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

                                    FORM 10-Q



[X]      QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934.

                  For the quarterly period ended June 30, 2003.

                                       OR

[_]      TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934.



         For the transition period from ____________ to _______________.



                         Commission file number 1-13669



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

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


                       21900 BURBANK BOULEVARD, SUITE 270
                        WOODLAND HILLS, CALIFORNIA 91367
                    (Address of Principal Executive Offices)


                                 (818) 444-4100
              (Registrant's Telephone Number, including area code)

         Indicate by check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the  Exchange  Act  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 the past 90
days.
                                Yes [X]   No [_]

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Exchange Act Rule 12b-2).

                                Yes [_]   No [X]

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest  practicable  date:  Common Stock, par
value $0.001 per share,  11,451,909  shares issued and  outstanding as of August
14, 2003.

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<PAGE>


                              TAG-IT PACIFIC, INC.

                               INDEX TO FORM 10-Q



PART I FINANCIAL INFORMATION                                                PAGE
                                                                            ----



Item 1.     Consolidated Financial Statements..................................3

            Consolidated Balance Sheets as of
            June 30, 2003 (unaudited) and December 31, 2002....................3

            Consolidated Statements of Operations (unaudited)
            for the Three Months and Six Months Ended
            June 30, 2003 and 2002.............................................4

            Consolidated Statements of Cash Flows (unaudited)
            for the Six Months Ended June 30, 2003 and 2002....................5

            Notes to the Consolidated Financial Statements.....................6

Item 2.     Management's Discussion and Analysis of Financial
            Condition and Results of Operations...............................13

Item 3.     Quantitative and Qualitative Disclosures About
            Market Risk.......................................................31

Item 4.     Controls and Procedures...........................................31



PART II OTHER INFORMATION



Item 1.     Legal Proceedings.................................................32

Item 2.     Changes in Securities and Use of Proceeds.........................32

Item 4.     Submission of Matters to a Vote of Security Holders...............32

Item 6.     Exhibits and Reports on Form 8-K..................................33


                                       2


<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.
                              TAG-IT PACIFIC, INC.
                           Consolidated Balance Sheets

                                                        June 30,    December 31,
                                                          2003          2002
                                                       -----------   -----------
                       Assets                          (unaudited)
Current Assets:
   Cash and cash equivalents .......................   $ 1,376,892   $   285,464
   Due from factor .................................        26,517       532,672
   Trade accounts receivable, net ..................     8,036,297     5,456,517
   Trade accounts receivable, related parties ......    17,043,719    14,770,466
   Refundable income taxes .........................          --         212,082
   Inventories .....................................    24,586,332    23,105,267
   Prepaid expenses and other current assets .......     1,557,273       599,543
   Deferred income taxes ...........................        90,928        90,928
                                                       -----------   -----------
     Total current assets ..........................    52,717,958    45,052,939

Property and Equipment, net of accumulated
   depreciation and amortization ...................     4,937,066     2,953,701
Tradename ..........................................     4,110,750     4,110,750
Goodwill ...........................................       450,000       450,000
License rights .....................................       459,375       490,875
Due from related parties ...........................       899,256       870,251
Other assets .......................................       264,078       374,106
                                                       -----------   -----------
Total assets .......................................   $63,838,483   $54,302,622
                                                       ===========   ===========

     Liabilities, Convertible Redeemable
   Preferred Stock and Stockholders' Equity
Current Liabilities:
   Line of credit ..................................   $15,495,637   $16,182,061
   Accounts payable and accrued expenses ...........    12,785,951    10,401,187
   Deferred income .................................     1,027,984     1,027,984
   Subordinated notes payable to related parties ...       849,971     1,349,971
   Current portion of capital lease obligations ....       561,933        71,928
   Current portion of subordinated note payable ....     1,200,000     1,200,000
                                                       -----------   -----------
     Total current liabilities .....................    31,921,476    30,233,131

Capital lease obligations, less current portion ....       920,991       107,307
Subordinated note payable, less current portion ....     2,000,000     2,600,000
                                                       -----------   -----------
     Total liabilities .............................    34,842,467    32,940,438
                                                       -----------   -----------

Convertible  redeemable  preferred  stock
   Series C,  $0.001 par value; 759,494
   shares authorized; 759,494 shares issued
   and outstanding at June 30, 2003 and
   December 31, 2002 (stated value $3,000,000) .....     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; 11,394,909 shares
     issued and outstanding at June 30, 2003;
     9,319,909 at December 31, 2002 ................        11,396         9,321
   Additional paid-in capital ......................    23,392,437    16,776,012
   Retained earnings ...............................     2,697,182     1,681,850
                                                       -----------   -----------
Total stockholders' equity .........................    26,101,015    18,467,183
                                                       -----------   -----------
Total liabilities, convertible redeemable
   preferred stock and stockholders' equity ........   $63,838,483   $54,302,622
                                                       ===========   ===========

          See accompanying notes to consolidated financial statements.


                                       3


<PAGE>

<TABLE>
                              TAG-IT PACIFIC, INC.

