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                       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, 2002

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

                         Commission file number 1-13669

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

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

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

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

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

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

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

                                      NONE

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

                                  Yes [X]   No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K [ ]

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

         The issuer's  revenues for the fiscal year ended December 31, 2002 were
$60,073,170.

         At  June  30,  2002  the  aggregate  market  value  of the  voting  and
non-voting   common  stock  held  by   non-affiliates   of  the  registrant  was
$14,682,838.  At March 28, 2003 the issuer had 9,619,909 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 2003
annual meeting of  stockholders  are  incorporated by reference into Part III of
this report.

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

                                                                            PAGE
                                                                            ----
PART I

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

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

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

Item 4.   Submission of Matters to a Vote of Security Holders..........       7

PART II

Item 5.   Market for Registrant's Common Equity 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 ............................................      27

Item 8.   Financial Statements and Supplementary Data:

          Report of Independent Certified Public Accountants...........      29

          Consolidated Balance Sheets..................................      30

          Consolidated Statements of Operations........................      31

          Consolidated Statements of Stockholders' Equity and
               Convertible Redeemable Preferred Stock..................      32

          Consolidated Statements of Cash Flows........................      33

          Notes to Consolidated Financial Statements...................      34

          Independent Certified Public Accountants' Report on
               Schedule II.............................................      57

          Schedule II - Valuation and Qualifying Accounts and
               Reserves................................................      58

Item 9.   Changes in and Disagreements With Accountants on
               Accounting and Financial Disclosure.....................      59

PART III

Item 10.  Directors and Executive Officers of the Registrant...........      59

Item 11.  Executive Compensation.......................................      59

Item 12.  Security Ownership of Certain Beneficial Owners and
               Management and Related Shareholder Matters..............      59

Item 13.  Certain Relationships and Related Transactions...............      59

Item 14.  Controls and Procedures......................................      59

PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports
               on Form 8-K.............................................      60


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                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS

GENERAL

     Tag-It  Pacific,  Inc.  is an  apparel  company  that  specializes  in  the
distribution of a full range of trim items to  manufacturers  of fashion apparel
and licensed consumer products,  and 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 owners of
specific brands, brand licensees and retailers,  including  Abercrombie & Fitch,
Express,  The  Limited,  Lerner and  Miller's  Outpost,  among  others.  We also
distribute  zippers  under our TALON brand name to owners of apparel  brands and
apparel  manufacturers  such as Levi Strauss & Co., VF Corporation  and Tropical
Sportswear,  among others.  In 2002, we created a new division  under the TEKFIT
brand name. This division develops and sells apparel components that utilize the
patented  Pro-Fit  technology,  including a stretch  waistband.  We market these
products to the same  customers  targeted by our MANAGED TRIM SOLUTION and TALON
zipper divisions.

     We were incorporated in Delaware in September 1997. We were formed to serve
as the parent holding company of Tag-It, Inc., a California corporation,  Tag-It
Printing & Packaging Ltd., which changed its name in 1999 to Tag-It Pacific (HK)
LTD, a BVI corporation,  Tagit de Mexico, S.A. de C.V., A.G.S. Stationery, Inc.,
a  California  corporation,   and  Pacific  Trim  &  Belt,  Inc.,  a  California
corporation.  All of these  companies were  consolidated  under a parent limited
liability  company in October  1997.  These  companies  became our wholly  owned
subsidiaries  immediately  prior to the  effective  date of our  initial  public
offering in January 1998. In 2000,  we formed two wholly owned  subsidiaries  of
Tag-It Pacific, Inc, Tag-It Pacific Limited, a Hong Kong corporation,  and Talon
International, Inc., a Delaware corporation.

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 for
TALON brand  zippers.  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


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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.  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 and the
Caribbean.  We plan to continue to expand operations in Mexico 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 agreed to
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.  Each trim package  includes  all items of trim that a customer  will
need in the  manufacture  of a particular  item of apparel.  Our  complete  trim
packages  include a variety of trim items  including  thread,  zippers,  labels,
buttons, rivets,  polybags,  packing cartons and hangers. We also provide in our
complete  trim  packages  printed  marketing   materials  including  hang  tags,
bar-coded hang tags,  pocket flashers,  waistband tickets and size stickers that
are attached to products to identify and promote the products,  permit automated
data  collection,   provide  brand   identification  and  communicate   consumer
information  such as a product's  retail price,  size,  fabric  content and care
instructions.


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     We consider a high level of customer service  essential to our success.  We
combine our high level of customer  service  with our MANAGED  TRIM  SOLUTION to
offer  our  customers  a  complete  trim  service   product.   We  believe  this
full-service  product gives us a competitive edge over companies that only offer
selected trim  components  because our MANAGED TRIM SOLUTION saves our customers
time and employee  work hours in ordering and managing  trim orders from several
different  suppliers.  Our  MANAGED  TRIM  SOLUTION  is  a  business-to-business
e-commerce  system that allows us to provide our  customers  with a  customized,
comprehensive  system  for the  management  of  various  aspects  of their  trim
programs. Our MANAGED TRIM SOLUTION is an Internet-based supply-chain management
system which provides  customers with assistance in their ordering,  production,
inventory  management and just-in-time  distribution of their trim and packaging
requirements. 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,  Mexico  and  Hong  Kong.  In  addition,   we  are  negotiating  with
distributors  that service  local  apparel  manufacturing  regions in the United
States and overseas. We offer manufacturers  technologically  advanced equipment
for efficiently  handling 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.

     TEKFIT. We have entered into an Exclusive License and Intellectual Property
Rights  agreement  with Pro-Fit  Holdings  Limited.  The agreement  gives us the
exclusive rights to sell or sublicense stretch waistbands manufactured under the
patented technology developed by Pro-Fit for garments  manufactured  anywhere in
the world for the U.S.  market and all U.S.  brands,  for the life of the patent
and related  know-how.  We now offer apparel  manufacturers  advanced,  patented
fabric  technologies  to utilize in their garments  under the TEKFIT name.  This
revolutionary  technology  allows fabrics to be altered  through the addition of
stretch   characteristics   resulting  in  greatly  improved  fit  and  comfort.
Currently,  we are supplying Levi Strauss & Co. with TEKFIT waistbands for their
Dockers(R) programs. Our exclusive supply arrangement with Levi Strauss & Co. is
for twill type pants only.  This new  technology  allows pant  manufacturers  to
build in a  stretch  factor  into  standard  waistbands  that does not alter the
appearance  of the garment,  but will allow the waist to stretch out and back by
as much as two waist  sizes.  We are actively  working with other large  apparel
manufacturers  to develop and release  the TEKFIT  technology  in other types of
garments.

     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 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


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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 800 customers.  Our customers include  well-known apparel
manufacturers,  such as Levi  Strauss & Co.,  Abercrombie  & Fitch,  The Limited
Group,  Tarrant Apparel Group, Azteca Production  International,  VF Corporation
and Tropical  Sportswear,  among others. Our customers also include  contractors
for specialty  retailers  such as Miller's  Outpost and mass merchant  retailers
such as Wal-Mart.

     In July 2002,  we  entered  into an  exclusive  supply  contract  with Levi
Strauss & Co.  Under the terms of the supply  agreement,  Levi Strauss & Co. has
agreed to purchase a minimum of $10 million of various  trim  products,  stretch
waistbands,  garment  components  and  services  over the next two  years.  Levi
Strauss & Co. also appointed TALON as an approved zipper supplier.

     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
manufacturers  operating in the region.  The  Chairman and  President of Tarrant
Apparel  Group are among our  significant  stockholders.  Tarrant  Apparel Group
accounted for  approximately  41.5% of our net sales for the year ended December
31, 2002.

     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 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.  Azteca  Production  International  has been a
significant  customer of ours for many years.  This agreement is structured in a
manner  that allows us to utilize our  MANAGED  TRIM  SOLUTION  system to supply
Azteca Production International with its trim program requirements.  We 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, various other cities in the United States, Hong Kong 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.


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     A  significant  portion  of our sales is to  customers  based in the United
States.  For the year ended  December  31,  2002,  sales to United  States based
customers  for  shipments  to  production  facilities  in  Mexico,  Asia and the
Dominican  Republic  accounted  for  69.7%,  9.1%  and  3.1%,  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 and its
affiliates which accounted for 30.6% of our purchases in 2002.

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

     Through our Hong Kong  facility,  we distribute  TALON  zippers,  bar-coded
hangtags,  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.

     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".  We also rely
on our Exclusive License and Intellectual Property Rights agreement with Pro-Fit
Holdings Limited to sell our TEKFIT Stretch waistbands.

INVENTORIES

     In  order to meet the  rapid  delivery  requirements  of our  MANAGED  TRIM
SOLUTION  customers,  we are required to carry a substantial amount of inventory
on their behalf.  Included in inventories  at December 31, 2002 are  inventories
that are  subject to buyback  arrangements  with these  customers.  The  buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is required to purchase the  inventories  from us under normal  invoice
and selling terms.

COMPETITION

     We compete in highly  competitive  and fragmented  industries  that include
numerous  local and regional  companies that provide some or all of the products
we offer. We also compete with United States and international design companies,
distributors and manufacturers of tags, trim, packaging products and


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zippers.  Some  of  our  competitors,  including  Paxar  Corporation,  YKK  (R),
Universal Button,  Inc., Avery Denison  Corporation and Scovill Fasteners,  Inc.
have greater name  recognition,  longer operating  histories and, in many cases,
substantially greater financial and other resources.

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

SEGMENT INFORMATION

     We operate  primarily in one industry  segment,  the distribution of a full
range of apparel trim products to  manufacturers of fashion apparel and licensed
consumer  products,   and  specialty  retailers  and  mass  merchandisers.   For
information  regarding the revenues and assets  associated  with our  geographic
segments,  see Note 16 of the  Notes to the  Consolidated  Financial  Statements
included elsewhere in this filing.

INTERNATIONAL

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

     A summary of our domestic and  international  net revenue and net property,
plant  and  equipment  is set  forth  in Note 16 to the  Consolidated  Financial
Statements in Item 8, which is incorporated  herein by reference.  Approximately
85% of our  overall  net  revenue  came  from  sales to U.S.  based or  contract
manufacturers'  facilities  located outside of the United States during the year
ended December 31, 2002.

     For a discussion of risks attendant to our foreign  operations,  see "IF WE
EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN FACILITIES,  WE WILL NOT BE ABLE TO
MEET  OUR  OBLIGATIONS  AND  MAY  LOSE  SALES  AND   CUSTOMERS.",   in  Item  7,
"Quantitative and Qualitative  Disclosure about Market Risk" in Item 7A and Note
16 to the  Consolidated  Financial  Statements in Item 8, which are incorporated
herein by reference.

EMPLOYEES

     As of December 31, 2002, we had approximately 273 full-time employees, with
approximately 50 employees in Los Angeles,  7 employees in Miami, 2 employees in
New York,  8 employees  in various  other  cities,  17 employees in Hong Kong, 1
employee in the Dominican  Republic and 189 employees in Tlaxcala,  Mexico.  Our
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 facility are represented by a collective  bargaining unit, the Federacion
De  Trabajadores  Del Estado de Tlaxcala.  We believe that we have  satisfactory
employee and labor relations.


                                       6


<PAGE>


ITEM 2.   PROPERTIES

     Our headquarters is located in Woodland Hills,  California,  where we lease
approximately 8,800 square feet of administrative and product development space.
In addition to our Woodland Hills facility, we lease 2,600 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,  5,900 square feet of
office  and  warehouse  space in Kwun  Tong,  Hong Kong,  4,100  square  feet of
warehouse  space in  Santiago,  Dominican  Republic,  and 22,000  square feet of
warehouse, distribution and administration space in Tlaxcala, Mexico.

ITEM 3.   LEGAL PROCEEDINGS

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

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

     None.

                                     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.

                                                            HIGH         LOW
                                                            ----         ---
     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

     YEAR ENDED DECEMBER 31, 2002
          First Quarter .........................        $   3.99     $   3.50
          Second Quarter ........................            4.24         3.45
          Third Quarter .........................            4.20         3.60
          Fourth Quarter ........................            3.99         3.40

     On March 25, 2003,  the closing sales price of our Common Stock as reported
on the American Stock Exchange was $3.60 per share. As of March 26, 2003,  there
were 39 record holders of our Common Stock.


