<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-QSB

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934.
                For the quarterly period ended March 31, 1998.

                                       OR

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

                        Commission file number 1-13669

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

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

                            3820 SOUTH HILL STREET
                         LOS ANGELES, CALIFORNIA 90037
                   (Address of Principal Executive Offices)

                                (213) 234-9606
                          (Issuer's Telephone Number)

     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        No  X
                                   ---       ---

     State 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, 4,070,011 shares issued and outstanding as of May 4, 1998.

Transitional Small Business Disclosure Format (check one):

                               Yes        No  X
                                   ---       ---

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<PAGE>


=============================================================================== 
                              TAG-IT PACIFIC, INC.
                              INDEX TO FORM 10-QSB

<TABLE>
<CAPTION>
PART I    FINANCIAL INFORMATION                                        PAGE
                                                                       ----
<S>       <C>                                                          <C>

Item 1.   Condensed Financial Statements:

          Condensed Consolidated Balance Sheets (unaudited) as
            of March 31, 1998 and December 31, 1997..................    3

          Condensed Consolidated Statements of Operations
            (unaudited) for the Three Months Ended March 31,
            1998 and 1997............................................    4

          Condensed Consolidated Statements of Cash Flows
            (unaudited) for the Three Months Ended March 31,
            1998 and 1997............................................    5

          Notes to Condensed Consolidated Financial Statements.......    6

Item 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations......................    8

PART II   OTHER INFORMATION

Item 2    Changes in Securities and Use of Proceeds..................   17

Item 5    Other Information..........................................   18

Item 6    Exhibits and Reports on Form 8-K...........................   18
</TABLE>

                                       2
<PAGE>
 
                                    PART I
                             FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.

                             TAG-IT PACIFIC, INC.
                     Condensed Consolidated Balance Sheets
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                                  March 31,      December 31,
     Assets                                                                                         1998              1997
                                                                                                 -----------     ------------
<S>                                                                                              <C>             <C>
Current Assets:
   Cash.................................................................................         $   736,593      $    44,109
   Due from factor, net.................................................................             762,884                -
   Accounts receivable, trade...........................................................           2,063,848        3,017,391
   Due from related parties.............................................................             146,735          138,418
   Inventories..........................................................................           2,576,502        2,331,131
   Prepaid expenses and other current assets............................................             493,141          273,468
                                                                                                 -----------      -----------
   Total current assets.................................................................           6,779,703        5,804,517

Property and Equipment (net of accumulated                                                         1,015,183          974,309
   Depreciation and amortization).......................................................

Other assets............................................................................             103,002          392,238
                                                                                                 -----------      -----------
Total Assets............................................................................         $ 7,897,888      $ 7,171,064
                                                                                                 ===========      ===========

                    Liabilities and Stockholders' Equity (Deficiency)

Current Liabilities:
   Bank overdrafts......................................................................         $         -      $   306,565
   Due to factor, net...................................................................                   -        1,404,133
   Accounts payable.....................................................................           2,205,848        3,977,568
   Accrued expenses.....................................................................             723,993          628,086
   Current portion of long-term debt....................................................             143,050          463,708
   Current portion notes payable to related parties.....................................           1,271,285          277,003
                                                                                                 -----------      -----------
     Total current liabilities..........................................................           4,344,176        7,057,063

Long-term debt, less current portion....................................................              29,811           55,315
Notes payable to related parties, less current portion..................................                   -        1,249,698
                                                                                                 -----------      -----------
Total Liabilities.......................................................................           4,373,987        8,362,076
                                                                                                 -----------      -----------

Commitments and Contingencies (Note 4)

Stockholders' Equity (Deficiency):
   Preferred stock......................................................................                   -                -
   Common stock.........................................................................               4,070            2,470
   Additional paid-in capital...........................................................           5,741,106          957,530
   Accumulated deficit..................................................................          (2,221,275)      (2,151,012)
                                                                                                 -----------      -----------
     Total Stockholders' Equity (Deficiency)............................................           3,523,901       (1,191,012)
                                                                                                 -----------      -----------
Total Liabilities and Stockholders' Equity (Deficiency).................................         $ 7,897,888      $ 7,171,064
                                                                                                 ===========      ===========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                             TAG-IT PACIFIC, INC.
                Condensed Consolidated Statements of Operations
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended
                                                                                          March 31,
                                                                                --------------------------------
                                                                                   1998                 1997
                                                                                -----------          -----------
<S>                                                                             <C>                  <C>
Net sales.............................................................          $ 3,467,713          $ 4,251,048 
Cost of goods sold....................................................            2,253,268            2,671,147
                                                                                -----------          -----------
 Gross profit.........................................................            1,214,445            1,579,901
                                                                                                     
Selling expenses......................................................              207,870              410,645
General and administrative expenses...................................              984,358              848,811
Write-off of printing division........................................                    0              116,000
                                                                                -----------          -----------
 Total operating expenses.............................................            1,192,228            1,375,456
                                                                                                     
Income (loss) from operations.........................................               22,217              204,445
Interest expense......................................................              105,604              194,346
                                                                                -----------          -----------
Income (loss) before income taxes.....................................              (83,387)              10,099
Provision for Income Taxes............................................              (13,124)              57,000
                                                                                -----------          -----------
 Net Income (Loss)....................................................          $   (70,263)         $   (46,901)
                                                                                ===========          ===========
 
Basic earnings per share..............................................          $     (0.02)         $     (0.02)
                                                                                ===========          ===========
Diluted earnings per share............................................          $     (0.02)         $     (0.02)
                                                                                ===========          ===========
</TABLE>

                                       *

    See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                              TAG-IT PACIFIC, INC.
                Condensed Consolidated Statements of Cash Flows
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended
                                                                                          March 31,
                                                                                --------------------------------
                                                                                   1998                 1997
                                                                                -----------          -----------
<S>                                                                             <C>                  <C>
Increase (decrease) in cash
Cash flows from operating activities:
   Net income (loss).................................................           $   (70,263)         $   (46,901)
   Adjustments to reconcile net income (loss) to net cash            
    used in operating activities:                                    
      Depreciation...................................................                94,893               63,121
      Changes in operating assets and liabilities:                   
       Accounts receivable...........................................               190,659             (211,500)
       Inventories...................................................              (245,370)             116,029
       Other assets..................................................               289,236             (164,087)
       Prepaid expenses and other current assets.....................              (219,672)             293,768
       Accounts payable..............................................            (1,771,720)             215,816
       Accrued expenses..............................................                95,907              253,101
                                                                                -----------          -----------
   Net cash provided (used in) operating activities..................            (1,636,331)             519,249
                                                                     
