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                                  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 March 31, 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) filed all reports required to
be filed by Section 13 or 15(d) of the  Exchange  Act  during the  preceding  12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.                         Yes [X]    No [_]


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

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest  practicable  date:  Common Stock, par
value $0.001 per share,  18,053,316  shares issued and outstanding as of May 15,
2004.



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<PAGE>


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



PART I    FINANCIAL INFORMATION                                             PAGE
                                                                            ----

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

          Consolidated Balance Sheets as of March 31, 2004
          (unaudited) and December 31, 2003....................................3

          Consolidated Statements of Operations (unaudited)
          for the Three Months Ended March 31, 2004 and 2003...................4

          Consolidated Statements of Cash Flows (unaudited) for the
          Three Months Ended March 31, 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.................................10

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........25

Item 4.   Controls and Procedures.............................................26

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings...................................................26

Item 2.   Changes in Securities and Use of Proceeds...........................26

Item 4.   Submission of Matters to a Vote of Security Holders.................27

Item 6.   Exhibits and Reports on Form 8-K....................................27


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS.

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

<CAPTION>
                                                        MARCH 31,     DECEMBER 31,
                                                          2004             2003
                                                      ------------    ------------
                                                      (unaudited)
<S>                                                   <C>             <C>
                   ASSETS
Current Assets:
   Cash and cash equivalents ......................   $  7,106,130    $ 14,442,769
   Due from factor ................................          8,963           9,743
   Trade accounts receivable, net .................     10,324,965       7,531,079
   Trade accounts receivable, related parties .....     10,901,949      11,721,465
   Inventories ....................................     18,800,461      17,096,879
   Prepaid expenses and other current assets ......      1,193,729       2,124,366
   Deferred income taxes ..........................      2,800,000       2,800,000
                                                      ------------    ------------
     Total current assets .........................     51,136,197      55,726,301

Property and equipment, net of accumulated
   depreciation and amortization ..................      6,093,255       6,144,863
Tradename .........................................      4,110,750       4,110,750
Goodwill ..........................................        450,000         450,000
License rights ....................................        367,500         375,375
Due from related parties ..........................        775,290         762,076
Other assets ......................................        127,254         200,949
                                                      ------------    ------------
Total assets ......................................   $ 63,060,246    $ 67,770,314
                                                      ============    ============

    LIABILITIES, CONVERTIBLE REDEEMABLE
  PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Line of credit .................................   $  4,686,461    $  7,095,514
   Accounts payable and accrued expenses ..........      7,381,488       9,552,196
   Subordinated notes payable to related parties ..        849,971         849,971
   Current portion of capital lease obligations ...        560,402         562,742
   Current portion of subordinated note payable ...      1,500,000       1,200,000
                                                      ------------    ------------
     Total current liabilities ....................     14,978,322      19,260,423

Capital lease obligations, less current portion ...        510,111         651,191
Subordinated note payable, less current portion ...        800,000       1,400,000
                                                      ------------    ------------
     Total liabilities ............................     16,288,433      21,311,614
                                                      ------------    ------------

Convertible redeemable preferred stock Series C,
   $0.001 par value; 759,494 shares authorized;
   no shares issued and outstanding at March 31,
   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 March 31,
     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; 18,035,316 shares issued
     and outstanding at March 31, 2004; 11,508,201
     at December 31, 2003 .........................         18,037          11,510
   Additional paid-in capital .....................     50,593,171      23,890,356
   Accumulated Deficit ............................     (3,839,395)     (3,256,860)
                                                      ------------    ------------
Total stockholders' equity ........................     46,771,813      43,563,699
                                                      ------------    ------------
Total liabilities, convertible redeemable
   preferred stock and stockholders' equity .......   $ 63,060,246    $ 67,770,314
                                                      ============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>


                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                    THREE MONTHS ENDED MARCH 31,
                                                  ------------------------------
                                                      2004              2003
                                                  ------------      ------------

Net sales ...................................     $ 10,160,298      $ 14,358,833
Cost of goods sold ..........................        7,168,248        10,059,252
                                                  ------------      ------------
     Gross profit ...........................        2,992,050         4,299,581

