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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q



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

                  For the quarterly period ended June 30, 2002.

                                       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
                           (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 [X]   No [_]

     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, 9,307,909 shares issued and outstanding as of August 14, 2002.

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<PAGE>


                              TAG-IT PACIFIC, INC.

                               INDEX TO FORM 10-Q



PART I FINANCIAL INFORMATION                                                PAGE
                                                                            ----



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

         Consolidated Balance Sheets as of
         June 30, 2002 (unaudited) and December 31, 2001...................    3

         Consolidated Statements of Operations (unaudited)
         for the Three Months and Six Months Ended
         June 30, 2002 and 2001............................................    4

         Consolidated Statements of Cash Flows (unaudited)
         for the Six Months Ended June 30, 2002 and 2001...................    5

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

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

Item 3   Quantitative and Qualitative Disclosures About Market Risk........   26

PART II OTHER INFORMATION



Item 1.  Legal Proceedings.................................................   27

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.
                              TAG-IT PACIFIC, INC.
                           Consolidated Balance Sheets

                                                        June 30,    December 31,
                                                          2002           2001
                                                      -----------    -----------
       Assets                                                 (unaudited)
Current Assets:
Cash and cash equivalents ........................    $    61,032    $    46,948
Due from factor ..................................        704,313        105,749
Trade accounts receivable, net ...................      3,823,449      3,037,034
Trade accounts receivable, related parties .......     16,348,542      7,914,838
Refundable income taxes ..........................        259,605        259,605
Due from related parties .........................        841,787        814,219
Inventories ......................................     23,596,638     20,450,740
Prepaid expenses and other current assets ........        635,260        408,146
Deferred income taxes ............................        107,599        107,599
                                                      -----------    -----------
       Total current assets ......................     46,378,225     33,144,878

Property and Equipment, net of accumulated
  depreciation and amortization ..................      2,284,988      2,592,965
Tradename ........................................      4,110,750      4,110,750
Other assets .....................................      1,442,657        944,912
                                                      -----------    -----------
Total assets .....................................    $54,216,620    $40,793,505
                                                      ===========    ===========
       Liabilities, Convertible Redeemable
       Preferred Stock and Stockholders' Equity
Current Liabilities:
   Line of credit ................................     15,248,558    $ 9,660,581
   Accounts payable ..............................      9,431,356      5,176,436
   Accrued expenses ..............................      3,135,456      1,609,378
   Note payable ..................................         25,200         25,200
   Subordinated notes payable to related
       parties ...................................        849,971        849,971
   Current portion of capital lease
      obligations ................................         63,592        180,142
   Current portion of subordinated note
       payable ...................................      1,200,000      1,100,000
                                                      -----------    -----------
       Total current liabilities .................     29,954,133     18,601,708

Capital lease obligations, less current
   portion .......................................         30,241         69,030
Subordinated note payable, less current
   portion .......................................      3,200,000      3,800,000
                                                      -----------    -----------
       Total liabilities .........................     33,184,374     22,470,738
                                                      -----------    -----------
Convertible redeemable preferred stock
   Series C, $0.001 par value; 759,494
   shares authorized; 759,494 shares issued
   and outstanding at June 30, 2002 and
   December 31, 2001 (stated value $3,000,000) ...      2,895,001      2,895,001

Stockholders' equity:
   Preferred stock, Series A $0.001 par
       value; 250,000 shares authorized,
       no shares issued or outstanding ...........           --             --
   Convertible preferred stock Series B,
       $0.001 par value; 850,000 shares
       authorized; no shares issued or
       outstanding ...............................           --             --
   Common stock, $0.001 par value, 30,000,000
       shares authorized; 9,307,909 shares
       issued and outstanding at June 30,
       2002; 8,769,910 at December 31, 2001 ......          9,309          8,771
   Additional paid-in capital ....................     16,747,597     15,048,971
   Retained earnings .............................      1,380,339        370,024
                                                      -----------    -----------
Total  stockholders' equity ......................     18,137,245     15,427,766
                                                      -----------    -----------
Total liabilities, convertible redeemable
   preferred stock and stockholders' equity ......    $54,216,620    $40,793,505
                                                      ===========    ===========

           See accompanying notes to consolidated financial statements.


                                       3


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                              TAG-IT PACIFIC, INC.

                      Consolidated Statements of Operations
                                   (unaudited)


                                Three Months Ended        Six Months Ended
                                     June 30,                 June 30,
                             ------------------------  ------------------------
                                 2002         2001         2002        2001
                             -----------  -----------  -----------  -----------

Net sales .................  $19,793,344  $14,619,136  $29,118,400  $24,757,715
Cost of goods sold ........   14,816,081   10,615,402   21,506,794   17,910,453
                             -----------  -----------  -----------  -----------
   Gross profit ...........    4,977,263    4,003,734    7,611,606    6,847,262

Selling expenses ..........      578,051      401,043      972,918      881,124
General and administrative
   expenses ...............    2,691,781    2,369,550    4,596,912    4,408,070
Restructuring Charges
   (Note 3) ...............         --           --           --      1,257,598
                             -----------  -----------  -----------  -----------
   Total operating expenses    3,269,832    2,770,593    5,569,830    6,546,792

Income from operations ....    1,707,431    1,233,141    2,041,776      300,470
Interest expense, net .....      306,528      325,650      568,271      839,449
                             -----------  -----------  -----------  -----------
Income (loss) before income
   taxes ..................    1,400,903      907,491    1,473,505     (538,979)
Provision (benefit) for
   income taxes ...........      354,600      198,030      373,190     (103,368)
                             -----------  -----------  -----------  -----------
   Net income (loss) ......  $ 1,046,303  $   709,461  $ 1,100,315  $  (435,611)
                             ===========  ===========  ===========  ===========
Less:  Preferred stock
   dividends ..............       45,000         --         90,000         --
                             -----------  -----------  -----------  -----------
Net income (loss) to common
   shareholders ...........  $ 1,001,303  $   709,461  $ 1,010,315  $  (435,611)
                             ===========  ===========  ===========  ===========

Basic earnings per share ..  $      0.11  $      0.09  $      0.11  $     (0.05)
                             ===========  ===========  ===========  ===========
Diluted earnings per share   $      0.10  $      0.09  $      0.11  $     (0.05)
                             ===========  ===========  ===========  ===========
Weighted average number
   of common shares
   outstanding:
   Basic ..................    9,282,365    8,003,244    9,148,681    7,999,211
                             ===========  ===========  ===========  ===========
   Diluted ................    9,591,984    8,304,188    9,448,223    7,999,211
                             ===========  ===========  ===========  ===========


          See accompanying notes to consolidated financial statements.


                                       4


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                              TAG-IT PACIFIC, INC.

