. Currently, the Company is assessing but has not
yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.

     In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company believes the adoption of this Statement will have no
material impact on its financial statements.

     In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFASB 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company believes the adoption of this Statement will have no
material impact on its financial statements.


                                    Page 35
<PAGE>


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



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, 2001                      December 31, 2000                     December 31, 1999
                         -------------------------------------  ------------------------------------- -----------------------------
                                                    Per                                 Per                                   Per
                         Loss          Shares      Share      Income      Shares       Share      Income        Shares       Share
Years ended:          (Numerator)   (Denominator)  Amount   (Numerator)  (Denominator) Amount   (Numerator)  (Denominator)   Amount
--------------------  ------------  -------------  -------  -----------  ------------- ------  ------------  -------------   ------
<S>                   <C>           <C>            <C>      <C>          <C>           <C>     <C>           <C>             <C>
Basic earnings per
 share:
   Income (loss)
   available
   to common
   stockholders.....  $(1,275,701)    8,017,134    $(0.16)  $1,539,185     6,838,345   $0.23    $1,730,665    6,733,500      $0.26

Effect of dilutive
 securities:
   Options..........                          -                              386,903                            427,904
   Warrants.........                          -                               58,013                            237,434
                      ------------    ---------    -------  ---------      ---------   -----   -----------    ----------     ------
Income (loss)
 available to
   common
   stockholders.......$(1,275,701)    8,017,134    $(0.16)  $1,539,185     7,283,261   $0.21    $1,730,665    7,398,838      $0.23
                      ============    =========    =======  ==========     =========   ======   ==========    ==========     ======
</TABLE>


     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.

     Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00 and
$4.80, options to purchase 797,000 shares of common stock at between $4.125 and
$4.50 and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2000, 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, 2000, 850,000 shares of preferred Series B stock convertible
when the average trading price of the Company's common stock for a 30-day
consecutive period is equal to or greater than $8.00 per share were not included
in the computation of diluted earnings per share because the conversion
contingency related to these preferred shares was not met.

     Warrants to purchase 80,000 shares of common stock at $6.00 were
outstanding for the year ended December 31, 1999, but were not included in the
computation of diluted earnings per share because the effect of exercise would
have an antidilutive effect on earnings per share.

NOTE 3--DUE FROM FACTOR

     The Company has entered into a factoring agreement with East Asia Heller
for the purchase of eligible receivables from its Hong Kong subsidiary, Tag-it
Pacific Limited. The Company's factor purchases eligible accounts receivable and
assumes the credit risk with respect to those accounts for which they have given
their prior approval. If the factor does not assume the credit risk for a
receivable, the collection risk associated with the receivable remains with the
Company. The Company pays a fixed commission rate and may borrow up to 80% of
its eligible accounts receivable. Interest is charged at 1.5% over the Hong Kong
Dollar prime rate (5.125% and 9.0% at December 31, 2001 and 2000). Factored
accounts receivable, without recourse, amounted to $105,749 and $25,140 at
December 31, 2001 and 2000. There were no outstanding advances from the factor
at December 31, 2001 and 2000.


                                    Page 36
<PAGE>



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



NOTE 4--ACCOUNTS RECEIVABLE, TRADE, NET

     Accounts receivable, trade is net of an allowance for doubtful accounts and
subsequent returns. For the years ended December 31, 2001 and 2000, the
allowance for doubtful accounts and subsequent returns was $568,625 and
$299,224.

NOTE 5--INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                           ----------------------------------
                                               2001                 2000
                                           --------------        ------------
<S>                                        <C>                   <C>
Raw materials..........................    $      41,957         $    55,268
Work-in-process........................        3,220,518           1,763,838
Finished goods.........................       17,188,265          18,049,054
                                           --------------        ------------

Total inventories......................    $  20,450,740         $19,868,160
                                           ==============        ============
</TABLE>


     Inventories at December 31, 2001 and 2000 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 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.


