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

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


                                    FORM 10-Q

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

               For the quarterly period ended September 30, 2004.

                                       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) has  filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for 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,  18,144,351 shares issued and outstanding as of November
15, 2004.


<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 September 30, 2004
               (unaudited) and December 31, 2003...............................3

            Consolidated Statements of Operations (unaudited)
               For the Three and Nine Months
               Ended September 30, 2004 and 2003...............................4

            Consolidated Statements of Cash Flows (unaudited) for the
               Nine Months Ended September 30, 2004 and 2003...................5

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

Item 2.     Management's Discussion and Analysis of Financial
               Condition and Results of Operations............................11

Item 3.     Quantitative and Qualitative Disclosures
               About Market Risk..............................................28

Item 4.     Controls and Procedures...........................................29

PART II     OTHER INFORMATION

Item 1.     Legal Proceedings.................................................30

Item 6.     Exhibits..........................................................30


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.

                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                   September 30,   December 31,
                                                       2004            2003
                                                   ------------    ------------
                    Assets                         (unaudited)
 Current Assets:
    Cash and cash equivalents ..................   $  1,566,027    $ 14,442,769
    Due from factor ............................          8,003           9,743
    Trade accounts receivable, net .............     22,511,020       7,531,079
    Trade accounts receivable, related
       parties .................................      5,431,885      11,721,465
    Inventories ................................     16,483,353      17,096,879
    Prepaid expenses and other current
       assets ..................................      3,845,050       2,124,366
    Deferred income taxes ......................      2,800,000       2,800,000
                                                   ------------    ------------
      Total current assets .....................     52,645,338      55,726,301

 Property and equipment, net of accumulated
   depreciation and amortization ...............      7,396,746       6,144,863
 Tradename .....................................      4,110,750       4,110,750
 Goodwill ......................................        450,000         450,000
 License rights ................................        306,250         375,375
 Due from related parties ......................        802,484         762,076
 Other assets ..................................        698,464         200,949
                                                   ------------    ------------
 Total assets ..................................   $ 66,410,032      67,770,314
                                                   ============    ============

  Liabilities, Convertible Redeemable Preferred
        Stock and Stockholders' Equity
 Current Liabilities:
    Line of credit .............................   $  4,597,480    $  7,095,514
    Accounts payable and accrued expenses ......      9,051,494       9,552,196
    Subordinated notes payable to
       related parties .........................        849,971         849,971
    Current portion of capital lease
       obligations .............................        806,134         562,742
    Current portion of mortgage note
       payable .................................         20,137            --
    Current portion of subordinated
       note payable ............................      1,700,000       1,200,000
                                                   ------------    ------------
      Total current liabilities ................     17,025,216      19,260,423

 Capital lease obligations, less
    current portion ............................      1,281,949         651,191
 Mortgage note payable, less current
    portion ....................................        744,863            --
 Subordinated note payable, less
    current portion ............................           --         1,400,000
                                                   ------------    ------------
     Total liabilities .........................     19,052,028      21,311,614
                                                   ------------    ------------

 Convertible redeemable preferred stock
    Series C, $0.001 par value; 759,494
    shares authorized; no shares
    issued and outstanding at September
    30, 2004; 759,494 shares issued
    and outstanding at December 31, 2003
    (stated value $3,000,000) ..................           --         2,895,001
 Stockholders' equity:
    Preferred stock, Series A $0.001
      par value; 250,000 shares
      authorized, no shares issued or
      outstanding ..............................           --              --
    Convertible preferred stock Series D,
      $0.001 par value; 572,818 shares
      authorized; no shares issued or
      outstanding at September 30, 2004;
      572,818 shares issued and
      outstanding at December 31, 2003 .........           --        22,918,693
    Common stock, $0.001 par value,
      30,000,000 shares authorized;
      18,144,351 shares issued and
      outstanding at September 30, 2004;
      11,508,201 at December 31, 2003 ..........         18,146          11,510
    Additional paid-in capital .................     50,797,929      23,890,356
    Accumulated deficit ........................     (3,458,071)     (3,256,860)
                                                   ------------    ------------
 Total stockholders' equity ....................     47,358,004      43,563,699
                                                   ------------    ------------
 Total liabilities, convertible
    redeemable preferred stock and
    stockholders equity ........................   $ 66,410,032    $ 67,770,314
                                                   ============    ============

           See accompanying notes to consolidated financial statements


                                       3
<PAGE>


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

<CAPTION>
                                                            Three Months Ended             Nine Months Ended
                                                               September 30,                 September 30,
                                                        ---------------------------   ----------------------------
                                                            2004           2003          2004             2003
                                                        ------------   ------------   ------------    ------------
<S>                                                     <C>            <C>            <C>             <C>
Net sales ...........................................   $ 17,004,775   $ 16,467,896   $ 42,088,194    $ 51,558,303
Cost of goods sold ..................................     12,658,879     12,237,757     30,857,994      37,564,067
                                                        ------------   ------------   ------------    ------------
   Gross profit .....................................      4,345,896      4,230,139     11,230,200      13,994,236

Selling expenses ....................................        646,000        967,688      2,120,598       3,042,601
General and administrative expenses .................      3,226,995      2,831,140      8,875,344       8,469,572
                                                        ------------   ------------   ------------    ------------
   Total operating expenses .........................      3,872,995      3,798,828     10,995,942      11,512,173

Income from operations ..............................        472,901        431,311        234,258       2,482,063
Interest expense, net ...............................        161,828        307,253        492,902         971,090
                                                        ------------   ------------   ------------    ------------
Income (loss) before income taxes ...................        311,073        124,058       (258,644)      1,510,973
Provision (benefit) for income taxes ................        100,069         28,888        (87,938)        306,271
                                                        ------------   ------------   ------------    ------------
   Net income (loss) ................................   $    211,004   $     95,170   $   (170,706)   $  1,204,702
                                                        ============   ============   ============    ============
Less:  Preferred stock dividends ....................           --           49,926         30,505         144,126
                                                        ------------   ------------   ------------    ------------
Net income (loss) to common shareholders ............   $    211,004   $     45,244   $   (201,211)   $  1,060,576
                                                        ============   ============   ============    ============