                      Consolidated Statements of Cash Flows

                                   (unaudited)

                                                     Six months Ended June 30,
                                                     --------------------------
                                                         2002          2001
                                                     -----------    -----------
Increase  (decrease)  in cash and cash
  equivalents
Cash flows  from  operating activities:
   Net income (loss) .............................   $ 1,100,315    $  (435,611)
Adjustments to reconcile net income (loss) to
  net cash used in operating activities:
   Depreciation and amortization .................       575,006        716,710
   Increase in allowance for doubtful accounts ...        23,315        148,852
   Loss on sale of assets ........................          --          312,418
Changes in operating assets and liabilities:
      Receivables, including related parties .....    (9,841,998)    (2,118,374)
      Inventories ................................    (3,145,898)       760,497
      Other assets ...............................       (46,439)      (455,165)
      Prepaid expenses and other current assets ..      (227,113)        (1,547)
      Accounts payable ...........................     4,254,920        599,384
      Accrued restructuring charges ..............          --          386,678
      Accrued expenses ...........................     1,081,768        172,518
      Income taxes payable .......................       369,008       (119,484)
                                                     -----------    -----------
Net cash used in operating activities ............    (5,857,116)       (33,124)
                                                     -----------    -----------

Cash flows from investing activities:
    Additional loans to related parties ..........          --         (283,003)
    Acquisition of property and equipment ........      (140,835)      (206,608)
    Proceeds from sale of fixed assets ...........          --          118,880
                                                     -----------    -----------
Net cash used in investing activities ............      (140,835)      (370,731)
                                                     -----------    -----------
Cash flows from financing activities:
    Bank overdraft ...............................          --         (584,831)
    Proceeds from bank line of credit, net .......     5,587,977      1,033,821
    Proceeds from private placement transactions .     1,029,997           --
    Proceeds from exercise of stock options ......        49,400         19,500
    Proceeds from capital leases .................          --           87,556
    Repayment of capital leases ..................      (155,339)      (127,559)
    Proceeds from notes payable ..................          --          180,000
    Repayment of notes payable ...................      (500,000)      (135,100)
                                                     -----------    -----------
Net cash provided by financing activities ........     6,012,035        473,387
                                                     -----------    -----------

Net increase in cash .............................        14,084         69,532
Cash at beginning of period ......................        46,948        128,093
                                                     -----------    -----------
Cash at end of period ............................   $    61,032    $   197,625
                                                     ===========    ===========

Supplemental  disclosures of cash flow
 information:
   Cash paid during the period for:
      Interest ...................................   $   519,156    $   839,449
      Income taxes ...............................   $     4,814    $     2,430
   Non-cash financing activity:
      Common stock issued in acquisition of
        assets ...................................   $      --      $   500,000
      Common stock issued in acquisition of
        license rights ...........................   $   577,500    $      --


          See accompanying notes to consolidated financial statements.


                                       5


<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



1.   PRESENTATION OF INTERIM INFORMATION

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes  required by generally accepted
accounting  principles in the United States for complete  financial  statements.
The  accompanying   unaudited  consolidated  financial  statements  reflect  all
adjustments  that, in the opinion of the management of Tag-It Pacific,  Inc. and
Subsidiaries (collectively,  the "Company"), are considered necessary for a fair
presentation of the financial  position,  results of operations,  and cash flows
for the periods  presented.  The results of operations  for such periods are not
necessarily  indicative of the results  expected for the full fiscal year or for
any future  period.  The  accompanying  financial  statements  should be read in
conjunction with the audited  consolidated  financial  statements of the Company
included in the Company's Form 10-K for the year ended December 31, 2001.



2.   EARNINGS PER SHARE

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

THREE MONTHS ENDED JUNE 30, 2002:       INCOME         SHARES       PER SHARE
---------------------------------     ----------     ----------     ----------

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

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

THREE MONTHS ENDED JUNE 30, 2001:
Basic earnings per share:
Income available to common
   stockholders ..................    $  709,461      8,003,244     $     0.09

Effect of Dilutive Securities:
Options ..........................                      248,086
Warrants .........................                       52,858
                                      ----------     ----------     ----------
Income available to common
   stockholders ..................    $  709,461      8,304,188     $     0.09
                                      ==========     ==========     ==========


                                       6


<PAGE>


SIX MONTHS ENDED JUNE 30, 2002:        (LOSS)         SHARES        PER SHARE
-------------------------------       ----------     ----------     ----------
Basic earnings per share:
Income available to common
   stockholders ..................    $1,010,315      9,148,681      $    0.11

Effect of dilutive securities:
Options ..........................                      245,101
Warrants .........................                       54,441
                                      ----------     ----------     ----------
Income available to common
   stockholders ..................    $1,010,315      9,448,223     $     0.11
                                      ==========     ==========     ==========
SIX MONTHS ENDED JUNE 30, 2001:
Basic earnings per share:
Loss available to common
   stockholders ..................    $ (435,611)     7,999,211     $    (0.05)

Effect of dilutive securities:
Options ..........................                         --
Warrants .........................                         --
                                      ----------     ----------     ----------
Loss available to common
   stockholders ..................    $ (435,611)     7,999,211     $    (0.05)
                                      ==========     ==========     ==========


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

     Warrants to purchase 80,000 and 110,000 shares of common stock at $6.00 and
$4.80, options to purchase 1,002,500 shares of common stock at between $3.75 and
$4.63,  convertible  debt of  $500,000  convertible  at  $4.50  per  share  were
outstanding  for the three months ended June 30, 2001,  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. During the three months
ended June 30, 2001, 850,000 shares of preferred Series B stock convertible when
the average trading price of the Company's stock for a 30-day consecutive period
is equal to or  greater  than  $8.00 per share  were  outstanding,  but were not
included in the computation of diluted earnings per share because the conversion
contingency related to these preferred shares was not met.

     Warrants to purchase  80,000,  110,000,  39,235 and 35,555 shares of common
stock at $6.00, $4.80, $0.71 and $1.50,  options to purchase 1,384,500 shares of
common  stock  at  between  $1.30  and  $4.63,   convertible  debt  of  $500,000
convertible  at $4.50 per share were  outstanding  for the six months ended June
30, 2001, 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.  During the six months ended June 30, 2001,  850,000  shares of preferred
Series B stock convertible when the average trading price of the Company's stock
for a 30-day consecutive period is equal to or greater than $8.00 per share were
outstanding,  but were not included in the  computation of diluted  earnings per
share because the conversion  contingency  related to these preferred shares was
not met.


                                       7


<PAGE>


3.   RESTRUCTURING CHARGES

     During  the  first  quarter  of 2001,  the  Company  implemented  a plan to
restructure  certain business  operations.  In accordance with the restructuring
plan, the Company closed its Tijuana, Mexico, facilities and relocated its TALON
brand  operations to Miami,  Florida.  In addition,  the Company  incurred costs
related to the  reduction of its Hong Kong  operations,  the  relocation  of its
corporate  headquarters  from  Los  Angeles,   California,  to  Woodland  Hills,
California,  and the  downsizing  of its  corporate  operations  by  eliminating
certain corporate expenses related to sales and marketing,  customer service and
general and administrative  expenses.  Total restructuring charges for the first
and fourth  quarters of 2001  amounted to  $1,257,598  and  $304,025,  including
$355,769 of benefits paid to terminated employees.  Included in accrued expenses
at December 31, 2001 was $114,554 of accrued restructuring charges consisting of
future payments to former employees paid in the first quarter of 2002.