NOTE 6--PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                           ----------------------------------
                                               2001                 2000
                                           -------------       ------------
<S>                                        <C>                 <C>
Furniture and fixtures................      $    547,152       $    943,819
Machinery and equipment...............         2,924,301          3,012,590
Leasehold improvements................           197,355            805,337
Films, dies, molds and art designs....         1,708,964          1,640,122
                                            ------------       ------------
                                               5,377,772          6,401,868
Accumulated depreciation and
  amortization........................         2,784,807          2,646,741
                                            ------------       ------------
Net property and equipment............      $  2,592,965       $  3,755,127
                                            ============       ============
</TABLE>


                                    Page 37
<PAGE>



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



NOTE 7--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 $20,000,000. 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% (6.75% at December 31, 2001). The credit facility requires the
compliance with certain financial covenants including net worth, fixed charge
coverage ratio and capital expenditures. The Company was in compliance with
these covenants as of December 31, 2001. Availability under the UPS Capital
credit facility is determined based on a defined formula related to eligible
accounts receivable and inventory.

NOTE 8--NOTE PAYABLE

     Note payable to an unrelated party is unsecured, bears interest at 10% and
is due on demand.


NOTE 9--SUBORDINATED NOTES PAYABLE TO RELATED PARTIES

     Subordinated notes payable to related parties consist of the following:

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                        -----------------------------
                                                                                             2001            2000
                                                                                        --------------   ------------
<S>                                                                                     <C>              <C>
Six notes payable issued in 1996, four notes payable issued in 1997, and two
   notes payable issued in 1998 to officers and directors of the Company with no
   monthly payments and interest rates ranging from 7.5% to 10% annually, due
   and payable on the fifteenth day following delivery of written demand for payment...   $    85,176    $   118,175

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 directors and officers of the Company accrue interest
   at 7%, 7.5% and 11% per annum, principal and interest due on demand.................       264,795        264,795
                                                                                          ------------   ------------
                                                                                          $   849,971    $   882,970
                                                                                          ============   ============
</TABLE>


                                    Page 38
<PAGE>



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



     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,
2001, 2000 and 1999 amounted to $88,103, $46,335 and $35,550. Included in
accrued expenses at December 31, 2001 and 2000 was $197,326 and $109,223 of
accrued interest related to these notes. Interest paid during the year ended
December 31, 2000 amounted to $87,938.


NOTE 10--CAPITAL LEASE OBLIGATIONS

     The Company financed equipment purchases through various capital lease
obligations expiring through August 2004. These obligations bear interest at
various rates ranging from 8% and 15% per annum. Future minimum annual payments
under these capital lease obligations are as follows:

YEARS ENDING DECEMBER 31,                                    Amount
                                                          -------------
2002...................................................   $    200,156
2003...................................................         47,393
2004...................................................         26,456
                                                          -------------
Total payments.........................................        274,005
Less amount representing interest......................        (24,833)
                                                          -------------
Balance at December 31, 2001...........................        249,172
Less current portion...................................        180,142
                                                          -------------
Long-term portion......................................   $     69,030
                                                          =============

     At December 31, 2001, total equipment, included in property and equipment
(Note 6), under capital lease obligations and related accumulated depreciation
amounted to $714,887 and $303,976. At December 31, 2000, total equipment,
included in property and equipment, under capital lease obligations and related
accumulated depreciation amounted to $595,203 and $140,399.

NOTE 11--STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK

PREFERRED STOCK

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


                                    Page 39
<PAGE>



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



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.

     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.

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

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

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

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

     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% (6.75% at December 31, 2001) and is subordinated to the Company's obligations


                                    Page 40
<PAGE>



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



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
                                                             -------------
2002..................................................       $  1,100,000
2003..................................................          1,200,000
2004..................................................          1,200,000
2005..................................................          1,400,000
                                                             -------------
Balance at December 31, 2001..........................          4,900,000
Less current portion..................................          1,100,000
                                                             -------------
Long-term portion.....................................       $  3,800,000
                                                             =============

COMMON STOCK

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 include 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 October
1, 2002 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. Total shares and warrants issued during the year ended
December 31, 2001 amount to 266,666 and 133,332. Total shares and warrants
issued in January 2002 amounted to 249,999 and 125,000.

     In March 2002, one of the non-related investors purchased an additional
100,000 shares 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
$300,000. The remaining commitment under this agreement is for an additional
300,000 shares with aggregate proceeds of $900,000. Pursuant to the second
closing provisions of the Stock and Warrant Purchase Agreement, 50,000 warrants
were issued to the investor.