                                       7


<PAGE>


RECENT SALES OF UNREGISTERED SECURITIES

     In a series of  transactions  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 $1.55 million.  The stock and warrant purchase  agreements
also included a commitment by one of the two  non-related  investors to purchase
an  additional  400,000  shares of common stock at a price per share of $3.00 at
second  closing dates on or prior to March 1, 2003, as amended,  for  additional
proceeds of $1,200,000.  Pursuant to the stock and warrant purchase  agreements,
258,332  warrants  to  purchase  common  stock were  issued.  The  warrants  are
exercisable  immediately  after  closing,  one half of the warrants at $4.34 per
share and the  second  half at $4.73  per  shares,  representing  110% and 120%,
respectively,  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 and February 2003, one of the non-related investors
purchased 100,000 and 300,000 shares,  respectively,  of common stock at a price
per share of $3.00  pursuant to the second  closing  provisions of the stock and
warrant  purchase  agreement for total proceeds of  $1,200,000.  Pursuant to the
second closing  provisions of the stock and warrant purchase  agreement,  50,000
and  150,000  warrants  were issued to the  investor in March 2002 and  February
2003, respectively, under the same terms as stated above. There are no remaining
commitments due under the stock and warrant  purchase  agreements.  The issuance
and sale of these  securities  was exempt from the  registration  and prospectus
delivery  requirements  of the  Securities  Act  pursuant to Section 4(2) of the
Securities Act as a transaction not involving any public offering.

DIVIDENDS

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

EQUITY COMPENSATION PLAN INFORMATION

     The following table sets forth certain  information as of December 31, 2002
regarding  equity   compensation   plans  (including   individual   compensation
arrangements) under which our equity securities are authorized for issuance:

<TABLE>
<CAPTION>
                                                                                NUMBER OF SECURITIES
                            NUMBER OF SECURITIES TO      WEIGHTED-AVERAGE       REMAINING AVAILABLE
                            BE ISSUED UPON EXERCISE     EXERCISE PRICE OF       FOR FUTURE ISSUANCE
                            OF OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,        UNDER EQUITY
                              WARRANTS AND RIGHTS      WARRANTS AND RIGHTS      COMPENSATION PLANS
                            -----------------------    --------------------     --------------------
<S>                               <C>                      <C>                        <C>
Equity compensation
plans approved by
security holders .........        1,733,500                $   3.48                   544,000

Equity compensation
plans not approved
by security holders ......          608,122                $   4.35                      --

   Total .................        2,341,622                $   3.71                   544,000
</TABLE>

     See  Note  13 to the  Consolidated  Financial  Statements  for  information
regarding  the  material  features of the above  plans.  Each of the above plans
provides  that the number of shares with  respect to which  options and warrants
may be  granted,  and the  number  of  shares  of  Common  Stock  subject  to an
outstanding option or warrant, shall be proportionately adjusted in the event of
a subdivisions or  consolidation of shares or the payment of a stock dividend on
Common Stock.


                                       8


<PAGE>


ITEM 6.   SELECTED FINANCIAL DATA.

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

<TABLE>
                      TAG-IT PACIFIC, INC. AND SUBSIDIARIES
                             SELECTED FINANCIAL DATA
<CAPTION>
                                                                     FISCAL YEARS ENDED DECEMBER 31,
                                                               (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
                                                         1998(1)    1999       2000      2001(2)    2002
                                                       --------   --------   --------  --------   --------
<S>                                                    <C>        <C>        <C>       <C>        <C>
OPERATIONS:
Total Revenue......................................    $ 18,808   $ 32,385   $ 49,362  $ 43,568   $ 60,073
Income (loss) from operations......................    $    824   $  2,406   $  2,547  $   (253)  $  3,044
Net Income (loss)..................................    $    527   $  1,731   $  1,539  $ (1,226)  $  1,496
Net income (loss) per share - basic................    $   0.12   $   0.26   $   0.23  $  (0.16)  $   0.14
Net income (loss) per share - diluted..............    $   0.11   $   0.23   $   0.21  $  (0.16)  $   0.14
Weighted average shares outstanding - basic........       4,419      6,734      6,838     8,017      9,232
Weighted average sharesoutstanding - diluted.......       4,960      7,399      7,283     8,017      9,531
FINANCIAL POSITION (AT PERIOD END):
Cash, cash equivalents and short-term investments..    $  2,065   $    101   $    128  $     47   $    285
Total assets.......................................    $ 14,643   $ 19,855   $ 39,099  $ 40,794   $ 54,303
Capital lease obligations and notes payable........    $    508   $  1,031   $  3,873  $  6,024   $  5,354
Convertible redeemable preferred stock.............    $      -   $      -   $      -  $  2,895   $  2,895
Stockholders' equity...............................    $  7,090   $  8,861   $ 14,791  $ 15,428   $ 18,467
Total liabilities and stockholders' equity.........    $ 14,643   $ 19,855   $ 39,099  $ 40,794   $ 54,303
PER SHARE DATA (AT END OF PERIOD):
Net book value per common share....................    $   1.05   $   1.31   $   1.88  $   1.76   $   1.98
Common shares outstanding..........................       6,727      6,778      7,863     8,770      9,320

----------
<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>


                                       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, 2002, 2001 and
2000.  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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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


                                       10


<PAGE>


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

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

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

BUSINESS OVERVIEW AND RECENT DEVELOPMENTS

     Tag-it  Pacific,  Inc.  is an  apparel  company  that  specializes  in  the
distribution  of trim items to  manufacturers  of fashion  apparel and  licensed
consumer products,  and 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 owners of specific  brands,
brand  licensees and  retailers,  including  Abercrombie  & Fitch,  The Limited,
Express,  Lerner and Miller's Outpost,  among others. We also distribute zippers
under our TALON brand name to owners of apparel brands and apparel manufacturers
such as Levi  Strauss & Co.,  VF  Corporation  and  Tropical  Sportswear,  among
others.  In 2002,  we created a new division  under the TEKFIT brand name.  This
division develops and sells apparel components that utilize the patented Pro-Fit
technology,  including a stretch waistband. We market these products to the same
customers targeted by our MANAGED TRIM SOLUTION and TALON zipper divisions.

     We 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(TM),  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  manufacturers 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(TM)  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


                                       11


<PAGE>


manufacturing customers. Our MANAGED TRIM SOLUTION(TM) also helps to eliminate a
manufacturer's need to maintain a trim purchasing and logistics department.

     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.  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 contract manufacturers of apparel under that brand name.

     On July 12, 2002, we entered into an exclusive  supply  agreement with Levi
Strauss & Co. In  accordance  with the supply  agreement,  Levi is to purchase a
minimum of $10 million of various trim products, garment components and services
over  the  next  two  years.   Certain  proprietary   products,   equipment  and
technological  know-how  will be supplied to Levi on an  exclusive  basis during
this period.  The supply  agreement  also appoints  TALON as an approved  zipper
supplier to Levi.

     On April 2, 2002,  we entered  into an exclusive  license and  intellectual
property rights agreement with Pro-Fit Holdings Limited. This agreement gives us
the  exclusive  rights  to  sell or  sublicense  waistbands  manufactured  under
patented  technology  developed by Pro-Fit  Holdings  for garments  manufactured
anywhere  in the world for the United  States  market and for all United  States
brands.  The new technology allows pant  manufacturers to build a stretch factor
into standard waistbands that does not alter the appearance of the garment,  but
allows the waist to stretch out and back by as much as two waist sizes.  Through
our trim package business, and our TALON line of zippers, we are already focused
on the North American  bottoms  market.  This product  compliments  our existing
product line and we intend to integrate the  production of the  waistbands  into
our existing  infrastructure.  The exclusive  license and intellectual  property
rights  agreement  has an  indefinite  term that extends for the duration of the
trade secrets licensed under the agreement.

     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 believe we will be able to
more  effectively  respond to customer needs and better maintain the quality and
value of the TALON products.

RELATED PARTY SUPPLY AGREEMENTS

     On September 20, 2001, we entered into a ten-year  co-marketing  and supply
agreement  with Coats  American,  Inc.,  an affiliate of Coats plc, as well as a
preferred stock purchase agreement with Coats North America Consolidated,  Inc.,
also an affiliate of Coats plc. The co-marketing  and supply agreement  provides
for selected  introductions  into Coats'  customer base and has the potential to
accelerate  our growth plans and to introduce our MANAGED TRIM  SOLUTION(TM)  to
apparel  manufacturers  on a  broader  basis.  Pursuant  to  the  terms  of  the
co-marketing  and supply  agreement,  our trim packages will  exclusively  offer
thread manufactured by


                                       12


<PAGE>


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(TM) 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(TM)
program.

     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 United States,  Canada, Mexico, Central
America and the Caribbean.

     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.
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(TM)  system to supply Azteca Production  International
with all of its trim program  requirements.  We have 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(TM)  system since 1998.  The  exclusive  supply
agreement with Tarrant Apparel Group has an indefinite term.

     Sales  under  our  exclusive  supply   agreements  with  Azteca  Production
International  and Tarrant  Apparel Group  amounted to  approximately  69.7% and
63.0%  of  our  total  sales  for  the  years  ended  December  2002  and  2001,
respectively.  We will continue to rely on these two customers for a significant
amount  of our  sales  for the year  ended  December  2003.  Sales  under  these
exclusive  supply  agreements  as a percentage of total sales for the year ended
December 2003 are  anticipated to be lower than the year ended December 2002 due
to an  increase in sales to other  customers.  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.
Included in trade accounts receivable,  related parties at December 31, 2002, is
approximately $14.8 million due from Tarrant Apparel Group and Azteca Production
International.

     Included  in   inventories   at  December  31,  2002  are   inventories  of
approximately $8.5 million that are subject to buyback arrangements with Tarrant
Apparel Group, Azteca Production  International and other customers. The buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is required to purchase the  inventories  from us under normal  invoice
and selling  terms.  If the  financial  condition of Tarrant  Apparel  Group and
Azteca Production International were to deteriorate,  resulting in an impairment
of their  ability to purchase  inventories  of pay  receivables,  it may have an
adverse affect on our results of operations.


                                       13


<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.

RESULTS OF OPERATIONS

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

                                                            YEAR ENDED
                                                           DECEMBER 31,
                                                    ------------------------
                                                     2002     2001      2000
                                                    -----    -----     -----
     Net sales ................................     100.0%   100.0%    100.0%
     Cost of goods sold .......................      74.3     72.7      72.6
                                                    -----    -----     -----
     Gross profit .............................      25.7     27.3      27.4
     Selling expenses .........................       3.5      3.8       4.2
     General and administrative expenses ......      17.1     20.5      18.0
     Restructuring charges ....................       --       3.6       --
                                                    -----    -----     -----
     Operating income (loss) ..................       5.1%    (0.6)%     5.2%
                                                    =====    =====     =====

     Net sales increased approximately $16,500,000 (or 37.8%) to $60,100,000 for
the year ended  December 31, 2002 from  $43,600,000  for the year ended December
31,  2001.  The  increase  in net  sales was  primarily  due to an  increase  in
trim-related  sales from our Tlaxcala,  Mexico operations under our MANAGED TRIM
SOLUTION(TM)  trim  package  program.   The  increase  in  net  sales  was  also
attributable  to an increase  in zipper  sales under our TALON brand name to our
MANAGED TRIM  SOLUTION(TM)  customers in Mexico and our other Talon customers in
Mexico and Asia. TALON has been successful in becoming an approved zipper vendor
for major  brands and  retailers  which has allowed us to increase  our sales to
these customers. Our purchase of the TALON brand name and trademarks in December
2001 has enabled us to better control our product offerings,  selling prices and
profit margins.

     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 was 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.


                                       14


<PAGE>


     Gross profit increased  approximately  $3,500,000 (or 29.4%) to $15,400,000
for the year  ended  December  31,  2002  from  $11,900,000  for the year  ended
December  31,  2001.  Gross  margin as a  percentage  of net sales  decreased to
approximately  25.7% for the year ended  December  31, 2002 as compared to 27.3%
for the year  ended  December  31,  2001.  The  decrease  in gross  profit  as a
percentage  of net sales for the year ended  December 31, 2002 was primarily due
to an  increase in zipper  sales under our TALON brand name to our MANAGED  TRIM
SOLUTION(TM)  customers in Mexico during the year.  Talon  products have a lower
gross margin than other products  included  within the complete trim packages we
offer to our customers  through our MANAGED TRIM  SOLUTION(TM).  The decrease in
gross margin as a percentage  of net sales for the year ended  December 31, 2002
was offset by a further  reduction of manufacturing and facility costs which was
a direct result of the  implementation  of our  restructuring  plan in the first
quarter of 2001.

     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(TM).

     Selling expense increased  approximately  $490,000 (or 29.9%) to $2,130,000
for the year ended December 31, 2002 from $1,640,000 for the year ended December
31, 2001. As a percentage of net sales, these expenses decreased to 3.5% for the
year ended  December 31, 2002  compared to 3.8% for the year ended  December 31,
2001. The increase in selling expenses was due to our efforts to obtain approval
from major brands and retailers of the TALON brand zipper and the implementation
of our new sales and marketing plan for the TALON brand.  In addition,  we hired
additional  personnel to support the exclusive  waistband  license  agreement we
entered into in April 2002. The increase in these selling expenses was partially
offset by a reduction  of our sales force  under our MANAGED  TRIM  SOLUTION(TM)
program,  which was part of our  restructuring  plan that we  implemented in the
first quarter of 2001.  For the year ended December 31, 2002,  selling  expenses
increased  at a slower  rate than the  increase  in net  sales,  resulting  in a
decrease in selling expenses as a percentage of net sales.