4.   PRIVATE PLACEMENTS

     In a series of sales on December 28,  2001,  January 7, 2002 and January 8,
2002, the Company entered into Stock and Warrant Purchase  Agreements with three
private  investors,  including Mark Dyne, the chairman of the Company's board of
directors.  Pursuant to the Stock and Warrant Purchase  Agreements,  the Company
issued an  aggregate  of 516,665  shares of common stock at a price per share of
$3.00 for  aggregate  proceeds of  $1,549,995.  The Stock and  Warrant  Purchase
Agreements also include a commitment by one of the private investors to purchase
an  additional  400,000  shares of common stock at a price per share of $3.00 at
second closings  (subject of certain  conditions) on or prior to October 1, 2002
for  additional  proceeds  of  $1,200,000.  Pursuant  to the Stock  and  Warrant
purchase  agreements,  258,332  warrants to purchase common stock were issued at
the first closing of the  transactions  and 200,000 warrants are to be issued at
the second closings. The warrants are exercisable immediately after closing, one
half of the  warrants  at an  exercise  price of 110% and the second  half at an
exercise price of 120% of the market value of the Company's  common stock on the
date of closing. The exercise price for the warrants shall be adjusted upward by
25% of the amount,  if any, that the market price of the Company's  common stock
on the exercise  date exceeds the initial  exercise  price (as adjusted) up to a
maximum  exercise  price of $5.25.  The warrants have a term of four years.  The
shares  contain  restrictions  related to the sale or  transfer  of the  shares,
registration and voting rights. Total shares and warrants issued during the year
ended December 31, 2001 amount to 266,666 and 133,332. Total shares and warrants
issued in January 2002 amounted to 249,999 and 125,000.

     In March 2002, one of the private investors purchased an additional 100,000
shares of common  stock at a price per  share of $3.00  pursuant  to the  second
closing provisions of the related agreement for total proceeds of $300,000.  The
remaining  commitment  under this agreement is for an additional  300,000 shares
with aggregate  proceeds of $900,000.  Pursuant to the second closing provisions
of the Stock and Warrant Purchase Agreement,  50,000 warrants were issued to the
investor.



5.   EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT

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


                                       8


<PAGE>


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



     Years ending December 31,                                  Amount
     -------------------------                               ------------
     2002 (six months)...............................        $    100,000
     2003............................................              75,000
     2004............................................             200,000
     2005............................................             400,000
     2006............................................             225,000
                                                             ------------
     Total minimum royalties.........................        $  1,000,000
                                                             ============


6.   EXCLUSIVE SUPPLY AGREEMENT

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



7.   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.



8.   NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001,  the Financial  Accounting  Standards  Board  finalized  FASB
Statements No. 141, BUSINESS  COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER  INTANGIBLE  ASSETS (SFAS 142).  SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that the Company recognize  acquired  intangible assets apart from
goodwill if the  acquired  intangible  assets meet  certain  criteria.  SFAS 141
applies to all  business  combinations  initiated  after  June 30,  2001 and for
purchase  business  combinations  completed  on or after July 1,  2001.  It also
requires,  upon adoption of SFAS 142, that the Company  reclassify  the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

     SFAS 142 requires,  among other things,  that companies no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires that the Company  identify  reporting units for the
purposes of assessing  potential  future  impairments of goodwill,  reassess the
useful  lives  of  other  existing  recognized   intangible  assets,  and  cease
amortization of intangible  assets with an indefinite useful life. An intangible
asset  with an  indefinite  useful  life  should be  tested  for  impairment  in
accordance with the guidance in SFAS 142.

     The Company has adopted  SFAS 141 and 142  effective  January 1, 2002.  The
Company's  previous business  combinations were accounted for using the purchase
method  and there are no  intangible  assets  acquired  in  connection  with the
business  combinations  that  are  required  to be  recognized  separately  from
goodwill. The Company ceased amortization of goodwill effective as of January 1,
2002.  As


                                       9


<PAGE>


provided by SFAS 142, the initial  testing of goodwill  for possible  impairment
was completed and no impairment  was  identified.  As of June 30, 2002,  the net
carrying amount of goodwill is $450,000.

     Another intangible asset,  totaling $4,110,750 at January 1, 2002, consists
of the Talon  tradename  and  trademarks  acquired on December 21, 2001 under an
asset purchase  agreement with Talon,  Inc. and Grupo Industrial  Cierres Ideal,
S.A. de C.V.  The  Company  has  determined  that this  intangible  asset has an
indefinite life and therefore,  ceased  amortization in accordance with SFAS 142
beginning  January 1, 2002. The  impairment  test was completed as of January 1,
2002 and did not result in an impairment charge.

     In accordance  with SFAS 142, prior period  amounts were not restated.  The
June 30, 2001 net loss  adjusted for the exclusion of  amortization  of goodwill
would  have  been  $25,000  less than  reported  and  there  would  have been no
difference in basic or diluted earnings per share.

     In  October  2001,  the  FASB  issued  SFAS  No.  144,  Accounting  for the
Impairment  or Disposal  of  Long-Lived  Assets.  SFAS 144  requires  that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell,  whether  reported in  continuing  operations  or in  discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable  value or include  amounts  for  operating  losses  that have not yet
occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning   after   December  15,  2001  and,   generally,   is  to  be  applied
prospectively.  The  adoption of this  Statement  had no material  impact on the
Company's financial statements.

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

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


                                       10


<PAGE>


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

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

     This   discussion   summarizes  the  significant   factors   affecting  the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It  Pacific,  Inc.  for the three and six months  ended June 30, 2002 and
2001.  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.

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.  Certain  inventories are subject to buyback
     agreements with our customers.  The buyback  agreements  contain provisions
     related to the inventory purchased on behalf of our customers. In the event
     that inventories remain with us in excess of six months from our receipt of
     the goods from our  vendors,  the  customer is  required  to  purchase  the
     inventories  from us under normal invoice and selling terms.  These buyback
     agreements 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.

OVERVIEW

     We specialize in the distribution of trim items to manufacturers of fashion
apparel, licensed consumer products, specialty retailers and mass merchandisers.
We act as a full service outsourced trim management department for manufacturers
of  fashion  apparel  such  as  Tarrant  Apparel  Group  and  Azteca  Production
International.  We also serve as a supplier  of trim items to  specific  brands,
brand licensees and retailers, including Levi Strauss & Co., Tommy Hilfiger, A/X
Armani,  Express,  The Limited,  A&F,  Lerner,  among  others.  In addition,  we
distribute   zippers   under  our  TALON  brand  name  to  apparel   brands


                                       11


<PAGE>


and  manufacturers  such  as  VF  Corporation,  Savane  International,  Tropical
Sportswear, Target Stores, Abercrombie & Fitch, among others.