                                    Page 41
<PAGE>



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



ACQUISITION OF ASSETS

     On January 2, 2001, the Company entered into an asset purchase agreement
with a Florida based corporation. The agreement provided for the acquisition of
certain assets, including customer lists, fixed assets, general intangibles,
among others, in exchange for 125,000 shares of the Company's common stock. The
stock was issued at the market value of the Company's common stock on the
closing date of the transaction.

SUPPLY AGREEMENT

     On December 22, 2000, the Company entered into a supply agreement with
Azteca Production International, Inc., AZT International SA D RL and Commerce
Investment Group, LLC (collectively "Azteca"). The term of the supply agreement
is three years, with automatic renewals of consecutive three-year terms, and
provides for a minimum of $10 million in sales for each contract year beginning
April 1, 2001, if and to the extent, we are able to provide trim products on a
basis that is competitive in terms of price and quality. The first contract year
used to compute the minimum sales requirement is for a period of eighteen
months. In accordance with the agreement, the Company purchased existing
inventory from Azteca in exchange for 1,000,000 shares of the Company's common
stock. The shares contain restrictions related to the sale or transfer of the
shares, registration and voting rights. The value of the restricted shares was
estimated at $2,800,000.

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




                                    Page 42
<PAGE>



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



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 grant.

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

         The following table summarizes the activity in the 1997 Plan:



                                    Page 43
<PAGE>



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


<TABLE>
<CAPTION>
                                                           Number of                Average
                                                            Shares              Exercise Price
                                                         --------------         --------------
<S>                                                      <C>                    <C>
Options outstanding - January 1, 1999.................         562,000          $        1.30
     Granted..........................................         393,000                   4.31
     Exercised........................................         (31,500)                  1.30
     Canceled.........................................         (19,000)                  2.88
                                                         --------------         --------------
Options outstanding - December 31, 1999...............         904,500                   2.57
     Granted..........................................         401,500                   4.23
     Exercised........................................         (72,689)                  1.30
     Canceled.........................................         (72,811)                  2.10
                                                         --------------         --------------
Options outstanding - December 31, 2000...............       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
                                                         ==============         ==============
</TABLE>


STOCK BASED COMPENSATION

     All stock options issued to employees have an exercise price not less than
the fair market value of the Company's Common Stock on the date of grant, and in
accounting for such options utilizing the intrinsic value method there is no
related compensation expense recorded in the Company's financial statements. If
compensation cost for stock-based compensation had been determined based on the
fair market value of the stock options on their dates of grant in accordance
with SFAS 123, the Company's net (loss) income and (loss) income per share for
the years ended December 31, 2001, 2000 and 1999 would have been amounted to the
pro forma amounts presented below:

<TABLE>
<CAPTION>
                                                                 2001             2000            1999
                                                            -------------    -------------    -------------
<S>                                                         <C>              <C>              <C>
Net (loss) income:
      As reported.......................................    $ (1,225,751)    $  1,539,185     $  1,730,665
      Pro forma.........................................    $ (1,521,649)    $  1,023,651     $  1,198,777
Basic (loss) earnings per common share:
      As reported.......................................    $      (0.16)    $       0.23     $       0.26
      Pro forma.........................................    $      (0.19)    $       0.15     $       0.18
Diluted (loss) earnings per common share:
      As reported.......................................    $      (0.16)    $       0.21     $       0.23
      Pro forma.........................................    $      (0.19)    $       0.14     $       0.16
</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 2001, 2000 and 1999; expected life of
option of 1.5 years, expected volatility of 17% for 2001, 60% for 2000 and 53%
for 1999, risk free interest rate of 5% for 2001 and 6% for 2000 and 1999 and a
0% dividend yield. The weighted average fair value at the grant date for such
options is $.37, $1.33 and $1.06 per option for the years ended December 31,
2001, 2000 and 1999.