     Selling expense decreased  approximately  $460,000 (or 21.9%) to $1,640,000
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.

     General and administrative expenses increased approximately  $1,330,000 (or
14.9%) to $10,270,000  for the year ended December 31, 2002 from  $8,940,000 for
the year ended  December  31,  2001.  The  increase  in these  expenses  was due
primarily to  additional  staffing and other  expenses  incurred  related to our
Tlaxcala, Mexico operations, the amortization of intangible assets incurred as a
result of the exclusive waistband technology license rights we acquired in April
2002 and additional adjustments for bad debts of approximately $633,000 recorded
during the year. As a percentage of net sales, these expenses decreased to 17.1%
for the year  ended  December  31,  2002  compared  to 20.5% for the year  ended
December 31, 2001, as the rate of increase in net sales exceeded that of general
and administrative expenses.


                                       15


<PAGE>


     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, 2002 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.

     Interest expense decreased  approximately  $128,000 (or 9.2%) to $1,269,000
for the year ended December 31, 2002 from $1,397,000 for the year ended December
31, 2001. On May 30, 2001,  we replaced our credit  facility with a new facility
with UPS Capital Global Trade Finance Corporation,  which 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 credit  facility.  Our borrowings
under the new UPS  Capital  credit  facility  increased  during  the year  ended
December 31, 2002 due to increased  sales and expanded  operations in Mexico and
Asia. The increase in interest  expense due to increased  borrowings  during the
year was offset by decreases in the prime rate from prior periods.

     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.  As
discussed above, we incurred  financing  charges and were charged less favorable
interest  rates  during the first two  quarters of 2001 under our former  credit
facility.

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

     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.

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

     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 2001 of $1.6 million and the reduction
of sales from the prior year of $5.8 million, as discussed above.


                                       16


<PAGE>


LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

     Cash and cash  equivalents  increased to $285,000 at December 31, 2002 from
$47,000 at December 31, 2001.  The increase  resulted  from  $6,947,000  of cash
provided by financing  activities,  offset by $5,440,000  and $1,268,000 of cash
used in operating and investing activities, respectively.

     Net  cash  used  in  operating  activities  was  approximately  $5,440,000,
$2,100,000 and $3,659,000 for the years ended December 31, 2002,  2001 and 2000,
respectively.  The  increase in cash used by operating  activities  for the year
ended December 31, 2002 resulted  primarily  from  increases in inventories  and
receivables,  which was  partially  offset by increases in accounts  payable and
accrued expenses and net income. The increase in inventories during the year was
due primarily to increased  customer  orders for future  sales.  The increase in
accounts  receivable during the year was due primarily to increased sales during
the  fourth  quarter  of 2002 and  slower  customer  collections.  Cash  used in
operating  activities  for the year ended  December 31, 2001 resulted  primarily
from increased inventories,  other assets and net losses, and decreased accounts
payable  and  accrued  expenses.  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  investing  activities  was  approximately  $1,268,000,
$667,000 and $2,033,000  for the years ended  December 31, 2002,  2001 and 2000,
respectively.  Net cash used in investing activities for the year ended December
31,  2002  consisted  primarily  of  capital   expenditures  for  machinery  and
equipment. Net cash used in investing activities for the year ended December 31,
2001  consisted  primarily of capital  expenditures  for computer  equipment and
upgrades and  additional  loans to related  parties.  Net cash used in investing
activities for the year ended  December 31, 2000 consisted  primarily of capital
expenditures for computer equipment and upgrades.

     Net cash provided by financing  activities  was  approximately  $6,947,000,
$2,687,000 and $5,719,000 for the years ended December 31, 2002,  2001 and 2000,
respectively.  Net cash  provided  by  financing  activities  for the year ended
December  31, 2002  primarily  reflects  increased  borrowings  under our credit
facility  and funds raised from private  placement  transactions,  offset by the
repayment of notes payable. The increase in borrowings under our credit facility
during the year was due  primarily to working  capital  requirements  related to
increases in accounts receivable and inventories. Net cash provided by financing
activities for the year ended December 31, 2001 primarily  reflects funds raised
from private  placement  transactions and proceeds from the issuance of Series C
Convertible  Redeemable  preferred  stock,  offset  by the  repayment  of a bank
overdraft. 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.

     We currently  satisfy our working capital  requirements  primarily  through
cash flows  generated from  operations and borrowings  under our credit facility
with UPS  Capital.  Our maximum  availability  under the credit  facility is $20
million.  At December 31, 2002 and 2001,  outstanding  borrowings  under our UPS
Capital credit facility  amounted to  approximately  $16,182,000 and $9,661,000,
respectively.  Open letters of credit  amounted to  approximately  $1,537,000 at
December 31, 2002. There were no open letters of credit at December 31, 2001.

     The initial term of our  agreement  with UPS Capital 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 that
we comply with certain  financial  covenants  including net worth,  fixed charge
ratio and capital expenditures.  At December 31, 2002, we were not in compliance
with our capital expenditure covenant due to additional  equipment  requirements
for our exclusive  supply  agreement  with Levi Strauss & Co. UPS Capital waived
the  noncompliance as of December 31, 2002. We were in compliance with all other
financial  covenants at December  31,  2002.  The amount we can borrow under the
credit facility is determined based on a defined  borrowing base formula related
to eligible accounts receivable and inventories. Our


                                       17


<PAGE>


borrowing base availability ranged from approximately  $9,921,000 to $18,829,000
from January 1, 2002 to December 31,  2002. A  significant  decrease in eligible
accounts receivable and inventories due to customer concentration levels and the
aging of  inventories,  among other  factors,  can have an adverse effect on our
borrowing capabilities under our credit facility,  which thereafter,  may not be
adequate  to  satisfy  our  working  capital  requirements.   Eligible  accounts
receivable  are  reduced  if  our  accounts  receivable  customer  balances  are
concentrated in excess of the  percentages  allowed under our agreement with UPS
Capital. In addition,  we have typically  experienced  seasonal  fluctuations in
sales volume.  These seasonal  fluctuations  result in sales volume decreases in
the first and  fourth  quarters  of each year due to the  seasonal  fluctuations
experienced by the majority of our customers.  During these quarters,  borrowing
availability  under our credit facility may decrease as a result of decreases in
eligible  accounts  receivables  generated  from our  sales.  As a result of our
concentration  of business  with  Tarrant  Apparel  Group and Azteca  Production
International,  our eligible receivables have been limited under the UPS Capital
facility to various degrees over the past year. If our business  becomes further
dependant on one or a limited  number of customers  or if we  experience  future
significant  seasonal reductions in receivables,  our availability under the UPS
Capital credit facility would be correspondingly reduced. If this were to occur,
we would be required to seek additional  financing which may not be available on
attractive terms and, if such financing is unavailable, we may be unable to meet
our working capital requirements.

     Pursuant  to the  terms of a  foreign  factoring  agreement  under  our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible accounts receivable under our credit facility. As of December 31, 2002,
the amount factored without recourse was approximately  $292,000.  There were no
receivables factored with UPS Capital at December 31, 2001.

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

     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 included a commitment
by one of the private  investors  to purchase an  additional  400,000  shares of
common  stock at a price per share of $3.00 at  second  closings  on or prior to
March 1, 2003, as amended, for additional proceeds of $1,200,000.  In March 2002
and February 2003, this private investor  purchased  100,000 and 300,000 shares,
respectively,  of common  stock at a price per  share of $3.00  pursuant  to the
second closing  provisions of the stock and warrant purchase agreement for total
proceeds of $1,200,000.  Pursuant to the second closing  provisions of the stock
and warrant purchase  agreement,  50,000 and 150,000 warrants were issued to the
investor in March 2002 and February 2003,  respectively.  There are no remaining
commitments due under the stock and warrant purchase agreements.

     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


                                       18


<PAGE>


the option of the holder after one year at the rate $4.94 per share.  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 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.

     Pursuant  to  the  terms  of  a  factoring  agreement  for  our  Hong  Kong
subsidiary,  Tag-It Pacific Limited,  the factor purchases our eligible accounts
receivable  and assumes the credit risk with respect to those accounts for which
the  factor  has given its prior  approval.  If the  factor  does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 80% of
eligible  accounts  receivable.  Interest  is charged at 1.5% over the Hong Kong
Dollar prime rate. As of December 31, 2002 and 2001, the amount factored without
recourse was approximately $241,000 and $106,000.

     As  of  December  31,  2002,  we  had  outstanding  related-party  debt  of
approximately  $1,350,000  at  interest  rates  ranging  from  4%  to  11%,  and
additional  non-related-party  debt of $25,200 at an interest  rate of 10%.  The
majority of  related-party  debt is due on demand,  with the  remainder  due and
payable on the fifteenth  day  following the date of delivery of written  demand
for payment. On October 4, 2002, we entered into a note payable agreement with a
related  party in the amount of  $500,000  to fund  additional  working  capital
requirements. The note payable was unsecured, due on demand, accrued interest at
4% and was  subordinated  to UPS Capital.  This note was re-paid on February 28,
2003.  As of December  31,  2001,  we had  outstanding  related-party  debt,  of
approximately  $850,000 at interest rates ranging from 7% to 11%, and additional
non-related-party  debt of $25,200 at an interest  rate of 10%.  The majority of
related-party  debt is due on demand,  with the remainder due and payable on the
fifteenth day following the date of delivery of written demand for payment.

     Our  receivables  increased  to  $20,227,000  at  December  31,  2002  from
$10,952,000  at December 31, 2001.  This increase was due primarily to increased
related-party  trade  receivables of approximately  $6.8 million  resulting from
increased  related  party  sales  during the year  ended  December  31,  2002 of
approximately  $14.4 million.  The increase in receivables also resulted from an
increase in sales to non-related parties during 2002.

     In October 1998, we entered into a supply  agreement  with Tarrant  Apparel
Group. In October 1998, we also issued  2,390,000  shares of our common stock to
KG  Investment,  LLC.  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.  Pricing and terms are  consistent
with competitive vendors.

     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.  In
accordance with the supply  agreement,  we issued 1,000,000 shares of our common
stock to Commerce  Investment Group, LLC.  Commencing in December 2000, we began
to  provide  trim  products  to  Azteca  Production  International,  Inc for its
operations in Mexico. Pricing and terms are consistent with competitive vendors.


                                       19


<PAGE>


     Included  in   inventories   at  December  31,  2002  are   inventories  of
approximately $8.5 million that are subject to buyback arrangements with Tarrant
Apparel Group, Azteca Production  International and other customers. The buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is required to purchase the  inventories  from us under normal  invoice
and selling  terms.  If the  financial  condition of Tarrant  Apparel  Group and
Azteca Production International were to deteriorate,  resulting in an impairment
of their  ability to purchase  inventories  of pay  receivables,  it may have an
adverse affect on our results of operations.

     We believe that our existing cash and cash equivalents and anticipated cash
flows from our operating  activities and available  financing will be sufficient
to fund our minimum working capital and capital  expenditure  needs for the next
twelve months.  In addition,  we expect to receive  quarterly cash payments of a
minimum of $1.25  million  under our supply  agreement  with Levi  Strauss & Co.
through August 2004. We also received  additional  funds of $900,000 in February
2003  pursuant  to the  remaining  commitment  due under the stock  warrant  and
purchase agreement we entered into with a private investor. We used a portion of
these funds to repay a subordinated  note payable to a related party of $500,000
in February 2003. The extent of our future capital  requirements  will depend on
many  factors,  including  our  results  of  operations,  future  demand for our
products,  the size and  timing  of  future  acquisitions,  our  borrowing  base
availability limitations related to eligible accounts receivable and inventories
and our expansion into foreign markets. 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. 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,
the  expansion  of our  operations  in the Asian and  Caribbean  markets and the
further development of our waistband technology.