     We have positioned ourselves as a fully integrated  single-source  supplier
of a full range of trim items for manufacturers of fashion apparel. Our business
focuses  on  servicing  all of the trim  requirements  of our  customers  at the
manufacturing and retail brand level of the fashion apparel industry. Trim items
include thread, zippers,  labels,  buttons,  rivets, printed marketing material,
polybags,  packing cartons, and hangers.  Trim items comprise a relatively small
part of the cost of most apparel  products  but  comprise  the vast  majority of
components  necessary to fabricate a typical apparel product. We offer customers
what  we  call  our  MANAGED  TRIM  SOLUTION(TM),  which  is  an  Internet-based
supply-chain  management system covering the complete management of development,
ordering,  production,  inventory  management and  just-in-time  distribution of
their trim and packaging requirements.  Traditionally,  manufacturers of apparel
products  have been  required  to operate  their own apparel  trim  departments,
requiring the  manufacturers to maintain a significant  amount of infrastructure
to coordinate  the buying of trim  products  from a large number of vendors.  By
acting as a single  source  provider  of a full  range of trim  items,  we allow
manufacturers  using  our  MANAGED  TRIM  SOLUTION(TM)  to  eliminate  the added
infrastructure,  trim inventory  positions,  overhead  costs and  inefficiencies
created by in-house  trim  departments  that deal with a large number of vendors
for the  procurement  of trim items.  We also seek to leverage our position as a
single source  supplier of trim items as well as our extensive  expertise in the
field of trim  distribution and procurement to more efficiently  manage the trim
assembly process  resulting in faster delivery times and fewer production delays
for our  manufacturing  customers.  Our MANAGED TRIM  SOLUTION(TM) also helps to
eliminate a  manufacturer's  need to maintain a trim  purchasing  and  logistics
department.

     We also serve as a specified  supplier  for a variety of major retail brand
and private label oriented companies. We seek to expand our services as a vendor
of select lines of trim items for such  customers to being a preferred or single
source provider of all of such brand  customer's  authorized trim  requirements.
Our  ability to offer  brand name and private  label  oriented  customers a full
range of trim products is attractive because it enables our customers to address
their quality and supply needs for all of their trim  requirements from a single
source,  avoiding the time and expense  necessary to monitor  quality and supply
from  multiple  vendors and  manufacturer  sources.  In addition,  by becoming a
specified  supplier to brand  customers,  we have an  opportunity  to become the
preferred or sole vendor of trim items for all contract manufacturers of apparel
under that brand name.

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

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


                                       12


<PAGE>


     On December 21,  2001,  we entered into an asset  purchase  agreement  with
Talon,  Inc.  and Grupo  Industrial  Cierres  Ideal,  S.A.  de C.V.  whereby  we
purchased certain TALON zipper assets, including the TALON(R) zipper brand name,
trademarks,  patents,  technical field equipment and inventory. Since July 2000,
we have been the  exclusive  distributor  of TALON  brand  zippers.  TALON is an
American brand with significant name recognition and brand equity. TALON was the
original pioneer of the formed wire metal zipper for the jeans industry and is a
specified  zipper  brand  for  manufacturers  in the  sportswear  and  outerwear
markets.  The TALON  acquisition is an important step in our strategy to offer a
complete high quality trim package to apparel manufacturers. Our transition from
a  distributor  to an owner of the  TALON  brand  name  better  positions  us to
revitalize  the TALON  brand  name and  capture  increased  market  share in the
industry.  As the owner of the TALON brand  name,  we believe we will be able to
more  effectively  respond to customer needs and better maintain the quality and
value of the TALON products.

     On September 20, 2001, we entered into a ten-year  co-marketing  and supply
agreement  with Coats  American,  Inc.,  an affiliate of Coats plc, as well as a
preferred stock purchase agreement with Coats North America Consolidated,  Inc.,
also an affiliate of Coats plc. The co-marketing  and supply agreement  provides
for selected  introductions  into Coats'  customer base and has the potential to
accelerate  our growth plans and to introduce our MANAGED TRIM  SOLUTION(TM)  to
apparel  manufacturers  on a  broader  basis.  Pursuant  to  the  terms  of  the
co-marketing  and supply  agreement,  our trim packages will  exclusively  offer
thread manufactured by Coats. Coats was selected for its quality, service, brand
recognition and global reach. Prior to entering into the co-marketing and supply
agreement,  we were a long-time customer of Coats,  distributing their thread to
sewing  operations under our MANAGED TRIM SOLUTION(TM)  program.  This exclusive
agreement  will allow Coats to offer its customer base of contractors in Mexico,
Central America and the Caribbean full-service trim management under our MANAGED
TRIM SOLUTION(TM) program.

     Pursuant  to the  terms  of the  preferred  stock  purchase  agreement,  we
received a cash  investment of $3 million from Coats North America  Consolidated
in exchange  for 759,494  shares of series C  convertible  redeemable  preferred
stock. London-based Coats, plc is the world's largest manufacturer of industrial
thread and textile-related craft products.  Coats has operations in 65 countries
and has a North American presence in the United States,  Canada, Mexico, Central
America and the Caribbean.

     We have entered into an exclusive supply  agreement with Azteca  Production
International,  Inc., AZT  International SA D RL and Commerce  Investment Group,
LLC. Pursuant to this supply agreement, we provide all trim-related products for
certain programs manufactured by Azteca Production International.  The agreement
provides  for a minimum  aggregate  total of $10 million in annual  purchases by
Azteca  Production  International  and its  affiliates  during  each year of the
three-year term of the agreement,  if and to the extent,  we are able to provide
trim products on a basis that is competitive in terms of price and quality.  The
first  contract  year used to compute the  minimum  sales  requirement  is for a
period  of  eighteen  months.   Azteca  Production   International  has  been  a
significant  customer of ours for many years.  This agreement is structured in a
manner that has allowed us to utilize our MANAGED  TRIM  SOLUTION(TM)  system to
supply   Azteca   Production   International   with  all  of  its  trim  program
requirements.  We expanded oUR facilities in Tlaxcala, Mexico, to service Azteca
Production International's trim requirements.

     We also have an exclusive  supply  agreement with Tarrant Apparel Group and
have been  supplying  Tarrant  Apparel  Group with all of its trim  requirements
under our MANAGED TRIM SOLUTION(TM) system since 1998.

     Sales  under  our  exclusive  supply   agreements  with  Azteca  Production
International  and Tarrant  Apparel Group amounted to  approximately  63% of our
total sales for the year ended  December 2001. We will continue to rely on these
two customers for a significant  amount of our sales for the year ended December
2002.  Our results of operations  will depend to a  significant  extent upon the
commercial success of Azteca Production International and Tarrant Apparel Group.
If Azteca  Production  International  and Tarrant Apparel Group fail to purchase
our trim  products  at  anticipated  levels,  or our  relationship  with


                                       13


<PAGE>


Azteca Production International or Tarrant Apparel Group terminates, it may have
an adverse affect on our 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   SIX MONTHS ENDED
                                               JUNE 30,             JUNE 30,
                                           ----------------    ----------------
                                            2002      2001      2002      2001
                                           ------    ------    ------    ------
Net sales ..........................       100.0%    100.0%    100.0%    100.0%
Cost of goods sold .................        74.9      72.6      73.9      72.3
                                           ------    ------    ------    ------
Gross profit .......................        25.1      27.4      26.1      27.7
Selling expenses ...................         2.9       2.7       3.3       3.6
General and administrative
  expenses .........................        13.6      16.2      15.8      17.8
Restructuring Charges ..............         --        --        --        5.1
                                           ------    ------    ------    ------
Operating Income ...................         8.6%      8.5%      7.0%      1.2%
                                           ======    ======    ======    ======


RESTRUCTURING PLAN

     During the first  quarter of 2001,  we  implemented  a plan to  restructure
certain of our business  operations.  In accordance with the restructuring plan,
we closed  our  Tijuana,  Mexico,  facilities  and  relocated  our  TALON  brand
operations  to Miami,  Florida.  In addition,  we incurred  costs related to the
reduction  of  our  Hong  Kong  operations,  the  relocation  of  our  corporate
headquarters from Los Angeles,  California,  to Woodland Hills, California,  and
the  downsizing of our corporate  operations by  eliminating  certain  corporate
expenses  related to sales and  marketing,  customer  service  and  general  and
administrative  expenses.  Total restructuring  charges for the first and fourth
quarters of 2001 amounted to  $1,257,598  and  $304,025,  including  $355,769 of
benefits paid to terminated employees.