                      Consolidated Statements of Operations
                                   (unaudited)

<CAPTION>
                                    Three Months Ended          Six Months Ended
                                         June 30,                   June 30,
                                -------------------------   -------------------------
                                    2003          2002         2003          2002
                                -----------   -----------   -----------   -----------
<S>                             <C>           <C>           <C>           <C>
Net sales ...................   $20,731,573   $19,793,344   $35,090,407   $29,118,400
Cost of goods sold ..........    15,267,058    14,816,081    25,326,310    21,506,794
                                -----------   -----------   -----------   -----------
   Gross profit .............     5,464,515     4,977,263     9,764,097     7,611,606

Selling expenses ............     1,245,769       578,051     2,074,913       972,918
General and administrative
   expenses .................     2,939,927     2,691,781     5,638,432     4,596,912
                                -----------   -----------   -----------   -----------
   Total operating expenses .     4,185,696     3,269,832     7,713,345     5,569,830

Income from operations ......     1,278,819     1,707,431     2,050,752     2,041,776
Interest expense, net .......       342,989       306,528       663,837       568,271
                                -----------   -----------   -----------   -----------
Income before income taxes ..       935,830     1,400,903     1,386,915     1,473,505
Provision for income taxes ..       187,166       354,600       277,383       373,190
                                -----------   -----------   -----------   -----------
   Net income ...............   $   748,664   $ 1,046,303   $ 1,109,532   $ 1,100,315
                                ===========   ===========   ===========   ===========
Less:  Preferred stock
   dividends ................        47,100        45,000        94,200        90,000
                                -----------   -----------   -----------   -----------
Net income to common
   shareholders .............   $   701,564   $ 1,001,303   $ 1,015,332   $ 1,010,315
                                ===========   ===========   ===========   ===========

Basic earnings per share ....   $      0.07   $      0.11   $      0.10   $      0.11
                                ===========   ===========   ===========   ===========
Diluted earnings per share ..   $      0.07   $      0.10   $      0.10   $      0.11
                                ===========   ===========   ===========   ===========

Weighted average number of
   common shares outstanding:
   Basic ....................    10,209,195     9,282,365     9,818,390     9,148,681
                                ===========   ===========   ===========   ===========
   Diluted ..................    10,737,427     9,591,984    10,169,168     9,448,223
                                ===========   ===========   ===========   ===========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       4


<PAGE>


                              TAG-IT PACIFIC, INC.

                      Consolidated Statements of Cash Flows

                                   (unaudited)

                                                     Six Months Ended June 30,
                                                   ----------------------------
                                                      2003             2002
                                                   -----------      -----------
Increase (decrease) in cash and cash
  equivalents
Cash flows from operating activities:
    Net income ...............................     $ 1,109,532      $ 1,100,315
Adjustments to reconcile net income
  to net cash used in operating
  activities:
   Depreciation and amortization .............         617,925          575,006
   Increase in allowance for doubtful
     accounts ................................         163,489           23,315
Changes in operating assets and
  liabilities:
      Receivables, including related
        parties and due from factor ..........      (4,660,629)      (9,841,998)
      Inventories ............................      (1,481,065)      (3,145,898)
      Other assets ...........................          (5,663)         (46,439)
      Prepaid expenses and other
        current assets .......................        (957,730)        (227,113)
      Accounts payable and accrued
        expenses .............................       2,035,362        5,336,688
      Income taxes payable ...................         479,479          369,008
                                                   -----------      -----------
Net cash used in operating activities ........      (2,699,300)      (5,857,116)
                                                   -----------      -----------

Cash flows from investing activities:
    Acquisition of property and
      equipment ..............................        (980,046)        (140,835)
                                                   -----------      -----------

Cash flows from financing activities:
    (Repayment) proceeds from bank
      line of credit, net ....................        (536,162)       5,587,977
    Proceeds from private placement
      transactions ...........................       6,395,300        1,029,997
    Proceeds from exercise of stock
      options ................................         182,000           49,400
    Repayment of capital leases ..............        (170,364)        (155,339)
    Repayment of notes payable ...............      (1,100,000)        (500,000)
                                                   -----------      -----------
Net cash provided by financing
  activities .................................       4,770,774        6,012,035
                                                   -----------      -----------

Net increase in cash .........................       1,091,428           14,084
Cash at beginning of period ..................         285,464           46,948
                                                   -----------      -----------
Cash at end of period ........................     $ 1,376,892      $    61,032
                                                   ===========      ===========

Supplemental disclosures of cash flow
  information:
    Cash paid (received) during the
    period for:
      Interest ...............................     $   637,930      $   519,156
      Income taxes paid ......................     $     9,131      $     4,814
      Income taxes received ..................     $  (212,082)     $      --
     Non-cash financing activity:
      Common stock issued in acquisition
        of license rights ....................     $      --        $   577,500
      Capital lease obligation ...............     $ 1,474,053      $      --


          See accompanying notes to consolidated financial statements.


                                       5


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



1.       PRESENTATION OF INTERIM INFORMATION

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes  required by generally accepted
accounting  principles in the United States for complete  financial  statements.
The  accompanying   unaudited  consolidated  financial  statements  reflect  all
adjustments  that, in the opinion of the management of Tag-It Pacific,  Inc. and
Subsidiaries (collectively,  the "Company"), are considered necessary for a fair
presentation of the financial  position,  results of operations,  and cash flows
for the periods  presented.  The results of operations  for such periods are not
necessarily  indicative of the results  expected for the full fiscal year or for
any future  period.  The  accompanying  financial  statements  should be read in
conjunction with the audited  consolidated  financial  statements of the Company
included in the Company's Form 10-K for the year ended December 31, 2002.



