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

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


                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2005.

                                       OR

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

         For the transition period from ____________ to _______________.



                         Commission file number 1-13669



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

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


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


                                 (818) 444-4100
              (Registrant's Telephone Number, Including Area Code)

         Indicate by check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the  Exchange  Act  during the  preceding  12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes [X] No [_]

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

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest  practicable  date:  Common Stock, par
value $0.001 per share,  18,241,045  shares issued and  outstanding as of August
22, 2005.


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<PAGE>


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



PART I   FINANCIAL INFORMATION                                             PAGE
                                                                           ----

Item 1.  Consolidated Financial Statements. (unaudited)........................3

         Consolidated Balance Sheets as of June 30, 2005
         and December 31, 2004.................................................3

         Consolidated Statements of Operations for the Three and Six
         Months Ended June 30, 2005 and 2004...................................4

         Consolidated Statements of Cash Flows for the
         Six Months Ended June 30, 2005 and 2004...............................5

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

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations............................................12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........27

Item 4.  Controls and Procedures..............................................28

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings....................................................29

Item 4.  Submission of Matters to a Vote of Security Holders..................29

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

             CAUTIONARY LEGEND REGARDING FORWARD-LOOKING STATEMENTS

         Some of the  information  in this  Quarterly  Report  on Form  10-Q may
constitute  forward-looking  statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934,
both as amended.  These forward-looking  statements are subject to various risks
and uncertainties.  The forward-looking  statements include, without limitation,
statements  regarding our future  business  plans and  strategies and our future
financial  position or results of operations,  as well as other  statements that
are not historical.  You can find many of these  statements by looking for words
like  "will",  "may",   "believes",   "expects",   "anticipates",   "plans"  and
"estimates"  and for similar  expressions.  Because  forward-looking  statements
involve  risks and  uncertainties,  there are many  factors that could cause the
actual  results to differ  materially  from those  expressed  or implied.  These
include, but are not limited to, economic  conditions.  This Quarterly Report on
Form 10-Q contains important  cautionary  statements and a discussion of many of
the  factors  that could  materially  affect the  accuracy  of Tag-It  Pacific's
forward-looking  statements and such statements and discussions are incorporated
herein by reference.  Any subsequent written or oral forward-looking  statements
made by us or any person acting on our behalf are qualified in their entirety by
the cautionary  statements and factors contained or referred to in this section.
We do not intend or  undertake  any  obligation  to update  any  forward-looking
statements to reflect events or circumstances after the date of this document or
the date on which any subsequent forward-looking statement is made or to reflect
the occurrence of unanticipated events.


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS.
                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                   (UNAUDITED)

                                                     June 30,      December 31,
                                                       2005           2004
                                                   ------------    ------------
                     Assets
 Current Assets:
    Cash and cash equivalents ..................   $  2,962,082    $  5,460,662
    Trade accounts receivable, net .............     13,352,574      17,890,044
    Trade accounts receivable, related party ...      3,375,000       4,500,000
    Inventories, net ...........................     11,948,779       9,305,819
    Prepaid expenses and other current assets ..      2,064,950       2,326,245
    Deferred income taxes ......................           --         1,000,000
                                                   ------------    ------------
      Total current assets .....................     33,703,385      40,482,770

 Property, plant & equipment, net of accumulated
    depreciation and amortization ..............      9,988,844       9,380,026
 Tradename .....................................      4,110,751       4,110,750
 Goodwill ......................................        450,000         450,000
 License rights ................................        198,625         259,875
 Due from related parties ......................        578,406         556,550
 Other assets ..................................      1,012,947       1,207,885
                                                   ------------    ------------
 Total assets ..................................   $ 50,042,958    $ 56,447,856
                                                   ============    ============

Liabilities and Stockholders' Equity
   Current Liabilities:

    Line of credit .............................   $  1,001,309    $    614,506
    Accounts payable and accrued expenses ......     14,780,039       7,460,916
    Demand notes payable to related parties ....        664,971         664,971
    Current portion of capital lease obligations        844,231         859,799
    Current portion of notes payable ...........        180,809         174,975
    Note payable ...............................        200,000       1,400,000
                                                   ------------    ------------
      Total current liabilities ................     17,671,359      11,175,167

 Capital lease obligations, less current portion      1,049,982       1,220,969
 Notes payable, less current portion ...........      1,355,969       1,447,855
 Secured convertible promissory notes ..........     12,424,491      12,408,623
                                                   ------------    ------------
      Total liabilities ........................     32,501,801      26,252,614
                                                   ------------    ------------

 Guarantees and Contingencies (Note 4)