                                    Page 44
<PAGE>



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



     Additional information relating to stock options and warrants outstanding
and exercisable at December 31, 2001, summarized by exercise price is as
follows:

<TABLE>
<CAPTION>
                                                                                           Exercisable
                                         Outstanding Weighted Average                    Weighted Average
                                  --------------------------------------------     -----------------------------
                                                    Life           Exercise                          Exercise
  Exercise Price Per Share          Shares        (years)           Price            Shares           Price
-----------------------------     -----------    -----------     -------------     -----------     -------------
           <S>                    <C>            <C>             <C>               <C>             <C>
           $ 0.71 (warrants)          39,235        1.0             $ 0.71             39,235         $ 0.71
           $ 1.30                    379,000        6.5             $ 1.30            353,000         $ 1.30
           $ 1.50 (warrants)          35,555        1.0             $ 1.50             35,555         $ 1.50
           $ 4.31                    357,000        8.0             $ 4.31            357,000         $ 4.31
           $ 4.80 (warrants)         110,000        1.0             $ 4.80             82,500         $ 4.80
           $ 6.00 (warrants)          80,000        1.0             $ 6.00             60,000         $ 6.00
           $ 4.63                    106,000        8.0             $ 4.63             96,000         $ 4.63
           $ 3.78                    126,000        9.5             $ 3.78            126,000         $ 3.78
           $ 4.25                    166,000        8.5             $ 4.25            142,000         $ 4.25
           $ 4.50                     17,000        8.5             $ 4.50             10,625         $ 4.50
           $ 3.75                    156,000        9.0             $ 3.75            133,250         $ 3.75
           $ 3.64                    239,000        10.0            $ 3.64            239,000         $ 3.64
           $ 3.65 (warrants)          10,000        2.6             $ 3.65             10,000         $ 3.65
           $ 5.00 (warrants)          20,000        2.5             $ 5.00             20,000         $ 5.00
           $ 4.57 (warrants)           5,000        2.5             $ 4.57              5,000         $ 4.57
           $ 4.34 (warrants) (1)      66,666        4.0             $ 4.34             66,666         $ 4.34
           $ 4.73 (warrants) (1)      66,666        4.0             $ 4.73             66,666         $ 4.73
                                  -----------                                      -----------
           $ 3.58                  1,979,122        6.9             $ 3.58          1,842,497         $ 3.55
                                  ===========                                      ===========
<FN>
(1) The exercise price of these warrants includes an upward adjustment of 25% of
the amount, if any, that the market price of the Company's common stock on the
exercise date exceeds the stated exercise price, up to a maximum of $5.25.
</FN>
</TABLE>


NOTE 13--INCOME TAXES

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

<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                            ---------------------------------------------
                                               2001             2000             1999
                                            ------------   -------------     ------------
<S>                                         <C>            <C>               <C>
Current:
     Federal...........................     $  (172,073)   $    161,567      $   474,351
     State.............................         (30,366)         28,512           53,343
                                            ------------    -------------     ------------
                                               (202,439)        190,079          527,694
Deferred:
     Federal...........................        (187,794)         54,839          (93,025)
     State.............................         (33,140)          9,678          (16,416)
                                            ------------    -------------     ------------
                                               (220,934)         64,517         (109,441)
                                            ------------    -------------     ------------
                                           $   (423,373)   $    254,596      $   418,253
                                            ============    =============     ============
</TABLE>


                                    Page 45
<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:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                           ---------------------------------------------
                                                              2001            2000              1999
                                                           -----------     ------------      -----------
<S>                                                        <C>             <C>               <C>
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..........             1.2           (15.0)           (6.7)
    Utilization of NOL benefit.......................            15.7            (9.6)           (8.0)
    Exercise of stock options........................             1.1            (7.2)              -
    Other............................................            (3.7)            6.0            (5.8)
                                                           -----------     ------------      -----------
                                                           $    (25.7)%    $     14.2 %      $   19.5 %
                                                           ===========     ============      ===========
</TABLE>


         Income (loss) before income taxes are as follows:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                         -----------------------------------------------
                                                              2001            2000              1999
                                                         -------------     ------------      -----------
<S>                                                      <C>               <C>               <C>
    Domestic.........................................    $ (1,400,553)     $   654,555       $ 1,538,616
    Foreign..........................................        (248,571)       1,139,226          610,302
                                                         -------------     ------------      -----------
                                                         $ (1,649,124)     $ 1,793,781       $ 2,148,918
                                                         =============     ============      ===========
</TABLE>