Basic earnings (loss) per share .....................   $       0.01   $       0.00   $      (0.01)   $       0.10
                                                        ============   ============   ============    ============
Diluted earnings (loss) per share ...................   $       0.01   $       0.00   $      (0.01)   $       0.10
                                                        ============   ============   ============    ============

Weighted average number of common shares outstanding:
   Basic ............................................     18,112,802     11,436,702     17,036,001      10,363,755
                                                        ============   ============   ============    ============
   Diluted ..........................................     18,269,005     12,245,083     17,036,001      10,809,895
                                                        ============   ============   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                                            Nine Months
                                                         Ended September 30,
                                                   ----------------------------
                                                       2004            2003
                                                   ------------    ------------
Increase  (decrease)  in cash and cash
   equivalents
Cash flows  from  operating activities:

    Net (loss) income ..........................   $   (170,706)   $  1,204,702
Adjustments to reconcile net (loss)
  income to net cash (used in)
  provided by operating activities:
   Depreciation and amortization ...............      1,100,886         956,742
   Increase in allowance for doubtful accounts .        421,943         238,440
   Common stock issued for services ............         74,825            --
   Warrants issued for services ................         10,906            --
Changes in operating assets and liabilities:
      Receivables, including related parties ...     (9,110,564)     (2,765,882)
      Inventories ..............................        613,526         126,869
      Other assets .............................       (504,946)         (6,050)
      Prepaid expenses and other current assets      (1,720,684)     (1,025,217)
      Accounts payable and accrued expenses ....        377,567         782,998
      Income taxes payable .....................       (413,212)        504,291
                                                   ------------    ------------
Net cash (used in) provided by operating
   activities ..................................     (9,320,459)         16,893
                                                   ------------    ------------

Cash flows from investing activities:
    Acquisition of property and equipment ......     (1,261,795)     (2,329,606)
                                                   ------------    ------------

Cash flows from financing activities:
    Repayment of bank line of credit, net ......     (2,498,034)     (2,669,013)
    Proceeds from private placement transactions           --         6,395,300
    Proceeds from exercise of stock options and
       warrants ................................        478,814         297,500
    Repayment of capital leases ................       (325,268)       (308,178)
    Proceeds from capital lease ................        950,000            --
    Repayment of notes payable .................       (900,000)     (1,400,000)
                                                   ------------    ------------
Net cash (used in) provided by financing
   activities ..................................     (2,294,488)      2,315,609
                                                   ------------    ------------

Net (decrease) increase in cash ................    (12,876,742)          2,896
Cash at beginning of period ....................     14,442,769         285,464
                                                   ------------    ------------
Cash at end of period ..........................   $  1,566,027    $    288,360
                                                   ============    ============

Supplemental  disclosures of cash flow
   information:
    Cash received (paid) during the period for:
      Interest paid ............................   $   (474,619)   $   (953,732)
      Income taxes paid ........................   $   (340,119)   $    (13,208)
      Income taxes received ....................   $      2,585    $    212,082
Non-cash financing activities:
    Preferred Series D stock converted to
       common stock ............................   $ 22,918,693    $       --
    Preferred Series C stock converted to
       common stock ............................   $  2,895,001    $       --
    Accrued dividends converted to common stock    $    458,707    $       --
    Capital lease obligation ...................   $    249,418    $  1,474,053
    Mortgage note payable ......................   $    765,000    $       --

          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  accounting
principles  generally  accepted  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, 2003.

2.       EARNINGS PER SHARE

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


                                            INCOME       SHARES     PER SHARE
                                          ----------   ----------   ----------
THREE MONTHS ENDED SEPTEMBER 30, 2004:
Basic earnings per share:
Income available to common stockholders   $  211,004   18,112,802   $     0.01

Effect of Dilutive Securities:
Options ...............................         --        156,203          --
Warrants ..............................         --           --            --
                                          ----------   ----------   ----------
Income available to common stockholders   $  211,004   18,269,005   $     0.01
                                          ==========   ==========   ==========

THREE MONTHS ENDED SEPTEMBER 30, 2003:
Basic earnings per share:
Income available to common stockholders   $   45,244   11,436,702   $     0.00

Effect of Dilutive Securities:
Options                                         --        684 740          --
Warrants                                        --        123,641          --
                                          ----------   ----------   ----------
Income available to common stockholders   $   45,244   12,245,083   $     0.00
                                          ==========   ==========   ==========


                                        6
<PAGE>


                                            (LOSS)
                                            INCOME       SHARES     PER SHARE
NINE MONTHS ENDED SEPTEMBER 30, 2004:     ----------   ----------   ----------
Basic loss per share:
Loss available to common stockholders     $ (201,211)  17,036,001   $    (0.01)

Effect of Dilutive Securities:
Options                                         --           --            --
Warrants                                        --           --            --
                                          ----------   ----------   ----------
Loss available to common stockholders     $ (201,221)  17,036,001   $    (0.01)
                                          ==========   ==========   ==========

NINE MONTHS ENDED SEPTEMBER 30, 2003:
Basic earnings per share:
Income available to common stockholders   $1,060,576   10,363,755   $     0.10

Effect of Dilutive Securities:
Options                                         --         44,609          --
Warrants                                        --        401,531          --
                                          ----------   ----------   ----------
Income available to common stockholders   $1,060,576   10,806,895   $     0.10
                                          ==========   ==========   ==========


         Warrants to purchase  1,191,984 shares of common stock at between $4.29
and $5.06, options to purchase 1,270,200 shares of common stock at between $3.63
and $4.63, and convertible debt of $500,000 convertible at $4.50 per share, were
outstanding for the three months ended September 30, 2004, 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  1,191,984 shares of common stock at between $4.29
and $5.06, options to purchase 1,790,200 shares of common stock at between $1.30
and $4.63, and convertible debt of $500,000 convertible at $4.50 per share, were
outstanding  for the nine months ended September 30, 2004, 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.

         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 September 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  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  nine  months  ended  September  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.