                                       20


<PAGE>


CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

     The following  summarizes our contractual  obligations at December 31, 2002
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:
<TABLE>
<CAPTION>
                                                  Payments Due by Period
                                ----------------------------------------------------------
                                               Less than        1-3         4-5     After
   Contractual Obligations         Total         1 Year        Years       Years   5 Years
-----------------------------   -----------   -----------   -----------   ------    ------
<S>                             <C>           <C>           <C>           <C>       <C>
Subordinated note payable ...   $ 3,800,000   $ 1,200,000   $ 2,600,000   $  --     $  --

Capital lease obligations ...   $   179,235   $    71,928   $   107,307   $  --     $  --

Subordinated notes payable to
related parties (1) .........   $ 1,349,971   $ 1,349,971   $      --     $  --     $  --

Operating leases ............   $ 1,559,103   $   641,373   $   917,730   $  --     $  --

Line of credit ..............   $16,182,061   $16,182,061   $      --     $  --     $  --

Note payable ................   $    25,200   $    25,200   $      --     $  --     $  --

Royalty Payments ............   $   900,000   $    75,000   $   825,000   $  --     $  --
------------------------------------------------------------------------------------------
<FN>
(1)  The majority of  subordinated  notes payable to related  parties are due on
     demand with the  remainder  due and payable on the  fifteenth day following
     the date of delivery of written demand for payment.
</FN>
</TABLE>

     On December 31, 2002, we indirectly  guaranteed the  indebtedness of two of
its  suppliers  through the issuance by a related  party of letters of credit to
purchase goods and equipment  totaling $1.5 million.  Financing costs due to the
related party amounted to approximately $15,000. The letters of credit expire on
March 27, 2003 and June 26, 2003.

NEW ACCOUNTING PRONOUNCEMENTS

     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
September  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.  SFAS 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.  SFAS 144 was  effective for  financial  statements  issued for fiscal
years  beginning  after  December  15,  2001 and,  generally,  are to be applied
prospectively.  The  adoption of this  Statement  had no material  impact on our
financial statements.

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections.  This statement  eliminates the current  requirement that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance with the current GAAP criteria for extraordinary  classification.  In
addition,  SFAS 145 eliminates an inconsistency in lease accounting by requiring
that  modifications  of  capital  leases  that  result  in  reclassification  as
operating  leases be accounted for  consistent  with  sale-leaseback  accounting
rules.  The  statement  also  contains  other   nonsubstantive   corrections  to
authoritative accounting literature.  The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for  transactions  occurring after
May 15, 2002.  Adoption of this standard  will not have any immediate  effect on
our consolidated financial statements.


                                       21


<PAGE>


     In  September  2002,  the FASB issued SFAS No.  146,  Accounting  for Costs
Associated  with Exit or Disposal  Activities,  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging  Issues Task Force (EITF)  Issue No. 94-3.  The
Company will adopt the provisions of SFAS No. 146 for  restructuring  activities
initiated  after December 31, 2002. SFAS No. 146 requires that the liability for
costs  associated  with an exit or  disposal  activity  be  recognized  when the
liability  is incurred.  Under EITF No.  94-3, a liability  for an exit cost was
recognized at the date of a company's  commitment to an exit plan.  SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair  value.  Accordingly,  SFAS No. 146 may  affect  the timing of  recognizing
future restructuring costs as well as the amount recognized.

     In  November  2002,  the FASB  issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness to Others,  an  interpretation of FASB Statements No.
5,  57  and  107  and  a  rescission  of  FASB   Interpretation   No.  34.  This
interpretation  elaborates on the  disclosures  to be made by a guarantor in its
interim and annual financial  statements about its obligations  under guarantees
issued.  The  interpretation  also  clarifies  that a  guarantor  is required to
recognize,  at inception of a guarantee,  a liability  for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation  are  applicable to guarantees  issued or modified after December
31, 2002. The expected impact of the Statement on our future financial  position
is not  reasonably  estimable.  The  disclosure  requirements  are effective for
financial  statements of interim and annual  periods  ending after  December 15,
2002.

     In January 2003, the FASB issued FASB Interpretation No. 46,  Consolidation
of  Variable  Interest  Entities,   an  interpretation  of  Accounting  Research
Bulletins ("ARB") No. 51, Consolidated  Financial  Statements ("FIN 46"). FIN 46
clarifies  the  application  of ARB No. 51 to certain  entities in which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional  subordinated financial support from other parties. We do not
believe  the  adoption  of FIN 46 will have a material  impact on our  financial
position and results of operations.

     On  December  31,  2002,  the FASB issued  SFAS No.  148,  "Accounting  for
Stock-Based  compensation  Transition  and  Disclosure."  SFAS No. 148  requires
certain disclosures  related to stock-based  compensation plans. At December 31,
2002, we had one  stock-based  employee  compensation  plan that is described in
Note 12. We have applied the recognition  and  measurement  provisions of APB 25
and related  interpretations  in  accounting  for those  plans.  No  stock-based
employee  compensation expense is reflected in net income in 2002, 2001 or 2000,
as all options  granted  under  those  plans had an exercise  price equal to the
market value of the  underlying  common stock on the date of grant.  The initial
disclosure  provisions  of SFAS 148 are  applicable to fiscal years ending after
December  15,  2002  and  are not  expected  to have a  material  effect  on our
financial statements.


                                       22


<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 41.5% and 42.3% of
our net sales,  on a consolidated  basis,  for the years ended December 31, 2002
and 2001. In December 2000, we entered into an exclusive  supply  agreement with
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 and Tarrant fail to purchase our trim products at anticipated  levels,
or our relationship  with Azteca or Tarrant  terminates,  it may have an adverse
affect on our results because:

          o    We will lose a primary  source of revenue if either of Tarrant or
               Azteca 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 and Tarrant 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.  Further,  if we are unable to
collect any large receivables due us, our cash flow would be severely impacted.

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


                                       23


<PAGE>


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

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

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

          o    The timing and magnitude of customers' marketing campaigns;

          o    The loss or addition of a major customer;

          o    The availability and pricing of materials for our products;

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

          o    Currency fluctuations;

          o    Delays caused by third parties; and

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

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

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

     OUR BUSINESS MODEL IS DEPENDENT ON INTEGRATION OF INFORMATION  SYSTEMS ON A
GLOBAL  BASIS AND,  TO THE  EXTENT  THAT WE FAIL TO  MAINTAIN  AND  SUPPORT  OUR
INFORMATION  SYSTEMS,  IT CAN RESULT IN LOST REVENUES.  We must  consolidate and
centralize  the  management of our  subsidiaries  and  significantly  expand and
improve our financial and operating controls.  Additionally, we must effectively
integrate the information  systems of our Mexican 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.

     THE LOSS OF KEY MANAGEMENT AND SALES PERSONNEL  COULD ADVERSELY  AFFECT OUR
BUSINESS,  INCLUDING  OUR  ABILITY TO OBTAIN AND SECURE  ACCOUNTS  AND  GENERATE
SALES. Our success has and will continue to depend to a significant  extent upon
key management and sales personnel,  many of whom would be difficult to replace,
particularly Colin Dyne, our Chief Executive Officer. Colin Dyne is not bound by
an employment agreement.  The loss of the services of Colin Dyne or the services
of other key  employees  could have a material  adverse  effect on our business,
including our ability to establish and maintain client relationships. Our future
success  will  depend in large  part upon our  ability  to  attract  and  retain
personnel with a variety of sales, operating and managerial skills.


                                       24


<PAGE>


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

          o    Foreign trade disruptions;

          o    Import restrictions;

          o    Labor disruptions;

          o    Embargoes;

          o    Government intervention; and

          o    Natural disasters.

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

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

     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.


                                       25


<PAGE>


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

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

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

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

          o    Interest rates;

          o    Changes in accounting principles;

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

          o    Announcements of key developments by our competitors; and

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

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

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

     WE 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.


                                       26


<PAGE>


     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,  2002,  our  officers and  directors  and their  affiliates  owned
approximately  36.2% 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  41.1% 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  10.7% of the
outstanding  shares of common stock at December  31, 2002.  Gerard Guez and Todd
Kay, significant  stockholders of Tarrant Apparel Group, own approximately 12.8%
of  the   outstanding   shares  of  our  common  stock  at  December  31,  2002,
respectively.  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.

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

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

     All of our sales are  denominated  in United States dollars or the currency
of the country in which our products originate and, accordingly, we do not enter
into  hedging  transactions  with  regard to any  foreign  currencies.  Currency
fluctuations  can,  however,  increase  the  price of our  products  to  foreign
customers which can adversely  impact the level of our export sales from time to
time.  The  majority  of our cash  equivalents  are held in United  States  bank
accounts and we do not believe we have  significant  market risk  exposure  with
regard to our investments.

     We  are  also  exposed  to the  impact  of  interest  rate  changes  on our
outstanding borrowings.  At December 31 2002, we had approximately $20.0 million
of indebtedness  subject to interest rate  fluctuations.  These fluctuations may
increase our interest expense and decrease our cash flows from time to time. For
example,  based on average bank  borrowings of $10 million  during a three-month
period, if the interest rate indices on which our bank borrowing rates are based
were to increase 100 basis points in the three-month  period,  interest incurred
would increase and cash flows would decrease by $25,000.


                                       27


<PAGE>


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                TABLE OF CONTENTS
                                                                            PAGE
                                                                            ----

Report of Independent Certified Public Accountants.......................    29
Consolidated Balance Sheets..............................................    30
Consolidated Statements of Operations....................................    31
Consolidated Statements of Stockholders' Equity and
     Convertible Redeemable Preferred Stock..............................    32
Consolidated Statements of Cash Flows....................................    33
Notes to Consolidated Financial Statements...............................    34
Independent Certified Public Accountants' Report on Schedule II..........    57
Schedule II - Valuation and Qualifying Accounts and Reserves.............    58


                                       28


<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, 2002 and 2001, 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,  2002.   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, 2002 and 2001, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2002, in conformity  with  accounting  principles  generally
accepted in the United States of America.

     As discussed  in Notes 1 and 7 to the  consolidated  financial  statements,
effective  January 1, 2002,  Tag-It Pacific,  Inc. and subsidiaries  adopted the
provisions  of SFAS No.  142,  "Goodwill  and Other  Intangible  Assets" for its
goodwill and tradename.



                                                     /s/ BDO Seidman, LLP

Los Angeles, California
March 14, 2003


                                       29


<PAGE>


                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                     December 31,   December 31,
                                                         2002           2001
                                                     -----------     -----------
Assets
Current assets:
   Cash and cash equivalents ...................     $   285,464     $    46,948
   Due from factor .............................         532,672         105,749
   Trade accounts receivable, net ..............       5,456,517       3,037,034
   Trade accounts receivable, related
     parties ...................................      14,770,466       7,914,838
   Refundable income taxes .....................         212,082         259,605
   Inventories, net ............................      23,105,267      20,450,740
   Prepaid expenses and other current
     assets ....................................         599,543         408,146
   Deferred income taxes .......................          90,928         107,599
                                                     -----------     -----------
Total current assets ...........................      45,052,939      32,330,659

Property and equipment, net of
  accumulated depreciation
  and amortization .............................       2,953,701       2,592,965
Tradename ......................................       4,110,750       4,110,750
Due from related parties .......................         870,251         814,219
Other assets ...................................       1,314,981         944,912
                                                     -----------     -----------
Total assets ...................................     $54,302,622     $40,793,505
                                                     ===========     ===========

Liabilities, Convertible Redeemable
Preferred Stock and Stockholders' Equity
Current liabilities:
  Line of credit ...............................     $16,182,061     $ 9,660,581
  Accounts payable and accrued expenses ........      10,375,987       6,785,814
  Deferred income ..............................       1,027,984            --
  Note payable .................................          25,200          25,200
  Subordinated demand notes payable to
     related parties ...........................       1,349,971         849,971
  Current portion of capital lease
     obligations ...............................          71,928         180,142
  Current portion of subordinated note
     payable ...................................       1,200,000       1,100,000
                                                     -----------     -----------
Total current liabilities ......................      30,233,131      18,601,708

Capital lease obligations, less current
  portion ......................................         107,307          69,030
Subordinated note payable, less current
  portion ......................................       2,600,000       3,800,000
                                                     -----------     -----------
Total liabilities ..............................      32,940,438      22,470,738
                                                     -----------     -----------

Commitments and contingencies (Note 15)

Convertible redeemable preferred stock
  Series C, $0.001 par value; 759,494
  shares authorized; 759,494 shares
  issued and outstanding at
  December 31, 2002 and 2001(stated
  value $3,000,001) ............................       2,895,001       2,895,001

Stockholders' equity:
  Preferred stock Series A, $0.001 par
     value; 250,000 shares authorized;
     no shares issued or outstanding ...........            --              --
   Convertible preferred stock Series
     B, $0.001 par value; 850,000
     shares authorized; no shares
     issued or outstanding .....................            --              --
   Common stock, $0.001 par value,
     30,000,000 shares authorized;
     9,319,909 shares issued and
     outstanding at December 31, 2002;
     8,769,910 at December 31, 2001 ............           9,321           8,771
  Additional paid-in capital ...................      16,776,012      15,048,971
  Retained earnings ............................       1,681,850         370,024
                                                     -----------     -----------
Total stockholders' equity .....................      18,467,183      15,427,766
                                                     -----------     -----------
Total liabilities, convertible
  redeemable preferred stock and
  stockholders' equity .........................     $54,302,622     $40,793,505
                                                     ===========     ===========


          See accompanying notes to consolidated financial statements.