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

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                         ----------------------------------
                                                                             2001                 2000
                                                                         --------------        ------------
<S>                                                                      <C>                   <C>
Net deferred tax asset (liability):
     Net operating loss carryforwards...............................     $     374,356         $   120,900
     Dies, film and art library.....................................           (86,944)           (192,641)
     Depreciation and amortization..................................          (183,457)           (102,414)
     Other..........................................................             3,644              60,820
                                                                         --------------        ------------
                                                                         $     107,599         $  (113,335)
                                                                         ==============        ============
</TABLE>

     At December 31, 2001, the Company's subsidiary, AGS Stationery, Inc. had
Federal and state NOL carryforwards of approximately $133,000 and $825,000,
respectively. The Federal NOL is available to offset future taxable income
through 2011, and the state NOL through 2001. The Company's ability to utilize
the NOL carryforwards are dependent upon the Company's ability to generate
taxable income in future periods and are limited in the annual amount of
approximately $430,000 due to restrictions imposed under Federal and state laws
upon a change in ownership. The NOL's stated above are subject to separate year
loss limitations. At December 31, 2001, Tag-it Pacific, Inc. had Federal and
state NOL carryforwards of approximately $708,000 and $650,000, respectively.
The Federal NOL is available to offset future taxable income through 2016, and
the state NOL expires in 2011. The Company's ability to utilize the NOL
carryforwards are dependent upon the Company's ability to generate taxable
income in 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


                                    Page 46
<PAGE>



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



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 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

LEASES

     The Company is a party to a number of non-cancelable operating lease
agreements involving buildings and equipment which expire at various dates. The
future minimum lease commitments as of December 31, 2001 are as follows:

                 Years Ending
                  December 31,                          Amount
         --------------------------------           ----------------
             2002...........................          $     650,661
             2003...........................                588,322
             2004...........................                366,202
             2005...........................                316,927
             2006...........................                147,720
                                                    ----------------
                Total minimum payments......          $    2,069,832
                                                    ================


     Total rental expense for the years ended December 31, 2001, 2000 and 1999
aggregated $766,962, $270,479 and $406,632, 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, 2001, 2000 and 1999.

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.

NOTE 15--GEOGRAPHIC INFORMATION

     The Company develops and distributes complete brand-identity programs to
manufacturers of fashion driven apparel, licensed consumer products and to
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.


                                    Page 47
<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:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                      ----------------------------------------------------
                                          2001              2000                 1999
                                      -------------     --------------       -------------
Sales:
<S>                                   <C>               <C>                  <C>
     United States................    $ 14,494,035      $  18,262,860        $ 12,344,418
     Asia.........................       1,984,103          5,344,853           4,539,500
     Mexico.......................      27,089,492         25,753,953          15,500,918
                                      -------------     --------------       -------------
                                      $ 43,567,630      $  49,361,666        $ 32,384,836
                                      =============     ==============       =============
Long-lived Assets:
     United States................    $  6,610,522      $  2,684,021
     Asia.........................         199,064           284,136
     Mexico.......................         344,129           786,970
                                      -------------     --------------
                                      $  7,153,715      $  3,755,127
                                      =============     ==============
</TABLE>


NOTE 16--MAJOR CUSTOMER & VENDORS

     Two major customers, related parties, accounted for approximately 63.0% of
the Company's net sales on a consolidated basis for the year ended December 31,
2001 and one major customer, a related party, accounted for 48.1% and 47.9% of
the Company's net sales on a consolidated basis for the years ended December 31,
2000 and 1999 . Included in accounts receivable related parties at December 31,
2001 and 2000 is $7,914,838 and $8,270,790 due from these customers. Terms are
net 60 days.

     One major vendor, a related party, accounted for approximately 57.6% of the
Company's purchases for the year ended December 31, 2001, two major vendors
accounted for approximately 26.6% of the Company's purchases for the year ended
December 31, 2000 and one major vendor accounted for approximately 22.2% of the
Company's purchases for the year ended December 31, 1999. Included in accounts
payable at December 31, 2001, 2000 and 1999 is $819,181, $3,212,449 and $351,851
due to these vendors. Terms are net 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
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




                                    Page 48
<PAGE>




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



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, 2001,
2000 and 1999 amounted to $366,000, $18,655 and $0.