Cash Flows From Investing Activities:                                
  Loans to related parties...........................................                (8,317)             (81,193)
  Acquisition of property and equipment..............................              (135,768)             (58,861)
                                                                                -----------          -----------
  Net cash used in investing activities..............................              (144,085)            (140,054)
                                                                     
Cash Flows from Financing Activities:                                
  Bank overdraft.....................................................              (306,565)            (247,475)
  Net advances from factor...........................................            (1,404,133)            (284,163)
  Proceeds from IPO, net.............................................             4,785,176                   -
  Proceeds from long-term debt.......................................              (346,162)            (209,736)
  Proceeds from notes payable to related parties.....................              (255,416)             474,575
                                                                                -----------          -----------
Net cash provided (used in) financing activities.....................             2,472,900             (266,799)
                                                                                -----------          -----------
                                                                     
Net increase (decrease) in cash......................................               692,484              112,396
Cash at beginning of period..........................................                44,109                5,057
                                                                                -----------          -----------
Cash at end of period................................................           $   736,593          $   117,453
                                                                                ===========          ===========
                                                                     
 Supplemental Disclosures of Cash Flow Information:                  
   Cash paid during the period for:                                  
     Interest........................................................           $   105,604          $   194,346
     Income taxes....................................................           $     3,270          $     7,418
   Non-cash financing activity:                                                                       
     Note payable converted to equity................................           $         0          $         0
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                              TAG-IT PACIFIC, INC.
            Notes to the Condensed Consolidated Financial Statements
                                  (unaudited)


   1.  PRESENTATION OF INTERIM INFORMATION

        In the opinion of the management of Tag-It Pacific, Inc. and
   Subsidiaries (collectively, the "Company"), the accompanying unaudited
   condensed consolidated financial statements include all normal adjustments
   considered necessary to present fairly the financial position as of March 31,
   1998, and the results of operation and cash flows for the three months ended
   March 31, 1998 and 1997.  Interim results are not necessarily indicative of
   results for a full year.

        The condensed consolidated financial statements and notes are presented
   as permitted by Form 10-QSB, and do not contain certain information included
   in the Company's audited consolidated financial statements and notes for the
   year ended August 31, 1997.

   2.  NEW ACCOUNTING PRONOUNCEMENTS

        In 1997, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 129, "Disclosure of Information about
   Capital Structure" ("Statement 129"), which is effective for financial
   statements ending after December 15, 1997.  Statement 129 reinstates various
   securities disclosure requirements previously in effect under Accounting
   Principles Board Opinion No. 15, which has been superseded by Statement 128.
   The Company does not expect adoption of Statement 129 to have a material
   effect, if any, on its consolidated financial position or results of
   operation.

        During June 1997, the Financial Accounting Standards Board issued
   Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
   Income" ("Statement 130"), which is effective for financial statements with
   fiscal years beginning after December 15, 1997.  Statement 130 establishes
   standards for reporting and display of comprehensive income and its
   components in a full set of general purpose financial statements.  The
   Company has not determined the effect on its consolidated financial position
   or results of operations, if any, from the adoption of this statement.

        During June 1997, the Financial Accounting Standards Board issued
   Statement of Financial Accounting Standards No. 131, "Disclosure about
   Segments of an Enterprise and Related Information" ("Statement 131"), which
   is effective for financial statements with fiscal years beginning after
   December 15, 1997.  The new standard requires that public business
   enterprises report certain information about operating segments in complete
   sets of financial statements of the enterprise and in condensed financial
   statements of interim periods issued to stockholders.  It also requires that
   public business enterprises report certain information about their products
   and services, the geographic areas in which they operate and their major
   customers.  The Company does not expect adoption of Statement 131 to have a
   material effect, if any, on its consolidated results of operation.

   3.  EARNINGS PER SHARE

        The Company has adopted Financial Accounting Standards Board issued
   Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
   ("Statement 128"), which is effective for financial statements issued for the
   periods after December 15, 1997, including interim periods.  Statement 128
   requires the restatement of all prior period earnings per share ("EPS") data
   presented.

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

                                       6
<PAGE>
 
<TABLE>
<CAPTION>
                                                                      INCOME                SHARES           PER SHARE
                                                                    (NUMERATOR)          (DENOMINATOR)         AMOUNT
                                                                  ---------------       ----------------    -------------
FOR THE THREE MONTHS ENDED MARCH 31, 1998:
------------------------------------------
<S>                                                               <C>                   <C>                 <C>
BASIC EARNINGS PER SHARE:

Income available to common stockholders......................         $(70,263)             3,661,122           $(0.02)

EFFECT OF DILUTIVE SECURITIES:

Options......................................................                                  41,910

Warrants.....................................................                                  60,808

Shares Issued................................................                                       -
                                                                  ---------------       ----------------    -------------
Income available to common stockholders......................         $(70,263)             3,763,840           $(0.02)
</TABLE>

        For the three months ended March 31, 1997 basic and diluted earning per
share are the same amount based on weighted average shares of 2,085,609.
Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00 and
$4.80 were outstanding for the three months ended March 31, 1998 but were not
included in the computations of diluted earnings per share because the effect of
exercise would have an antidilutive effect on earnings per share.

        On January 23, 1998 the Company completed its initial public offering
(the "IPO") and issued 1,600,000 shares of common stock at price of $4.00 per
share. In conjunction with the IPO the Company issued options to directors to
purchase 65,000 shares of common stock at $3.20, warrants to legal counsel to
purchase 35,555 shares of common stock at $3.60, warrants to underwriters to
purchase 110,000 shares of common stock at $4.80, and warrants in connection
with bridge financing to purchase 80,000 shares of common stock at $6.00.

   4.  CONTINGENCIES

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

                                       7
<PAGE>
 
ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Tag-It Pacific, Inc. (the "Company") is a single-source provider of
   complete brand identity programs to manufacturers of fashion apparel and
   accessories as well as specialty retailers and mass merchandisers. Such
   programs communicate a certain lifestyle, image or identity and enable the
   Company's customers to promote and differentiate their product line or brand.
   The Company also designs and produces high-quality paper, metal and injection
   molded boxes, woven and leather labels, paper-hanging and bar-coded tags,
   metal jean buttons, and custom shopping bags. In addition, the Company
   designs and produces specialty private label and licensed stationery as well
   as related accessories and backpacks.

        The Company is the parent holding company of Tag-It, Inc., a California
   corporation, Tag-It Printing & Packaging Ltd., a BVI corporation, Tagit de
   Mexico, SA de CV, A.G.S. Stationery, Inc., a California corporation ("AGS
   Stationery") and Pacific Trim & Belt, Inc., a California corporation
   (collectively, the "Subsidiaries"), all of which were consolidated under a
   parent limited liability company on October 17, 1997 (the "Consolidation")
   and became wholly-owned subsidiaries of the Company immediately prior to the
   effective date of the Company's initial public offering in January 1998 (the
   "Offering").