                                       30


<PAGE>


                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                      Year Ended     Year Ended      Year Ended
                                     December 31,   December 31,    December 31,
                                         2002           2001            2000
                                     ------------   ------------    ------------

Net sales to unrelated parties ...   $ 18,179,970   $ 16,114,039    $ 23,723,666
Net sales to related parties .....     41,893,200     27,453,591      25,638,000
                                     ------------   ------------    ------------
Total net sales ..................     60,073,170     43,567,630      49,361,666
Cost of goods sold ...............     44,633,195     31,678,663      35,821,097
                                     ------------   ------------    ------------
Gross profit .....................     15,439,975     11,888,967      13,540,569

Selling expenses .................      2,126,227      1,639,263       2,104,614
General and administrative
   expenses ......................     10,269,672      8,940,593       8,889,272
Restructuring charges (Note 19) ..           --        1,561,623            --
                                     ------------   ------------    ------------
Total operating expenses .........     12,395,899     12,141,479      10,993,886

Income (loss) from operations ....      3,044,076       (252,512)      2,546,683
Interest expense, net ............      1,269,365      1,396,612         752,902
                                     ------------   ------------    ------------
Income (loss) before income
   taxes .........................      1,774,711     (1,649,124)      1,793,781
Provision (benefit) for
   income taxes ..................        278,685       (423,373)        254,596
                                     ------------   ------------    ------------
Net income (loss) ................   $  1,496,026   $ (1,225,751)   $  1,539,185
                                     ============   ============    ============

Less: Preferred stock dividends ..       (184,200)       (49,950)           --
                                     ------------   ------------    ------------
Net income (loss) to common
   shareholders ..................   $  1,311,826   $ (1,275,701)   $  1,539,185
                                     ============   ============    ============

Basic earnings (loss) per share ..   $       0.14   $      (0.16)   $       0.23
                                     ============   ============    ============
Diluted earnings (loss) per share    $       0.14   $      (0.16)   $       0.21
                                     ============   ============    ============
Basic weighted average shares
   outstanding ...................      9,232,405      8,017,134       6,838,345
                                     ============   ============    ============
Diluted weighted average shares
   outstanding ...................      9,531,301      8,017,134       7,283,261
                                     ============   ============    ============


          See accompanying notes to consolidated financial statements.


                                       31


<PAGE>


<TABLE>

                              TAG-IT PACIFIC, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   AND CONVERTIBLE REDEEMABLE PREFERRED STOCK
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<CAPTION>
                                                              Preferred Stock        Preferred Stock
                                          Common Stock           Series A                Series B          Additional
                                      --------------------    ---------------     ----------------------     Paid-In      Retained
                                       Shares      Amount     Shares   Amount      Shares      Amount        Capital      Earnings
                                      ---------    -------    ------   ------     --------   -----------   -----------   ----------

<S>                                   <C>          <C>        <C>      <C>        <C>        <C>           <C>           <C>
BALANCE, JANUARY 1, 2000              6,777,556    $ 6,778        --   $   --           --   $        --   $ 8,748,157   $  106,540
   Preferred stock issued for
     distribution rights                     --         --        --       --      850,000     1,400,000            --           --
   Common stock issued for supply
     agreement and inventory          1,000,000      1,000        --       --           --            --     2,799,000           --
   Common stock issued for
     settlement agreement                12,999         13        --       --           --            --        57,546           --
   Common stock issued upon
     exercise of options and
     warrants                            72,689         73        --       --           --            --         3,827           --
   Tax benefit from exercise of
     stock options                           --         --        --       --           --            --       129,280           --
   Net income                                --         --        --       --           --            --           --     1,539,185
                                      ---------    -------    ------   ------     --------   -----------   -----------   ----------

BALANCE, DECEMBER 31, 2000            7,863,244      7,864        --       --      850,000     1,400,000    11,737,810    1,645,725
   Preferred stock issued for
     equity investment                       --         --        --       --           --            --            --           --
   Common stock issued upon
     exercise of options                 15,000         15        --       --           --            --        19,485           --
     Issuance of warrants                    --         --        --       --           --            --         5,170           --
   Common stock issued in
     acquisition of assets              125,000        125        --       --           --            --       499,875           --
   Acquisition of trademarks            500,000        500        --       --     (850,000)   (1,400,000)    1,969,500           --
   Common stock issued in private
     placement transactions             266,666        267        --       --           --            --       799,731           --
   Tax benefit from exercise of
     stock options                           --         --        --       --           --            --        17,400           --
   Preferred stock dividends                 --         --        --       --           --            --            --      (49,950)
   Net loss                                  --         --        --       --           --            --            --    (1,225,75)
                                      ---------    -------    ------   ------     --------   -----------   -----------   ----------

BALANCE, DECEMBER 31, 2001            8,769,910      8,771        --       --           --            --    15,048,971      370,024
   Common stock issued upon
   exercise of options                  50,000          50        --       --           --            --        64,948           --
   Acquisition of license rights       150,000         150        --       --           --            --       577,350           --
   Common stock issued in private
     placement transactions            349,999         350        --       --           --            --     1,029,647           --
   Tax benefit from exercise of
     stock options                          --          --        --       --           --            --        55,096           --
   Preferred stock dividends                --          --        --       --           --            --            --     (184,200)
   Net income                               --          --        --       --           --            --            --    1,496,026
                                      ---------    -------    ------   ------     --------   -----------   -----------   ----------

BALANCE, DECEMBER 31, 2002            9,319,909    $ 9,321        --   $   --           --   $        --   $16,776,012   $1,681,850
                                      =========    =======    ======   ======     ========   ===========   ===========   ==========


<CAPTION>
                                                          Preferred Stock
                                                             Series C
                                                       ---------------------
                                            Total       Shares      Amount
                                         -----------   --------   ----------

<S>                                      <C>            <C>       <C>
BALANCE, JANUARY 1, 2000                 $ 8,861,475         --   $       --
   Preferred stock issued for
     distribution rights                   1,400,000         --           --
   Common stock issued for supply
     agreement and inventory               2,800,000         --           --
   Common stock issued for
     settlement agreement                     57,559         --           --
   Common stock issued upon
     exercise of options and
     warrants                                  3,900         --           --
   Tax benefit from exercise of
     stock options                           129,280         --           --
   Net income                              1,539,185         --           --
                                         -----------   --------   ----------

BALANCE, DECEMBER 31, 2000                14,791,399         --           --
   Preferred stock issued for
     equity investment                            --    759,494    2,895,001
   Common stock issued upon
     exercise of options                      19,500         --           --
     Issuance of warrants                      5,170         --           --
   Common stock issued in
     acquisition of assets                   500,000         --           --
   Acquisition of trademarks                 570,000         --           --
   Common stock issued in private
     placement transactions                  799,998         --           --
   Tax benefit from exercise of
     stock options                            17,400         --           --
   Preferred stock dividends                 (49,950)        --           --
   Net loss                               (1,225,751)        --           --
                                         -----------   --------   ----------

BALANCE, DECEMBER 31, 2001                15,427,766    759,494    2,895,001
   Common stock issued upon
   exercise of options                        64,998
   Acquisition of license rights             577,500         --           --
   Common stock issued in private
     placement transactions                1,029,997         --           --
   Tax benefit from exercise of
     stock options                            55,096         --           --
   Preferred stock dividends                (184,200)        --           --
   Net income                              1,496,026         --           --
                                         -----------   --------   ----------

BALANCE, DECEMBER 31, 2002               $18,467,183    759,494   $2,895,001
                                         ===========   ========   ==========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       32


<PAGE>

<TABLE>

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

                                                                    Year Ended     Year Ended     Year Ended
                                                                    December 31,   December 31,   December 31,
                                                                        2002           2001           2000
                                                                    -----------    -----------    -----------
<S>                                                                 <C>            <C>            <C>
Increase (decrease) in cash and cash equivalents
Cash flows  from  operating activities:
   Net income (loss) ............................................   $ 1,496,026    $(1,225,751)   $ 1,539,185
   Adjustments to reconcile net income (loss) to net cash used in
     operating activities:
     Depreciation and amortization ..............................     1,169,247      1,478,055      1,039,027
     Decrease (increase) in deferred income taxes ...............        16,671       (220,934)        64,517
     Loss (gain) on sale of assets ..............................        20,804        684,391        (14,584)
     Stock and warrants issued for services .....................          --            5,170         57,559
     (Decrease) increase in allowance for doubtful accounts .....      (167,140)       (80,599)       244,226
   Changes in operating assets and liabilities:
     Receivables, including related parties .....................    (9,534,894)       788,022     (7,622,086)
     Inventories ................................................    (2,654,527)    (2,497,580)    (4,408,021)
     Prepaid expenses and other current assets ..................      (191,396)       330,588        454,338
     Other assets ...............................................       (75,580)      (447,618)       (48,207)
     Accounts payable and accrued expenses ......................     3,197,895       (604,798)     5,058,534
     Deferred income ............................................     1,027,984           --             --
     Income taxes payable .......................................       254,663       (309,147)       (23,088)
                                                                    -----------    -----------    -----------
Net cash used in operating activities ...........................    (5,440,247)    (2,100,201)    (3,658,600)
                                                                    -----------    -----------    -----------
Cash flows from investing activities:
   Additional loans to related parties ..........................          --         (251,489)      (217,107)
   Acquisition of property and equipment ........................    (1,290,087)      (534,873)    (1,832,816)
   Proceeds from sale of equipment ..............................        22,312        118,880         17,000
                                                                    -----------    -----------    -----------
Net cash used in investing activities ...........................    (1,267,775)      (667,482)    (2,032,923)
                                                                    -----------    -----------    -----------
Cash flows from financing activities:
   Bank overdraft ...............................................          --         (584,831)       584,831
   Proceeds from preferred stock issuance .......................          --        2,895,001           --
   Proceeds from common stock issuance ..........................     1,029,997        799,998           --
   Proceeds from exercise of stock options and warrants .........        64,998         19,500          3,900
   Proceeds (repayment) from bank line of credit, net ...........     6,521,480       (295,855)     4,889,178
   Proceeds from capital lease obligations ......................       125,000        207,240           --
   Payment of capital lease obligations .........................      (194,937)      (321,516)      (236,912)
   Proceeds from notes payable ..................................       500,000        180,000        685,000
   Repayment of notes payable ...................................    (1,100,000)      (212,999)      (207,179)
                                                                    -----------    -----------    -----------
Net cash provided by financing activities .......................     6,946,538      2,686,538      5,718,818
                                                                    -----------    -----------    -----------
Net increase (decrease) in cash and cash equivalents ............       238,516        (81,145)        27,295
Cash and cash equivalents, beginning of year ....................        46,948        128,093        100,798
                                                                    -----------    -----------    -----------
Cash and cash equivalents, end of year ..........................   $   285,464    $    46,948    $   128,093
                                                                    ===========    ===========    ===========
Supplemental  disclosures of cash flow information:
   Cash paid (received) during the year for:
     Interest paid ..............................................   $ 1,203,663    $ 1,312,805    $   746,433
     Interest received ..........................................   $      (180)        (2,430)          --
     Income taxes paid ..........................................   $     7,984    $    22,780    $   237,415

     Income taxes received ......................................   $      --      $   (10,389)   $   (21,400)
   Non-cash financing activity:
     Common stock issued in acquisition of assets ...............   $      --      $   500,000    $      --
     Common stock issued in acquisition of license rights .......   $   577,500    $      --      $      --
     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.


                                       33


<PAGE>


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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

     Tag-It  Pacific,  Inc.  (the  "Company") is the parent  holding  company of
Tag-It,  Inc.,  a  California  corporation,  Tag-It  Pacific  (HK)  Ltd.,  a BVI
corporation  (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 Company
and its  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
2002, 2001 and 2000,  foreign  currency  translation  and transaction  gains and
losses were not material.

NATURE OF BUSINESS

     The Company  specializes in the  distribution of a full range of trim items
to  manufacturers  of  fashion  apparel  and  licensed  consumer  products,  and
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, The Limited,  Lerner and Miller's
Outpost,  among others. In addition,  the Company  distributes zippers under our
TALON brand name to apparel brands and manufacturers such as Levi Strauss & Co.,
VF  Corporation  and Tropical  Sportswear,  among others.  In 2002,  the Company
created a new division under the TEKFIT brand name.  This division  develops and
sells apparel components that utilize the patented Pro-Fit technology, including
a stretch  waistband.  These  products are sold to the same  customers  that are
targeted by the Company's MANAGED TRIM SOLUTION and TALON zipper divisions.


                                       34


<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, 2002,
2001 and 2000.

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 16).

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 ten 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.