RESULTS OF OPERATIONS

     Net sales increased approximately  $5,174,000, or 35.4%, to $19,793,000 for
the three months ended June 30, 2002 from $14,619,000 for the three months ended
June 30,  2001.  The increase in net sales was  primarily  due to an increase in
trim-related  sales from our Tlaxcala,  Mexico operations under our MANAGED TRIM
SOLUTION(TM)  trim  package  program.   The  increase  in  net  sales  was  also
attributable  to an increase  in zipper  sales under our TALON brand name to our
MANAGED TRIM  SOLUTION(TM)  customers in Mexico and our other Talon customers in
Mexico and Asia. TALON has been successful in becoming an approved zipper vendor
for major  brands and  retailers  which has allowed us to increase  our sales to
these customers. Our purchase of the TALON brand name and trademarks in December
2001 has enabled us to better control our product offerings,  selling prices and
profit margins.

     Net sales increased approximately  $4,360,000, or 17.6%, to $29,118,000 for
the six months  ended June 30, 2002 from  $24,758,000  for the six months  ended
June 30,  2001.  The increase in net sales was  primarily  due to an increase in
trim-related  sales from our Tlaxcala,  Mexico operations under our MANAGED TRIM
SOLUTION(TM)  trim  package  program.   The  increase  in  net  sales  was  also
attributable,  for the reasons  discussed  above, to an increase in zipper sales
under our TALON brand name to our MANAGED TRIM SOLUTION(TM)  customers in Mexico
and our other Talon customers in Mexico and Asia.


                                       14


<PAGE>


     Gross profit increased  approximately $973,000, or 24.3%, to $4,977,000 for
the three months ended June 30, 2002 from  $4,004,000 for the three months ended
June  30,  2001.  Gross  margin  as a  percentage  of  net  sales  decreased  to
approximately  25.1% for the three  months  ended June 30,  2002 as  compared to
27.4% for the three months ended June 30, 2001.  The decrease in gross profit as
a percentage of net sales for the three months ended June 30, 2002 was primarily
due to an  increase  in zipper  sales  under our TALON brand name to our MANAGED
TRIM SOLUTION(TM)  customers in Mexico during the quarter. Talon products have a
lower  gross  margin  thAN other  products  included  within the  complete  trim
packages we offer to our customers through our MANAGED TRIM SOLUTION(TM).

     Gross profit increased  approximately $765,000, or 11.2%, to $7,612,000 for
the six months ended June 30, 2002 from $6,847,000 for the six months ended June
30, 2001.  Gross margin as a percentage of net sales decreased to  approximately
26.1% for the six months  ended June 30,  2002 as  compared to 27.7% for the six
months ended June 30, 2001.  The decrease in gross profit as a percentage of net
sales for the six months ended June 30, 2002 was primarily due to an increase in
zipper  sales  under our  TALON  brand  name to our  MANAGED  TRIM  SOLUTION(TM)
customers in Mexico during the period.  Talon products have a lower gross margin
than other products  included  within the complete trim packages we offer to our
customers through our MANAGED TRIM SOLUTION(TM). The decrease in gross margin as
a percentage of net sales for the six months ended June 30, 2002 was offset by a
further  reduction of manufacturing and facility costs which was a direct result
of the implementation of our restructuring plan in the first quarter of 2001.

     Selling expenses increased  approximately  $177,000,  or 44.1%, to $578,000
for the three  months  ended June 30, 2002 from  $401,000  for the three  months
ended June 30, 2001. As a percentage of net sales,  these expenses  increased to
2.9% for the three  months  ended June 30,  2002  compared to 2.7% for the three
months  ended June 30,  2001.  This  increase  was due to our  efforts to obtain
approval  from major  brands and  retailers  of the TALON  brand  zipper and the
implementation  of our new sales and  marketing  plan for the  TALON  brand.  In
addition,  we hired  additional  personnel  to support the  exclusive  waistband
license agreement we entered into in April 2002.

     Selling expenses increased approximately $92,000, or 10.4%, to $973,000 for
the six months  ended June 30, 2002 from  $881,000 for the six months ended June
30, 2001. As a percentage of net sales, these expenses decreased to 3.3% for the
six months  ended June 30, 2002  compared to 3.6% for the six months  ended June
30,  2001.  The  increase in selling  expenses  during the period was due to our
efforts to obtain  approval  from major brands and  retailers of the TALON brand
zipper and the  implementation of our new sales and marketing plan for the TALON
brand.  The  increase  in these  selling  expenses  was  partially  offset  by a
reduction of our sales force under our MANAGED TRIM SOLUTION(TM) program,  which
was part of our  restructuring  plan that we implemented in the first quarter of
2001.  For the  period,  selling  expenses  increased  at a slower rate than the
increase  in net  sales,  resulting  in a  decrease  in  selling  expenses  as a
percentage of net sales.

     General and administrative  expenses increased  approximately  $322,000, or
13.6%,  to $2,692,000  for the three months ended June 30, 2002 from  $2,370,000
for the three months ended June 30, 2001. The increase in these expenses was due
primarily to  additional  staffing and other  expenses  incurred  related to our
Tlaxcala,  Mexico  operations.  As a  percentage  of net sales,  these  expenses
decreased to 13.6% for the three  months  ended June 30, 2002  compared to 16.2%
for the three months  ended June 30,  2001,  because the rate of increase in net
sales exceeded that of general and administrative expenses.

     General and administrative  expenses increased  approximately  $189,000, or
4.3%, to $4,597,000  for the six months ended June 30, 2002 from  $4,408,000 for
the six months  ended June 30,  2001.  The  increase in these  expenses  was due
primarily to  additional  staffing and other  expenses  related to our Tlaxcala,
Mexico  operations.  As a percentage of net sales,  these expenses  decreased to
15.8% for the six  months  ended  June 30,  2002  compared  to 17.8% for the six
months ended June 30, 2001,  because the rate of increase in net sales  exceeded
that of general and administrative expenses.