        The following discussion and analysis, which should be read in
   connection with the Company's Financial Statements and accompanying
   footnotes, contain forward-looking statements that involve risks and
   uncertainties. Important factors that could cause actual results to differ
   materially from the Company's expectations are set forth in "Factors That May
   Affect Future Results" below as well as those discussed elsewhere in this
   Form 10-QSB. All subsequent written or oral forward-looking statements
   attributable to the Company or persons acting on its behalf are expressly
   qualified in their entirety by the "Factors That May Affect Future Results."
   Those forward-looking statements relate to, among other things, the Company's
   working capital requirements and need for additional financing.

   RESULTS OF OPERATIONS

        Net Sales. Net sales decreased approximately $783,000 to $3.5 million 
   (or 18.4%) for the three months ended March 31, 1998 from $4.3 million for
   the three months ended March 31, 1997. The decrease in net sales was
   primarily the result of $840,000 decrease in sales of tags and specialty
   packaging, partially offset by an increase of $225,000 of apparel trim
   products, plus $180,000 in returns of specialty licensed stationery products
   shipped in 1997. The sales decrease in tags and specialty packaging was due,
   in part, to management's efforts relating to the initial public offering
   (IPO), including the effect of an approximate 5-week delay of the IPO from
   December 1997 to January 1998, a period when substantial management focus on
   development of customer programs was required. In January 1998, the Company
   also started focusing on private label specialty stationery and 
   de-emphasizing its specialty licensed products. The Company expects that 
   de-emphasizing specialty licensed products will reduce occurrences of product
   returns in the future. We expect the factors that impacted the Company's 
   revenue during the first quarter to continue to impact second quarter 1998, 
   with the result that the Company expects revenues for the second quarter of 
   1998 be in the range of revenues for the second quarter of 1997. While sales 
   momentum is building, the Company does not expect to experience the benefits 
   of this momentum until the third quarter of 1998.

        Gross Profit.  Gross profit was decreased approximately $400,000 to $1.2
   million (or 23.1%) for the three months ended March 31, 1998 from $1.6
   million for the three months ended March 31, 1997. Gross margin as a
   percentage of net sales decreased to approximately 35.0% as compared to 37.2%
   for the three months ended March 31, 1997. The decrease in gross margin was
   primarily attributable to the return of $180,000 higher margin specialty
   licensed stationery products, and secondarily to lower overhead absorption,
   offset by labor and other cost savings associated with normalized production
   at the Company's Mexico facility and lower overhead resulting from
   termination of printing operations in November 1996.

        Selling, General and Administrative Expenses.  Selling, general and
   administrative expenses decreased approximately $70,000 to $1.2 million for
   the three months ended March 31, 1998 from $1.3 million for the three months
   ended March 31, 1997. As a percentage of net sales, these expenses increased
   to 34.4% in the three months ended March 31, 1998 compared to 29.6% for the
   three months ended March 31, 1997 due to lower net sales for the quarter
   ended March 31, 1998. A one-time incentive bonus of approximately $38,000 was
   paid to two salesmen in the quarter ended March 31, 1998 which the Company
   does not anticipate providing in the future.

                                       8
<PAGE>
 
        Printing Division Expense. In the three months ended March 31, 1997, the
   Company incurred approximately $116,000 of incremental printing costs
   associated with its captive printing division which was closed in February
   1997.

        Interest Expense. Interest expense decreased approximately $89,000 (or
   45.7%) to $106,000 for the three months ending March 31, 1998 from $194,000
   for the three months ended March 31, 1997. This decrease is attributable to
   decreased factoring expenses associated with decreased borrowings under the
   factoring arrangements due to proceeds received from the initial public
   offering in January. During the three months ended March 31, 1998, the
   Company substantially reduced its use of factors, a trend which the Company
   intends to continue. The Company intends in future periods to rely upon its
   $2 million line of credit which was established in April 1998.

        Provision for Income Taxes. The provision for income taxes decreased
   approximately $70,000 to ($13,000) for the three months ended March 31,
   1998 as compared to a $57,000 tax provision for the three months ended March
   31, 1997. Provision for income taxes has been made for each Subsidiary
   through October 17, 1997, the date of the consummation of the Consolidation.
   Notwithstanding the Consolidation, operating losses from AGS Stationery were
   not available to offset taxable income of the Company's other Subsidiaries
   and in future periods may only be used to offset future AGS Stationery
   profits. Management has established a valuation allowance on the deferred tax
   asset because it is more likely than not that the deferred tax asset will not
   be realized.

        Net Loss. Net loss was $70,000 for the three months ended March 31, 1998
   as compared to a net loss of $47,000 for the three months ended March 31,
   1997, due to the factors set forth above. 

   LIQUIDITY AND CAPITAL RESOURCES

        During fiscal 1997 the Company satisfied its working capital
   requirements primarily through cash flows generated from operations,
   borrowings under factoring agreements with Heller Financial, Inc. ("Heller
   Financial") and Safcor, Inc. ("Safcor") and related party borrowings.
   Generally, the Company's borrowing requirements have been somewhat seasonal,
   with peak working capital need occurring at the end of the year. The Company 
   has substantially reduced its use of factoring arrangements with Heller and 
   Safcor.

        Pursuant to the terms of its factoring agreement, the Company's factors
   purchase the Company's eligible accounts receivable and assume the credit
   risk only with respect to those accounts for which the factors have given
   prior approval. Where the Company's factors do not assume the credit risk for
   a receivable, the collection risk associated with the receivable remains with
   the Company and if the factor, in its discretion, determines to advance
   against the receivable, the customer's payment obligation is recorded as a
   Company receivable and the advance from the factor is recorded as a current
   liability. As of March 31, 1998, the amount factored without recourse was
   $530,000 and the amount due from the factor recorded as a current asset was
   $700,000.

        The Company's initial public offering resulted in net proceeds to the
   Company of approximately $4,785,000. As of March 31, 1998, $3,852,000 had
   been applied and the remaining $933,000 was available for working capital and
   other purposes. Effective May 1, 1998, the Company entered into a line of
   credit agreement with a bank for $2 million to be used for working capital
   purposes. The line of credit expires on May 31, 1999. The line of credit
   interest rate is equal to the bank's reference rate and includes certain
   financial covenants relating to net worth, debt to net worth, current ratio,
   and profitability. The Company used a portion of the net proceeds from its
   public offering to satisfy the majority of its obligations existing under the
   Heller Financial and Safcor factoring arrangements.