                                       35


<PAGE>


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

IMPAIRMENT OF LONG-LIVED ASSETS

     On January 1, 2002,  the Company  adopted  SFAS 142 which  requires,  among
other things,  that the Company no longer  amortize  goodwill,  but instead test
goodwill for impairment at least annually.  In addition,  SFAS 142 requires that
the Company  identify  reporting  units for the purposes of assessing  potential
future  impairments  of goodwill,  reassess  the useful lives of other  existing
recognized  intangible  assets, and cease amortization of intangible assets with
an indefinite  useful life. The Company's  previous  business  combinations were
accounted  for using the  purchase  method.  As of December  31,  2002,  the net
carrying  amount of goodwill is  $450,000,  tradename  is  $4,110,750  and other
intangible  assets is $490,875.  Management  has  determined  that  goodwill and
tradename  have  indefinite  lives.   Amortization   expense  related  to  other
intangibles amounted to $86,625 for the year ended December 31, 2002.

 RECLASSIFICATION

     Certain  reclassifications  have  been  made to the  prior  year  financial
statements to conform with 2002 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.
All stock options  issued to employees  had an exercise  price not less than the
fair market value of the  Company's  Common  Stock on the date of grant,  and in
accounting  for such options  utilizing the  intrinsic  value method there is no
related  compensation expense recorded in the Company's financial statements for
the years ended December 31, 2002, 2001 and 2000.

     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.


                                       36


<PAGE>


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

USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL INFORMATION

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

NEW ACCOUNTING PRONOUNCEMENTS

     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
September 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.  SFAS 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.  SFAS 144 was  effective for  financial  statements  issued for fiscal
years  beginning  after  December  15,  2001 and,  generally,  are to be applied
prospectively.  The  adoption of this  Statement  had no material  impact on the
Company's financial statements.

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections.  This statement  eliminates the current  requirement that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance with the current GAAP criteria for extraordinary  classification.  In
addition,  SFAS 145 eliminates an inconsistency in lease accounting by requiring
that  modifications  of  capital  leases  that  result  in  reclassification  as
operating  leases be accounted for  consistent  with  sale-leaseback  accounting
rules.  The  statement  also  contains  other   nonsubstantive   corrections  to
authoritative accounting literature.  The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for  transactions  occurring after
May 15, 2002.  Adoption of this standard  will not have any immediate  effect on
the Company's consolidated financial statements.

     In  September  2002,  the FASB issued SFAS No.  146,  Accounting  for Costs
Associated  with Exit or Disposal  Activities,  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging  Issues Task Force (EITF)  Issue No. 94-3.  The
Company will adopt the provisions of SFAS No. 146 for  restructuring  activities
initiated after December 31, 2002.


                                       37


<PAGE>


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

SFAS No. 146 requires that the liability  for costs  associated  with an exit or
disposal  activity be recognized when the liability is incurred.  Under EITF No.
94-3,  a liability  for an exit cost was  recognized  at the date of a company's
commitment  to an exit plan.  SFAS No. 146 also  establishes  that the liability
should initially be measured and recorded at fair value.  Accordingly,  SFAS No.
146 may affect the timing of recognizing future  restructuring  costs as well as
the amount recognized.

     In  November  2002,  the FASB  issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness to Others,  an  interpretation of FASB Statements No.
5,  57  and  107  and  a  rescission  of  FASB   Interpretation   No.  34.  This
interpretation  elaborates on the  disclosures  to be made by a guarantor in its
interim and annual financial  statements about its obligations  under guarantees
issued.  The  interpretation  also  clarifies  that a  guarantor  is required to
recognize,  at inception of a guarantee,  a liability  for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation  are  applicable to guarantees  issued or modified after December
31, 2002. The expected impact of the Statement on the Company's future financial
position is not reasonably estimable.  The disclosure requirements are effective
for financial statements of interim and annual periods ending after December 15,
2002.

     In January 2003, the FASB issued FASB Interpretation No. 46,  Consolidation
of  Variable  Interest  Entities,   an  interpretation  of  Accounting  Research
Bulletins ("ARB") No. 51, Consolidated  Financial  Statements ("FIN 46"). FIN 46
clarifies  the  application  of ARB No. 51 to certain  entities in which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without  additional  subordinated  financial  support  from other  parties.  The
Company does not believe the  adoption of FIN 46 will have a material  impact on
its financial position and results of operations.

     On  December  31,  2002,  the FASB issued  SFAS No.  148,  "Accounting  for
Stock-Based  Compensation  Transition  and  Disclosure."  SFAS No. 148  requires
certain disclosures related to stock-based compensation plans of the Company. At
December 31, 2002, the Company had one stock-based  employee  compensation  plan
that is  described  in Note 12. The  Company has  applied  the  recognition  and
measurement  provisions of APB 25 and related  interpretations in accounting for
those plans. No stock-based  employee  compensation  expense is reflected in net
income in 2002,  2001 or 2000,  as all options  granted under those plans had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant. The initial  disclosure  provisions of SFAS 148 are applicable to
fiscal  years  ending  after  December  15, 2002 and are not  expected to have a
material effect on the Company's  financial  statements.  The Company intends to
continue  accounting for its stock-based  employee  compensation  plan under the
recognition and measurement provisions of APB 25.


                                       38


<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, 2002                    December 31, 2001                December 31, 2000
                      --------------------------------   ---------------------------------  --------------------------------
                                                 Per                                Per                                Per
                       Income        Shares     Share      Loss         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...   1,311,826     9,232,405  $ 0.14    $(1,275,70)   8,017,134  $ (0.16)  $1,539,185    6,838,345  $  0.23

Effect of dilutive
securities:
    Options........                   244,706                                 --                            386,903
    Warrants.......                    54,191                                 --                             58,013
                      ---------   -----------  -------   ----------  -----------  -------   ----------  -----------  -------
Income (loss)
available to
common
stockholders.......   1,311,826     9,531,302  $  0.14   $(1,275,70)   8,017,134  $ (0.16)  $1,539,185    7,283,261  $  0.21
                      =========   ===========  =======   ==========  ===========  =======   ==========  ===========  =======
</TABLE>

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

     Warrants to purchase  433,122  shares of common stock at between  $0.71 and
$6.00, options to purchase 1,546,000 shares of common stock at between $1.30 and
$4.63,  759,494  shares of  preferred  Series C stock  convertible  at $4.94 per
share,  and  convertible  debt of $500,000  convertible  at $4.50 per share were
outstanding  for the year ended  December 31, 2001, but were not included in the
computation  of diluted  earnings  per share  because  the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

     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.

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% and 5.125% at  December  31,  2002 and  2001).  Factored
accounts  receivable,  without  recourse,  amounted to $241,138  and $105,749 at
December 31, 2002 and 2001.  There were no outstanding  advances from the factor
at December 31, 2002 and 2001.


                                       39


<PAGE>


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

     The Company also has a factoring  agreement  with UPS Capital  Global Trade
Finance  Corporation,  whereby  UPS  Capital  purchases  our  eligible  accounts
receivable  and assumes the credit risk with respect to those  foreign  accounts
for which UPS Capital  has given its prior  approval.  If UPS  Capital  does not
assume the credit risk for a receivable, the collection risk associated with the
receivable  remains  with us. The Company pays a fixed  commission  rate and may
borrow up to 85% of eligible accounts  receivable under our credit facility.  As
of December 31, 2002, the amount  factored  without  recourse was  approximately
$291,534.

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,  2002 and  2001,  the
allowance  for  doubtful  accounts  and  subsequent  returns  was  $401,485  and
$568,625.

NOTE 5--INVENTORIES

     Inventories consist of the following:

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

Raw materials ........................          $    10,937          $    41,957
Work-in-process ......................               83,105            3,220,518
Finished goods .......................           23,011,225           17,188,265
                                                -----------          -----------

Total inventories ....................          $23,105,267          $20,450,740
                                                ===========          ===========


     Inventories at December 31, 2002 and 2001 include goods that are subject to
buy back agreements with the Company's customers. The buyback agreements contain
provisions  related  to the  inventory  purchased  on  behalf  of the  Company's
customers.  In the event that  inventories  remain with the Company in excess of
six to nine months from the Company's receipt of the goods from its vendors, the
customer is required to purchase the  inventories  from the Company under normal
invoice and selling  terms.  Included in  inventories  at December  31, 2002 are
inventories  of   approximately   $8.5  million  that  are  subject  to  buyback
arrangements with Tarrant Apparel Group,  Azteca Production  International (Note
18) and other customers.


NOTE 6--PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

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

Furniture and fixtures ...........................     $  571,923     $  547,152
Machinery and equipment ..........................      4,003,402      2,924,301
Leasehold improvements ...........................        168,785        197,355
Films, dies, molds and art designs ...............      1,838,364      1,708,964
                                                       ----------     ----------

                                                        6,582,474      5,377,772
Accumulated depreciation and amortization ........      3,628,773      2,784,807
                                                       ----------     ----------

Net property and equipment .......................     $2,953,701     $2,592,965
                                                       ==========     ==========


                                       40


<PAGE>


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

NOTE 7--GOODWILL AND OTHER INTANGIBLE ASSETS

     Intangible assets consist of goodwill,  tradename and exclusive license and
intellectual  property  rights.  In  accordance  with SFAS No.  142,  all of the
Company's  intangible  assets that have definite lives are being  amortized on a
straight-line  basis over  their  estimated  useful  lives.  Goodwill  and other
intangible  assets with indefinite  lives are evaluated to determine if the fair
value of the asset has decreased below its carrying value. At December 31, 2002,
the Company  evaluated its goodwill and tradename  assets and determined that no
impairment adjustment was necessary.  Amortization expense of $50,000 recognized
in 2001, would not have been recognized  under SFAS No. 142.  Goodwill and other
intangible assets as of December 31, 2002 and 2001 are as follows:

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

Goodwill ...................................      $   500,000       $   500,000
Accumulated amortization ...................          (50,000)          (50,000)
                                                  -----------       -----------
Goodwill, net ..............................          450,000           450,000
                                                  -----------       -----------
Tradename ..................................        4,110,750         4,110,750
Accumulated amortization ...................             --                --
                                                  -----------       -----------
Tradename, net .............................        4,110,750         4,110,750
                                                  -----------       -----------

Exclusive license and intellectual
  property rights ..........................          577,500              --
Accumulated amortization ...................          (86,625)             --
                                                  -----------       -----------
Exclusive license and intellectual
  property rights, net .....................          490,875              --
                                                  -----------       -----------
Intangible assets, net .....................      $ 5,051,625       $ 4,560,750
                                                  ===========       ===========

     There were no changes in the net carrying amounts of goodwill and tradename
for the years ended December 31, 2002 and 2001.

     Amortization expense consists of the following:

                                                     Year Ended December 31,
                                              ----------------------------------
                                                2002         2001         2000
                                              --------     --------     --------

Goodwill ................................     $   --       $ 50,000     $   --

Tradename ...............................         --           --           --
Exclusive license and intellectual
  property rights .......................       86,625         --           --
Other intangible assets .................         --        128,333      105,000
                                              --------     --------     --------
                                              $ 86,625     $178,333     $105,000
                                              ========     ========     ========


                                       41


<PAGE>


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

     The  weighted  average  amortization  period  for  intangible  assets  with
definite  lives  is  five  years.   The  following  table  shows  the  estimated
amortization expense for these assets for each of the succeeding years:

     Years ending December 31,                                      Amount
     -------------------------                                     --------
     2003 ..............................................           $115,500
     2004 ..............................................            115,500
     2005 ..............................................            115,500
     2006 ..............................................            115,500
     2007 ..............................................             28,875
                                                                   --------
     Total amortization expense ........................           $490,875
                                                                   ========

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

                                                   Year Ended December 31,
                                           -------------------------------------
                                              2002          2001         2000
                                           ----------    ----------   ----------
Net income (loss):
   Reported............................    $1,496,026   $(1,225,751)  $1,539,185
   Goodwill amortization...............            --        50,000           --
                                           ----------    ----------   ----------
   Adjusted............................    $1,496,026   $(1,175,751)  $1,539,185
                                           ==========    ==========   ==========

Basic net income (loss) per common
  share:
   Reported............................    $     0.14   $     (0.16)  $     0.23
   Effect of goodwill amortization.....            --          0.01           --
                                           ----------   -----------   ----------
   Adjusted............................    $     0.14   $     (1.15)  $     0.23
                                           ==========   ===========   ==========

Diluted net income (loss) per common
  share:
   Reported............................    $     0.14   $     (0.16)  $     0.21
   Effect of goodwill amortization.....            --          0.01           --
                                           ----------   -----------   ----------
   Adjusted............................    $     0.14   $     (0.15)  $     0.21
                                           ==========   ===========   ==========

NOTE 8--LINE OF CREDIT

     On May 30, 2001,  the Company  entered  into a loan and security  agreement
with UPS Capital  Global  Trade  Finance  Corporation,  providing  for a working
capital credit  facility with a maximum  available  amount of  $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% (6.25% at December  31,  2002).  The credit  facility  requires the
compliance with certain financial  covenants  including net worth,  fixed charge
coverage  ratio and capital  expenditures.  At December 31, 2002, we were not in
compliance  with our capital  expenditure  covenant due to additional  equipment
requirements  for our  exclusive  supply  agreement  with Levi Strauss & Co. UPS
Capital waived the  noncompliance as of December 31, 2002. We were in compliance
with all other financial covenants at December 31, 2002.  Availability under the
UPS Capital credit facility is determined  based on a defined formula related to
eligible accounts  receivable and inventory.  Open letters of credit amounted to
$1,537,416  at  December  31,  2002.  There  were no open  letters  of credit at
December 31, 2001.