     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. Total sales to Tarrant for the years ended December 31, 2001,
2000 and 1999 amounted to approximately $18,438,000, $23,760,000 and
$15,500,000. As of December 31, 2001, 2000 and 1999, accounts receivable related
parties included approximately $4,995,000, $8,270,000 and $2,047,000 due from
Tarrant. Terms are net 60 days.

     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 Azteca for the years ended
December 31, 2001 and 2000 amounted to approximately $9,016,000 and $1,878,000.
As of December 31, 2001 and 2000, accounts receivable related parties included
approximately $2,920,000 and $771,000 due from Azteca. Terms are net 60 days.

     Sales to Brilliant Digital Entertainment, a company in which two of its
officers are also members of the Board of Directors of the Company, amounted to
$144,000 for the year ended December 31, 1999. Included in accounts receivable
related party at December 31, 1999 was $81,400 due from this related company.
Terms are net 30 days.

     Included in due from related parties at December 31, 2001 and 2000 is
$814,219 and $513,614, 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, a member 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.

     Consulting fees paid to Diversified Investments, a company owned by a
member of the Board of Directors of the Company, amounted to $150,000, $87,500
and $0 for the years ended December 31, 2001, 2000 and 1999.

     Consulting fees paid for services provided by a member of the Board of
Directors amounted to $64,900, $87,200 and $1,900 for the years ended December
31, 2001, 2000 and 1999.

     On February 1, 2001, 15,000 options 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




                                    Page 49
<PAGE>




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



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

     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, 2001, 2000 and 1999 are
reflected below:

<TABLE>
<CAPTION>
                                              FOURTH (1)         THIRD          SECOND         FIRST (1)
  ---------------------------------------------------------------------------------------------------------
<S>                                         <C>              <C>             <C>             <C>
  2001
  Revenue                                   $  7,770,704     $ 11,039,211    $ 14,619,136    $ 10,138,579
  Operating income (loss)                   $   (611,524)    $     58,542    $ 1,233,141     $   (932,671)
  Net income (loss)                         $   (591,496)    $   (198,644)   $   709,461     $ (1,145,072)
  Basic earnings (loss) per share           $      (0.08)    $      (0.03)   $      0.09     $      (0.14)
  Diluted earnings (loss) per share         $      (0.08)    $      (0.03)   $      0.09     $      (0.14)

  2000
  Revenue                                   $ 12,297,227     $ 17,514,987    $ 11,358,628    $ 8,190,824
  Operating income                          $    564,289     $    945,751    $   600,434     $   436,209
  Net income                                $    385,566     $    546,061    $   345,451     $   262,107
  Basic earnings per share                  $       0.06     $       0.08    $      0.05     $      0.04
  Diluted earnings per share                $       0.05     $       0.08    $      0.05     $      0.04
  ---------------------------------------------------------------------------------------------------------
<FN>
(1)  The Company recorded a Restructuring Charge of $1,257,598 and $304,025
     during the first and fourth quarters of 2001.
</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.


                                    Page 50
<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, 2002, included the related
financial statement schedule as of December 31, 2001, and for each of the three
years in the period ended December 31, 2001, 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, 2002


                                    Page 51
<PAGE>


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<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>
         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
                                                     ===========      ===========     ===========    ===========
         2000
         Allowance for doubtful accounts deducted
         from accounts receivable in the balance
         sheet.................................... $     54,998     $    445,176    $    200,950   $    299,224
         Reserve for obsolescence deducted from
         inventories on the balance sheet......... $     24,050     $  1,146,563    $  1,170,613   $          -
                                                     -----------      -----------     -----------    -----------
                                                   $     79,048     $  1,591,739    $  1,371,563   $    299,224
                                                     ===========      ===========     ===========    ===========
         1999
         Allowance for doubtful accounts deducted
         from accounts receivable in the balance
         sheet.................................... $    271,113     $          -    $    216,115   $     54,998
         Reserve for obsolescence deducted from
         inventories on the balance sheet......... $    407,367     $          -    $    383,317   $     24,050
                                                     -----------      -----------     -----------    -----------
                                                   $    678,480     $          -    $    599,432   $     79,048
                                                     ===========      ===========     ===========    ===========
</TABLE>



                                    Page 52
<PAGE>


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

     None.