        As of March 31, 1998, the Company had outstanding related party debt of
   $1.27 million (the "Related Party Indebtedness") and non-related party debt
   of $170,000.  All Related Party Indebtedness is due and payable on the
   fifteenth day following the date of delivery of written demand for payment
   which may be delivered at any time after December 31, 1998.  As of March 31,
   1998, the Cruttenden Roth Bridge Fund, LLC and Beta Research Corporation
   purchased for $323,125 and $226,875, respectively, of the Company's Senior
   Subordinated Secured Notes (the "Bridge Notes"), were repaid.

        Net cash (used in) provided by operating activities was approximately
   ($1,636,000) and $519,000 for the three months ended March 31, 1998 and 1997,
   respectively. Cash provided in the three months ended March 31, 1997 resulted
   primarily from increased prepaid expenses, accounts payable, and accrued
   expenses partially offset by decreases in inventory.  Cash used in operations
   in the three months ended March 31, 1998 resulted primarily from decreased
   accounts payable, increased inventory and expenses related to the Offering.

                                       9
<PAGE>
 
        Net cash used in investing activities was $144,000 and $140,000 for the
   three months ended March 31, 1998 and 1997, respectively.  Those activities
   related primarily to capital expenditures related to the leasing of equipment
   and expenditures for office and assembly equipment in connection with the
   Mexico facility.

        Net cash (used in) provided by financing activities was approximately
   $2,473,000 and ($267,000) for the three months ending March 31, 1998 and
   1997, respectively. Net cash provided by financing activities for the three
   months ended March 31, 1998 reflects proceeds from the IPO. Net cash used for
   the three months ending March 31, 1997 resulted from net advances from
   related parties, offset by reductions in factor and non-related party
   borrowings.

        The Company believes that it will be required to obtain additional
   financing in order to provide adequate liquidity to funds its business growth
   plans and operations during the next 12 months. The Company is continually
   evaluating various financing strategies to be utilized in expanding its
   business and to fund future growth or acquisitions. The extent of the
   Company's future capital requirements will depend, however, on many factors,
   including but not limited to, results of operations, the size and timing of
   future acquisitions, if any, and the availability of additional financing. No
   assurance can be given that such additional financing will be available or
   that, if available, it can be obtained on terms favorable to the Company and
   its stockholders. The Company's inability to obtain adequate funds would
   adversely affect the Company's operations and ability to implements its
   strategy. In addition, any equity financing could result in dilution to the
   Company's stockholders. See "Factors That May Affect Future Results - Future
   Capital Needs; Uncertainty of Additional Funding".

   NEW ACCOUNTING PRONOUNCEMENTS

        In 1997, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 129, "Disclosure of Information about
   Capital Structure" ("Statement 129"), which is effective for financial
   statements ending after December 15, 1997.  Statement 129 reinstates various
   securities disclosure requirements previously in effect under Accounting
   Principles Board Opinion No. 15, which has been superseded by Statement 128.
   The Company does not expect adoption of Statement 129 to have a material
   effect, if any, on its consolidated financial position or results of
   operation.

        During June 1997, the Financial Accounting Standards Board issued
   Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
   Income" ("Statement 130"), which is effective for financial statements with
   fiscal years beginning after December 15, 1997.  Statement 130 establishes
   standards for reporting and display of comprehensive income and its
   components in a full set of general purpose financial statements.  The
   Company has not determined the effect on its consolidated financial position
   or results of operations, if any, from the adoption of this statement.

        During June 1997, the Financial Accounting Standards Board issued
   Statement of Financial Accounting Standards No. 131, "Disclosure about
   Segments of an Enterprise and Related Information" ("Statement 131"), which
   is effective for financial statements with fiscal years beginning after
   December 15, 1997.  The new standard requires that public business
   enterprises report certain information about operating segments in complete
   sets of financial statements of the enterprise and in condensed financial
   statements of interim periods issued to stockholders.  It also requires that
   public business enterprises report certain information about their products
   and services, the geographic areas in which they operate and their major
   customers.  The Company does not expect adoption of Statement 131 to have a
   material effect, if any, on its consolidated results of operation.

                                       10
<PAGE>
 
   FACTORS THAT MAY AFFECT FUTURE RESULTS

        The following is a discussion of certain factors that may affect the
   Company's financial condition and results of operations.

        Management of Business Changes; Potential Growth; Potential
   Acquisitions.  The Subsidiaries have been operated under family management
   since inception and have recently significantly expanded their operations.
   Such expansion has placed, and any future expansion, internally or through
   acquisitions, will place, significant demands on the Company's management,
   operational, administrative, financial and accounting resources.  Successful
   management of the Company's operations will require the Company to continue
   to implement and improve its financial and management information and
   reporting systems and procedures on a timely basis.  The Company's ability to
   manage its future growth, if any, will also require it to hire and train new
   employees, including management and operating personnel, and motivate and
   manage its new employees and integrate them into its overall operations and
   culture.  The Company recently has made additions to its management team and
   is in the process of expanding its accounting staff and improving its
   financial and management information and reporting systems to adapt to its
   new role as a public company, a process which is expected to continue.  The
   Company's failure to manage implementation of its growth strategies and to
   implement and improve its financial and management information and reporting
   systems would have a material adverse effect on the Company's results of
   operations and its ability to implement its growth strategy.

        In the future, the Company may acquire complementary companies, products
   or technologies, although no specific acquisitions currently are pending or
   under negotiation.  Acquisitions involve numerous risks, including adverse
   short-term effects on the combined business' reported operating results,
   impairments of goodwill and other intangible assets, the diversion of
   management's attention, the dependence on retention, hiring and training of
   key personnel, the amortization of intangible assets and risks associated
   with unanticipated problems or legal liabilities.

        Potential Fluctuations in Quarterly Operating Results; Seasonality.  The
   Company may in the future experience significant quarterly fluctuations in
   sales, operating income and cash flows as a result of certain factors,
   including the volume and timing of customer orders received during the
   quarter, the timing and magnitude of customers' marketing campaigns, the loss
   of a major customer, the availability and pricing of materials for the
   Company's products, increased selling, general and administrative expenses
   incurred in connection with acquisitions or the introduction of new products,
   the costs and timing of any future acquisitions, the timing and magnitude of
   capital expenditures, and changes in the Company's product mix or in the
   relative contribution to sales of the various Subsidiaries.  Due to the
   foregoing factors, it is possible that in some future quarter the Company's
   operating results may be below the expectations of public market analysts and
   investors.  In such event, the price of the Company's Common Stock would
   likely be materially and adversely affected.

        In addition, most of the Company's customers are in the apparel
   industry, which historically has been subject to substantial cyclical
   variations.  The Company's business has experienced and is expected to
   continue to experience significant seasonality, in part due to customer
   buying patterns.  A recession in the general economy or uncertainties
   regarding future economic prospects that affect consumer spending habits
   could have a material adverse effect on the Company's financial condition and
   results of operations.