2.       EARNINGS PER SHARE

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

                                                                          PER
THREE MONTHS ENDED JUNE 30, 2003:         INCOME          SHARES         SHARE
                                        ----------      ----------      --------
Basic earnings per share:
Income available to common
  stockholders ...................      $  701,564      10,209,195      $   0.07

Effect of Dilutive Securities:
Options ..........................                         482,937
Warrants .........................                          45,295
                                        ----------      ----------      --------
Income available to common
  stockholders ...................      $  701,564      10,737,427      $   0.07
                                        ==========      ==========      ========

THREE MONTHS ENDED JUNE 30, 2002:

Basic earnings per share:
Income available to common
  stockholders ...................      $1,001,303       9,282,365      $   0.11

Effect of Dilutive Securities:
Options ..........................                         254,634
Warrants .........................                          54,985
                                        ----------      ----------      --------
Income available to common
  stockholders ...................      $1,001,303       9,591,984      $   0.10
                                        ==========      ==========      ========


                                       6


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



                                                                          PER
SIX MONTHS ENDED JUNE 30, 2003:           INCOME          SHARES         SHARE
                                        ----------      ----------      --------
Basic earnings per share:
Income available to common
  stockholders ...................      $1,015,332       9,818,390      $   0.10

Effect of Dilutive Securities:
Options ..........................                          33,488
Warrants .........................                         317,290
                                        ----------      ----------      --------
Income available to common
  stockholders ...................      $1,015,332      10,169,168      $   0.10
                                        ==========      ==========      ========

SIX MONTHS ENDED JUNE 30, 2002:

Basic earnings per share:
Income available to common
  stockholders ...................      $1,010,315       9,148,681      $   0.11

Effect of Dilutive Securities:
Options ..........................                         245,101
Warrants .........................                          54,441
                                        ----------      ----------      --------
Income available to common
  stockholders ...................      $1,010,315       9,448,223      $   0.11
                                        ==========      ==========      ========


         Warrants to purchase  426,666  shares of common stock at between  $4.57
and  $5.06,  options  to  purchase  105,000  shares  of  common  stock at $4.63,
convertible  debt of $500,000  convertible at $4.50 per share and 759,494 shares
of preferred Series C stock  convertible at $4.94 per share were outstanding for
the three months ended June 30, 2003,  but were not included in the  computation
of diluted  earnings  per share  because  exercise or  conversion  would have an
antidilutive effect on earnings per share.

         Warrants to purchase  655,832  shares of common stock at between  $4.34
and $5.06,  options to purchase  568,000 shares of common stock at between $4.25
and  $4.63,  convertible  debt of  $500,000  convertible  at $4.50 per share and
759,494 shares of preferred  Series C stock  convertible at $4.94 per share were
outstanding for the six months ended June 30, 2003, but were not included in the
computation of diluted  earnings per share because  exercise or conversion would
have an antidilutive effect on earnings per share.

         Warrants to purchase  523,332  shares of common stock at between  $4.34
and $6.00,  options to purchase  646,000 shares of common stock at between $4.00
and  $4.63,  convertible  debt of  $500,000  convertible  at $4.50 per share and
759,494 shares of preferred  Series C stock  convertible at $4.94 per share were
outstanding  for the three and six  months  ended  June 30,  2002,  but were not
included in the  computation of diluted  earnings per share because  exercise or
conversion would have an antidilutive effect on earnings per share.


                                       7


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



3.       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 three and six months ended June 30, 2003 and 2002. If compensation  cost
for stock-based  compensation had been determined based on the fair market value
of the stock  options on their dates of grant in  accordance  with SFAS 123, the
Company's  net income and  earnings per share for the three and six months ended
June 30, 2003 and 2002 would have  amounted to the pro forma  amounts  presented
below:

<TABLE>
<CAPTION>
                                            Three Months Ended June 30,        Six Months Ended June 30,
                                                2003           2002             2003              2002
                                            -----------    -------------    -------------    -------------
<S>                                         <C>            <C>              <C>              <C>
Net income, as reported .................   $   748,664    $   1,046,303    $   1,109,532    $   1,100,315
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 ............................       (44,838)         (30,268)         (50,120)         (60,536)
                                            -----------    -------------    -------------    -------------

Pro forma net income ....................   $   703,826    $   1,016,035    $   1,059,412    $   1,039,779
                                            ===========    =============    =============    =============

Earnings per share:

       Basic - as reported ..............   $      0.07    $        0.11    $        0.10    $        0.11

       Basic - pro forma ................   $      0.06    $        0.11    $        0.10    $        0.10


       Diluted - as reported ............   $      0.07    $        0.10    $        0.10    $        0.11

       Diluted - pro forma ..............   $      0.06    $        0.10    $        0.10    $        0.10
</TABLE>


                                      8

<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



4.       PRIVATE PLACEMENTS

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

          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  were  issued  at  the  second  closings.   The  warrants  are
exercisable  immediately after closing,  one half of the warrants at an exercise
price of 110% and the  second  half at an  exercise  price of 120% of the market
value of the Company's  common stock on the date of closing.  The exercise price
for the warrants shall be adjusted upward by 25% of the amount, if any, that the
market  price of our common  stock on the  exercise  date  exceeds  the  initial
exercise  price (as  adjusted)  up to a  maximum  exercise  price of $5.25.  The
warrants have a term of four years. The shares contain  restrictions  related to
the sale or transfer of the shares, registration and voting rights.

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


                                       9


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



5.       CAPITAL LEASE OBLIGATION

         On April 3, 2003,  the Company  entered into a financing  agreement for
the purchase and implementation of computer equipment and software.  The capital
lease obligation bears interest at 6% and expires in March 2006.  Future minimum
annual payments under the capital lease obligation are as follows:

Years ending December 31,                                              Amount
                                                                    -----------

2003 (six months) .......................................           $   282,440
2004 ....................................................               564,880
2005 ....................................................               466,756
2006 ....................................................               152,117
                                                                    -----------

Total payments ..........................................             1,466,193

Less amount representing interest .......................              (126,278)
                                                                    -----------

Balance at June 30, 2003 ................................             1,339,995

Less current portion ....................................               491,982
                                                                    -----------

Long-term portion .......................................           $   847,933
                                                                    ===========


6.       GUARANTEES AND CONTINGENCIES

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

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

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


                                       10


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



         As of June 30, 2003, the Company indirectly guaranteed the indebtedness
of one of its  suppliers  through the issuance by a related  party of letters of
credit to purchase goods totaling  $528,000.  Financing costs due to the related
party amounted to approximately $43,000. The letters of credit expire on various
dates thru July 2003.