                                       42


<PAGE>


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

NOTE 9--NOTE PAYABLE

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

NOTE 10--SUBORDINATED NOTES PAYABLE TO RELATED PARTIES

     Subordinated notes payable to related parties consist of the following:

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

Six notes payable issued in 1996, four
   notes payable issued in 1997, and two
   notes payable issued in 1998 to officers
   and directors of the Company with no
   monthly payments and interest rates
   ranging from 7.5% to 10% annually, due
   and payable on the fifteenth day following
   delivery of written demand for payment ........     $   85,176     $   85,176

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

Unsecured notes payable to  shareholders,
   directors and officers of the Company
   accrue interest at 4%, 7%, 7.5% and 11%
   per annum, principal and interest due
   on demand and fifteen days from demand ........        764,795        264,795
                                                       ----------     ----------

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

     The notes are  subordinate to UPS Capital Global Trade Finance  Corporation
under the Company's line of credit  facility.  Interest  expense  related to the
subordinated  notes payable to related  parties for the years ended December 31,
2002, 2001 and 2000 amounted to $88,102, $88,103and $46,335. Included in accrued
expenses at  December  31, 2002 and 2001 was  $285,428  and  $197,326 of accrued
interest  related to these notes.  Interest paid during the years ended December
31, 2002 and 2001 amounted to $0 and $87,938.

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


                                       43


<PAGE>


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

NOTE 11--CAPITAL LEASE OBLIGATIONS

     The Company  financed  equipment  purchases  through  various capital lease
obligations  expiring  through June 2006.  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
-------------------------                                             ---------
2003 ......................................................           $  87,960
2004 ......................................................              63,184
2005 ......................................................              40,567
2006 ......................................................              20,284
                                                                      ---------

Total payments ............................................             211,995

Less amount representing interest .........................             (32,760)
                                                                      ---------

Balance at December 31, 2002 ..............................             179,235

Less current portion ......................................              71,928
                                                                      ---------

Long-term portion .........................................           $ 107,307
                                                                      =========

     At December 31, 2002, total  equipment,  included in property and equipment
(Note 6), under capital lease obligations and related  accumulated  depreciation
amounted to $729,342  and  $482,414.  At December  31,  2001,  total  equipment,
included in property and equipment,  under capital lease obligations and related
accumulated depreciation amounted to $714,887 and $303,976.

NOTE  12--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 Shares could then be converted  into on the record date.
Total legal and other costs  associated  with this  transaction of $105,000 were
netted against the $3,000,001  proceeds  received from Coats.  Dividends accrued
but unpaid at December 31, 2002 and 2001 amounted to $234,150 and $49,950.

     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.


                                       44


<PAGE>


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

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% (6.25% at December 31, 2002) and is subordinated to the Company's obligations
under  its  senior  credit  facility  with  UPS  Capital  Global  Trade  Finance
Corporation.  In connection with the Asset Purchase Agreement,  the Company also
entered  into a mutual  release with Talon,  Inc.  and GICISA  pursuant to which
Talon,  Inc.  and GICISA  released the Company  from its  obligations  under the
unsecured note payable of $2,830,024  dated September 30, 2000 and other current
liabilities  under the Exclusive  License and Distribution  Agreement.  Further,
850,000  shares of the Company's  series B convertible  preferred  stock held by
GICISA were cancelled at the closing of the Asset Purchase Agreement.


                                       45


<PAGE>


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

     Future minimum annual payments under the  subordinated  note payable are as
follows:

     Years ending December 31,                                     Amount
     -------------------------                                   ----------
     2003 .............................................          $1,200,000
     2004 .............................................           1,200,000
     2005 .............................................           1,400,000
                                                                 ----------

     Balance at December 31, 2002 .....................           3,800,000

     Less current portion .............................           1,200,000
                                                                 ----------

     Long-term portion ................................          $2,600,000
                                                                 ==========

COMMON STOCK

EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT

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

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

     Years ending December 31,                                      Amount
     -------------------------                                     --------
     2003 .............................................            $ 75,000
     2004 .............................................             200,000
     2005 .............................................             400,000
     2006 .............................................             225,000
                                                                   --------
     Total minimum royalties ..........................            $900,000
                                                                   ========

PRIVATE PLACEMENTS

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


                                       46


<PAGE>


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

exercise date exceeds the initial  exercise  price (as adjusted) up to a maximum
exercise  price of $5.25.  The  warrants  have a term of four years.  The shares
contain restrictions related to the sale or transfer of the shares, registration
and voting rights.

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

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 and recorded 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,  the  Company  is able to  provide  trim
products  on a basis  that is  competitive  in terms of price  and  quality.  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 13--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


                                       47


<PAGE>


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

was exchanged. The new options are exercisable through their expiration dates in
2007 and 2008,  which expiration dates correspond to the expiration dates of the
options for which they were exchanged.  At October 10, 1998, options to purchase
70,500  shares of Common Stock  previously  granted under the 1997 Plan had been
canceled in accordance with the terms of the respective option agreements.

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

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

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

     In 2002, the Company's  Board of Directors  further  amended its 1997 Stock
Incentive Plan to provide for a total of 2,277,500  shares of common stock to be
reserved for issuance  under the Plan.  During the year ended December 31, 2002,
the Company  granted  270,000  options to purchase  common  stock at an exercise
price of $3.63 per share, the closing price of the Company's common stock on the
date of grant.

     The following table summarizes the activity in the 1997 Plan:


                                       48


<PAGE>

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

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

Options outstanding -
  January 1, 2000 .............................          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
     Granted ..................................          270,000            3.63
     Exercised ................................          (50,000)           1.30
     Canceled .................................          (32,500)           3.40
                                                      ----------        --------

Options outstanding -
  December 31, 2002 ...........................        1,733,500        $   3.48
                                                      ==========        ========

STOCK BASED COMPENSATION

     All stock options  issued to employees had an exercise  price not less than
the fair market value of the Company's Common Stock on the date of grant, and in
accounting  for such options  utilizing the  intrinsic  value method there is no
related  compensation expense recorded in the Company's financial statements for
the years ended  December  31, 2002,  2001 and 2000.  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 income  (loss) and  income  (loss) per share for the years  ended
December 31, 2002,  2001 and 2000 would have  amounted to the pro forma  amounts
presented below:

<TABLE>
<CAPTION>
                                                         2002              2001               2000
-------------------------------------------------    ------------      -----------     --------------
<S>                                                  <C>               <C>             <C>
Net income (loss), as reported.................      $  1,496,026      $(1,225,751)    $    1,539,185
Add:  Stock-based employee compensation expense
     included in reported net income, net of
     related tax effects ......................                -                -                  -

Deduct:  Total stock-based employee
     compensation expense determined under fair
     value based method for all awards, net of
     related tax effects ......................          (121,073)        (295,898)          (515,534)
                                                     ------------      -----------     --------------

Pro forma net income (loss)....................      $  1,374,953      $(1,521,649)    $    1,023,651
                                                     ============      ===========     ==============

Earnings (loss) per share:
     Basic - as reported.......................      $       0.14      $     (0.16)    $         0.23
     Basic - pro forma.........................      $       0.13      $     (0.19)    $         0.15

     Diluted - as reported.....................      $       0.14      $     (0.16)    $         0.21
     Diluted - pro forma.......................      $       0.13      $     (0.19)    $         0.14
</TABLE>


                                       49


<PAGE>


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

     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 2002,  2001 and 2000;  expected life of
option of 1.5 years,  expected  volatility of 19% for 2002, 17% for 2001 and 60%
for 2000,  risk free  interest  rate of 3% for 2002, 5% for 2001 and 6% for 2000
and a 0% dividend yield.  The weighted  average fair value at the grant date for
such options is $.38, $.37 and $1.33 per option for the years ended December 31,
2002, 2001 and 2000.

     Additional  information  relating to stock options and warrants outstanding
and  exercisable  at December  31,  2002,  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      5.0       $ 0.71         39,235     $ 0.71
           $ 1.30                    324,500      5.5       $ 1.30        324,500     $ 1.30
           $ 1.50 (warrants)          35,555      0.1       $ 1.50         35,555     $ 1.50
           $ 4.31                    357,000      7.0       $ 4.31        357,000     $ 4.31
           $ 4.80 (warrants)         110,000      0.1       $ 4.80        110,000     $ 4.80
           $ 6.00 (warrants)          80,000      0.1       $ 6.00         80,000     $ 6.00
           $ 4.63                    105,000      7.0       $ 4.63        105,000     $ 4.63
           $ 3.78                    126,000      8.5       $ 3.78        126,000     $ 3.78
           $ 4.25                    166,000      7.5       $ 4.25        151,000     $ 4.25
           $ 4.50                     15,000      7.5       $ 4.50          9,375     $ 4.50
           $ 3.75                    156,000      8.0       $ 3.75        156,000     $ 3.75
           $ 3.63                    270,000     10.0       $ 3.63        100,000     $ 3.63
           $ 3.64                    214,000      9.0       $ 3.64        214,000     $ 3.64
           $ 3.65 (warrants)          10,000      1.6       $ 3.65         10,000     $ 3.65
           $ 5.00 (warrants)          20,000      1.5       $ 5.00         20,000     $ 5.00
           $ 4.57 (warrants)           5,000      1.5       $ 4.57          5,000     $ 4.57
           $ 4.34 (warrants) (1)     154,166      3.0       $ 4.34        154,166     $ 4.34
           $ 4.73 (warrants) (1)     154,166      3.0       $ 4.73        154,166     $ 4.73
                                   ---------                            ---------

           $ 3.48                  2,341,622      6.2       $ 3.71      2,150,997     $ 3.71
                                   =========                            =========
----------
<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>



                                       50


<PAGE>


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

NOTE 14--INCOME TAXES

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

                                               Year Ended December 31,
                                   ---------------------------------------------
                                      2002              2001             2000
                                   ---------         ---------         ---------
Current:
     Federal ..............        $ 222,713         $(172,073)        $ 161,567
     State ................           39,301           (30,366)           28,512
                                   ---------         ---------         ---------
                                     262,014          (202,439)          190,079
Deferred:
     Federal ..............           14,170          (187,794)           54,839
     State ................            2,501           (33,140)            9,678
                                   ---------         ---------         ---------
                                      16,671          (220,934)           64,517
                                   ---------         ---------         ---------
                                   $ 278,685         $(423,373)        $ 254,596
                                   =========         =========         =========

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

                                                       Year Ended December 31,
                                                     --------------------------
                                                      2002      2001      2000
                                                     ------    ------    ------
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 ......    (18.2)      1.2     (15.0)
    Utilization of NOL benefit ...................      --       15.7      (9.6)
    Exercise of stock options ....................     (3.1)      1.1      (7.2)
    Other ........................................     (3.0)     (3.7)      6.0
                                                     ------    ------    ------

                                                       15.7%    (25.7)%    14.2%
                                                     ======    ======    ======

     Income (loss) before income taxes are as follows:

                                           Year Ended December 31,
                            -----------------------------------------------
                                2002              2001              2000
                            -----------       -----------       -----------

     Domestic ........      $   428,473       $(1,400,553)      $   654,555
     Foreign .........        1,346,238          (248,571)        1,139,226
                            -----------       -----------       -----------

                            $ 1,774,711       $(1,649,124)      $ 1,793,781
                            ===========       ===========       ===========


                                       51


<PAGE>


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

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

                                                        Year Ended December 31,
                                                      -------------------------
                                                         2002           2001
                                                      ---------       ---------
Net deferred tax asset:
     Net operating loss carryforwards ..........      $ 334,292       $ 374,356
     Dies, film and art library ................        (37,766)        (86,944)
     Depreciation and amortization .............         42,951        (183,457)
     Intangible assets .........................       (173,620)           --
     Bad debt reserve ..........................        (75,737)           --
     Other .....................................            808           3,644
                                                      ---------       ---------

                                                      $  90,928       $ 107,599
                                                      =========       =========

     At  December  31,  2002,  Tag-it  Pacific,  Inc.  had Federal and state NOL
carryforwards of approximately $890,000 and $507,000,  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  NOL  carryforwards  are
dependent upon the Company's ability to generate taxable income in the future.