        Requirement for Integrated Information System.  The Consolidation and
   resulting centralized management of the Subsidiaries, implementation of the
   Company's growth strategies and the general strains of the Company's new role
   as a public company will place significant demands on the Company's financial
   and management information and reporting systems and require that the Company
   significantly expand and improve its financial and operating controls.
   Additionally, the Company must effectively integrate the information systems
   of Hong Kong and Mexico with its principal offices in Los Angeles. There are
   no assurances that the Company will be successful in implementing and
   improving its financial and management information

                                       11
<PAGE>
 
   reporting systems and staff, and the Company's failure to do so could have a
   material adverse effect on the Company's results of operations and its
   ability to implement its business strategy.

        Dependence on Key Customers; Absence of Long-Term Contracts with
   Customers.  The Company's two largest customers, Guess? and Swank (a licensee
   of Yves Saint Laurent, Kenneth Cole, Geoffrey Beene and Pierre Cardin),
   accounted for approximately 14.6% and 7.4%, respectively, of the Company's
   net sales (on a consolidated basis) for the three months ended March 31,
   1998, and approximately 16.3% and 12.5%, respectively, of the Company's net
   sales (on a consolidated basis) for the year ended December 31, 1997.  There
   can be no assurance that the Company will be able to maintain the current
   level of sales derived from these or any other customer in the future.

        The Company generally does not enter into long-term sales contracts with
   its customers requiring them to make purchases from the Company.  The
   Company's sales are generally evidenced by a purchase order and similar
   documentation limited to a specific sale.  As a result, a customer from whom
   the Company generates substantial revenue in one period may not be a
   substantial source of revenue in a subsequent period.  In addition, the
   Company's customers generally have the right to terminate their relationships
   with the Company without penalty and on little or no notice.  In the absence
   of such long-term contracts, there can be no assurance that these customers
   will continue to engage the Company to design and produce products, and thus
   there can be no assurance that the Company will be able to maintain a
   consistent level of sales.

        The termination of the Company's business relationship with any of its
   significant customers or a material reduction in sales to a significant
   customer could have a material adverse effect on the Company's business,
   financial condition and results of operations.

        Dependence on Key Personnel.  The Company's success has and will
   continue to depend to a significant extent upon certain key management and
   design and sales personnel, many of whom would be difficult to replace,
   particularly Colin Dyne, its Chief Executive Officer and Harold Dyne, its
   President, neither of whom is bound by an employment agreement or the subject
   of key man insurance.  The Company has no current plan to enter into
   employment agreements with Colin Dyne or Harold Dyne but does intend to
   obtain $1 million key man life insurance on Colin Dyne.  The loss of the
   services of one or more of these key executives and other key employees could
   have a material adverse effect on the Company, including the Company's
   ability to establish and maintain client relationships.  The Company's future
   success will depend in large part upon its ability to identify, attract,
   assimilate, retain and motivate personnel with a variety of design, sales,
   operating and managerial skills.  There can be no assurance that the Company
   will be able to retain and motivate its managerial, design, sales and
   operating personnel or attract additional qualified members to management,
   design or sales staff.

        Future Capital Needs; Uncertainty of Additional Funding.  The Company
   anticipates that it will need to raise additional capital to fund its
   business growth plans and operations during the next 12 months. To the extent
   that existing resources and future earnings are insufficient to fund the
   Company's activities, the Company will need to raise additional funds through
   debt or equity financings. No assurance can be given that such additional
   financing will be available or that, if available, it can be obtained on
   terms favorable to the Company and its stockholders. In addition, any equity
   financing could result in dilution to the Company's stockholders. The
   Company's inability to obtain adequate funds would adversely affect the
   Company's operations and ability to implement its strategy.

        Control by Existing Stockholders.  The Company's officers and directors
   (and their affiliates), own approximately 46.6% of the Company's outstanding
   shares; and the Dyne family (Harold Dyne, Mark Dyne, Colin Dyne, Larry Dyne
   and Jonathan Burstein) own approximately 46.2% of the Company's outstanding
   shares.  As a result, these stockholders, or the Dyne family acting as a
   group, control the Company and its operations, including the election of at
   least a majority of the Company's Board of Directors and thus the policies of
   the Company.  The voting power of these stockholders could also serve to
   discourage potential acquirors from seeking to acquire control of the Company
   through the purchase of the Common Stock, which might have a depressive
   effect on the price of the Common Stock.

        Access to Financing and Replacement of Factors.  Historically, the
   Company has been capital constrained.  The Company's working capital has been
   provided primarily through related party loans and factoring arrangements,
   with both related and unrelated parties.  Factoring of its receivables has
   substantially increased the Company's cost of funds, restricted the Company's
   ability to sell to customers not approved by the Company's factors, and, in
   management's opinion, limited the Company's growth potential.  Under the
   Company's factoring arrangements, the amount of cash available to the Company
   is tied directly to the level of 

                                       12
<PAGE>
 
   the Company's shipments and the credit quality of the Company's customers.
   The amount of cash available to the Company has been, and may continue to be,
   adversely affected by delays in shipment, economic trends in the packaging
   and garment industry, interest rate fluctuations and the lending policies of
   the Company's factors. Many of these influences are beyond the Company's
   control. The Company expects to replace its factoring relationships with more
   cost effective bank line of credit financing. Even if the Company is able to
   obtain alternative financing on acceptable terms, any decrease or material
   limitation on the amount of capital available to the Company under such
   arrangements will limit the ability of the Company to expand its sales levels
   and, therefore, would have a material adverse effect on the Company's
   financial position, operating results and cash flows. In addition, any
   significant increases in interest rates will increase the cost of financing
   to the Company and would have a material adverse effect on the Company's
   financial position, operating results and cash flows.

        Dependence on Limited Assembly Facilities.  Certain of the Company's
   products are assembled or finished at the foreign assembly facilities of the
   Company.  Since the Company does not currently operate duplicate facilities
   in different geographic areas, a disruption of the Company's manufacturing
   operations resulting from various factors, including human error, foreign
   trade disruptions, import restrictions, labor disruptions, embargos,
   government intervention or a natural disaster such as fire, earthquake or
   flood, could cause the Company to cease or limit its assembly or finishing
   operations and consequently could have a material adverse effect on the
   Company's business, financial condition and results of operations.

        Limited Sources of Supply.  The Company generally does not have long-
   term agreements with its key sources of supply.  Lead times for materials
   ordered by the Company can vary significantly and depend on factors such as
   the specific supplier, contract terms and demand for particular materials at
   a given time.  From time to time, the Company has experienced fluctuations in
   materials prices and disruptions in supply.  Shortages or disruptions in the
   supply of materials, or the inability of the Company to procure such
   materials from alternate sources at acceptable prices in a timely manner,
   could lead to the loss of customers due to the failure to timely meet orders
   which in turn could result in a material adverse effect on the Company's
   business, financial condition and results of operations.