 Stockholders' equity:
    Preferred stock, Series A $0.001 par value;
      250,000 shares authorized,
      no shares issued or outstanding ..........           --              --
    Common stock, $0.001 par value, 30,000,000
      shares authorized; 18,241,045 shares
      issued and outstanding at June 30, 2005;
      18,171,301 at December 31, 2004 ..........         18,243          18,173
    Additional paid-in capital .................     51,327,873      51,073,402
    Accumulated deficit ........................    (33,804,959)    (20,896,333)
                                                   ------------    ------------
 Total stockholders' equity ....................     17,541,157      30,195,242
                                                   ------------    ------------
 Total liabilities and stockholders' equity ....   $ 50,042,958    $ 56,447,856
                                                   ============    ============

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>


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

<CAPTION>
                                                        Three Months Ended June 30,     Six Months Ended June 30,
                                                        ----------------------------   ----------------------------
                                                            2005           2004            2005            2004
                                                        ------------    ------------   ------------    ------------
<S>                                                     <C>             <C>            <C>             <C>
Net sales ...........................................   $ 18,473,236    $ 14,923,121   $ 31,528,513    $ 25,083,419
Cost of goods sold ..................................     16,500,664      11,030,867     26,304,118      18,199,115
                                                        ------------    ------------   ------------    ------------
   Gross profit .....................................      1,972,572       3,892,254      5,224,395       6,884,304

Selling expenses ....................................        655,295         702,482      1,397,629       1,474,598
General and administrative expenses .................     11,008,446       2,791,209     14,735,706       5,648,349
                                                        ------------    ------------   ------------    ------------
   Total operating expenses .........................     11,663,741       3,493,691     16,133,335       7,122,947

(Loss) income from operations .......................     (9,691,169)        398,563    (10,908,940)       (238,643)
Interest expense, net ...............................        268,021         144,355        536,676         331,074
                                                        ------------    ------------   ------------    ------------
(Loss) income before income taxes ...................     (9,959,190)        254,208    (11,445,616)       (569,717)
Provision (benefit) for income taxes ................      1,300,996          83,889      1,463,013        (188,007)
                                                        ------------    ------------   ------------    ------------
   Net (loss) income ................................   $(11,260,186)   $    170,319   $(12,908,629)   $   (381,710)
                                                        ============    ============   ============    ============
Less:  Preferred stock dividends ....................           --              --             --            30,505
                                                        ------------    ------------   ------------    ------------
Net (loss) income to common shareholders ............   $(11,260,186)   $    170,319   $(12,908,629)   $   (412,215)
                                                        ============    ============   ============    ============

Basic (loss) earnings per share .....................   $      (0.62)   $       0.01   $      (0.71)   $      (0.02)
                                                        ============    ============   ============    ============
Diluted (loss) earnings per share ...................   $      (0.62)   $       0.01   $      (0.71)   $      (0.02)
                                                        ============    ============   ============    ============

Weighted average number of common shares outstanding:
   Basic ............................................     18,241,045      18,061,778     18,210,406      16,491,684
                                                        ============    ============   ============    ============
   Diluted ..........................................     18,241,045      18,779,239     18,210,406      16,491,684
                                                        ============    ============   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


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

<CAPTION>
                                                             Six months Ended June 30,
                                                           ----------------------------
                                                               2005            2004
                                                           ------------    ------------
<S>                                                        <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net loss ...........................................   $(12,908,629)   $   (381,710)
Adjustments to reconcile net loss to net cash used
  by operating activities:
   Depreciation and amortization .......................      1,127,169         730,153
   Increase in allowance for doubtful accounts .........      6,120,691         147,282
    Increase in deferred tax asset valuation allowance .      1,000,000            --
    Increase in inventory valuation reserve ............      1,550,000            --
   Common stock issued for services ....................           --            74,825
Changes in operating assets and liabilities:
      Receivables, including related parties ...........       (458,222)     (6,777,637)
      Inventories ......................................     (4,192,959)     (1,907,176)
      Other assets .....................................         (4,445)       (236,854)
      Prepaid expenses and other current assets ........        321,295         929,415
      Accounts payable and accrued expenses ............      7,182,615         739,019
      Income taxes payable .............................        114,651        (434,901)
                                                           ------------    ------------
Net cash used in operating activities ..................       (147,834)     (7,117,584)
                                                           ------------    ------------

Cash flows from investing activities:
    Acquisition of property and equipment ..............     (1,248,886)       (337,082)
                                                           ------------    ------------