         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.

7.       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  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. 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  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.


                                       11


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



         In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of Statement
133 on Derivative  Instruments and Hedging  Activities,"  ("SFAS 149"). SFAS No.
149 amends and clarifies the accounting for  derivative  instruments,  including
certain derivative instruments embedded in other contracts,  and for the hedging
activities  under SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities." SFAS 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging  relationships  designated after
June 30,  2003.  The  adoption  of SFAS 149 is not  expected  to have a material
effect on the Company's financial position, results of operations or cash flows.

         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
Instruments with  Characteristics  of Both Liabilities and Equity," ("SFAS 150")
which  establishes  standards for how an issuer  classifies and measures certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer  classify a financial  instrument that is within
its scope, which may have previously been reported as equity, as a liability (or
an asset in some  circumstances).  This  statement  is effective  for  financial
instruments  entered  into or modified  after May 31,  2003,  and  otherwise  is
effective at the beginning of the first interim period  beginning after June 15,
2003 for public companies. The Company does not believe the adoption of SFAS 150
will have a material impact on its fiancial statements.


                                       12


<PAGE>


ITEM 2.  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-Q.

         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 three and six months  ended June 30, 2003 and
2002.  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.

         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


                                       13


<PAGE>


                  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 manufacturing customers. Our MANAGED


                                       14


<PAGE>


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

         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  waistbands,  various  trim  products,  garment
components  and  services  over  the  two-year  term of the  agreement.  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.  As an addendum to the
supply  agreement,  we have also been granted  approval as a specified vendor of
woven labels and printed tags by Levi Strauss & Co.

         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


                                       15


<PAGE>


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 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,  and 47.3%
of our total sales for the six months ended June 30, 2003.  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 mainly 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 June


                                       16


<PAGE>


30, 2003,  is  approximately  $17.0  million due from Tarrant  Apparel Group and
Azteca Production International.

         Included  in   inventories   at  June  30,  2003  are   inventories  of
approximately  $10.5 million that are subject to buyback  arrangements with Levi
Strauss & Co., 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.  During the six months ended June 30,
2003, we sold  approximately  $1.3 million in inventory to Tarrant Apparel Group
and Azteca Production  International pursuant to these buyback arrangements.  If
the  financial   condition  of  Tarrant  Apparel  Group  and  Azteca  Production
International  were to deteriorate,  resulting in an impairment of their ability
to purchase inventories or pay receivables, it may have an adverse affect on our
results of operations.

RESULTS OF OPERATIONS

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


                                               THREE MONTHS       SIX MONTHS
                                                  ENDED              ENDED
                                                 JUNE 30,          JUNE 30,
                                              --------------    --------------
                                               2003     2002     2003     2002
                                              -----    -----    -----    -----
Net sales ...............................     100.0%   100.0%   100.0%   100.0%
Cost of goods sold ......................      73.6     74.9     72.2     73.9
                                              -----    -----    -----    -----
Gross profit ............................      26.4     25.1     27.8     26.1
Selling expenses ........................       6.0      2.9      5.9      3.3
General and administrative expenses .....      14.2     13.6     16.1     15.8
                                              -----    -----    -----    -----
Operating Income ........................       6.2%     8.6%     5.8%     7.0%
                                              =====    =====    =====    =====



         Net sales increased approximately $939,000, or 4.7%, to $20,732,000 for
the three months ended June 30, 2003 from $19,793,000 for the three months ended
June 30, 2002.  The increase in net sales was  primarily  due to the addition of
sales under our TEKFIT stretch waistband division, for which there were no sales
in the three months ended June 30, 2002. In late 2002, we created a new division
under the TEKFIT brand name. This division develops and sells apparel components
that utilize the patented Pro-Fit technology, including a stretch waistband sold
under our exclusive supply agreement with Levi Strauss & Co. The increase in net
sales  was  also  attributable  to an  increase  in sales  from  our  Hong  Kong
subsidiary  for  programs  related to major U.S.  retailers  and an  increase in
zipper  sales  under our  TALON  brand  name to our  MANAGED  TRIM  SOLUTION(TM)
customers  in Mexico  and our other  Talon  customers  in Mexico  and Asia.  The
increase  in net sales was offset by a decrease in  trim-related  sales from our
Tlaxcala,  Mexico  operations under our MANAGED TRIM  SOLUTION(TM)  trim package
program. This decrease is due in part to our efforts to decrease our reliance on
our major customers and to further diversify our customer base.


                                       17


<PAGE>


         Net sales increased approximately  $5,972,000, or 20.5%, to $35,090,000
for the six months ended June 30, 2003 from $29,118,000 for the six months ended
June 30, 2002.  The increase in net sales was  primarily  due to the addition of
sales under our TEKFIT  stretch  waistband  division,  as discussed  above.  The
increase  in net sales was also  attributable  to an  increase in sales from our
Hong Kong  subsidiary  for  programs  related  to major  U.S.  retailers  and an
increase  in zipper  sales  under  our  TALON  brand  name to our  MANAGED  TRIM
SOLUTION(TM)  customers  in Mexico and our other Talon  customers  in Mexico and
Asia. The increase in net sales was offset by a decrease in  trim-related  sales
from our Tlaxcala,  Mexico  operations under our MANAGED TRIM  SOLUTION(TM) trim
package  program.  This  decrease is due in part to our efforts to decrease  our
reliance on our major customers and to further diversify our customer base.