Selling expenses ............................          772,116           829,144
General and administrative expenses .........        2,857,140         2,698,504
                                                  ------------      ------------
     Total operating expenses ...............        3,629,256         3,527,648

(Loss) income from operations ...............         (637,206)          771,933
Interest expense, net .......................          186,719           320,848
                                                  ------------      ------------
(Loss) income before income taxes ...........         (823,925)          451,085
(Benefit) provision for income taxes ........         (271,895)           90,217
                                                  ------------      ------------
     Net (loss) income ......................     $   (552,030)     $    360,868
                                                  ============      ============
Less:  Preferred stock dividends ............           30,505            47,100
                                                  ------------      ------------
Net (loss) income available to common
  shareholders ..............................     $   (582,535)     $    313,768
                                                  ============      ============

Basic (loss) earnings per share .............     $      (0.04)     $       0.03
                                                  ============      ============
Diluted (loss) earnings per share ...........     $      (0.04)     $       0.03
                                                  ============      ============

Weighted average number of common shares
  outstanding:
     Basic ..................................       14,921,591         9,423,242
                                                  ============      ============
     Diluted ................................       14,921,591         9,686,457
                                                  ============      ============


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<CAPTION>
                                                      THREE MONTHS ENDED MARCH 31,
                                                      ----------------------------
                                                          2004            2003
                                                      ------------    ------------
<S>                                                   <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net (loss) income .............................   $   (552,030)   $    360,868
Adjustments to reconcile net (loss) income to net
  cash (used) provided by operating activities:
   Depreciation and amortization ..................        377,580         308,364
   Increase in allowance for doubtful accounts ....         75,000          94,965
   Stock issued for services ......................         74,825            --
Changes in operating assets and liabilities:
      Receivables, including related parties ......     (2,048,590)       (249,213)
      Inventories .................................     (1,703,582)     (1,527,450)
      Other assets ................................          3,162          (2,592)
      Prepaid expenses and other current assets ...        930,637        (283,948)
      Accounts payable and accrued expenses .......     (1,308,107)      2,247,601
      Income taxes payable ........................       (433,738)        298,879
                                                      ------------    ------------
Net cash (used) provided by operating activities ..     (4,584,843)      1,247,474
                                                      ------------    ------------

Cash flows from investing activities:
    Acquisition of property and equipment .........       (247,564)       (681,818)
                                                      ------------    ------------

Cash flows from financing activities:
    Repayment of bank line of credit, net .........     (2,409,053)       (778,575)
    Proceeds from private placement transactions ..           --           900,000
    Proceeds from exercise of stock options and
      warrants ....................................        348,241            --
    Repayment of capital leases ...................       (143,420)        (17,984)
    Repayment of notes payable ....................       (300,000)       (800,000)
                                                      ------------    ------------
Net cash used by financing activities .............     (2,504,232)       (696,559)
                                                      ------------    ------------

Net decrease in cash ..............................     (7,336,639)       (130,903)
Cash at beginning of period .......................     14,442,769         285,464
                                                      ------------    ------------
Cash at end of period .............................   $  7,106,130    $    154,561
                                                      ============    ============

Supplemental  disclosures of cash flow information:
Cash received (paid) during the period for:
      Interest paid ...............................   $   (189,949)   $   (314,009)
      Income taxes paid ...........................   $   (170,016)   $     (2,566)
      Income taxes received .......................   $       --      $    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    $       --
</TABLE>


          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:

<TABLE>
<CAPTION>

THREE MONTHS ENDED MARCH 31, 2004:         (LOSS) INCOME        SHARES        PER SHARE
---------------------------------          -------------      ------------    ---------
<S>                                         <C>                <C>            <C>
Basic loss per share:
Loss available to common stockholders       $  (582,535)       14,921,591     $  (0.04)

Effect of Dilutive Securities:
Options                                                                -
Warrants                                                               -
                                            -----------       -----------     --------
Loss available to common stockholders       $  (582,535)       14,921,591     $  (0.04)
                                            ===========       ===========     ========

THREE MONTHS ENDED MARCH 31, 2003:
Basic earnings per share:
Income available to common stockholders     $   313,768         9,423,242     $   0.03

Effect of Dilutive Securities:
Options                                                           210,718
Warrants                                                           52,497
                                            -----------       -----------     --------
Income available to common stockholders     $   313,768         9,686,457     $   0.03
                                            ===========       ===========     ========
</TABLE>


         Warrants to purchase  1,236,219 shares of common stock at between $0.71
and $5.06, options to purchase 1,927,000 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 three months ended March 31, 2004, but were not included in
the computation of diluted  earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.