        Fluctuating Paper Costs and Paper Shortages.  The cost of paper is a
   principal component of the price the Company charges for its paper products,
   including its high quality paper boxes, custom shopping bags, hang tags,
   packaging and stationery products.  Historically, the Company has been able
   to pass on to its customers any increase or decrease in the cost of paper,
   and therefore maintain its gross margins on paper products during
   fluctuations in the cost of paper.  There can be no assurance, however, that
   the Company will continue to be able to pass increases in paper costs to its
   customers.  To the extent that the Company's customers are unwilling to
   absorb increases in paper costs, the Company's results of operations could be
   materially adversely affected.

        While capacity in the paper industry has remained relatively stable in
   recent years, increases or decreases in demand for paper have led to
   corresponding pricing changes and, in periods of high demand, to limitations
   on the availability of certain grades of paper, including grades utilized by
   the Company.  Any disruption in the Company's paper sources could cause
   shortages in needed materials which could have a material adverse effect on
   the Company's results of operations.  Although the Company actively manages
   its paper supply and has established strong relationships with its paper
   suppliers, the Company does not have any long-term agreements with its key
   paper suppliers and there can be no assurance that the Company's sources of
   paper supply will be adequate or, in the event that such sources are not
   adequate, that alternative sources can be developed in a timely manner.

        Competition.  The industries in which the Company competes are highly
   competitive and fragmented and include numerous local and regional companies
   that provide some or all of the services offered by the Company.  The Company
   also competes with United States and international design companies,
   distributors and manufacturers of tags, packaging products and trims.  Some
   of the Company's competitors, including Paxar, Inc., RVL, Inc, Copac
   International Packaging, Inc., Universal Button, Inc., and Scovill Fasteners,
   Inc., have 

                                       13
<PAGE>
 
   greater name recognition, longer operating histories and, in many cases,
   substantially greater financial and other resources than the Company.

        In addition, new competitors, potentially with substantially greater
   resources than the Company, may arise and may develop products which compete
   with the Company's products. Moreover, there can be no assurance that new or
   proprietary technology will not be introduced by an existing or new
   competitor that may make some of the Company's products or services obsolete.
   To the extent that the Company is unable to compete successfully against its
   existing and future competitors, its business, operating results and
   financial condition would be materially adversely affected. While the Company
   believes that it competes effectively within the value-added design and
   packaging industry, there are numerous factors that could reduce the
   Company's ability to compete effectively.

        Dependence Upon Guess? License.  The Company, through AGS Stationery,
   manufactures Guess? stationery products pursuant to an exclusive license with
   Guess? entered into as of March 1, 1996.  Net sales of Guess? stationery
   products accounted for (0.1%) and 5.5% of the Company's consolidated net
   sales for the three months ended March 31, 1998 and 1997, respectively.  The
   Guess? license terminates on December 31, 2001, but may be renewed by the
   Company through December 31, 2006 so long as the Company is not in breach of
   the license and generates the required amount of minimum net sales for the
   two contract years prior to renewal.  Guess? may terminate the license before
   its term expires upon the occurrence of certain events, including (i) if the
   Company commits a breach of the license and fails to cure that breach within
   any applicable cure period, (ii) if net sales for any contract year do not
   meet or exceed the minimum net sales required for such contract year, (iii)
   if, following any consolidation, sale or merger of AGS Stationery, Mark Dyne
   (the Company's Chairman) and Colin Dyne do not retain, directly or
   indirectly, the power to vote or direct the voting of more than fifty percent
   of the outstanding voting securities of AGS Stationery, or (iv) if Colin Dyne
   leaves the employment of AGS Stationery or otherwise fails to devote the vast
   majority of his time and efforts to the daily management of AGS Stationery's
   business, or Mark Dyne ceases to exert, on a regular basis, actual and bona
   fide management control and oversight over AGS Stationery's business.  The
   termination of the Guess? license could have a material adverse effect on the
   Company's business, operating results and financial condition.  Additionally,
   Guess? has certain approval rights over the various aspects of the design,
   manufacture, marketing and distribution of products under the license and
   consequently may delay the distribution of products bearing its proprietary
   marks.  There can be no assurance that the Company will not be subject to
   delays resulting from disagreements with, or an inability to obtain approvals
   from Guess?.

        Risk of Product Returns.  The Company incurs expenses as a result of the
   return of products by customers, particularly in connection with customers of
   the Company's licensed stationery business.  Such returns may result from
   sale or return arrangements, defective goods, inadequate performance relative
   to customer expectations, shipping errors and other causes which are outside
   the Company's control.  Generally, returned items have limited or no value
   and the Company will be forced to bear the cost of such returns.  Product
   returns could result in loss of revenue or delay in market acceptance,
   diversion of development resources, damage to the Company's reputation, and
   increases service and warranty costs.  Any significant increase in the rate
   of product returns could have a material adverse effect on the Company's
   financial position, operating results, and cash flows.

        International Business.  For the year ended December 31, 1997,
   approximately 40% of the Company's products were purchased, assembled or
   finished outside the United States, principally in Hong Kong and Mexico, and
   the Company intends to continue to purchase, assemble or finish a similar or
   greater percentage of its products outside of the United States in the
   future.  The Company's international business is subject to numerous risks,
   including the need to comply with a wide variety of foreign and United States
   export and import laws, changes in export or import controls, tariffs and
   other regulatory requirements, the imposition of governmental controls,
   political and economic instability, trade restrictions, the difficulty of
   administering business overseas and general economic conditions.  The
   inability of a contractor or supplier to ship orders in a timely manner could
   cause the Company to miss the delivery date requirements of its customers for
   those items, 

                                       14
<PAGE>
 
   which could result in the cancellation of orders, refusal to accept
   deliveries or a reduction in sales price. Although the Company's
   international operations are denominated principally in United States
   dollars, purchases from foreign vendors and sales to foreign customers may
   also be affected by changes in demand resulting from fluctuations in interest
   and currency exchange rates, including the recent Asian currency
   fluctuations. There can be no assurance that these factors will not have a
   material adverse effect on the Company's business and results of operations.
   In addition, the Company cannot predict the effects the above risks will have
   on its business arrangements with its customers, contractors or suppliers. If
   any such risks were to render the conduct of business in a particular country
   undesirable or impractical, or if the Company's current contractors or
   suppliers were to cease doing business with the Company for any reason, the
   Company's financial position, operating results and cash flows could be
   adversely affected.