         Gross profit increased  approximately  $488,000, or 9.8%, to $5,465,000
for the three  months ended June 30, 2003 from  $4,977,000  for the three months
ended June 30,  2002.  Gross margin as a  percentage  of net sales  increased to
approximately  26.4% for the three  months  ended June 30,  2003 as  compared to
25.1% for the three months ended June 30, 2002.  The increase in gross profit as
a percentage  of net sales for the three months ended June 30, 2003 was due to a
change in our product mix during the current  quarter,  resulting in an increase
in sales of products with higher gross margins.

         Gross  profit  increased   approximately   $2,152,000,   or  28.3%,  to
$9,764,000  for the six months ended June 30, 2003 from  $7,612,000  for the six
months ended June 30, 2002.  Gross margin as a percentage of net sales increased
to  approximately  27.8% for the six months  ended June 30,  2003 as compared to
26.1% for the six months ended June 30, 2002.  The increase in gross profit as a
percentage  of net sales for the six  months  ended  June 30,  2003 was due to a
change in our product mix during the period,  resulting  in an increase in sales
of products with higher gross margins.

         Selling  expenses  increased  approximately  $668,000,  or  115.6%,  to
$1,246,000  for the three months ended June 30, 2003 from $578,000 for the three
months  ended  June 30,  2002.  As a  percentage  of net sales,  these  expenses
increased to 6.0% for the three months ended June 30, 2003  compared to 2.9% for
the three months ended June 30, 2002.  The increase in selling  expenses  during
the quarter  was due  primarily  to royalty  expenses  related to our  exclusive
license and intellectual property rights agreement with Pro-Fit Holdings Limited
incurred  during the period,  the  addition of sales  personnel in our Hong Kong
facility and  increased  marketing  efforts to promote our updated  Oracle-based
MANAGED TRIM SOLUTION  system.  We are in the process of completing an update of
our MANAGED TRIM  SOLUTION  system which will enable us to further sell complete
trim packages to new locations on a global basis.

         Selling expenses  increased  approximately  $1,102,000,  or 113.3%,  to
$2,075,000  for the six months  ended June 30,  2003 from  $973,000  for the six
months  ended  June 30,  2002.  As a  percentage  of net sales,  these  expenses
increased  to 5.9% for the six months  ended June 30, 2003  compared to 3.3% for
the six months ended June 30, 2002. The increase in selling  expenses during the
period was due primarily to royalty  expenses  related to our exclusive  license
and  intellectual  property  rights  agreement  with  Pro-Fit  Holdings  Limited
incurred  during the period and additional  sales personnel hired for our TEKFIT
division.

         General and administrative  expenses increased  approximately $248,000,
or 9.2%, to $2,940,000 for the three months ended June 30, 2003 from  $2,692,000
for the three months ended June 30, 2002. The increase in these expenses was due
primarily  to  expenses  incurred  related to our  exclusive  waistband  license
agreement and the amortization of intangible  assets incurred as a result of the
exclusive  waistband  technology  license rights we acquired in April 2002. As a
percentage of net sales,  these expenses increased to 14.2% for the three months
ended June 30, 2003  compared to 13.6% for the three months ended June 30, 2002,
because  the rate of  increase  in net sales did not exceed  that of general and
administrative expenses.


                                       18


<PAGE>


         General and administrative expenses increased approximately $1,041,000,
or 22.6%,  to $5,638,000 for the six months ended June 30, 2003 from  $4,597,000
for the six months ended June 30, 2002.  The increase in these  expenses was due
primarily  to  expenses  incurred  related to our  exclusive  waistband  license
agreement,  the  amortization  of intangible  assets incurred as a result of the
exclusive waistband  technology license rights we acquired in April 2002 and the
relocation  of our Hong Kong office  during the period.  As a percentage  of net
sales,  these expenses increased to 16.1% for the six months ended June 30, 2003
compared to 15.8% for the six months  ended June 30,  2002,  because the rate of
increase  in net  sales  did not  exceed  that  of  general  and  administrative
expenses.

         Interest expense increased approximately $36,000, or 11.7%, to $343,000
for the three  months  ended June 30, 2003 from  $307,000  for the three  months
ended June 30, 2002.  Borrowings under our UPS Capital credit facility increased
during the  quarter  ended June 30,  2003 due to  increased  sales and  expanded
operations in Mexico, the Dominican Republic and Asia. The additional borrowings
during the  quarter  were offset by the  application  of the  proceeds  from our
private placement  transaction in which we raised  approximately $6 million from
the sale of common stock.

         Interest expense increased approximately $96,000, or 16.9%, to $664,000
for the six months  ended June 30, 2003 from  $568,000  for the six months ended
June 30, 2002. Borrowings under our UPS Capital credit facility increased during
the period ended June 30, 2003 due to increased sales and expanded operations in
Mexico,  the Dominican  Republic and Asia. The additional  borrowings during the
period were offset by the application of the proceeds from our private placement
transaction in which we raised approximately $6 million in May 2003.

         The provision for income taxes for the three months ended June 30, 2003
amounted to  approximately  $187,000  compared to $355,000  for the three months
ended June 30, 2002.  Income taxes decreased for the three months ended June 30,
2003 primarily due to decreased taxable income.

         The  provision  for income taxes for the six months ended June 30, 2003
amounted to approximately $277,000 compared to an income tax benefit of $373,000
for the six months  ended June 30,  2002.  Income  taxes  decreased  for the six
months ended June 30, 2003 primarily due to decreased taxable income.

         Net income was  approximately  $749,000 for the three months ended June
30, 2003 as compared to net income of $1,046,000 for the three months ended June
30, 2002, due primarily to an increase in net sales and gross margin,  offset by
increases  in selling and  general and  administrative  expenses,  as  discussed
above.