                                    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 2002 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 2002 Annual Meeting of Stockholders, and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information regarding security ownership of certain beneficial owners and
management will appear in the proxy statement for the 2002 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 2002 Annual Meeting of Stockholders, and
is incorporated by reference.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)       (1)  FINANCIAL STATEMENTS - See Item 8 of this Form 10-K annual
               report.

          (2)  REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -- See Item 8
               of this Form 10-K annual report.

          (3)  INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON SCHEDULE
               II -- See Item 8 of this Form 10-K annual report.

          (4)  FINANCIAL STATEMENT SCHEDULE II - See Item 8 of this Form 10-K
               annual report.

          (5)  EXHIBITS -- See Exhibit Index attached to this Form 10-K annual
               report.


                                    Page 53
<PAGE>


(b)       (1)  Report on Form 8-K, filed January 7, 2002, reporting under
               Item 5, our entering into an Asset Purchase Agreement dated
               December 21, 2001 for the purchase of the Talon trade name.

               Report on Form 8-K, filed January 23, 2002, reporting under (2)
               Item 5, our entering into Stock and Warrant Purchase Agreements
               dated December 28, 2001, January 7, 2002 and January 8, 2002 with
               various private investors.

(c)            See Exhibit Index on attached to this Form 10-K annual report.



                                    Page 54
<PAGE>


                                   SIGNATURES

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

                                               TAG-IT PACIFIC, INC.

                                               /S/ RONDA SALLMEN
                                               --------------------------------
                                               By:    Ronda Sallmen
                                               Its:   Chief Financial Officer


                                POWER OF ATTORNEY

     Each person whose signature appears below constitutes and appoints Colin
Dyne and Ronda Sallmen, 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

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

<TABLE>
<CAPTION>
SIGNATURE                          TITLE                                   DATE
<S>                                <C>                                     <C>


     /S/ MARK DYNE                 Chairman of the Board of Directors      March 28, 2002
---------------------------
Mark Dyne


     /S/ COLIN DYNE                Chief Executive Officer and             March 28, 2002
---------------------------        Director
Colin Dyne


     /S/ RONDA SALLMEN             Chief Financial Officer
---------------------------
Ronda Sallmen                                                              March 28, 2002


     /S/ KEVIN BERMEISTER          Director                                March 28, 2002
---------------------------
Kevin Bermeister


     /S/MICHAEL KATZ               Director
---------------------------
Michael Katz                                                               March 28, 2002


     /S/JONATHAN BURSTEIN          Director and Vice President             March 28, 2002
---------------------------        of Operations
Jonathan Burstein


     /S/ BRENT COHEN               Director
---------------------------
Brent Cohen                                                                March 28, 2002


     /S/ DONNA ARMSTRONG           Director                                March 28, 2002
---------------------------
Donna Armstrong
</TABLE>


                                    Page 55
<PAGE>


                                  EXHIBIT INDEX

EXHIBIT
NUMBER                EXHIBIT DESCRIPTION

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

3.1       Certificate of Incorporation of Registrant. Incorporated by reference
          to Exhibit 3.1 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
          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 B Convertible Preferred Stock of
          Tag-It Pacific, Inc. Incorporated by reference to Exhibit 3.1 to Form
          10-QSB filed on August 14, 2000.

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

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

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

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

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

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

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

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


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<PAGE>


10.6      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.

10.7      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.

10.8      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.

10.9      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.

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

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

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

10.13     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.

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

10.15     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.

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

10.17     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.

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


                                    Page 57
<PAGE>


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

10.20     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.

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

10.22     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.

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

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

10.25     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.

10.26     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.

10.27     Securities Purchase Agreement, dated December 31, 1997, between
          Registrant and Cruttenden Roth Bridge Fund, LLC. Incorporated by
          reference to Exhibit 10.50 to Form SB-2 filed on October 21, 1997, and
          the amendments thereto. Amendment to Securities Purchase Agreement,
          dated January 20, 1998, among Registrant, Cruttenden Roth Bridge Fund,
          LLC and Beta Research Corporation. Incorporated by reference to
          Exhibit 10.55 to Form SB-2 filed on October 21, 1997, and the
          amendments thereto.