                                       7
<PAGE>


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 nine months ended September 30, 2004 and 2003. If compensation
cost for stock-based  compensation  had been determined based on the fair market
value of the stock options on their dates of grant in accordance  with SFAS 123,
the Company's net income (loss) and earnings  (loss) per share for the three and
nine months  ended  September  30, 2004 and 2003 would have  amounted to the pro
forma amounts presented below:


<TABLE>
<CAPTION>
                                                            Three Months                    Nine Months
                                                         Ended September 30,             Ended September 30,
                                                      ---------------------------    --------------------------
                                                        2004             2003           2004            2003
                                                      -----------     -----------    -----------    -----------
<S>                                                   <C>             <C>            <C>            <C>
Net income (loss), as reported.................       $   211,004     $    95,170    $  (170,706)   $ 1,204,702
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 ..................................            (5,224)        (44,838)       (50,004)       (94,948)
                                                      -----------     -----------    -----------    -----------

Pro forma net income (loss) ...................       $   205,780     $    50,332    $  (220,710)   $ 1,109,754
                                                      ===========     ===========    ===========    ===========

Earnings per share:
     Basic - as reported.......................       $      0.01     $      0.00    $     (0.01)   $      0.10
     Basic - pro forma.........................       $      0.01     $      0.00    $     (0.01)   $      0.09
     Diluted - as reported.....................       $      0.01     $      0.00    $     (0.01)   $      0.10
     Diluted - pro forma.......................       $      0.01     $      0.00    $     (0.01)   $      0.09
</TABLE>


4.       SERIES D PREFERRED STOCK

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


                                       8
<PAGE>


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

         The Company has registered the common shares issued upon  conversion of
the Series D  Convertible  Preferred  Stock  with the  Securities  and  Exchange
Commission  for  resale  by the  investors.  In  conjunction  with  the  private
placement  transaction,  the Company issued a warrant to purchase 572,818 common
shares to the placement  agent.  The warrant is  exercisable  beginning June 18,
2004 through  December 18, 2008.  The fair value of the warrant was estimated at
approximately $165,000 utilizing the Black-Scholes option-pricing model.

5.       SERIES C PREFERRED STOCK

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

6.       EXCLUSIVE SUPPLY AGREEMENT

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

7.       SUBSEQUENT EVENTS

         REFINANCING OF WORKING CAPITAL CREDIT FACILITY

         On November 10, 2004, the Company raised $12.5 million from the sale of
Secured  Convertible Notes Payable (the "Notes") to existing  shareholders.  The
Notes are  convertible  into  common  stock at a price of $3.65 per share,  bear
interest at 6% payable  quarterly,  are due  November 9, 2007 and are secured by
the TALON  trademarks.  The Notes are convertible at the option of the holder at
any time after  closing.  The  Company may repay the Notes at any time after one
year from the closing  date with a 15%  prepayment  penalty.  At  maturity,  the
Company may repay the Notes in cash or require  conversion if certain conditions
are met. In  connection  with the issuance of the Notes,  171,235  warrants were
issued to the Note holders.  The warrants have a term of five years, an exercise
price of $3.65 and vest 30 days  after  closing.  The  Company  is  required  to
register the shares  issuable upon conversion of the options and exercise of the
warrants.  In  connection  with this  financing,  the Company paid the placement
agent  $704,000 in cash,  and issued the  placement  agent a warrant to purchase
215,754  common shares at an exercise  price of $3.65 per share.  The warrant is
exercisable beginning May 10, 2004 through November 10, 2009.

         A portion of the proceeds  from the Secured  Convertible  Notes Payable
was used to pay off all existing indebtedness under our credit facility with UPS
Capital Global Trade Finance Corporation.


                                       9
<PAGE>


FRANCHISE AGREEMENTS

         On October 21, 2004, the Company entered into a franchise agreement for
the sale of TALON  zippers in Central Asia.  The agreement  provides for minimum
purchases  from the  Company of $9.5  million  of TALON  zipper  products  to be
received over a term beginning October 21, 2004 through April 21, 2008.

         On November  10,  2004,  the Company  entered  into a second  franchise
agreement  for the sale of TALON  zippers  in South  East  Asia.  The  agreement
provides for minimum purchases from the Company of $10.5 million of TALON zipper
products to be received over a term beginning  November 10, 2004 through May 10,
2008.

8.       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.

         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.


                                       10
<PAGE>


9.       NEW ACCOUNTING PRONOUNCEMENT

         In March  2004,  the  Financial  Accounting  Standards  Board  ("FASB")
published  an  Exposure  Draft,  "Share-Based  Payment,  an  Amendment  of  FASB
Statements  No. 123 and 95." The proposed  change in  accounting  would  replace
existing  requirements  under SFAS No. 123 and APB Opinion No. 25. The  proposed
statement  would  require  public  companies to  recognize  the cost of employee
services  received in exchange for equity  instruments,  based on the grant-date
fair value of those instruments, with limited exceptions. The proposed statement
would also affect the pattern in which  compensation  costs would be recognized,
the accounting for employee share purchase plans,  and the accounting for income
tax effects of share-based payment  transactions.  The Exposure Draft also notes
that the use of a lattice model,  such as the binomial  model,  to determine the
fair value of employee stock options, is preferable.  The Company currently uses
the  Black-Scholes  pricing  model to  determine  the fair value of its employee
stock  options.  Use of a lattice  model to determine the fair value of employee
stock options may result in compensation  costs materially  different from those
pro forma costs disclosed in Note 3 to the consolidated  financial  information.
The Company is currently  determining  what impact the proposed  statement would
have on its results of operations or financial position.

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 nine months ended September 30, 2004 and 2003.
Except for historical  information,  the matters  discussed in this Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  are
forward looking  statements that involve risks and  uncertainties  and are based
upon judgments concerning various factors that are beyond our control.

OVERVIEW

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

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


                                       11
<PAGE>


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

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

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

         On November 10, 2004, we refinanced our working capital credit facility
with UPS Capital Global Trade Finance Corporation with a portion of the proceeds
received from a private  placement of $12.5 million  Secured  Convertible  Notes
Payable.  See further  discussion  under the  LIQUIDITY  AND  CAPITAL  RESOURCES
section of this document.