                                       6
<PAGE>


         Warrants to purchase  683,332  shares of common stock at between  $3.65
and $6.00,  options to purchase  925,000 shares of common stock at between $3.75
and  $4.63,  convertible  debt of  $500,000  convertible  at $4.50 per share and
759,494 shares of preferred  Series C stock  convertible at $4.94 per share were
outstanding  for the three months ended March 31, 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.

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 months  ended March 31, 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 (loss)  income and (loss)  earnings per share for the three months
ended  March 31,  2004 and 2003 would  have  amounted  to the pro forma  amounts
presented below:

                                                    THREE MONTHS ENDED MARCH 31,
                                                     --------------------------
                                                         2004           2003
                                                     -----------    -----------
Net (loss) income, as reported ...................   $  (552,030)   $   360,868

Add:  Stock-based employee compensation expense
     included in reported net (loss) 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 .........................       (39,556)        (5,282)
                                                     -----------    -----------
Pro forma net (loss) income ......................   $  (591,586)   $   355,586
                                                     ===========    ===========

(Loss) earnings per share:
     Basic - as reported .........................   $     (0.04)   $      0.03
     Basic - pro forma ...........................   $     (0.04)   $      0.03

     Diluted - as reported .......................   $     (0.04)   $      0.03
     Diluted - pro forma .........................   $     (0.04)   $      0.03


                                       7
<PAGE>


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.

         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.       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.


                                       8
<PAGE>


         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.

7.       NEW ACCOUNTING PRONOUNCEMENTS

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

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

         In April 2003,  the FASB issued SFAS No. 149,  "AMENDMENT  OF STATEMENT
133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES" ("FAS No. 149"). FAS No.
149 amends and  clarifies  the  accounting  guidance on  derivative  instruments
(including  certain  derivative  instruments  embedded in other  contracts)  and
hedging  activities  that fall within the scope of FAS No. 133,  "Accounting for
Derivative  Instruments and Hedging Activities." FAS No. 149 also amends certain
other existing pronouncements, which will result in more consistent reporting of
contracts  that are  derivatives  in their  entirety  or that  contain  embedded
derivatives  that warrant separate  accounting.  This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for  hedging  relationships  designated  after June 30,  2003.  The  Company
adopted this  Statement as of July 1, 2003 and it had no material  impact on its
financial statements.


                                       9
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

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

         This  discussion  summarizes  the  significant  factors  affecting  the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It  Pacific,  Inc.  for the three  months  ended March 31, 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 distributor  of
zippers under our TALON brand name and a distributor of stretch  waistbands that
utilize licensed patented technology.

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

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

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

         The 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.


                                       10
<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 and charged to
                  operations  in the period in which the facts that give rise to
                  the  adjustments  become known.  A substantial  portion of our
                  total inventories is subject to buyback  arrangements with our
                  customers. The buyback arrangements contain provisions related
                  to the  inventory we purchase  and  warehouse on behalf of our
                  customers.  In the event that  inventories  remain  with us in
                  excess of six to nine  months  from our  receipt  of the goods
                  from  our  vendors  or  the  termination  of  production  of a
                  customer's  product  line  related  to  the  inventories,  the
                  customer is required to purchase the inventories from us under
                  normal invoice and selling terms.  If the financial  condition
                  of a customer were to deteriorate,  resulting in an impairment
                  of  its  ability  to  purchase   inventories,   an  additional
                  adjustment  may be required.  These buyback  arrangements  are
                  considered in management's  estimate of future market value of
                  inventories.