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

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

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


                                    Page 58
<PAGE>


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

10.32     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.

10.33     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.

10.34     Series B Convertible Preferred Stock Agreement, dated as of April 3,
          2000, between the Registrant and Grupo Industrial Cierres Ideal, S.A.
          de C.V. Incorporated by reference to Exhibit 10.1 to Form 10-QSB filed
          on August 14, 2000.

10.35     Talon License and Distribution Agreement, dated April 3, 2000, between
          the Registrant and Grupo Industrial Cierres Ideal, S.A. de C.V.
          Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed on
          August 14, 2000. *

10.36     Consignment Inventory Purchase Agreement, dated September 30, 2000,
          between the Registrant and Grupo Industrial Cierres Ideal, S.A. de
          C.V. Incorporated by reference to Exhibit 10.1 to Form 10-QSB filed on
          November 14, 2000.

10.37     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.

10.38     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.

10.39     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.

10.40     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.

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

10.42     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.

10.43     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.

10.44     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.


                                    Page 59
<PAGE>


10.45     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.

10.46     Credit Agreement, dated as of September 30, 2000, among A.G.S.
          Stationery, Inc., Tag-It, Inc., Talon International, Inc. and Sanwa
          Bank California. Incorporated by reference to Exhibit 10.49 to Form
          10-K filed on April 4, 2001.

10.47     Promissory Note, dated as of October 11, 2000, provided by Tag-It,
          Inc. in favor of Sanwa Bank California. Incorporated by reference to
          Exhibit 10.50 to Form 10-K filed on April 4, 2001.

10.48     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.

10.49     Continuing Guaranty, dated October 12, 2000, among Sanwa Bank
          California, Tag-It, Inc., Talon International, Inc. and A.G.S.
          Stationery, Inc. Incorporated by reference to Exhibit 10.52 to Form
          10-K filed on April 4, 2001.

10.50     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.

10.51     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.

10.52     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.

10.53     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.

10.54     Series C Preferred Stock Purchase Agreement, dated as of September 20,
          2001, between Tag-it Pacific, Inc. and Coats North America
          Consolidated, Inc. Incorporated by reference to Exhibit 99.1 to Form
          8-K filed on October 15, 2001.

10.55     Investor Rights Agreement, dated as of September 20, 2001, between
          Tag-it Pacific, Inc. and Coats North America Consolidated, Inc.
          Incorporated by reference to Exhibit 99.2 to Form 8-K filed on October
          15, 2001.

10.56     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.


                                    Page 60
<PAGE>


10.57     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.

10.58     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.

10.59     Asset Purchase Agreement, dated as of December 21, 2001, among Tag-it
          Pacific, Inc., Groupo Industrial Cierres Ideal, S. A. de C.V., Talon,
          Inc. and Industias Unidas, S.A. de C.V. Incorporated by reference to
          Exhibit 99.1 to Form 8-K filed on January 7, 2002.

10.60     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.

10.61     Stockholders Agreement, dated as of December 21, 2001, among Tag-it
          Pacific, Inc. and Talon, Inc. Incorporated by reference to Exhibit
          99.3 to Form 8-K filed on January 7, 2002.

10.62     Mutual Release, dated as of December 21, 2001, among Tag-it Pacific,
          Inc., Etic Art S.A. de C.V. and Cierres Ideal de Mexico, S. A. de C.V.
          Incorporated by reference to Exhibit 99.4 to Form 8-K filed on January
          7, 2002.

10.63     Escrow Agreement, dated as of December 21, 2001, among Tag-it Pacific,
          Inc., Talon, Inc. and Wells Fargo Bank, National Association.
          Incorporated by reference to Exhibit 99.5 to Form 8-K filed on January
          7, 2002.

10.64     Form of Stock and Warrant Purchase Agreement dated December 28, 2001.
          Incorporated by reference to Exhibit 99.1 to Form 8-K filed on January
          23, 2002.

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

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

10.67     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.

23.1      Consent of BDO Seidman, LLP.

24.1      Power of Attorney (included on signature page).

     * 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.


                                    Page 61