         Net income was  approximately  $1,110,000 for the six months ended June
30, 2003 as compared to net income of  $1,100,000  for the six months ended June
30, 2002, due primarily to an increase in net sales and gross margin,  offset by
increases  in selling and  general and  administrative  expenses,  as  discussed
above.

         Preferred  stock  dividends  amounted to $47,100  for the three  months
ended June 30, 2003 as compared to $45,000 for the three  months  ended June 30,
2002.  Preferred stock dividends  represent earned dividends at 6% of the stated
value per annum of the Series C  convertible  redeemable  preferred  stock.  Net
income  available  to common  shareholders  amounted to  $702,000  for the three
months  ended June 30, 2003  compared to  $1,001,000  for the three months ended
June 30,  2002.  Basic and diluted  earnings  per share were $0.07 for the three
months ended June 30, 2003.  Basic and diluted earnings per share were $0.11 and
$0.10 for the three months ended June 30, 2002.

         Preferred stock dividends  amounted to $94,200 for the six months ended
June 30, 2003 as compared  to $90,000  for the six months  ended June 30,  2002.
Preferred stock dividends  represent  earned dividends at 6% of the stated value
per annum of the Series C convertible  redeemable  preferred  stock.


                                       19


<PAGE>


Net income available to common  shareholders  amounted to $1,015,000 for the six
months ended June 30, 2003 compared to $1,010,000  for the six months ended June
30, 2002 and basic and diluted  earnings  per share were $0.10 and $0.11 for the
six months ended June 30, 2003 and 2002.



LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         Cash and cash equivalents increased to $1,377,000 at June 30, 2003 from
$285,000 at December 31, 2002.  The increase  resulted  from  $4,771,000 of cash
provided by financing activities, offset by $2,699,000 and $980,000 of cash used
in operating and investing activities, respectively.

         Net cash used in operating activities was approximately  $2,699,000 and
$5,857,000 for the six months ended June 30, 2003 and 2002,  respectively.  Cash
used in operating  activities  for the six months  ended June 30, 2003  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 period was due to increased  customer orders
for future sales. The increase in accounts  receivable during the period was due
primarily to increased  sales  during 2003 and slower  collections  from related
parties.  Cash used in  operating  activities  for the six months ended June 30,
2002 resulted  primarily from increases in inventories and accounts  receivable,
which was partially offset by increases in accounts payable and accrued expenses
and net income.

         Net cash used in investing  activities was  approximately  $980,000 and
$141,000 for the six months ended June 30, 2003 and 2002, respectively. Net cash
used in investing  activities  for the six months ended June 30, 2003  consisted
primarily of capital  expenditures for equipment related to the exclusive supply
agreement  we entered into with Levi  Strauss & Co.  During the period,  we also
purchased  computer  equipment  and  software  for the  implementation  of a new
Oracle-based  computer  system.  This purchase was treated as a non-cash capital
lease obligation. Net cash used in investing activities for the six months ended
June 30, 2002 consisted primarily of capital expenditures for computer equipment
and upgrades

         Net cash provided by financing activities was approximately  $4,771,000
and  $6,012,000  for the six months ended June 30, 2003 and 2002,  respectively.
Net cash provided by financing activities for the six months ended June 30, 2003
primarily reflects funds raised from private placement  transactions,  offset by
the  repayment  of notes  payable  and  decreased  borrowings  under our  credit
facility.  Net cash  provided by financing  activities  for the six months ended
June 30, 2002 primarily reflects increased  borrowings under our credit facility
and funds raised from private placement transactions, offset by the repayment of
notes payable.

         We currently satisfy our working capital requirements primarily through
cash flows  generated from  operations and borrowings  under our credit facility
with UPS  Capital.  Our maximum  availability  under the credit  facility is $20
million,  although historically we have been unable to borrow up to this maximum
amount due to borrowing restrictions under our credit facility. At June 30, 2003
and  2002,  outstanding  borrowings  under  our  UPS  Capital  credit  facility,
including  amounts borrowed under the foreign factoring  agreement,  amounted to
approximately  $15,314,000  and  $15,249,000,  respectively.  There were no open
letters of credit under our UPS Capital credit  facility at June 30, 2003.  Open
letters of credit amounted to approximately $287,000 at June 30, 2002.

         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.  We were in compliance with all financial
covenants at June 30, 2003.  The amount we can borrow under the credit  facility
is  determined  based on a defined  borrowing  base formula  related to eligible
accounts receivable and inventories. Our borrowing base availability ranged from



                                       20


<PAGE>


approximately  $14,801,000 to $18,829,000  from July 1, 2002 to June 30, 2003. A
significant  decrease in eligible  accounts  receivable and  inventories  due to
customer concentration levels and the aging of inventories, among other factors,
can have an  adverse  effect on our  borrowing  capabilities  under  our  credit
facility,  which thereafter,  may not be adequate to satisfy our working capital
requirements.   Eligible  accounts   receivable  are  reduced  if  our  accounts
receivable  customer  balances are  concentrated  with a particular  customer in
excess of the  percentages  allowed  under our  agreement  with UPS Capital.  In
addition,  we have typically  experienced seasonal fluctuations in sales volume.
These seasonal  fluctuations  result in sales volume  decreases in the first and
fourth quarters of each year due to the seasonal fluctuations experienced by the
majority of our customers.  During these quarters,  borrowing availability under
our credit  facility may decrease as a result of decreases in eligible  accounts
receivables  generated  from our  sales.  As a result  of our  concentration  of
business with Tarrant  Apparel Group and Azteca  Production  International,  our
eligible  receivables  have been limited under the UPS Capital facility over the
past year. If our business becomes further  dependant on one or a limited number
of customers or if we  experience  future  significant  seasonal  reductions  in
receivables,  our  availability  under the UPS Capital credit  facility would be
correspondingly  reduced.  If this were to occur,  we would be  required to seek
additional financing which may not be available on attractive terms and, if such
financing  is  unavailable,  we  may be  unable  to  meet  our  working  capital
requirements.