         We have developed, and are now implementing,  what were refer to as our
TALON  franchise  strategy,  whereby we locate  suitable  candidates  in various
geographic  international  regions  to finish and sell  zippers  under the TALON
brand name. Our designated  franchisees  purchase and install locally  equipment
for  producing  finished  zippers,  thus  minimizing  our  capital  outlay.  The
franchisee  will then purchase from us large zippers rolls and produce  finished
zippers locally, according to their customers' specifications, in markets around
the world,  becoming in essence a local  marketer and  distributor  of the TALON
brand. The benefits of this strategy are profound,  as we expect to dramatically
expand the geographic  footprint of our TALON division without the need to build
factories,  commit  significant  capital  resources and hire sales people in the
markets we target.

         On October 21, 2004, we entered into a franchise agreement for the sale
of TALON zippers in Central Asia. The agreement  provides for minimum  purchases
from us of $9.5  million in TALON  zipper  products to be  received  over a term
beginning October 21, 2004 through April 21, 2008.

         On November 10, 2004,  we entered into our second  franchise  agreement
for the sale of TALON  zippers in South East Asia.  The  agreement  provides for
minimum  purchases  from us of $10.5  million  in TALON  zipper  products  to be
received over a term beginning November 10, 2004 through May 10, 2008.

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


                                       12
<PAGE>


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

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

         o        We record  valuation  allowances  to reduce our  deferred  tax
                  assets to an amount that we believe is more likely than not to
                  be realized.  We consider  estimated future taxable income and
                  ongoing  prudent  and  feasible  tax  planning  strategies  in
                  assessing 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


                                       13
<PAGE>


                  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.


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 ENDED         NINE MONTHS ENDED
                                   SEPTEMBER 30,              SEPTEMBER 30,
                              ----------------------     ---------------------
                                 2004        2003         2004         2003
                              ---------   ----------   ----------   ---------
Net sales                        100.0%       100.0%       100.0%      100.0%
Cost of goods sold                74.4         74.3         73.3        72.9
                              ---------   ----------   ----------   ---------
Gross profit                      25.6         25.7         26.7        27.1
Selling expenses                   3.8          5.9          5.0         5.9
General and administrative
   expenses                       19.0         17.2         21.1        16.4
                              ---------   ----------   ----------   ---------
Operating Income                   2.8%         2.6%        0.6%         4.8%
                              =========   ==========   ==========   =========


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

                                 THREE MONTHS ENDED       NINE MONTHS ENDED
                                   SEPTEMBER 30,             SEPTEMBER 30,
                              ----------------------   ----------------------
                                2004         2003         2004         2003
                              ---------   ----------   ----------   ---------
United States.................     9.7%         5.4%         8.7%       12.9%
Asia                              19.3         15.9         22.2        13.6
Mexico........................    44.9         43.0         40.2        42.3
Dominican Republic............    15.8         22.1         18.2        22.5
Central and South America.....     7.4          8.6          9.3         5.9
Other.........................     2.9          5.0          1.4         2.8
                              ---------   ----------   ----------   ---------
                                 100.0%       100.0%       100.0%      100.0%
                              =========   ==========   ==========   =========


                                       14
<PAGE>


         Net sales increased approximately $537,000, or 3.3%, to $17,005,000 for
the three months ended September 30, 2004 from  $16,468,000 for the three months
ended  September 30, 2003.  The increase in net sales for the three months ended
September  30, 2004 was  primarily  due to an increase in sales from our TRIMNET
programs related to major U.S.  retailers in our Hong Kong and Mexico facilities
and an increase in zipper sales under our TALON brand name in Asia. The increase
in net sales was offset by a decrease  in  trim-related  sales of  approximately
$3.0  million  from our  Tlaxcala,  Mexico,  operations  under our MANAGED  TRIM
SOLUTION(TM)  trim  package  program.  During  the fourth  quarter  of 2003,  we
implemented a plan to restructure  certain  business  operations,  including the
reduction  of our  reliance  on two  significant  customers  in Mexico,  Tarrant
Apparel   Group  and  Azteca   Production   International,   which   contributed
approximately  $6.0  million or 36.2% of revenues in the third  quarter of 2003.
These customers  contributed  approximately $3.0 million or 17.9% of revenues in
the third quarter of 2004. This plan was accelerated  when Tarrant Apparel Group
unexpectedly exited its Mexico operations.  We were able to replace in excess of
100% of the lost revenue  during the three months ended  September 30, 2004. The
reduction  of our  operations  in Mexico was also in  response to our efforts to
decrease our reliance on our larger Mexico  customers.  Fiscal 2004 continues to
be a transitional year as we experience the effects of diversifying our customer
base.

         Net sales decreased approximately  $9,470,000, or 18.4%, to $42,088,000
for the nine  months  ended  September  30, 2004 from  $51,558,000  for the nine
months ended  September 30, 2003.  The decrease in net sales for the nine months
ended September 30, 2004 was primarily due to a decrease in  trim-related  sales
of  approximately  $18.3  million  from  our  Tlaxcala,  Mexico  operations,  as
discussed above. Our previous  reliance on two significant  customers in Mexico,
Tarrant  Apparel  Group and  Azteca  Production  International,  during the nine
months ended September 30, 2003 contributed approximately $22.5 million or 43.7%
of revenues compared to approximately  $4.2 million or 10.1% of revenues for the
nine months ended September 30, 2004. We were able to replace  approximately 48%
of lost revenue during the nine months ended September 30, 2004. The decrease in
net sales was offset by an increase in sales from our TRIMNET  programs  related
to major U.S.  retailers in our Hong Kong and Mexico  facilities and an increase
in zipper sales under our TALON brand name in Asia.

         Gross profit increased  approximately  $116,000, or 2.7%, to $4,346,000
for the three  months ended  September  30, 2004 from  $4,230,000  for the three
months  ended  September  30, 2003.  Gross  margin as a percentage  of net sales
decreased to  approximately  25.6% for the three months ended September 30, 2004
as compared to 25.7% for the three months ended September 30, 2003. The decrease
in gross  profit  as a  percentage  of net  sales  for the  three  months  ended
September 30, 2004 was due to a change in our product mix during the quarter.

         Gross  profit  decreased   approximately   $2,764,000,   or  19.8%,  to
$11,230,000  for the nine months ended  September 30, 2004 from  $13,994,000 for
the nine months ended  September  30, 2003.  Gross margin as a percentage of net
sales decreased to  approximately  26.7% for the nine months ended September 30,
2004 as compared to 27.1% for the nine months  ended  September  30,  2003.  The
decrease in gross profit as a percentage  of net sales for the nine months ended
September 30, 2004 was due to a change in our product mix during the period.