                                       15


<PAGE>


     Interest expense decreased  approximately $19,000, or 5.8%, to $307,000 for
the three  months  ended June 30, 2002 from  $326,000 for the three months ended
June 30, 2001.  On May 30,  2001,  we replaced  our credit  facility  with a new
facility with UPS Capital Global Trade Finance  Corporation,  which provides for
increased  borrowing  availability  of up to  $20,000,000  and a more  favorable
interest rate of prime plus 2%. We incurred  financing  charges of approximately
$570,000,  including  legal,  consulting  and  closing  costs,  in the first two
quarters of 2001 related to our efforts to replace our existing credit facility.
Our borrowings  under the new UPS Capital credit facility  increased  during the
second quarter of 2002 due to increased sales and expanded  operations in Mexico
and Asia. The increase in interest  expense due to increased  borrowings  during
the quarter was offset by decreases in the prime rate from prior periods.

     Interest expense decreased  approximately  $271,000,  or 32.3%, to $568,000
for the six months  ended June 30, 2002 from  $839,000  for the six months ended
June 30,  2001.  As  discussed  above,  we incurred  financing  charges and were
charged  less  favorable  interest  rates  during the first two quarters of 2001
under our former credit facility.

     The  provision  for income  taxes for the three  months ended June 30, 2002
amounted to  approximately  $355,000  compared to $198,000  for the three months
ended June 30, 2001.  Income taxes increased for the three months ended June 30,
2002 primarily due to increased taxable income.

     The  provision  for  income  taxes for the six months  ended June 30,  2002
amounted to approximately $373,000 compared to an income tax benefit of $103,000
for the six months  ended June 30,  2001.  Income  taxes  increased  for the six
months ended June 30, 2002 primarily due to increased taxable income.

     Net income was approximately $1,046,000 for the three months ended June 30,
2002 as compared to net income of $709,000  for the three  months ended June 30,
2001, due primarily to increased net sales during the quarter.

     Net income was  approximately  $1,100,000 for the six months ended June 30,
2002 as  compared to a net loss of  $436,000  for the six months  ended June 30,
2001,  due primarily to increased net sales during the period and  restructuring
charges incurred during the first quarter of 2001 of approximately $1.3 million.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

     Cash and cash  equivalents  increased  to  $61,000  at June 30,  2002  from
$47,000 at December 31, 2001.  The increase  resulted  from  $6,012,000  of cash
provided by financing activities, offset by $5,857,000 and $141,000 of cash used
in operating and investing activities, respectively.

     Net cash used in operating  activities  was  approximately  $5,857,000  and
$33,000  for the six months  ended  June 30,  2002 and 2001,  respectively.  The
decrease in cash provided by operating  activities for the six months ended June
30, 2002 resulted primarily from increases in inventories and receivables, which
was partially offset by increases in accounts payable,  accrued expenses and net
income.  The  increase  in  inventories  during the period was due to  increased
customer orders for future sales. Cash used in operating  activities for the six
months  ended  June  30,  2001  resulted   primarily  from  increased   accounts
receivable,  other  assets  and net  losses,  which  were  offset  by  increased
inventories, accounts payable and accrued expenses.

     Net cash  used in  investing  activities  was  approximately  $141,000  and
$371,000 for the six months ended June 30, 2002 and 2001, respectively. Net cash
used in investing  activities  for the six months ended June 30, 2002  consisted
primarily of capital expenditures for computer equipment and upgrades.  Net cash
used in investing  activities  for the six months ended June 30, 2001  consisted
primarily  of capital  expenditures  for  computer  equipment  and  upgrades and
additional loans to related parties.


                                       16


<PAGE>


     Net cash provided by financing activities was approximately  $6,012,000 and
$473,000 for the six months ended June 30, 2002 and 2001, respectively. Net cash
provided  by  financing  activities  for the six  months  ended  June  30,  2002
primarily  reflects  increased  borrowings  under our credit  facility and funds
raised from private  placement  transactions,  offset by the  repayment of notes
payable. Net cash provided by financing activities for the six months ended June
30, 2001 primarily  reflects  increased  borrowings  under our credit  facility,
offset by the repayment of a bank overdraft.

     We currently  satisfy our working capital  requirements  primarily  through
cash flows  generated from  operations and borrowings  under our credit facility
with UPS  Capital.  Our maximum  availability  under the credit  facility is $20
million. At June 30, 2002 and 2001, outstanding borrowings under our UPS Capital
credit  facility   amounted  to   approximately   $15,249,000  and  $10,990,000,
respectively.  Open letters of credit amounted to approximately $287,000 at June
30, 2002. There were no open letters of credit at June 30, 2001.

     The initial term of our  agreement  with UPS Capital is three years and the
facility is secured by substantially all of our assets. The interest rate of the
credit facility is at the prime rate plus 2%. The credit facility  requires that
we comply with certain  financial  covenants  including net worth,  fixed charge
ratio and capital expenditures. At June 30, 2002, we were in compliance with all
applicable  financial  covenants.  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  $9,921,000 to $16,319,000  from July 1, 2001 to June
30, 2002. A significant decrease in eligible accounts receivable and inventories
due to customer  concentration levels and the aging of inventories,  among other
factors,  can have an adverse  effect on our  borrowing  capabilities  under our
credit facility,  which  thereafter,  may not be adequate to satisfy our working
capital  requirements.  Eligible accounts receivable are reduced if our accounts
receivable  customer  balances  are  concentrated  in excess of the  percentages
allowed under our agreement  with UPS Capital.  In addition,  we have  typically
experienced seasonal  fluctuations in sales volume. These seasonal  fluctuations
result in sales volume  decreases in the first and fourth  quarters of each year
due to the seasonal  fluctuations  experienced by the majority of our customers.
During these  quarters,  borrowing  availability  under our credit  facility may
decrease as a result of decreases  in eligible  accounts  receivables  generated
from our  sales.  As a result of our  concentration  of  business  with  Tarrant
Apparel Group and Azteca Production International, our eligible receivables have
been limited  under the UPS Capital  facility to various  degrees over the prior
six months. If our business becomes further dependant on one or a limited number
of customers or if we  experience  future  significant  seasonal  reductions  in
receivables,  our  availability  under the UPS Capital credit  facility would be
correspondingly  reduced.  If this were to occur,  we would be  required to seek
additional financing which may not be available on attractive terms and, if such
financing  is  unavailable,  we  may be  unable  to  meet  our  working  capital
requirements.

     Pursuant  to the  terms of a  foreign  factoring  agreement  under  our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible accounts receivable under our credit facility. As of June 30, 2002, the
amount  factored  without  recourse was  approximately  $501,000.  There were no
receivables factored with UPS Capital at June 30, 2001.