Cash flows from financing activities:
    Proceeds (repayment) of bank line of credit, net ...        386,803      (1,160,152)
    Proceeds from exercise of stock options and warrants        254,541         424,801
    Repayment of capital leases ........................       (457,152)       (299,377)
    Repayment of notes payable .........................     (1,286,052)       (600,000)
                                                           ------------    ------------
Net cash used in financing activities ..................     (1,101,860)     (1,634,728)
                                                           ------------    ------------

Net decrease in cash ...................................     (2,498,580)     (9,089,394)
Cash at beginning of period ............................      5,460,662      14,442,769
                                                           ------------    ------------
Cash at end of period ..................................   $  2,962,082    $  5,353,375
                                                           ============    ============

Supplemental disclosures of cash flow information:
    Cash received (paid) during the period for:
      Interest paid ....................................   $   (655,032)   $   (324,292)
      Income taxes paid ................................   $    (47,560)   $   (255,067)
      Income taxes received ............................   $     29,734    $       --
Non-cash financing activities:
    Preferred Series D stock converted to common stock .   $       --      $ 22,918,693
    Preferred Series C stock converted to common stock .   $       --      $  2,895,001
    Accrued dividends converted to common stock ........   $       --      $    458,707
    Capital lease obligation ...........................   $    270,597    $    249,418
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


                              TAG-IT PACIFIC, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       PRESENTATION OF INTERIM INFORMATION

        The accompanying  unaudited  consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not  include  all  of the  information  and  footnotes  required  by  accounting
principles  generally  accepted  in the  United  States for  complete  financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments  that, in the opinion of the management of Tag-It Pacific,  Inc.
and Subsidiaries  (collectively,  the "Company"), are considered necessary for a
fair  presentation of the financial  position,  results of operations,  and cash
flows for the periods presented.  The results of operations for such periods are
not necessarily  indicative of the results  expected for the full fiscal year or
for any future period. The accompanying  financial  statements should be read in
conjunction with the audited  consolidated  financial  statements of the Company
included in the Company's  Form 10-K for the year ended  December 31, 2004.  The
balance  sheet  as of  December  31,  2004  has been  derived  from the  audited
financial statements as of that date but omits certain information and footnotes
required for complete financial statements.

2.       EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2005:         (LOSS) INCOME          SHARES          PER SHARE
                                           ------------       ------------      ------------
<S>                                        <C>                  <C>             <C>
Basic loss per share:
Loss available to common stockholders .    $(11,260,186)        18,241,045      $      (0.62)

Effect of Dilutive Securities:
Options ...............................            --                 --                --
Warrants ..............................            --                 --                --
                                           ------------       ------------      ------------
Loss available to common stockholders .    $(11,260,186)        18,241,045      $      (0.62)
                                           ============       ============      ============

THREE MONTHS ENDED JUNE 30, 2004:
Basic earnings per share:
Income available to common stockholders    $    170,319         18,061,778      $       0.01

Effect of Dilutive Securities:
Options ...............................            --              584,415              --
Warrants ..............................            --              133,046              --
                                           ------------       ------------      ------------
Income available to common stockholders    $    170,319         18,779,239      $       0.01
                                           ============       ============      ============
</TABLE>


                                       6
<PAGE>


<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2005:           (LOSS) INCOME          SHARES          PER SHARE
                                           ------------       ------------      ------------
<S>                                        <C>                  <C>             <C>
Basic loss per share:
Loss available to common stockholders      $(12,908,629)        18,210,406      $      (0.71)

Effect of Dilutive Securities:
Options .............................              --                 --                --
Warrants ............................              --                 --                --
                                           ------------       ------------      ------------
Loss available to common stockholders      $(12,908,629)        18,210,406      $      (0.71)
                                           ============       ============      ============

SIX MONTHS ENDED JUNE 30, 2004:
Basic loss per share:
Loss available to common stockholders      $   (412,215)        16,491,684      $      (0.02)

Effect of Dilutive Securities:
Options .............................              --                 --                --
Warrants ............................              --                 --                --
                                           ------------       ------------      ------------
Loss available to common stockholders      $   (412,215)        16,491,684      $      (0.02)
                                           ============       ============      ============
</TABLE>


         Warrants to purchase  1,510,479 shares of common stock at between $3.50
and $5.06, options to purchase 1,942,000 shares of common stock at between $1.30
and  $5.23,  convertible  debt of  $500,000  convertible  at $4.50 per share and
convertible  debt  of  $12.5  million   convertible  at  $3.65  per  share  were
outstanding  for the three and six  months  ended  June 30,  2005,  but were not
included in the  computation of diluted  earnings per share because  exercise or
conversion would have an antidilutive effect on earnings per share.