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

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible  accounts  receivable under our credit  facility.  Included in due from
factor as of June 30,  2003 and 2002,  are trade  accounts  receivable  factored
without recourse of approximately $177,000 and $501,000, respectively.  Included
in due from  factor  are  outstanding  advances  due to UPS  Capital  under this
factoring arrangement  amounting to approximately  $150,000 and $426,000 at June
30, 2003 and 2002, respectively.

         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 June 30,  2003 and 2002,  the amount  factored  with
recourse and included in trade accounts  receivable was  approximately  $542,000
and  $203,000.  Outstanding  advances as of June 30,  2003 and 2002  amounted to
approximately $332,000 and $59,000,  respectively,  and are included in the line
of credit balance.

         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


                                       21


<PAGE>


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 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.

         As of June 30, 2003 and 2002, 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.  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.

         Our  receivables  increased  to  $25,080,000  at  June  30,  2003  from
$20,172,000  at June 30,  2002.  This  increase  was due  primarily to increased
non-related  trade  receivables  of  approximately  $4.2 million  resulting from
increased sales to non-related parties during the period.

         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.


                                       22


<PAGE>


         Included  in   inventories   at  June  30,  2003  are   inventories  of
approximately  $10.5 million that are subject to buyback  arrangements with Levi
Strauss & Co., 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.  During the six months ended June 30,
2003, we sold  approximately  $1.3 million in inventory to Tarrant Apparel Group
and Azteca Production  International pursuant to these buyback arrangements.  If
the  financial   condition  of  Tarrant  Apparel  Group  and  Azteca  Production
International  were to deteriorate,  resulting in an impairment of their ability
to purchase inventories or pay receivables, it may have an adverse affect on our
results of operations.

         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 May 2003, we raised  approximately  $6 million in a
private placement  transaction with five institutional  investors.  Net proceeds
received from the private placement amounted to approximately  $5.5 million.  As
of June 30, 2003,  we have applied  approximately  $4.25 million of the proceeds
against  vendor  payables,   equipment   purchases  and  other  working  capital
requirements. 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 related party private  investor.  We used a portion of these
funds to  repay a  subordinated  note  payable  to this  related  party  private
investor  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.


                                       23


<PAGE>


CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our contractual  obligations at June 30, 2003
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:

<TABLE>
<CAPTION>
                                               Payments Due by Period
                             -------------------------------------------------------------
                                             Less than        1-3         4-5       After
  Contractual Obligations        Total        1 Year         Years       Years     5 Years
--------------------------   -----------   -----------   -----------   ---------   -------
<S>                          <C>           <C>           <C>           <C>         <C>
Subordinated note payable    $ 3,200,000   $ 1,200,000   $ 2,000,000   $    --     $    --

Capital lease obligations    $ 1,482,924   $   561,933   $   920,991   $    --     $    --

Subordinated notes payable
to related parties (1) ...   $   849,971   $   849,971   $      --     $    --     $    --

Operating leases .........   $ 1,357,346   $   571,733   $   780,890   $   4,723   $    --

Line of credit ...........   $15,495,637   $15,495,637   $      --     $    --     $    --

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

Royalty Payments .........   $   453,460   $      --     $   453,460   $    --     $    --
<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>

         As of June 30, 2003, we indirectly  guaranteed the  indebtedness of one
of our suppliers through the issuance by a related party of letters of credit to
purchase  goods  totaling  $528,000.  Financing  costs due to the related  party
amounted to approximately $43,000. The letters of credit expire on various dates
thru July 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  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.

         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


                                       24


<PAGE>


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  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.

         In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of Statement
133 on Derivative  Instruments and Hedging  Activities,"  ("SFAS 149"). SFAS No.
149 amends and clarifies the accounting for  derivative  instruments,  including
certain derivative instruments embedded in other contracts,  and for the hedging
activities  under SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities." SFAS 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging  relationships  designated after
June 30,  2003.  The  adoption  of SFAS 149 is not  expected  to have a material
effect on the Company's financial position, results of operations or cash flows.

         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
Instruments with  Characteristics  of Both Liabilities and Equity," ("SFAS 150")
which  establishes  standards for how an issuer  classifies and measures certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer  classify a financial  instrument that is within
its scope, which may have previously been reported as equity, as a liability (or
an asset in some  circumstances).  This  statement  is effective  for  financial
instruments  entered  into or modified  after May 31,  2003,  and  otherwise  is
effective at the beginning of the first interim period  beginning after June 15,
2003 for public companies. The Company does not believe the adoption of SFAS 150
will have a material impact on its fiancial statements.


                                       25


<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,  and 24.1% of our total  sales for the six  months
ended June 30, 2003.  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 Levi Strauss
&  Co.,  Tarrant  Apparel  Group  and  Azteca  Production  International.   This
concentration  of our business reduces the amount we can borrow from our lenders
under  receivables based financing  agreements.  Under our credit agreement with
UPS  Capital,  for  instance,  if accounts  receivable  due us from a particular
customer exceed a specified percentage of the total eligible accounts receivable
against which we can borrower, UPS Capital will not lend against the receivables
that exceed the specified  percentage.  Further, if we are unable to collect any
large receivables due us, our cash flow would be severely impacted.

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


                                       26


<PAGE>


         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.

         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 FROM  QUARTER TO QUARTER,  THAT MAY RESULT IN  UNEXPECTED
REDUCTIONS IN REVENUE 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


                                       27


<PAGE>


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.