        Sovereignty over Hong Kong was transferred from the United Kingdom to
   The People's Republic of China on July 1, 1997.  If the business climate in
   Hong Kong were to experience an adverse change as a result of the transfer,
   the Company believes it could relocate its production and sourcing facilities
   outside Hong Kong and replace the products currently produced in Hong Kong
   with products produced elsewhere without a material adverse effect on the
   Company's financial condition or results of operations.  Nevertheless, there
   can be no assurance that the Company would be able to do so.

        Shared Responsibilities of Chairman.  The Company's Chairman, Mark Dyne,
   also serves as Chief Executive Officer and Chairman of Brilliant Digital
   Entertainment, Inc. ("Brilliant"), as the joint managing director of Sega
   Ozisoft Pty., Limited ("Sega Ozisoft"), a director of Monto Holdings Pty.
   Ltd. ("Monto Holdings") and Nu-Metro Multimedia Pty. Ltd. ("Nu-Metro"), and a
   co-owner and director of Packard Bell Australia Pty. Ltd. ("Packard Bell NEC
   Australia").  Mr. Dyne is a shareholder of Sega Enterprises (Australia) Pty.
   Ltd., which operates a $70 million interactive indoor theme park in Darling
   Harbor in Sydney, Australia.  Brilliant is a production and development
   studio involved in the production of a new generation of digital
   entertainment that is being distributed over the internet and on CD-ROM.
   Sega Ozisoft is an Australia-distributor of software products for many
   leading publishers.  Monto Holdings is a private investment holding company,
   Nu-Metro is a South African based distributor of multi-media software
   products and Packard Bell NEC Australia is one of the leading manufacturers
   and distributors of personal computers through the Australian mass merchant
   channel.  Mr. Dyne is not required to spend a certain amount of time at the
   Company nor is he able to devote his full time and resources to the Company.

        Holding Company Structure.  The Company is a holding company with no
   substantial operations and, consequently, is dependent on dividends and other
   payments from the Subsidiaries for virtually all of its cash flow, including
   cash flow for management salaries and overhead, to service debt, to make
   equity investments and to finance its growth.

        No Earthquake Insurance.  The Company's principal executive offices are
   located in Los Angeles, California -- an area which often experiences
   earthquakes.  The Company faces the risks that it may experience uninsured
   property damage and/or sustain interruption of its business and operations.
   The Company does not currently carry insurance against earthquake-related
   risks.

                                       15
<PAGE>
 
        Limited Proprietary Protection.  The Company relies on trademark, trade
   secret and copyright laws to protect its designs and other proprietary
   property. The Company does not have United States or foreign patents or
   patent applications currently pending. If litigation is necessary in the
   future to enforce the Company's intellectual property rights, to protect the
   Company's 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 and could have a material adverse effect on
   the Company's business, operating results and financial condition.
   Ultimately, the Company may be unable, for financial or other reasons, to
   enforce its rights under intellectual property laws, and the laws of certain
   countries in which the Company's products are or may be distributed may not
   protect the Company's products and intellectual rights to the same extent as
   the laws of the United States.

        The Company believes that its products do not infringe any validly
   existing proprietary rights of third parties. Although the Company has
   received no communication from third parties alleging the infringement of
   proprietary rights of such parties, there can be no assurance that third
   parties will not assert infringement claims in the future and the Company
   could be subject to such claims in the future. Any such third party claims,
   whether or not meritorious, could result in costly litigation or require the
   Company to enter into royalty or licensing agreements. There can be no
   assurance that any such licenses would be available on acceptable terms, if
   at all, or that the Company would prevail in any such litigation. If the
   Company were found to have infringed upon the proprietary rights of third
   parties, it could be required to pay damages, cease sales of the infringing
   products and redesign or discontinue such products, any of which could have a
   material adverse effect on the Company's business, operating results and
   financial condition.

        Absence of Prior Public Market; Possible Volatility of Stock Price;
   Arbitrary Determination of Offering Price.  Prior to the Offering in January
   1998, there was no public market for the Common Stock.  Although the
   Company's Common Stock currently is trading on the American Stock Exchange,
   there can be no assurance that an active trading market for the Common Stock
   will continue or be sustained.  In the absence of such a market, investors
   may be unable readily to liquidate their investment in the Common Stock.  The
   trading price of the Common Stock is subject to wide fluctuations in response
   to quarter to quarter variations in operating results, news announcements
   relating to the Company's business (including innovations or new product
   introductions by the Company or its competitors), changes in financial
   estimates by securities analysts, the operating and stock price performance
   of other companies that investors may deem comparable to the Company as well
   as other developments affecting the Company or its competitors.  In addition,
   the market for equity securities in general has been volatile and the trading
   price of the Common Stock could be subject to wide fluctuations in response
   to general market trends, changes in general conditions in the economy or the
   financial markets and other factors which may be unrelated to the Company's
   operating performance.

        Shares Eligible for Future Sale. Future sales of Common Stock by
   existing stockholders could adversely affect the prevailing market price of
   the Common Stock and the Company's ability to raise capital in the equity
   markets. The Company has 4,070,011 shares of Common Stock outstanding. Of
   those shares, 1,680,000 shares are freely tradeable without restriction or
   further registration under the Securities Act, unless purchased by
   "affiliates" of the Company as that term is defined in Rule 144 under the
   Securities Act ("Rule 144"). The remaining 2,390,011 shares of Common Stock
   outstanding are "restricted securities," as that term is defined by Rule 144,
   and are also subject to the holding period, volume and manner of sale
   limitations of Rule 144. Under certain lock-up agreements, the officers,
   directors and other stockholders, holding an aggregate of 2,277,894 shares of
   Common Stock, have agreed that they will not, directly or indirectly, sell,
   assign or otherwise transfer any shares of Common Stock owned by them until
   January 1999, without the prior written consent of Cruttenden Roth
   Incorporated. Upon expiration of the lock-up agreements, such 2,277,894
   shares of Common Stock will become eligible for sale, subject to compliance
   with the volume and manner of sale limitations of Rule 144. The Company also
   intends to file a registration statement under the Securities Act to register
   the shares of Common Stock reserved for issuance pursuant to the Company's
   1997 Stock Incentive Plan (the "1997 Plan"). This registration statement will
   become effective immediately upon filing. As of March 31, 1998, options to
   purchase 260,000 shares of Common Stock and warrants to purchase 287,631
   shares 

                                       16
<PAGE>
 
   of Common Stock had been granted, none of which had been exercised. The
   availability for sale, as well as actual sales, of currently outstanding
   shares of Common Stock, and shares of Common Stock issuable upon the exercise
   of options and warrants, may depress the prevailing market price for the
   Common Stock and could adversely affect the terms upon which the Company
   would be able to obtain additional equity financing.