                                       15
<PAGE>


         Selling  expenses  decreased   approximately  $322,000,  or  33.3%,  to
$646,000  for the three months ended  September  30, 2004 from  $968,000 for the
three  months ended  September  30, 2003.  As a percentage  of net sales,  these
expenses  decreased  to 3.8% for the  three  months  ended  September  30,  2004
compared to 5.9% for the three months ended  September 30, 2003. The decrease in
selling  expenses during the period was due in part to a decrease in the royalty
rate related to our exclusive license and intellectual property rights agreement
with Pro-Fit Holdings Limited.  We incurred  royalties related to this agreement
of approximately  $85,000 for the three months ended September 30, 2004 compared
to $199,000 for the three months ended  September 30, 2003. Over the life of the
contract,  we pay royalties of 6% on related  sales of up to $10 million,  4% of
related  sales from  $10-20  million  and 3% on  related  sales in excess of $20
million.  Selling  expenses  also  decreased  due to the  implementation  of our
restructuring plan in the fourth quarter of 2003.

         Selling  expenses  decreased   approximately  $922,000,  or  30.3%,  to
$2,121,000 for the nine months ended  September 30, 2004 from $3,043,000 for the
nine months ended  September  30,  2003.  As a  percentage  of net sales,  these
expenses decreased to 5.0% for the nine months ended September 30, 2004 compared
to $5.9% for the nine months ended  September 30, 2003.  The decrease in selling
expenses  during the period was due in part to a decrease  in the  royalty  rate
related to our exclusive license and intellectual property rights agreement with
Pro-Fit Holdings  Limited.  We incurred  royalties  related to this agreement of
approximately  $312,000 for the nine months ended September 30, 2004 compared to
$705,000 for the nine months ended  September  30, 2003.  Selling  expenses also
decreased  due to the  implementation  of our  restructuring  plan in the fourth
quarter of 2003.

         General and administrative  expenses increased  approximately $396,000,
or 14.0%,  to  $3,227,000  for the three  months ended  September  30, 2004 from
$2,831,000  for the three  months  ended  September  30,  2003.  The increase in
general  and  administrative  expenses  was  due  primarily  to  the  hiring  of
additional employees related to the expansion of our Asian operations, including
our TALON franchising strategy.  Additional  administrative  employees were also
hired for our new TALON manufacturing facility in North Carolina.  This facility
is estimated to begin production in December 2004. As a percentage of net sales,
these expenses  increased to 19.0% for the three months ended September 30, 2004
compared to 17.2% for the three months ended  September 30, 2003, as the rate of
increase in general and administrative expenses exceeded the rate of increase in
net sales.

         General and administrative  expenses increased  approximately $405,000,
or 4.8%,  to  $8,875,000  for the nine  months  ended  September  30,  2004 from
$8,470,000 for the nine months ended September 30, 2003. The increase in general
and  administrative  expenses  was due  primarily  to the  hiring of  additional
employees related to the expansion of our Asian operations,  including our TALON
franchising strategy.  Additional  administrative  employees were also hired for
our new  TALON  manufacturing  facility  in North  Carolina.  This  facility  is
estimated to begin  production in December  2004. The increase in these expenses
was also due to a one-time charge of approximately $400,000 in the first quarter
of 2004 related to the final residual costs  associated  with our  restructuring
plan  implemented in the fourth quarter of 2003. This one-time charge was offset
by a decrease in salaries  and related  benefits  and other costs as a result of
the implementation of our restructuring plan in the fourth quarter of 2003. As a
percentage of net sales,  these expenses  increased to 21.1% for the nine months
ended  September 30, 2004 compared to 16.4% for the nine months ended  September
30, 2003, due to the decrease in net sales.

         Interest  expense  decreased   approximately  $145,000,  or  47.2%,  to
$162,000  for the three months ended  September  30, 2004 from  $307,000 for the
three months ended September 30, 2003.  Borrowings  under our UPS Capital credit
facility  decreased  during the period ended  September 30, 2004 due to proceeds
received  from our private  placement  transactions  in May and December 2003 in
which  we  raised  approximately  $29  million  from  the  sale  of  common  and
convertible preferred stock.


                                       16
<PAGE>


         Interest  expense  decreased   approximately  $478,000,  or  49.2%,  to
$493,000 for the nine months ended September 30, 2004 from $971,000 for the nine
months  ended  September  30,  2003.  Borrowings  under our UPS  Capital  credit
facility  decreased  during the period ended  September 30, 2004 due to proceeds
received  from our private  placement  transactions  in May and December 2003 in
which  we  raised  approximately  $29  million  from  the  sale  of  common  and
convertible preferred stock.

         The provision for income taxes for the three months ended September 30,
2004 amounted to approximately $100,000 compared to $29,000 for the three months
ended  September  30, 2003.  Income taxes  increased  for the three months ended
September 30, 2004 primarily due to increased taxable income.

         The income tax  benefit for the nine months  ended  September  30, 2004
amounted to  approximately  $88,000  compared to a provision for income taxes of
$306,000 for the nine months ended  September 30, 2003.  Income taxes  decreased
for the nine months ended September 30, 2004 primarily due to decreased  taxable
income.

         Net  income  was  approximately  $211,000  for the three  months  ended
September  30, 2004 as compared to $95,000 for the three months ended  September
30, 2003,  due  primarily to an increase in net sales,  decreases in selling and
interest  expenses,  offset by an  increase in general  and  administrative,  as
discussed above.

         Net loss was approximately $171,000 for the nine months ended September
30,  2004 as  compared to net income of  $1,205,000  for the nine  months  ended
September 30, 2003,  due primarily to a decrease in net sales and an increase in
general and administrative expenses, offset by decreases in selling and interest
expenses, as discussed above.

         There were no  preferred  stock  dividends  for the three  months ended
September  30, 2004 as compared to $50,000 for the three months ended  September
30, 2003.  Preferred stock  dividends  represent  earned  dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
In February 2004, the holders of the Series C convertible  redeemable  preferred
stock  converted  all  759,494  shares of the  Series C  Preferred  Stock,  plus
$458,707 of accrued  dividends,  into 700,144  shares of our common  stock.  Net
income  available  to common  shareholders  amounted to  $211,000  for the three
months ended  September  30, 2004 compared to $45,000 for the three months ended
September  30,  2003.  Basic and diluted  earnings  per share were $0.01 for the
three  months  ended  September  30, 2004 and $0.00 for the three  months  ended
September 30, 2003.