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


                                       17


<PAGE>


     In a series of sales on December 28,  2001,  January 7, 2002 and January 8,
2002, we entered into stock and warrant  purchase  agreements with three private
investors, including Mark Dyne, the chairman of our board of directors. Pursuant
to the stock and warrant purchase agreements,  we issued an aggregate of 516,665
shares of common stock at a price per share of $3.00 for  aggregate  proceeds of
$1,549,995.  The stock and warrant purchase agreements also include a commitment
by one of the private  investors  to purchase an  additional  400,000  shares of
common  stock at a price  per  share of $3.00 at  second  closings  (subject  of
certain  conditions) on or prior to October 1, 2002 for  additional  proceeds of
$1,200,000.  In March 2002, this private  investor  purchased  100,000 shares of
common  stock at a price  per  share of $3.00  pursuant  to the  second  closing
provisions of the stock and warrant  purchase  agreement  for total  proceeds of
$300,000.  The  remaining  commitment  under  the  stock  and  warrant  purchase
agreement  is for an  additional  300,000  shares  with  aggregate  proceeds  of
$900,000.  Pursuant to the second  closing  provisions  of the stock and warrant
purchase agreement, 50,000 warrants were issued to the investor.

     In accordance with the series C preferred stock purchase  agreement entered
into by us and Coats North America Consolidated,  Inc. on September 20, 2001, we
issued  759,494  shares of series C convertible  redeemable  preferred  stock to
Coats North America Consolidated, Inc. in exchange for an equity investment from
Coats North  America  Consolidated  of $3 million  cash.  The series C preferred
shares are  convertible  at the option of the holder  after one year at the rate
$4.94 per share.  The series C preferred  shares are redeemable at the option of
the  holder  after  four  years.  If the  holders  elect to redeem  the series C
preferred  shares,  we have the option to redeem for cash at the stated value of
$3 million or in the form of the our common  stock at 85% of the market price of
our common  stock on the date of  redemption.  If the market price of our common
stock on the date of redemption is less than $2.75 per share, we must redeem for
cash at the  stated  value of the  series C  preferred  shares.  We can elect to
redeem the series C preferred  shares at any time for cash at the stated  value.
The preferred stock purchase  agreement  provides for cumulative  dividends at a
rate of 6% of the stated value per annum,  payable in cash or our common  stock.
Each  holder of the  series C  preferred  shares  has the right to vote with our
common  stock  based on the  number  of our  common  shares  that  the  series C
preferred shares could then be converted into on the record date.

     Pursuant  to  the  terms  of  a  factoring  agreement  for  our  Hong  Kong
subsidiary,  Tag-It Pacific Limited,  the factor purchases our eligible accounts
receivable  and assumes the credit risk with respect to those accounts for which
the  factor  has given its prior  approval.  If the  factor  does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 80% of
eligible  accounts  receivable.  Interest  is charged at 1.5% over the Hong Kong
Dollar prime rate.  As of June 30, 2002 and 2001,  the amount  factored  without
recourse  was  approximately  $203,000  and $123,000 and the amount due from the
factor and recorded as a current asset was approximately  $203,000 and $123,000.
There were no outstanding advances from the factor as of June 30, 2002 and 2001.

     As of June 30, 2002, we had outstanding related-party debt of approximately
$850,000  at  a  weighted   average  interest  rate  of  10.5%,  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.  As
of June 30,  2001,  we had  outstanding  related-party  debt,  of  approximately
$3,618,000  at a weighted  average  interest  rate of  between  0% and 11%,  and
additional  non-related-party  debt of $25,200 at an interest  rate of 10%.  The
majority  of  related-party  debt was  cancelled  in  connection  with the TALON
trademark  purchase agreement dated December 21, 2001, with the remainder due on
the fifteenth day following the date of delivery of written demand for payment.

     Our receivables  increased to $20,172,000 at June 30, 2002 from $14,379,000
at June 30, 2001.  This  increase was due  primarily to increased  related-party
trade receivables of approximately $5.8 million resulting from increased related
party sales during the three months ended June 30, 2002.


                                       18


<PAGE>


     In October 1998, we entered into a supply  agreement  with Tarrant  Apparel
Group. In accordance with the supply  agreement,  we issued  2,390,000 shares of
our common stock to KG  Investment,  LLC. KG  Investment is owned by Gerard Guez
and Todd Kay, executive officers and significant shareholders of Tarrant Apparel
Group. Commencing in December 1998, we began to provide trim products to Tarrant
Apparel  Group  for  its  operations  in  Mexico.  Pricing  is  consistent  with
competitive vendors and terms are net 60 days.

     On  December  22,  2000,  we entered  into a supply  agreement  with Azteca
Production  International,   Inc.,  AZT  International  SA  D  RL  and  Commerce
Investment  Group,  LLC. The term of the supply  agreement is three years,  with
automatic  renewals of consecutive  three-year terms, and provides for a minimum
of $10 million in sales for each  contract  year  beginning  April 1, 2001.  The
first  contract  year used to compute the  minimum  sales  requirement  is for a
period of eighteen months.  In accordance with the supply  agreement,  we issued
1,000,000  shares  of our  common  stock  to  Commerce  Investment  Group,  LLC.
Commencing  in  December  2000,  we began to  provide  trim  products  to Azteca
Production  International,   Inc  for  its  operations  in  Mexico.  Pricing  is
consistent with competitive vendors and terms are net 60 days.

     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 through fiscal
2002. In addition,  we expect to receive quarterly cash payments of a minimum of
$1.25  million  under  our  supply  agreement  with Levi  Strauss  & Co.  and an
additional  private  placement  of $900,000  by October 1, 2002  pursuant to the
remaining  commitment  due under the stock  warrant and  purchase  agreement  we
entered into with a private  investor.  If our cash from operations is less than
anticipated or our working capital  requirements  and capital  expenditures  are
greater  than  we  expect,  we will  need to  raise  additional  debt or  equity
financing in order to provide for our operations.  We are continually evaluating
various  financing  strategies to be used to expand our business and fund future
growth or  acquisitions.  The extent of our  future  capital  requirements  will
depend,  however, 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.  There  can be no
assurance  that  additional  debt  or  equity  financing  will be  available  on
acceptable terms or at all. If we are unable to secure additional financing,  we
may not be able to execute our plans for  expansion,  including  expansion  into
foreign  markets  to  promote  our  TALON  brand  tradename,  and we may need to
implement additional cost savings initiatives.

     Our need for additional  long-term  financing  includes the integration and
expansion of our operations to exploit our rights under our TALON trade name and
the  expansion of our  operations in the Asian,  Caribbean and Central  American
markets.


                                       19


<PAGE>


CONTRACTUAL OBLIGATIONS

     The following  summarizes our contractual  obligations at June 30, 2002 and
the effects such  obligations are expected to have on liquidity and cash flow in
future periods:



                                         PAYMENTS DUE BY PERIOD
                          ------------------------------------------------------
                                        LESS THAN      1-3        4-5     AFTER
CONTRACTUAL OBLIGATIONS      TOTAL       1 YEAR       YEARS      YEARS   5 YEARS
-----------------------   -----------  -----------  ----------   ------  -------
Subordinated notes
  payable .............   $ 4,400,000  $ 1,200,000  $3,200,000   $  --   $  --

Capital lease
  obligations .........   $    93,833  $    63,592  $   30,241   $  --   $  --

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

Operating leases ......   $ 1,760,829  $   616,095  $1,144,734   $  --   $  --

Line of credit ........   $15,248,558  $15,248,558  $     --     $  --   $  --

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

Royalty payments ......   $ 1,000,000  $   150,000  $  850,000   $  --   $  --

(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.