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

EXCLUSIVE SUPPLY AGREEMENT

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

     The  Company  recognizes  revenue at the time goods are  shipped,  at which
point title transfers to the customer, and collection is reasonably assured. The
Company  received  its first  quarterly  minimum  payment  due under the  supply
agreement of $1.25  million  from Levi in July 2002.  Total  deferred  income at
December 31, 2002 amounted to $1,027,984.


                                       52


<PAGE>


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

LEASES

     The  Company  is a party  to a number  of  non-cancelable  operating  lease
agreements  involving  buildings  and  equipment  which expire at various  dates
through June 2006. The future minimum lease  commitments as of December 31, 2002
are as follows:

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

     2003 ............................................           $  641,373
     2004 ............................................              419,253
     2005 ............................................              346,031
     2006 ............................................              152,446
                                                                 ----------
        Total minimum payments .......................           $1,559,103
                                                                 ==========

     Total rental expense for the years ended  December 31, 2002,  2001 and 2000
aggregated $820,194, $766,962 and $270,479, 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, 2002, 2001 and 2000.

CONTINGENCIES

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

     On December 31, 2002, the Company indirectly guaranteed the indebtedness of
two of its  suppliers  thru the issuance by a related party of letters of credit
to purchase goods and equipment  totaling $1.5 million.  Financing  costs due to
this related  party  amounted to  approximately  $15,000.  The letters of credit
expire on March 27, 2003 and June 26, 2003.

NOTE 16--GEOGRAPHIC INFORMATION

     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.  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.


                                       53


<PAGE>


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

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

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2002           2001            2000
                                     -----------     -----------     -----------
Sales:
     United States .............     $ 8,709,833     $14,494,035     $18,262,860
     Asia ......................       5,436,927       1,984,103       5,344,853
     Mexico ....................      44,087,714      27,089,492      25,753,953
     Dominican Republic ........       1,838,696            --              --
                                     -----------     -----------     -----------
                                     $60,073,170     $43,567,630     $49,361,666
                                     ===========     ===========     ===========
Long-lived Assets:
     United States .............     $ 6,998,595     $ 6,610,522
     Asia ......................         117,534         199,064
     Mexico ....................         308,671         344,129
     Dominican Republic ........         580,526            --
                                     -----------     -----------
                                     $ 8,005,326     $ 7,153,715
                                     ===========     ===========

NOTE 17--MAJOR CUSTOMER & VENDORS

     Two major  customers,  both related  parties,  accounted for  approximately
69.7% and 63.0% of the Company's net sales on a consolidated basis for the years
ended  December  31, 2002 and 2001,  and one major  customer,  a related  party,
accounted for 48.1% of the Company's net sales on a  consolidated  basis for the
year ended  December 31, 2000.  Included in trade  accounts  receivable  related
parties at December 31, 2002 and 2001 is  $14,770,466  and  $7,914,838  due from
these  customers.  Terms  are net 60 days.  The  Company  holds  inventories  of
approximately  $8.5  million at  December  31,  2002 that are subject to buyback
arrangements with its customers. The Company's results of operations will depend
to a  significant  extent upon the  commercial  success of these  customers.  If
either of these customers fails to purchase trim products at anticipated levels,
or the relationship  terminates,  it may have an adverse affect on the Company's
results of operations.  If the financial  condition of either of these customers
were to  deteriorate,  resulting in an  impairment  of their ability to purchase
inventories  or repay  receivables,  it may also have an  adverse  affect on the
Company's results of operations.

     One major vendor, a related party,  accounted for  approximately  30.6% and
57.6% of the Company's purchases for the years ended December 31, 2002 and 2001,
and two  major  vendors  accounted  for  approximately  26.6%  of the  Company's
purchases for the year ended December 31, 2000. Included in accounts payable and
accrued expenses at December 31, 2002 and 2001 is $3,684,660 and $819,181 due to
these vendors. Terms are net 60 days.

NOTE 18--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


                                       54


<PAGE>


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

for such services,  in 1997, AGS Stationery granted to Chloe Holdings,  Inc., an
affiliate of Averil Associates,  warrants to purchase up to 135 shares of Common
Stock of AGS  Stationery.  Effective  upon the  Conversion,  the Chloe  Warrants
became exercisable for 22,841 shares of the Common Stock of the Company at $0.76
per share and the Company also paid Averil  Associates  an  additional  $175,000
upon consummation of the Company's initial public offering for services rendered
in connection therewith.  The Chloe warrants were exercised in November 1999. On
September 10, 2001,  the Company issued an additional  20,000  warrants to Chloe
Holdings, Inc. for consulting services provided to the Company. The warrants are
exercisable at $5.00 per share and expire on July 18, 2004. Consulting fees paid
to Averil  Associates  for the years  ended  December  31,  2002,  2001 and 2000
amounted to $0, $366,000 and $18,655.

     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, 2002,
2001  and  2000  amounted  to   approximately   $24,947,000,   $18,438,000   and
$23,760,000.  As of December  31,  2002 and 2001,  accounts  receivable  related
parties included approximately $9,362,000 and $4,995,000 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,  2002,  2001  and  2000  amounted  to  approximately  $16,946,000,
$9,016,000 and $1,878,000. As of December 31, 2002 and 2001, accounts receivable
related  parties  included  approximately  $5,408,000  and  $2,920,000  due from
Azteca. Terms are net 60 days.

     Transportation fees paid to a company that has common ownership with Azteca
for the years ended December 31, 2002 and 2001 amounted to $225,000 and $15,000.

     Included  in due from  related  parties at  December  31,  2002 and 2001 is
$870,251  and  $814,219,  respectively,  of  unsecured  notes  and  advances  to
officers, members of the Board of Directors and stockholders of the Company. The
notes and advances bear interest at 7.5%, 8.5% and prime and are due on demand.

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

     Consulting  fees paid to  Diversified  Investments,  a  company  owned by a
member of the Board of Directors of the Company, amounted to $150,000,  $150,000
and $87,500 for the years ended December 31, 2002, 2001 and 2000.

     Consulting  fees  paid for  services  provided  by a member of the Board of
Directors amounted to $70,800,  $64,900 and $87,200 for the years ended December
31, 2002, 2001 and 2000.


                                       55


<PAGE>


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

     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  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 19 -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 20 - QUARTERLY RESULTS (UNAUDITED)

     Quarterly  results  for the  years  ended  December  31,  2002 and 2001 are
reflected below:

<TABLE>
<CAPTION>

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

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)

------------------------------------------------------------------------------------------------
<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.


                                       56


<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 14, 2003, included the related
financial  statement schedule as of December 31, 2002, and for each of the three
years in the period ended  December 31, 2002,  included in the annual  report on
Form 10-K of Tag-it  Pacific,  Inc.  This  financial  statement  schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on this  financial  statement  schedule  based  on our  audits.  In our
opinion,  such financial  statement  schedule  presents fairly,  in all material
respects, the information set forth therein.



                                            /s/ BDO Seidman, LLP



Los Angeles, California
March 14, 2003


                                       57


<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>
2002
----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet ..................................   $  568,625   $  743,113   $  910,253   $  401,485
Reserve for obsolescence deducted from
inventories on the balance sheet .......         --        155,500         --        155,500
                                           ----------   ----------   ----------   ----------
                                           $  568,625   $  898,613   $  910,253   $  556,985
                                           ==========   ==========   ==========   ==========

2001
----
Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet ..................................   $  299,224   $  600,200   $  330,799   $  568,625
Reserve for obsolescence deducted from
inventories on the balance sheet .......         --      1,058,016    1,058,016         --
                                           ----------   ----------   ----------   ----------
                                           $  299,224   $1,658,216   $1,388,815   $  568,625
                                           ==========   ==========   ==========   ==========

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
                                           ==========   ==========   ==========   ==========
</TABLE>


                                       58


<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  2003  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 2003  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 2003 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 2003 Annual Meeting of  Stockholders,  and
is incorporated by reference.

ITEM 14.  CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

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

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

CHANGES IN CONTROLS AND PROCEDURES

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


                                       59


<PAGE>


                                     PART IV

ITEM 15.  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.

          (b)        Reports on Form 8-K:

                     None

          (c)        Exhibits:

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


                                       60


<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.

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

     /S/ MARK DYNE                Chairman of the Board           March 26, 2003
---------------------------       of Directors
Mark Dyne

     /S/ COLIN DYNE               Chief Executive Officer         March 26, 2003
---------------------------       and Director
Colin Dyne

     /S/ RONDA SALLMEN            Chief Financial Officer         March 26, 2003
---------------------------
Ronda Sallmen

     /S/ KEVIN BERMEISTER         Director                        March 26, 2003
---------------------------
Kevin Bermeister

     /S/ MICHAEL KATZ             Director                        March 26, 2003
---------------------------
Michael Katz

     /S/ JONATHAN BURSTEIN        Director and Vice               March 26, 2003
---------------------------       President of Operations
Jonathan Burstein

     /S/ BRENT COHEN              Director                        March 26, 2003
---------------------------
Brent Cohen

     /S/ DONNA ARMSTRONG          Director                        March 26, 2003
---------------------------
Donna Armstrong


                                       61


<PAGE>


                        Certification of CEO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Colin Dyne, certify that:

        1. I have reviewed  this annual  report on Form 10-K of Tag-It  Pacific,
Inc.;

        2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

        3. Based on my knowledge, the financial statements,  and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

        4. The registrant's other certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                 a) designed such  disclosure  controls and procedures to ensure
         that material  information  relating to the  registrant,  including its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

                 b) evaluated the  effectiveness of the registrant's  disclosure
         controls and procedures as of a date within 90 days prior to the filing
         date of this annual report (the "Evaluation Date"); and

                 c) presented in this annual  report our  conclusions  about the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

        5. The  registrant's  other  certifying  officers and I have  disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

                 a) all  significant  deficiencies in the design or operation of
         internal controls which could adversely affect the registrant's ability
         to  record,  process,  summarize  and  report  financial  data and have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

                 b) any fraud, whether or not material, that involves management
         or other  employees  who have a  significant  role in the  registrant's
         internal controls; and

        6. The registrant's  other  certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

        Date:    March 26, 2003

                                           /S/ COLIN DYNE
                                           -----------------------
                                           Colin Dyne
                                           Chief Executive Officer


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<PAGE>


                        Certification of CEO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Ronda Sallmen, certify that:

        1. I have reviewed  this annual  report on Form 10-K of Tag-It  Pacific,
Inc.;

        2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

        3. Based on my knowledge, the financial statements,  and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

        4. The registrant's other certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                 a) designed such  disclosure  controls and procedures to ensure
         that material  information  relating to the  registrant,  including its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

                 b) evaluated the  effectiveness of the registrant's  disclosure
         controls and procedures as of a date within 90 days prior to the filing
         date of this annual report (the "Evaluation Date"); and

                 c) presented in this annual  report our  conclusions  about the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

        5. The  registrant's  other  certifying  officers and I have  disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

                 a) all  significant  deficiencies in the design or operation of
         internal controls which could adversely affect the registrant's ability
         to  record,  process,  summarize  and  report  financial  data and have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

                 b) any fraud, whether or not material, that involves management
         or other  employees  who have a  significant  role in the  registrant's
         internal controls; and

        6. The registrant's  other  certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

        Date:    March 26, 2003

                                           /S/ RONDA SALLMEN
                                           -----------------------
                                           Ronda Sallmen
                                           Chief Financial Officer


                                       63


<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 4.1 to Form SB-2 filed on
               October 21, 1997, and the amendments thereto.

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

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

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

10.2           Intentionally Left Blank.

10.3           Intentionally Left Blank.

10.4           Intentionally Left Blank.

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.

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.


                                       64


<PAGE>


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

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          Intentionally Left Blank.

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          Intentionally Left Blank.

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          Intentionally Left Blank.

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.

10.19          Intentionally Left Blank.

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.


                                       65


<PAGE>


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

10.23          Intentionally Left Blank.

10.24          Intentionally Left Blank.

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          Intentionally Left Blank.

10.28          Intentionally Left Blank.

10.29          Intentionally Left Blank.

10.30          Intentionally Left Blank.

10.31          Intentionally Left Blank.

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.


                                       66


<PAGE>


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

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.

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          Intentionally Left Blank.

10.47          Intentionally Left Blank.

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          Intentionally Left Blank.

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.


                                       67


<PAGE>


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

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.

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.

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


                                       68


<PAGE>


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

10.69          Intellectual  Property  Rights  Agreement,  dated  April 2, 2002,
               between the Company and Pro-Fit Holdings, Ltd.*

10.70          Amendment to  Exclusive  Supply  Agreement,  dated July 12, 2002,
               between Tag-it Pacific, Inc. and Levi Strauss & Co.*

23.1           Consent of BDO Seidman, LLP.

24.1           Power of Attorney (included on signature page).

99.1           Certification  of Chief  Executive  Officer  and Chief  Financial
               Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
               Section 906 of the Sarbanes-Oxley Act of 2002.


     * 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.


                                       69