         Convertible  debt of $500,000,  convertible  at $4.50 per common share,
was  outstanding  for the three months ended June 30, 2004, but was not included
in the  computation  of  diluted  earnings  per  share  because  the  effect  of
conversion would have an antidilutive effect on earnings per share.


         Warrants to purchase  426,666  shares of common stock at between  $4.57
and  $5.06,  options  to  purchase  105,000  shares  of  common  stock at $4.63,
convertible  debt of $500,000  convertible at $4.50 per share and 759,494 shares
of preferred Series C stock  convertible at $4.94 per share were outstanding for
the three months ended June 30, 2004,  but were not included in the  computation
of diluted  earnings  per share  because  exercise or  conversion  would have an
antidilutive effect on earnings per share.


                                       7
<PAGE>


3.       STOCK BASED COMPENSATION

         All stock options  issued to employees  had an exercise  price not less
than the fair market value of the  Company's  Common Stock on the date of grant,
and in accounting for such options utilizing the intrinsic value method there is
no related  compensation  expense recorded in the Company's financial statements
for the three and six months ended June 30, 2005 and 2004. If compensation  cost
for stock-based  compensation had been determined based on the fair market value
of the stock  options on their dates of grant in  accordance  with SFAS 123, the
Company's net income (loss) and earnings  (loss) per share for the three and six
months ended June 30, 2005 and 2004 would have amounted to the pro forma amounts
presented below:

<TABLE>
<CAPTION>
                                                             Three Months                   Six Months
                                                             Ended June 30,                Ended June 30,
                                                    -----------------------------  ------------------------------
                                                        2005             2004          2005             2004
                                                    -------------     -----------  -------------    -------------
<S>                                                <C>               <C>               <C>               <C>
Net (loss) income, as reported .................   $  (11,260,186)   $      170,319    $  (12,908,629)   $     (381,710)
Add:  Stock-based employee compensation expense
     included in reported net income, net of
     related tax effects .......................             --                --                --                --

Deduct:  Total stock-based employee compensation
     expense determined under fair value based
     method for all awards, net of related tax
     effects ...................................          (65,332)           (5,224)          (77,062)          (44,780)
                                                   --------------    --------------    --------------    --------------


Pro forma net (loss) income ....................   $  (11,325,518)   $      165,095    $  (12,985,691)   $     (426,490)
                                                   ==============    ==============    ==============    ==============

Earnings per share:
       Basic - as reported .....................   $        (0.62)   $         0.01    $        (0.71)   $        (0.02)
       Basic - pro forma .......................   $        (0.62)   $         0.01    $        (0.71)   $        (0.03)
       Diluted - as reported ...................   $        (0.62)   $         0.01    $        (0.71)   $        (0.02)
       Diluted - pro forma .....................   $        (0.62)   $         0.01    $        (0.71)   $        (0.03)
</TABLE>


                                       8
<PAGE>


4.       GUARANTEES AND CONTINGENCIES

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

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

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

         The Company has filed suit against Pro-Fit Holdings Limited in the U.S.
District Court for the Central District of California -- TAG-IT PACIFIC, INC. V.
PRO-FIT HOLDINGS  LIMITED,  CV 04-2694 LGB (RCx) - based on various  contractual
and tort claims  relating to the Company's  exclusive  license and  intellectual
property agreement,  seeking declaratory relief,  injunctive relief and damages.
The  agreement  with  Pro-Fit  gives the  Company  exclusive  rights in  certain
geographic areas to Pro-Fit's  stretch and rigid waistband  technology.  Pro-Fit
filed an answer  denying the material  allegations  of the complaint and filed a
counterclaim  alleging  various  contractual and tort claims seeking  injunctive
relief and damages.  The Company filed a reply denying the material  allegations
of Pro-Fit's  pleading.  Pro-Fit has since  purported to terminate the exclusive
license and intellectual  property  agreement based on the same alleged breaches
of the agreement that are the subject of the parties'  existing  litigation,  as
well as on an  additional  basis  unsupported  by fact.  In February  2005,  the
Company amended its pleadings in the litigation to assert additional breaches by
Pro-Fit of its  obligations to the Company under the agreement and under certain
additional  letter  agreements,  and for a declaratory  judgment that  Pro-Fit's
patent No.  5,987,721 is invalid and not  infringed by the Company.  Thereafter,
Pro-Fit  filed  an  amended  answer  and   counterclaim   denying  the  material
allegations of the amended  complaint and alleging various  contractual and tort
claims seeking injunctive relief and damages.  Pro-Fit further asserted that the
Company  infringed its United States Patent Nos.  5,987,721 and  6,566,285.  The
Company filed a reply denying the  substantive  allegations of the reply. At the
Company's  request,  the  Court  bifurcated  the  contract  issues  for trial to
commence  on January 10,  2006.  The  remaining  issues will be tried at a later
date. Fact discovery has been completed and expert  discovery is ongoing.  As we
derive a significant  amount of revenue from the sale of products  incorporating
the stretch  waistband  technology,  our  business,  results of  operations  and
financial  condition could be materially  adversely affected if our dispute with
Pro-Fit is not  resolved  in a