        Environmental Regulations. Certain of the Subsidiaries use hazardous
   materials in their manufacturing operations. As a result, the Company is
   subject to federal, state and local regulations governing the storage, use
   and disposal of such materials. The use and disposal of hazardous materials
   involves the risk that the Company could be required to incur substantial
   expenditures for preventive or remedial action, reduction of chemical
   exposure, or waste treatment or disposal. The liability in the event of an
   accident or the costs of such actions could exceed the Company's resources or
   otherwise have a material adverse effect on the Company's business, financial
   condition or results of operations.

        Effect of Certain Charter Provisions; Anti-Takeover Effects of
   Certificate of Incorporation, Bylaws and Delaware Law.  The Company's Board
   of Directors has the authority to issue up to 3,000,000 shares of Preferred
   Stock and to determine the price, rights, preferences, privileges and
   restrictions, including voting rights, of those shares without any further
   vote or action by the stockholders.  The Preferred Stock could be issued with
   voting, liquidation, dividend and other rights superior to those of the
   Common Stock.  Following the Offering, no shares of Preferred Stock of the
   Company will be outstanding, and the Company has no present intention to
   issue any shares of Preferred Stock.  However, the rights of the holders of
   Common Stock will be subject to, and may be adversely affected by, the rights
   of the holders of any Preferred Stock that may be issued in the future.  The
   issuance of Preferred Stock, while providing desirable flexibility in
   connection with possible acquisitions and other corporate purposes, could
   have the effect of making it more difficult for a third party to acquire a
   majority of the outstanding voting stock of the Company.  Further, certain
   provisions of the Company's Certificate of Incorporation and Bylaws and of
   Delaware law could delay or make more difficult a merger, tender offer or
   proxy contest involving the Company.

                                    PART II

                               OTHER INFORMATION

   ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

        In January 1998, in connection with the purchase of $550,000 of Bridge
   Notes, Cruttenden Roth Bridge Fund, LLC and Beta Research Corporation
   received Bridge Warrants to purchase 47,000 shares and 33,000 shares,
   respectively, of Common Stock. The Bridge Warrants will be exercisable for a
   period of four year, commencing January 23, 1999, at an initial per share
   exercise price of $6.00. The Bridge Warrants provide for demand and piggyback
   registration rights. The issuance and sale of these securities was made in
   reliance on, Section 4(2) of the Securities Act as a transaction not
   involving any public offering.

        Also in January 1998, in connection with the Company's initial public
   offering, the Company granted to Cruttenden Roth Incorporated and Josephtal &
   Co. Inc. (the "Representatives") warrrants to purchase up to 110,000 shares
   of Common Stock (the "Representatives' Warrants). The Representatives'
   Warrants will be exerciseable for a period of four years, commencing January
   23, 1999, at an initial per share exercise price of $4.80. Neither the
   Representatives' Warrants nor the share of Common Stock issuable upon
   exercise thereof may be transferred, assigned or hypothecated until one year
   from the date of the Offering, except that they may be assigned, in whole or
   in part, (i) to individuals who are either officers or partners of the
   Representatives, or (ii) by will or the laws of descent and distribution or
   (iii) to certain successor of the Representatives. Any profit 

                                       17
<PAGE>
   realized by the Representatives on the sale of securities issuable upon
   exercise of the Representatives' Warrants may be deemed to be additional
   compensation. The issuance and sale of these securities was made in reliance
   on Section 4(2) of the Securities Act as a transaction not involving any
   public offering.

        The Company's Registration Statement on Form SB-2 (File No. 333-38397)
   relating to the offer and sale (the "Offering") of an aggregate of 1,680,000
   shares (the "Shares") of Common Stock, par value $0.001 per share (the
   "Common Stock"), of the Company was declared effective by the Securities and
   Exchange Commission (the "Commission") on January 23, 1998.  Of the 1,680,000
   shares of Common Stock registered under the Registration Statement, 1,600,000
   shares were sold by the Company and 80,000 shares were sold by a stockholder
   of the Company (the "Selling Stockholder").

        The Offering commenced on January 23, 1998 and the sale of 1,680,000
   shares closed on January 28, 1998. All of the Shares registered were sold in
   the Offering at an aggregate price of $4.00 per share, for aggregate proceeds
   of $6,400,000 and $320,000 to the Company and the Selling Stockholder,
   respectively. After deducting underwriting discounts and commissions of $0.32
   per share, the Selling Stockholder received net proceeds of $294,400 and the
   Company received net proceeds equal to $5,888,000 less expenses of $1,102,824
   incurred in connection with the Offering (all of which were paid or are
   payable by the Company). Of the $1,102,824, $134,400 represents non-
   accountable expenses payable to the underwriters. Cruttenden Roth
   Incorporated and Josepthal & Co. Inc. were the co-managing underwriters.

        The Offering resulted in net proceeds ("Net Proceed") to the Company of
   approximately $4,785,000. As of March 31, 1998, the Company had applied an
   aggregate of approximately $3,852,000 of the Net Proceeds as follows: (i)
   $2,014,000 to repay certain indebtedness (of which approximately $264,000 was
   paid to officers, directors, stockholders and/or other affilitates of the
   Company), (ii) $108,000 to develop a national sales and marketing network,
   including hiring additional sales personnel, (iii) $66,000 to acquire
   computer & production equipment, (iii) $245,000 to purchase inventories, (v)
   $1,419,000 for working capital. As of March 31, 1998, the Company had
   invested the remaining $933,000 of the Net Proceeds in short-term interest
   bearing securities.

        As required by Rule 463 of the Securities Act, the Company will disclose
   the application of the remaining Net Proceeds in the Company's periodic
   report for the quarter ending June 30, 1998 and, to the extent necessary, in
   subsequent periodic reports filed by the Company pursuant to Section 13(a)
   or 15(d) of the Exchange Act.
 
   ITEM 5.   OTHER INFORMATION

        Effective May 1, 1998, the Company entered into a Line of Credit
   Agreement with a bank for $2 million to be used for working capital purposes
   and expires on May 31, 1999.  The Line of Credit interest rate is equal to
   the bank's reference rate and includes certain financial covenants relating
   to net worth, debt to net worth, current ratio, and profitability.  The
   Company expects to replace its factoring relationships with the more cost
   effective Line of Credit.

   ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

        (a)  Exhibits:

             Exhibit 27.1  Financial Data Schedule

             Exhibit 10.53 Line of Credit Agreement

        (b)  Reports on Form 8-K.

             No reports on Form 8-K were filed during the period covered by this
   transition report.

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<PAGE>
 
                                   SIGNATURES

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


   Date: May 14, 1998         TAG-IT PACIFIC, INC.


                              By:   /s/  Francis Shinsato
                                    ---------------------------------
                                    Francis Shinsato
                                    Chief Financial Officer
                                    (Principal Financial & Accounting Officer)



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