         Preferred stock dividends amounted to $31,000 for the nine months ended
September  30, 2004 as compared to $144,000 for the nine months ended  September
30, 2003.  Preferred stock  dividends  represent  earned  dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
In February 2004, the holders of the Series C convertible  redeemable  preferred
stock  converted  all  759,494  shares of the  Series C  Preferred  Stock,  plus
$458,707 of accrued dividends, into 700,144 shares of our common stock. Net loss
available to common shareholders  amounted to $201,000 for the nine months ended
September 30, 2004 compared to net income  available to common  shareholders  of
$1,061,000 for the nine months ended September 30, 2003.  Basic and diluted loss
per share was $0.01 for the nine months ended  September  30, 2004 and basic and
diluted  earnings  per share was $0.10 for the nine months ended  September  30,
2003.


                                       17
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         Cash and cash equivalents decreased to $1,566,000 at September 30, 2004
from $14,443,000 at December 31, 2003. The decrease resulted from  approximately
$9,320,000  of cash used by  operating  activities,  $1,262,000  of cash used in
investing activities and $2,294,000 of cash used in financing activities.

         Net cash used in operating activities was approximately  $9,320,000 for
the nine months ended  September 30, 2004 and cash  provided by  operations  was
approximately $17,000 for the nine months ended September 30, 2003. Cash used in
operating  activities  for the nine months  ended  September  30, 2004  resulted
primarily  from  increased  accounts  receivable  and prepaid and other  current
assets. The increase in accounts  receivable during the period was due primarily
to slower  customer  collections of  non-related  party  receivables  during the
nine-month  period.   Non-related  party  trade  receivables   increased  by  an
additional $5.4 million due to the inclusion of receivables that were previously
classified  as related  party trade  receivables.  Cash  provided  by  operating
activities for the nine months ended September 30, 2003 resulted  primarily from
increases in accounts payable and accrued expenses, income taxes payable and net
income,  which was offset  primarily  by increases  in  receivables  and prepaid
expenses.

         Net cash used in investing activities was approximately  $1,262,000 and
$2,330,000 for the nine months ended September 30, 2004 and 2003,  respectively.
Net cash used in investing  activities  for the nine months ended  September 30,
2004 consisted  primarily of capital  expenditures for computer  equipment,  the
purchase of additional TALON zipper equipment and leasehold improvements related
to our new TALON manufacturing facility. During the quarter, we also purchased a
building and land in North Carolina for the manufacturing of TALON zippers. This
purchase  was  treated as a  non-cash  financing  transaction.  Net cash used in
investing  activities  for the nine months ended  September  30, 2003  consisted
primarily of capital  expenditures for equipment related to the exclusive supply
agreement we entered into with Levi Strauss & Co. and the purchase of additional
TALON zipper equipment.  During the period, we also purchased computer equipment
and software for the implementation of a new Oracle-based  computer system. This
purchase was treated as a non-cash capital lease obligation.

         Net cash used in financing activities was approximately  $2,294,000 for
the nine  months  ended  September  30, 2004  compared  to net cash  provided by
financing activities of $2,316,000 for the nine months ended September 30, 2003.
Net cash used in financing  activities  for the nine months ended  September 30,
2004 primarily  reflects the repayment of borrowings  under our credit  facility
and  subordinated  notes  payable,  offset by funds  raised from the exercise of
stock  options and warrants and proceeds from a capital  lease  obligation.  Net
cash provided by financing  activities  for the nine months ended  September 30,
2003 primarily reflects funds raised from private placement transactions, offset
by the  repayment of notes  payable and  decreased  borrowings  under our credit
facility.

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


                                       18
<PAGE>


cash or require conversion if certain conditions are met. In connection with the
issuance of the Notes,  171,235  warrants were issued to the Note  holders.  The
warrants have a term of five years,  an exercise price of $3.65 and vest 30 days
after closing.  We are required to register the shares  issuable upon conversion
of the options and exercise of the warrants.

         At September 30, 2004 and 2003,  outstanding  borrowings  under our UPS
Capital credit facility,  including amounts borrowed under our foreign factoring
agreement,  amounted to approximately $4,597,000 and $13,265,000,  respectively.
Open  letters  of credit  under our UPS  Capital  credit  facility  amounted  to
approximately  $96,000 at  September  30,  2004.  There were no open  letters of
credit at September 30, 2003.

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchased our eligible accounts receivable
and assumed the credit risk with respect to those foreign accounts for which UPS
Capital had given its prior  approval.  If UPS Capital did not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remained  with us. We paid a fixed  commission  rate and  borrowed  up to 85% of
eligible  accounts  receivable under our credit  facility.  Included in due from
factor as of September 30, 2004 and 2003 are trade accounts  receivable factored
without  recourse of  approximately  $53,000 and $117,000.  Included in due from
factor  are  outstanding  advances  due  to UPS  Capital  under  this  factoring
arrangement  amounting to  approximately  $45,000 and $100,000 at September  30,
2004 and 2003.

         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 September 30, 2004 and 2003,  the amount  factored with
recourse and included in trade accounts  receivable was  approximately  $872,000
and $260,000. Outstanding advances as of September 30, 2004 and 2003 amounted to
approximately  $512,000  and  $213,000  and are  included  in the line of credit
balance.

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

         Our trade  receivables  increased to  $27,943,000 at September 30, 2004
from  $23,022,000  at September  30, 2003.  This  increase was due  primarily to
increased  non-related  party  receivables of  approximately  $10 million due to
increased  sales  to  non-related   party  customers  and  slower   collections.
Non-related party trade receivables  increased by an additional $5.4 million due
to the inclusion of receivables that were previously classified as related party
trade receivables. As a result of the sale of its ownership in our common stock,
Azteca  Production  International  is  no  longer  considered  a  related  party
customer. The increase in non-related party receivables was offset by a decrease
in related party trade receivables of approximately $10.5 million resulting from
decreased  sales  to  related  parties  during  the  period,  offset  by  slower
collections.  We are currently in  negotiations  with the  management of Tarrant
Apparel  Group to resolve  its  outstanding  accounts  receivable  position.  We
believe  we can  come to an  agreement  and  have  recorded  a  reserve  against
outstanding accounts receivable based on these negotiations. If Tarrant does not
execute against its  commitments,  we will be required to record a write-down of
all or a portion of the outstanding receivables due from Tarrant.