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

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


                                       11
<PAGE>


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

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



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
                                                              MARCH 31,
                                                  -----------------------------
                                                      2004              2003
                                                  -----------       -----------
Net sales........................................      100.0 %           100.0 %
Cost of goods sold...............................       70.6              70.1
                                                  -----------       -----------
Gross profit.....................................       29.4              29.9
Selling expenses.................................        7.6               5.7
General and administrative expenses..............       28.1              18.8
                                                  -----------       -----------
Operating (loss) income..........................       (6.3)%             5.4 %
                                                  ===========       ===========


         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
                                                           MARCH 31,
                                                  -----------------------------
                                                     2004              2003
                                                  -----------       -----------
    United States...............................         8.2 %            12.3 %
    Asia                                                20.3              19.1
    Mexico......................................        36.0              44.7
    Dominican Republic..........................        21.3              23.9
    Central and South America...................        14.0                 -
    Other.......................................         0.2                 -
                                                  -----------       -----------
                                                       100.0 %           100.0 %
                                                  ===========       ===========


                                       12
<PAGE>


         Net sales decreased approximately  $4,199,000, or 29.2%, to $10,160,000
for the three months ended March 31, 2004 from  $14,359,000 for the three months
ended March 31, 2003.  The decrease in net sales was primarily due to a decrease
in trim-related sales of approximately  $6.1 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,  which  contributed  approximately  51.4% of  revenues  in the first
quarter of 2003. These customers  contributed  approximately 6.0% of revenues in
the first  quarter of 2004.  The  reduction of our  operations  in Mexico was in
response to an  anticipated  reduction  in sales  volume from our larger  Mexico
customers,  our efforts to decrease our reliance on our larger Mexico customers,
and our difficulty  obtaining  financing in Mexico due to the location of assets
outside  the U.S.  and  customer  concentration  and  other  limits  imposed  by
financial institutions.  The first quarter of 2004 was a transitional quarter as
we experienced the effects of  diversifying  our customer base. We are no longer
reliant on Tarrant Apparel Group for the majority of our sales.  The decrease in
net sales was offset by an increase in sales under our TEKFIT stretch  waistband
division. The decrease in net sales was also offset by an increase in sales from
our Hong Kong  subsidiary  for programs  related to major U.S.  retailers and an
increase in zipper sales under our TALON brand name in Asia.

         Gross  profit  decreased   approximately   $1,308,000,   or  30.4%,  to
$2,992,000  for the three  months ended March 31, 2004 from  $4,300,000  for the
three  months ended March 31,  2003.  Gross margin as a percentage  of net sales
decreased  to  approximately  29.4% for the three months ended March 31, 2004 as
compared to 29.9% for the three  months  ended March 31,  2003.  The decrease in
gross profit as a  percentage  of net sales for the three months ended March 31,
2004 was due to a change in our product mix during the current quarter.

         Selling expenses decreased  approximately $57,000, or 6.9%, to $772,000
for the three  months  ended March 31, 2004 from  $829,000  for the three months
ended March 31, 2003. As a percentage of net sales,  these expenses increased to
7.6% for the three  months  ended March 31, 2004  compared to 5.7% for the three
months ended March 31, 2003. The decrease in selling  expenses during the period
was due  primarily 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
$115,000 for the three months ended March 31, 2004  compared to $155,000 for the
three months ended March 31, 2003. We pay royalties of 6% on related sales of up
to $10 million,  4% of related sales from $10-20 million and 3% on related sales
in excess of $20 million. The majority of our sales force is on a non-commission
basis,  which  accounts for the increase in selling  expenses as a percentage of
net sales during the period ended March 31, 2004.

         General and administrative  expenses increased  approximately $158,000,
or 5.9%, to $2,857,000 for the three months ended March 31, 2004 from $2,699,000
for the three months ended March 31,  2003.  The increase in these  expenses was
due  primarily to a one-time  charge of  approximately  $400,000  related to the
final residual costs associated with our  restructuring  plan implemented in the
fourth quarter of 2003. This on-time charge was offset by a decrease in salaries
and related benefits 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 28.1% for the three  months ended March 31, 2004  compared to 18.8%
for the three months ended March 31, 2003, due to the decrease in net sales.

         Interest  expense  decreased   approximately  $134,000,  or  41.7%,  to
$187,000 for the three  months ended March 31, 2004 from  $321,000 for the three
months ended March 31, 2003.  Borrowings  under our UPS Capital credit  facility
decreased  during the period ended March 31, 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.