         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


                                       28


<PAGE>


by the customer  from the time we received  the goods from our  vendors.  If any
customer  defaults  on  these  buyback  provisions,  we may  incur a  charge  in
connection with our holding significant amounts of unsalable inventory.

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

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

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

         o        The  failure  of  our  quarterly  operating  results  to  meet
                  expectations of investors or securities analysts;
         o        Adverse  developments  in the financial  markets,  the apparel
                  industry and the worldwide or regional economies;
         o        Interest rates;
         o        Changes in accounting principles;
         o        Sales of common stock by existing  shareholders  or holders of
                  options;
         o        Announcements of key developments by our competitors; and
         o        The   reaction   of  markets   and   securities   analysts  to
                  announcements and developments involving our company.

         IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH,  OUR STOCKHOLDERS'  OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY  IMPACTED.  Our business strategy may
include expansion through internal growth, by acquiring complementary businesses
or  by  establishing   strategic   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


                                       29


<PAGE>


involve numerous risks,  including diversion of our management's  attention away
from our operating  activities.  We cannot assure our stockholders  that we will
not encounter  unanticipated problems or liabilities relating to the integration
of an acquired company's operations,  nor can we assure our stockholders that we
will realize the anticipated benefits of any future acquisitions.

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

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of December 31, 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, each own approximately
12.8% of the  outstanding  shares of our common stock at December 31, 2002. As a
result, our officers and directors, the Dyne family and Messrs. Kay and Guez 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.


                                       30


<PAGE>


ITEM 3.  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 June 30, 2003, we had approximately $18.7 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.

ITEM 4.  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.

         As of June 30,  2003,  the end of the period  covered  by 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.


                                       31


<PAGE>


                                     PART II



                                OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS.

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

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         In May 2003, we entered into a securities purchase agreement,  pursuant
to which we sold shares of our common stock, with the following investors:  Neil
I Goldman,  Prism Offshore Fund, Ltd, Prism Partners,  LP, SF Capital  Partners,
Ltd.,  MicroCapital Fund Limited Partner,  MicroCapital LLC,  Lagunitas Partners
LP, Gruber & McBaine  International,  Jon D. Gruber and Linda W. Gruber,  and J.
Patterson McBaine.  Pursuant to this securities purchase  agreement,  on June 2,
2003 we sold 1,725,000  shares of our common stock at a price per share of $3.50
for aggregate  proceeds to us of $6,037,500.  Roth Capital Partners LLC acted as
placement agent in connection with this private placement financing transaction.
For their services as placement  agent, we paid Roth Capital  Partners LLC a fee
equal to 8% of our gross  proceeds from the financing  ($483,000)  and a $25,000
non-accountable  expense  allowance.  In  addition,  we issued  to Roth  Capital
Partners  LLC a warrant to purchase up to 172,500  shares of our common stock at
an exercise price of $5.06 per share. The warrants have a term of 5 years. These
warrants vest and become  exercisable on August 30, 2003.  Each of the investors
in the  transaction  represented  to us, and we  reasonably  believed,  that the
investor (i) was  acquiring the  securities  for his or its own account with the
present  intention of holding such  securities for investment  purposes only and
not with a view to, or for sale in connection  with,  any  distribution  of such
securities (other than a distribution in compliance with all applicable  federal
and state securities laws);  (ii) was an experienced and sophisticated  investor
and has such knowledge and experience in financial and business  matters that it
is capable of evaluating  the relative  merits and the risks of an investment in
the securities and of protecting his or its own interests in connection with the
transaction;  (iii) was willing to bear and was capable of bearing the  economic
risk of an investment in the securities;  and (iv) was an "accredited  investor"
as that term is defined under Rule  501(a)(8) of Regulation D promulgated by the
Commission under the Securities Act. Each of the  certificates  representing the
securities  contained a customary legend  restricting  resale of the securities.
The issuance and sale of these  securities was exempt from the  registration and
prospectus delivery  requirements of the Securities Act pursuant to Section 4(2)
of the  Securities  Act (in  accordance  with  Rule  506 of  Regulation  D) as a
transaction not involving any public offering.

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

         At our  Annual  Meeting  of  Stockholders  held on June 14,  2003,  our
stockholders  (a) elected Colin Dyne,  Mark Dyne and Donna Armstrong to serve as
Class III  Directors on our Board of  Directors  for three years and until their
respective  successors  have been elected,  and (b) approved an amendment to our
1997 Stock Plan to increase from  2,277,500 to 2,577,500  the maximum  number of
shares of common stock that may be issued  pursuant to awards  granted under the
1997 Stock Plan.  Each Class III  Director  was  elected by a vote of  7,981,485
shares in favor,  44,700 shares voted against,  and no shares were withheld from
voting for the directors. At the annual meeting,  7,974,835 shares were voted in
favor of,  51,350  shares were voted  against,  and no shares were withheld from
voting on the amendment to our 1997 Stock Plan.  There were no broker  non-votes
at the annual meeting. Immediately prior to and


                                       32


<PAGE>


following the meeting,  the Board of Directors was comprised of Mark Dyne, Colin
Dyne, Donna Armstrong, Kevin Bermeister,  Brent Cohen, Michael Katz and Jonathan
Burstein.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

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

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

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

         (b)      Reports on Form 8-K:

                  Current Report on Form 8-K dated May 15, 2003, reporting Items
                  7 and 9, as filed on May 15, 2003.

                  Current Report on Form 8-K dated May 30, 2003, reporting Items
                  5 and 7, as filed on June 4, 2003.


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<PAGE>


                                   SIGNATURES



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.





Date: August 14, 2003                       TAG-IT PACIFIC, INC.



                                            /s/  Ronda Sallmen
                                            -----------------------------
                                            By:  Ronda Sallmen
                                            Its: Chief Financial Officer


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