         Our net deferred tax asset  increased to  $2,800,000  at September  30,
2004 from  $91,000 at September  30, 2003.  The increase in our net deferred tax
asset results  primarily from 2003 losses.  At December 31, 2003, we had Federal
and state net operating loss  carryforwards  of  approximately  $9.2 million and
$5.1 million, respectively, available to offset future taxable income.


                                       19
<PAGE>


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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS


         The following  summarizes our contractual  obligations at September 30,
2004 and the effects such obligations are expected to have on liquidity and cash
flow in future periods:

<TABLE>
<CAPTION>
                                                  Payments Due by Period
                             --------------------------------------------------------------
                                           Less than      1-3           4-5        After
  Contractual Obligations      Total        1 Year       Years         Years      5 Years
--------------------------   ----------   ----------   ----------   ----------   ----------
<S>                          <C>          <C>          <C>          <C>          <C>
Subordinated note payable    $1,700,000   $1,700,000   $     --     $     --     $     --
Capital lease obligations    $2,088,083   $  806,134   $1,049,608   $  232,341   $     --
Subordinated notes payable
   to related parties (1)    $  849,971   $  849,971   $     --     $     --     $     --
Operating leases .........   $1,162,387   $  662,385   $  500,002   $     --     $     --
Line of credit ...........   $4,597,480   $4,597,480   $     --     $     --     $     --
Notes payable ............   $   25,200   $   25,200   $     --     $     --     $     --
Mortgage note payments....   $  765,000   $   20,137   $   44,411   $   50,559   $  649,893
Royalty payments .........   $  119,947   $     --     $  119,947   $     --     $     --
----------
<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>


         At September 30, 2004 and 2003, we did not have any relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.


                                       20
<PAGE>


RELATED PARTY TRANSACTIONS

         We 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 supply agreement with
Tarrant Apparel Group has an indefinite  term.  Pricing and terms are consistent
with competitive vendors. At the time we entered into this supply agreement,  we
also sold 2,390,000 shares of our common stock to KG Investment,  LLC, an entity
then  owned by Gerard  Guez and Todd Kay,  executive  officers  and  significant
shareholders of Tarrant Apparel Group.

         Sales under our supply agreements with Tarrant Apparel Group and Azteca
Production  International  (a  former  related  party),  and  their  affiliates,
amounted to approximately 40.2% and 69.7% of our total sales for the years ended
December 2003 and 2002, respectively, and 10.1% and 43.7% of our total sales for
the nine months  ended  September  30, 2004 and 2003.  Sales under these  supply
agreements as a percentage of total sales for the year ending  December 2004 are
anticipated  to be  significantly  lower than for the year ended  December 2003.
This  decrease is due in part to our efforts to decrease  our  reliance on these
customers and to further  diversify our customer base. Our results of operations
will  depend,  to a lesser  extent than in prior  periods,  upon the  commercial
success of Azteca  Production  International  and Tarrant  Apparel Group. If 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  at September  30, 2004 and 2003 and December 31,
2003, is approximately  $10.8,  $16.0 and $11.7 million due from Tarrant Apparel
Group and Azteca Production International, and their affiliates.

         We are currently in negotiations with the management of Tarrant Apparel
Group to resolve its outstanding accounts receivable position. We believe we can
come to an agreement and have recorded a reserve  against  outstanding  accounts
receivable based on these negotiations.  If Tarrant does not execute against its
commitments,  we will be required to record a write-down  of all or a portion of
the outstanding receivables due from Tarrant.

         Included in inventories at September 30, 2004 and 2003 are  inventories
of approximately $5.1 and $8.4 million that are subject to buyback  arrangements
with Tarrant  Apparel  Group and Azteca  Production  International.  The buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is required to purchase the  inventories  from us under normal  invoice
and selling terms.  During the nine months ended September 30, 2004 and 2003, we
sold  approximately  $1,735,000 and  $2,400,000 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.  Of the $5.1 million of buyback inventories
with Tarrant Apparel Group and Azteca Production  International at September 30,
2004,  approximately  $3.9 million  represent  generic goods that can be sold to
other  customers.  We are  in the  process  of  selling  these  goods  to  other
customers.

         As of September  30, 2004 and 2003,  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.


                                       21
<PAGE>


NEW ACCOUNTING PRONOUNCEMENT

         In March  2004,  the  Financial  Accounting  Standards  Board  ("FASB")
published  an  Exposure  Draft,  "Share-Based  Payment,  an  Amendment  of  FASB
Statements  No. 123 and 95." The proposed  change in  accounting  would  replace
existing  requirements  under SFAS No. 123 and APB Opinion No. 25. The  proposed
statement  would  require  public  companies to  recognize  the cost of employee
services  received in exchange for equity  instruments,  based on the grant-date
fair value of those instruments, with limited exceptions. The proposed statement
would also affect the pattern in which  compensation  costs would be recognized,
the accounting for employee share purchase plans,  and the accounting for income
tax effects of share-based payment  transactions.  The Exposure Draft also notes
that the use of a lattice model,  such as the binomial  model,  to determine the
fair value of employee  stock  options,  is  preferable.  We  currently  use the
Black-Scholes  pricing model to determine  the fair value of its employee  stock
options.  Use of a lattice model to determine  the fair value of employee  stock
options may result in  compensation  costs  materially  different from those pro
forma costs disclosed in Note 3 to the consolidated  financial  information.  We
are currently  determining what impact the proposed  statement would have on its
results of operations or financial position.