                                       13
<PAGE>


         The  income tax  benefit  for the three  months  ended  March 31,  2004
amounted to approximately  $272,000  compared to a provision for income taxes of
$90,000 for the three months ended March 31, 2003.  Income taxes  decreased  for
the three months ended March 31, 2004 primarily due to decreased taxable income.

         Net loss was  approximately  $552,000  for the three months ended March
31, 2004 as compared to net income of $361,000  for the three months ended March
31,  2003,  due  primarily to a decrease in net sales and an increase in general
and administrative expenses, as discussed above.

         Preferred  stock  dividends  amounted to $31,000  for the three  months
ended March 31, 2004 as compared to $47,000 for the three months ended March 31,
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 $583,000 for the three months ended
March 31,  2004  compared  to net income  available  to common  shareholders  of
$314,000 for the three  months ended March 31, 2003.  Basic and diluted loss per
share were $0.04 for the three months ended March 31, 2004 and basic and diluted
earnings per share were $0.03 for the three months ended March 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         Cash and cash  equivalents  decreased to  $7,106,000  at March 31, 2004
from $14,443,000 at December 31, 2003. The decrease resulted from  approximately
$4,585,000  of cash  used by  operating  activities,  $248,000  of cash  used in
investing activities and $2,504,000 of cash used in financing activities.

         Net cash used in operating activities was approximately  $4,585,000 for
the three  months  ended  March 31,  2004 as  compared  to net cash  provided by
operating  activities  of  approximately  $1,247,000  for the three months ended
March 31,  2003.  Cash used in operating  activities  for the three months ended
March 31,  2004  resulted  primarily  from  increased  accounts  receivable  and
inventories and decreased accounts payable and accrued expenses. The increase in
inventories during the period was due primarily to increased customer orders for
future  sales.  The  increase in accounts  receivable  during the period was due
primarily to slower customer collections.  Cash provided by operating activities
for the three months ended March 31, 2003 resulted  primarily  from increases in
accounts payable and accrued expenses,  which were partially offset by increases
in inventories and receivables.

         Net cash used in investing  activities was  approximately  $248,000 and
$682,000 for the three months ended March 31, 2004 and 2003,  respectively.  Net
cash used in  investing  activities  for the three  months  ended March 31, 2004
consisted  primarily  of capital  expenditures  for computer  equipment  and the
purchase  of  additional  TALON  zipper  equipment.  Net cash used in  investing
activities  for the three  months  ended March 31, 2003  consisted  primarily of
capital  expenditures for equipment related to the exclusive supply agreement we
entered into with Levi Strauss & Co.


                                       14
<PAGE>


         Net cash used in financing activities was approximately  $2,504,000 and
$697,000 for the three months ended March 31, 2004 and 2003,  respectively.  Net
cash used in  financing  activities  for the three  months  ended March 31, 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.  Net cash provided by financing  activities  for the three
months ended March 31, 2003 primarily reflects the repayment of borrowings under
our credit facility and subordinated notes payable,  offset by funds raised from
a private placement transaction.

         We currently satisfy our working capital requirements primarily through
cash flows generated from operations,  sales of equity securities and borrowings
under our credit facility with UPS Capital.  Our maximum  availability under the
credit  facility  is $7  million.  At  March  31,  2004  and  2003,  outstanding
borrowings  under our UPS Capital credit  facility,  including  amounts borrowed
under our foreign factoring agreement,  amounted to approximately $4,686,000 and
$15,250,000,  respectively.  Open letters of credit under our UPS Capital credit
facility  amounted to approximately  $110,000 and $500,000 at March 31, 2004 and
2003.

         The initial  term of our  agreement  with UPS  Capital is three  years,
expiring May 30, 2004, and the facility is secured by  substantially  all of our
assets. The interest rate of the credit facility is at the prime rate plus 2% on
advances and the prime rate plus 4% on the term loan. On November 17, 2003,  the
credit facility was amended to provide for a term loan of $6 million in addition
to the revolving credit facility with a maximum  availability of $7 million. The
term loan  provided  for monthly  payments  beginning  December 15, 2003 through
March 1, 2004 and has been paid in full as of March 31,  2004.  On May 14, 2004,
the credit  facility  was  further  amended to provide  for an  additional  term
expiring  August 28, 2004 and an increased  interest rate of prime plus 2.75% on
advances.   We  are  currently  pursuing   alternative  working  capital  credit
arrangements to replace the UPS Capital credit facility upon its expiration.