NEW ACCOUNTING PRONOUNCEMENT

     In  August  2001,  the FASB  issued  SFAS No.  143,  Accounting  for  Asset
Retirement Obligations.  SFAS No. 143 requires the fair value of a liability for
an asset  retirement  obligation  to be  recognized in the period in which it is
incurred  if a  reasonable  estimate of fair value can be made.  The  associated
asset  retirement  costs are  capitalized as part of the carrying  amount of the
long-lived  asset.  SFAS No. 143 is effective for fiscal years  beginning  after
June 15, 2002. We believe the adoption of this  Statement  will have no material
impact on our financial statements.

     In  October  2001,  the  FASB  issued  SFAS  No.  144,  Accounting  for the
Impairment  or Disposal  of  Long-Lived  Assets.  SFAS 144  requires  that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell,  whether  reported in  continuing  operations  or in  discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable  value or include  amounts  for  operating  losses  that have not yet
occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning   after  December  15,  2001  and,   generally,   are  to  be  applied
prospectively.  The  adoption of this  Statement  had no material  impact on the
Company's financial statements.

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections.  This statement  eliminates the current  requirement that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance with the current GAAP criteria for extraordinary  classification.  In
addition,  SFAS 145 eliminates an inconsistency in lease accounting by requiring
that  modifications  of  capital  leases  that  result  in  reclassification  as
operating  leases be accounted for  consistent  with  sale-leaseback  accounting
rules.  The  statement  also  contains  other   nonsubstantive   corrections  to
authoritative accounting literature.  The changes related to debt


                                       20


<PAGE>


extinguishment  will be effective for fiscal years beginning after May 15, 2002,
and the changes related to lease  accounting will be effective for  transactions
occurring  after  May 15,  2002.  Adoption  of this  standard  will not have any
immediate effect on the Company's consolidated financial statements.

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


CAUTIONARY STATEMENTS AND RISK FACTORS

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

     IF WE LOSE OUR LARGEST  CUSTOMERS  OR THEY FAIL TO PURCHASE AT  ANTICIPATED
LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.  Our largest
customer,  Tarrant Apparel Group, accounted for approximately 42.0% and 48.1% of
our net sales,  on a consolidated  basis,  for the years ended December 31, 2001
and 2000. In December 2000, we entered into an exclusive  supply  agreement with
Azteca  Production  International,  AZT  International  SA D  RL,  and  Commerce
Investment Group, LLC that provides for a minimum of $10,000,000 in total annual
purchases by Azteca Production International and its affiliates during each year
of the three-year  term of the agreement.  Azteca  Production  International  is
required to purchase  from us only if we are able to provide trim  products on a
competitive basis in terms of price and quality.

     Our  results of  operations  will depend to a  significant  extent upon the
commercial success of Azteca Production International and Tarrant Apparel Group.
If Azteca and Tarrant fail to purchase our trim products at anticipated  levels,
or our relationship  with Azteca or Tarrant  terminates,  it may have an adverse
affect on our results because:

o    We will lose a primary  source of  revenue  if either of  Tarrant or Azteca
     choose not to purchase our products or services;

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

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

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

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

     CONCENTRATION  OF RECEIVABLES  FROM OUR LARGEST  CUSTOMERS MAKES RECEIVABLE
BASED FINANCING  DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGEST  CUSTOMERS
FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY  AFFECTED.  Our business  relies
heavily on a relatively  small number of customers,  including  Tarrant  Apparel
Group and Azteca Production  International.  This  concentration of our business
adversely  affects  our  ability to obtain  receivable  based  financing  due to
customer   concentration    limitations   customarily


                                       21


<PAGE>


applied by financial institutions,  including UPS Capital and factors.  Further,
if we are unable to collect any large receivables due us, our cash flow would be
severely impacted.

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

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

     WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO  SIGNIFICANT  FLUCTUATIONS  IN
OPERATING RESULTS 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.


                                       22


<PAGE>


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

     THE LOSS OF KEY  MANAGEMENT,  DESIGN 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 design 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 nor is he the subject of key
man  insurance.  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 design, sales, operating and managerial skills.

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

o    Foreign trade disruptions;

o    Import restrictions;

o    Labor disruptions;

o    Embargoes;

o    Government intervention; and

o    Natural disasters.

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

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


                                       23


<PAGE>


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

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

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

     OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND
CAUSE OUR STOCKHOLDERS TO SUFFER SIGNIFICANT LOSSES. The following factors could
cause the market price of our common stock to decrease, perhaps substantially: o
The failure of our quarterly operating results to meet expectations of investors
or securities analysts;

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

o    Interest rates;

o    Changes in accounting principles;

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

o    Announcements of key developments by our competitors; and

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

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


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<PAGE>


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
December  31,  2001,  our  officers and  directors  and their  affiliates  owned
approximately  42.4% 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  40.4% of the
outstanding shares of our common stock. The number of shares  beneficially owned
by the Dyne family includes the shares of common stock held by Azteca Production
International, which are voted by Colin Dyne pursuant to a voting agreement. The
Azteca Production  International  shares constitute  approximately  11.4% of the
outstanding  shares of common stock at December 31, 2001. KG Investment,  LLC, a
significant  stockholder,  owns approximately 27.2% of the outstanding shares of
our common stock at December 31, 2001. As a result,  our officers and directors,
the Dyne family and KG Investment,  LLC are able to exert considerable influence
over the outcome of any matters submitted to a vote of the holders of our common
stock,  including  the election of our Board of  Directors.  The voting power of
these  stockholders could also discourage others from seeking to acquire control
of us through the purchase of our common stock, which might depress the price of
our common stock.

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


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<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     We  are  also  exposed  to the  impact  of  interest  rate  changes  on our
outstanding borrowings.  At June 30, 2002, we had approximately $19.6 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>


                                     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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At  our  Annual  Meeting  of  Stockholders  held  on  June  14,  2002,  our
stockholders (a) elected Michael Katz and Jonathan Burstein to serve as Class II
Directors of Registrant  for three years and until their  respective  successors
have been  elected,  and (b)  approved  an  amendment  to our 1997 Stock Plan to
increase  from  2,077,500  to 2,277,500  the maximum  number of shares of common
stock that may be issued  pursuant to awards granted under the Plan.  Each Class
II Director was elected by a vote of 8,246,359  shares in favor,  44,400  shares
voted against, and no shares were withheld from voting for the directors. At the
annual  meeting,  8,232,940  shares were voted in favor of,  57,819  shares were
voted  against,  and no shares were withheld from voting on the amendment to our
1997 Stock Plan. There were no broker non-votes at the annual meeting.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:

         99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

     (b) Report on Form 8-K:

         Report on Form 8-K,  filed July 26, 2002,  reporting  under Item 5, our
         entering into an exclusive  supply agreement with Levi Strauss & Co. on
         July 12, 2002.


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<PAGE>


                                   SIGNATURES



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





Date: August 14, 2002                           TAG-IT PACIFIC, INC.



         `                                      /s/  Ronda Sallmen
                                                --------------------------------
                                                By:      Ronda Sallmen

                                                Its:     Chief Financial Officer


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