                                       22
<PAGE>


CAUTIONARY STATEMENTS AND RISK FACTORS

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

         IF WE LOSE OUR LARGER CUSTOMERS OR THEY FAIL TO PURCHASE AT ANTICIPATED
LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.  Our results
of operations will depend to a significant extent upon the commercial success of
our larger  customers.  If these customers fail to purchase our trim products at
anticipated levels, or our relationship with these customers terminates,  it may
have an adverse affect on our results because:

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

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

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

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

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

         CONCENTRATION OF RECEIVABLES FROM OUR LARGER CUSTOMERS MAKES RECEIVABLE
BASED  FINANCING  DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGER  CUSTOMERS
FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY  AFFECTED.  Our business  relies
heavily on a relatively  small number of customers.  This  concentration  of our
business  reduces the amount we can borrow from our  lenders  under  receivables
based financing  agreements.  Under 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.  If we are unable to collect any large receivables due us,
our cash flow would be severely impacted.

         OUR  GROWTH  AND  OPERATING  RESULTS  COULD  BE  MATERIALLY,  ADVERSELY
EFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING
OUR RIGHTS  UNDER OUR  EXCLUSIVE  LICENSE AND  INTELLECTUAL  PROPERTY  AGREEMENT
("AGREEMENT")  WITH PRO-FIT  HOLDINGS.  Pursuant to our  Agreement  with Pro-Fit
Holdings  Limited,  we have  exclusive  rights in  certain  geographic  areas to
Pro-Fit's stretch and rigid waistband technology. By letter dated April 6, 2004,
Pro-Fit alleged various  breaches of the Agreement which we dispute.  To prevent
Pro-Fit in the future from  terminating the Agreement based on alleged  breaches
that we do not regard as meritorious,  we filed a lawsuit against Pro-Fit in the
U.S.  District Court for the Central  District of  California,  based on various
contractual and tort claims seeking  declaratory  relief,  injunctive relief and
damages.  Pro-Fit  filed an  answer  denying  the  material  allegations  of the
complaint and filed a counterclaim  alleging various contractual and tort claims
seeking  injunctive  relief and damages.  We filed a reply  denying the material
allegations of Pro-Fit's pleading.  Discovery in this case has not yet commenced
and no date has been set for  trial of this  matter.  There  have  been  ongoing
negotiations  with Pro-Fit to attempt to resolve  these  disputes.  We intend to
proceed  with the lawsuit if these  negotiations  are not  concluded in a manner
satisfactory to us.

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


                                       23
<PAGE>


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

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

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

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


                                       24
<PAGE>


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

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

         o        The timing and magnitude of customers' marketing campaigns;

         o        The loss or addition of a major customer;

         o        The availability and pricing of materials for our products;

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

         o        Currency fluctuations;

         o        Delays caused by third parties; and

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

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

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

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

         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.


                                       25
<PAGE>


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

         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention; and

         o        Natural disasters.

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

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

         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.


                                       26
<PAGE>


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

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

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

         o        Interest rates;

         o        Changes in accounting principles;

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

         o        Announcements of key developments by our competitors; and

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

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

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

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

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of  October  29,  2004,   our  officers  and  directors  and  their   affiliates
beneficially owned  approximately  15.0% of the outstanding shares of our common
stock.  The Dyne  family,  which  includes  Mark Dyne,  Colin Dyne,  Larry Dyne,
Jonathan   Burstein   and  the  estate  of  Harold  Dyne,   beneficially   owned
approximately 17.8% of the outstanding shares of our common stock at October 29,
2004.  Gerard Guez and Todd Kay,  significant  stockholders  of Tarrant  Apparel
Group, each own approximately 5.5% of the outstanding shares of our common stock
at October 29, 2004. As a result,  our officers and directors,  the Dyne family,
Gerard  Guez and Todd Kay are  able to  exert  considerable  influence  over the
outcome of any matters  submitted to a vote of the holders of our common  stock,
including  the  election of our Board of  Directors.  The voting  power of these
stockholders  could also discourage others from seeking to acquire control of us
through the purchase of our common  stock,  which might depress the price of our
common stock.


                                       27
<PAGE>


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

ITEM 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.  We are  exposed to
market risk for fluctuations in the foreign currency  exchange rates for certain
product purchases that are denominated in British Pounds. At September 30, 2004,
we purchased forward exchange contracts for British Pounds to hedge the payments
of product  purchases  through  December 2004. These contracts have an aggregate
notional amount of $814,000.  The market value of these  contracts  approximated
their  carrying  value at September  30, 2004.  The Company  intends to purchase
additional  contracts to hedge the British  Pound  exposure  for future  product
purchases.  Currency  fluctuations  can  increase  the price of our  products to
foreign  customers which can adversely impact the level of our export sales from
time to time.  The majority of our cash  equivalents  are held in United  States
bank  accounts and we do not believe we have  significant  market risk  exposure
with regard to our investments.

         We are also  exposed  to the  impact of  interest  rate  changes on our
outstanding borrowings.  At September 30 2004, we had approximately $7.1 million
of indebtedness  subject to interest rate  fluctuations.  These fluctuations may
increase our interest expense and decrease our cash flows from time to time. For
example,  based on average bank  borrowings of $10 million  during a three-month
period, if the interest rate indices on which our bank borrowing rates are based
were to increase 100 basis points in the three-month  period,  interest incurred
would increase and cash flows would decrease by $25,000.


                                       28
<PAGE>


ITEM 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.

         Members of the Company's  management,  including  the  Company's  Chief
Executive Officer, Colin Dyne, and Chief Financial Officer, Ronda Ferguson, have
evaluated  the  effectiveness  of the  design  and  operation  of the  Company's
disclosure  controls and  procedures  as of September  30, 2004,  the end of the
period  covered by this  report.  Based upon that  evaluation,  Mr. Dyne and Ms.
Ferguson  concluded  that the Company's  disclosure  controls and procedures are
effective in causing material information to be recorded, processed,  summarized
and reported by  management  of the Company on a timely basis and to ensure that
the quality and timeliness of the Company's public disclosures complies with its
SEC disclosure obligations.

         Disclosure  controls and  procedures,  no matter how well  designed and
implemented,  can provide  only  reasonable  assurance  of achieving an entity's
disclosure  objectives.  The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal  control can occur  because of human  failures such as simple errors or
mistakes or intentional circumvention of the established process.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

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


                                       29
<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 6.  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.


                                       30
<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.


Dated:   November 15, 2004               TAG-IT PACIFIC, INC.

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


                                       31