         The credit  facility  requires  that we comply with  certain  financial
covenants including net worth, fixed charge ratio and capital  expenditures.  We
were not in compliance  with one of the  financial  covenants at March 31, 2004.
The non-compliance was subsequently waived by the bank. The amount we can borrow
under the  credit  facility  is  determined  based on a defined  borrowing  base
formula related to eligible accounts  receivable and inventories.  Our borrowing
base  availability  ranged from  approximately  $3,434,000  to  $4,560,000  from
January 1, 2004 to March 31, 2004. A significant  decrease in eligible  accounts
receivable and inventories due to customer concentration levels and the aging of
inventories,  among other  factors,  can have an adverse effect on our borrowing
capabilities under our credit facility, which thereafter, may not be adequate to
satisfy our working  capital  requirements.  Eligible  accounts  receivable  are
reduced if our accounts  receivable  customer  balances are concentrated  with a
particular  customer in excess of the  percentages  allowed  under our agreement
with  UPS  Capital.  In  addition,   we  have  typically   experienced  seasonal
fluctuations in sales volume. These seasonal fluctuations result in sales volume
decreases  in the first and  fourth  quarters  of each year due to the  seasonal
fluctuations  experienced  by  the  majority  of  our  customers.  During  these
quarters,  borrowing  availability  under our credit  facility may decrease as a
result of decreases in eligible accounts  receivables  generated from our sales.
If our business becomes  dependent on one or a limited number of customers or if
we  experience  future  significant  seasonal  reductions  in  receivables,  our
availability  under the UPS Capital  credit  facility  would be  correspondingly
reduced.  If this  were to  occur,  we  would  be  required  to seek  additional
financing which may not be available on attractive  terms and, if such financing
is unavailable, we may be unable to meet our working capital requirements.


                                       15
<PAGE>


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

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible  accounts  receivable under our credit  facility.  Included in due from
factor as of March  31,  2004 and 2003 are trade  accounts  receivable  factored
without  recourse of  approximately  $60,000 and $399,000.  Included in due from
factor  are  outstanding  advances  due  to UPS  Capital  under  this  factoring
arrangement  amounting to  approximately  $51,000 and $339,000 at March 31, 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 March 31,  2004 and 2003,  the amount  factored  with
recourse and included in trade accounts  receivable was  approximately  $375,000
and  $257,000.  Outstanding  advances as of March 31, 2004 and 2003  amounted to
approximately  $164,000  and  $185,000  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  credit  facility may not provide the level of financing we may need
to expand into additional  foreign  markets.  As a result,  we are continuing to
evaluate non-traditional financing of our foreign assets.

         Our trade  receivables  increased to $21,227,000 at March 31, 2004 from
$20,515,000  at March 31, 2003.  This  increase  was due  primarily to increased
non-related  party  receivables of  approximately  $3.2 million due to increased
sales  to  non-related  party  customers.  The  increase  in  non-related  party
receivables  was offset by a decrease  in related  party  trade  receivables  of
approximately  $2.5 million  resulting from decreased  sales to related  parties
during the period, offset by slower collections.

         Our net deferred tax asset  increased to  $2,800,000  at March 31, 2004
from  $91,000 at March 31,  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.

         We believe that our existing cash and cash  equivalents and anticipated
cash  flows  from our  operating  activities  and  available  financing  will be
sufficient to fund our minimum working capital and capital expenditure needs for
at least the next twelve months. We expect to receive quarterly cash payments of
a minimum of $1.25  million under our supply  agreement  with Levi Strauss & Co.
through August 2004. The extent of our future capital  requirements  will depend
on many  factors,  including  our results of  operations,  future demand for our
products,  the size and  timing  of  future  acquisitions,  our  borrowing  base
availability limitations related to eligible accounts receivable and inventories
and our  expansion  into  foreign  markets.  Our need for  additional  long-term
financing  includes the  integration  and expansion of our operations to exploit
our rights under our TALON trade name, the expansion of our


                                       16
<PAGE>


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 March 31, 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         $  2,300,000   $   1,500,000   $    800,000    $       --   $     --
Capital lease obligations         $  1,070,513   $     560,402   $    510,111    $       --   $     --
Subordinated notes payable to
related parties (1)               $    849,971   $     849,971   $         --    $       --   $     --
Operating leases                  $  1,397,627   $     635,925   $    761,702    $       --   $     --
Line of credit                    $  4,686,461   $   4,686,461   $         --    $       --   $     --
Note payable                      $     25,200   $      25,200   $         --    $       --   $     --
Royalty Payments                  $    369,315   $          --   $    369,315    $       --   $     --
-------------------------------------------------------------------------------------------------------
<FN>
(1)      The majority of  subordinated  notes payable to related parties are due
         on demand  with the  remainder  due and  payable on the  fifteenth  day
         following the date of delivery of written demand for payment.
</FN>
</TABLE>

         As of March 31, 2003, we indirectly  guaranteed the indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment  totaling $3.3 million.  Financing costs due to the
related party amounted to approximately  $328,000. The letters of credit expired
on various dates through July 2003. There were no outstanding  letters of credit
at March 31, 2004.

         At March 31,  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.


                                       17
<PAGE>


RELATED PARTY TRANSACTIONS

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

         We  have  entered  into  an  exclusive  supply  agreement  with  Azteca
Production  International,   Inc.,  AZT  International  SA  D  RL  and  Commerce
Investment  Group,  LLC.  Pursuant  to this  supply  agreement,  we provide  all
trim-related  products for certain  programs  manufactured by Azteca  Production
International.  In accordance  with the supply  agreement,  we issued  1,000,000
shares of our common stock to Commerce Investment Group, LLC.

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

         Sales under our supply agreements with Azteca Production  International
and Tarrant Apparel Group, and their affiliates, amounted to approximately 40.2%
and  69.7% of our  total  sales  for the  years  ended  December  2003 and 2002,
respectively,  and 6.0% and 51.4% of our total sales for the three  months ended
March 31, 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 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, related parties at March 31, 2004 and 2003 and December 31, 2003, is
approximately  $10.9, $13.4 and $11.7 million due from Tarrant Apparel Group and
Azteca  Production  International,  and their  affiliates.  As of May 12,  2004,
outstanding  receivables  due from Tarrant  Apparel Group and Azteca  Production
International, and their affiliates, amounted to $10.7.

         Included  in  inventories   at  March  31,  2004  are   inventories  of
approximately $6.8 million that are subject to buyback arrangements with Tarrant
Apparel  Group,   Azteca  Production   International  and  others.  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 three months  ended March 31, 2004 and 2003,  we
sold  approximately  $100,000 and $700,000 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.


                                       18
<PAGE>


         As of March 31, 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.  On
October 4, 2002, we entered into a note payable  agreement  with a related party
in the amount of $500,000 to fund additional working capital  requirements.  The
note  payable  was  unsecured,  due on demand,  accrued  interest  at 4% and was
subordinated to UPS Capital. This note was re-paid on February 28, 2003.

NEW ACCOUNTING PRONOUNCEMENTS

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

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

         In April 2003,  the FASB issued SFAS No. 149,  "AMENDMENT  OF STATEMENT
133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES" ("FAS No. 149"). FAS No.
149 amends and  clarifies  the  accounting  guidance on  derivative  instruments
(including  certain  derivative  instruments  embedded in other  contracts)  and
hedging  activities  that fall within the scope of FAS No. 133,  "Accounting for
Derivative  Instruments and Hedging Activities." FAS No. 149 also amends certain
other existing pronouncements, which will result in more consistent reporting of
contracts  that are  derivatives  in their  entirety  or that  contain  embedded
derivatives  that warrant separate  accounting.  This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging  relationships  designated  after June 30, 2003. We adopted this
Statement  as of July 1, 2003 and it had no  material  impact  on our  financial
statements.


                                       19
<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.  Representatives of Pro-Fit and our representatives have met to resolve
the  dispute.  We and  Pro-Fit  have  mutually  expressed  general  terms  to be
incorporated into an amendment to the Agreement to resolve the dispute. On April
30, 2004 we signed a letter  agreement  with Pro-Fit  continuing  discussions to
resolve the dispute  assuring  that no party takes any act to disturb the status
quo and the existence and enforceability of the Agreement while discussions were
ongoing to conclude an  amendment to the  Agreement.  The parties have agreed in
writing to conclude  and execute an agreement  during the month of May 2004.  We
intend to proceed with the lawsuit if these  negotiations are not concluded in a
manner satisfactory to us.


                                       20
<PAGE>


         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.

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

         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.


                                       21
<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.


                                       22
<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.


                                       23
<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 March 1, 2004, our officers and directors and their  affiliates  beneficially
owned  approximately  19.1% of the outstanding  shares of our common stock.  The
Dyne family, which includes Mark Dyne, Colin Dyne, Larry Dyne, Jonathan Burstein
and the estate of Harold Dyne,  beneficially  owned  approximately  21.2% of the
outstanding  shares of our common  stock at March 1, 2004.  The number of shares
beneficially  owned by the Dyne family  includes the shares of common stock held
by Azteca Production International,  which are voted by Colin Dyne pursuant to a
voting  agreement.   The  Azteca  Production   International  shares  constitute
approximately  3.3% of the outstanding  shares of common stock at March 1, 2004.
Gerard Guez and Todd Kay, significant stockholders of Tarrant Apparel Group, own
approximately  5.6% of the  outstanding  shares of our common  stock at March 1,
2004. As a result, our officers and directors,  the Dyne family, Gerard Guez and
Todd Kay are able to  exert  considerable  influence  over  the  outcome  of any
matters  submitted to a vote of the holders of our common  stock,  including the
election of our Board of Directors. The voting


                                       24
<PAGE>


power of these stockholders could also discourage others from seeking to acquire
control of us through the purchase of our common stock,  which might depress the
price of our common stock.

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

ITEM 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 March 31, 2004, we
purchased forward exchange contracts for British Pounds to hedge the payments of
product  purchases  through June 30,  2004.  These  contracts  have an aggregate
notional amount of $565,000.  The market value of these  contracts  approximated
their  carrying  value at March  31,  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 March 31 2004, we had approximately $7.8 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.


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<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 March 31, 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.

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.



                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

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

ITEM 2.  CHANGES IN SECURITIES,  USE OF PROCEEDS AND ISSUER  PURCHASES OF EQUITY
         SECURITIES.

         On  December  18,  2003,  we sold an  aggregate  of  572,818  shares of
non-voting Series D Convertible Preferred Stock, at a price of $44.00 per share,
to  institutional  investors and  individual  accredited  investors in a private
placement transaction. We received net proceeds of $23,083,693 after commissions
and other offering expenses.  Each share of Series D Convertible Preferred Stock
was automatically  converted into 10 shares of common stock, for an aggregate of
5,728,180  shares of common stock,  following  approval of the conversion by our
stockholders  at a special meeting held on February 11, 2004. We have registered
the common shares issued upon  conversion of the Series D Convertible  Preferred
Stock with the Securities  and Exchange  Commission for resale by the investors.
In  conjunction  with the  private  placement  transaction,  we  issued  572,818
warrants to the placement agent. The warrants are exercisable beginning June 18,
2004 through December 18, 2008 and have a per share exercise price of $4.74.


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<PAGE>


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

         At Special  Meeting of  Stockholders  held on February  11,  2004,  our
stockholders  approved the issuance of 5,728,180 shares of common stock issuable
upon  conversion of the outstanding  shares of Series D Preferred  Stock. At the
special  meeting,  8,797,569  shares were voted in favor of,  88,450 shares were
voted  against,  and 200 shares  abstained  from  voting on the  approval of the
issuance of 5,728,180  shares of common stock  issuable  upon  conversion of the
outstanding  shares of Series D Preferred Stock.  There were no broker non-votes
at the special meeting.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

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

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

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

         (b)      Reports on Form 8-K:

                  Current Report on Form 8-K dated February 11, 2004,  reporting
                  Item 5, as filed on February 13, 2004.

                  Current  Report on Form 8-K dated  March 30,  2004,  reporting
                  Items 7 and 12, as filed on March 30, 2004.


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<PAGE>


                                   SIGNATURES

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





Dated:   May 17, 2004                    TAG-IT PACIFIC, INC.

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


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