                                       9
<PAGE>


manner favorable to us. Additionally, we have incurred significant legal fees in
this  litigation,  and unless the case is  settled,  we will  continue  to incur
additional legal fees in increasing amounts as the case accelerates to trial.

         The Company is subject to certain  other 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.

5.       NEW ACCOUNTING PRONOUNCEMENTS

         In December  2004,  the FASB issued  Statement of Financial  Accounting
Standard  ("SFAS") No. 123R "Share Based  Payment." This statement is a revision
of SFAS  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
supersedes APB Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
its related  implementation  guidance.  SFAS 123R  addresses  all forms of share
based  payment  ("SBP")  awards  including  shares issued under  employee  stock
purchase plans, stock options,  restricted stock and stock appreciation  rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards'  grant  date,  based on the  estimated  number of awards that are
expected to vest.  This  statement is effective as of the beginning of the first
annual  reporting  period  that  begins  after June 15,  2005.  The  Company has
evaluated the effects of the adoption of this  pronouncement  and has determined
it will not have a material impact on the Company's financial statements.

         In March, 2005, the Securities and Exchange Commission's ("SEC") Office
of the  Chief  Accountant  and its  Division  of  Corporation  Finance  released
Financial Accounting Bulletin No. 107,  "Share-Based Payment" (SAB 107). SAB 107
provides  interpretive  guidance related to the interaction between Statement of
Financial  Accounting  Standard No. 123R "Shared Based  Payment" (SFAS 123R) and
certain SEC rules and regulations.  SAB 107 provides the staff's views regarding
the valuation of  shared-based  payment  arrangements  for public  companies and
stresses the importance of including appropriate disclosures within SEC filings,
particularly during the transition to SFAS 123R.

         In May 2005,  the FASB  issued SFAS No.  154,  "Accounting  Changes and
Error  Corrections - A Replacement  of APB Opinion No. 20 and FASB Statement No.
3" ("SFAS  154").  SFAS 154  replaces APB Opinion No. 20,  "Accounting  Changes"
("APB 20") and FASB Statement No. 3,  "Reporting  Accounting  Changes in Interim
Financial  Statements,"  and changes the requirements for the accounting for and
reporting of a change in accounting  principle.  APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative  effect of changing to the new
accounting  principle.  SFAS 154  requires  retrospective  application  to prior
periods'  financial  statements for voluntary  changes in accounting  principle.
SFAS 154 is effective for accounting  changes and  corrections of errors made in
fiscal years  beginning  after  December  15, 2005.  The impact of SFAS 154 will
depend on the accounting change, if any, in a future period.

6.       SUBSEQUENT EVENT - RESTRUCTURING

         In August 2005 the Company's Board of Directors adopted a restructuring
plan.  The plan  includes  restructuring  the  Company's  global  operations  by
eliminating  redundancies  in its Hong Kong  operation,  reducing the  functions
performed at its Mexico  facilities,  converting  its Guatemala  facility from a
manufacturing   site  to  a   distributor,   and  closing  its  North   Carolina
manufacturing  facility.  The Company also intends to focus its sales efforts on
higher margin products, which may result in lower net sales over the next twelve
months.  Upon  completion of this  restructuring,  the Company will operate with
fewer employees and significantly  reduce associated operating and manufacturing
expenses. As a result


                                       10
<PAGE>


of the  restructuring,  the  Company  expects to record a  restructuring  charge
during the third  quarter of 2005 of  between  $4 and $5  million.  This plan is
expected to be completed in December 2005.

7.       SIGNIFICANT ADJUSTMENTS

         The Company  evaluated  its accounts  receivable,  inventory,  accounts
payable,  certain  other  assets and its net deferred tax asset and recorded the
following significant adjustments during the three months ended June 30, 2005:

         o        Increased  allowance for doubtful accounts by $6,381,000 based
                  upon management's  estimate of the  collectibility of accounts
                  receivable related to two customers;

         o        Increased inventory  obsolescence  reserve by $1,550,000 based
                  upon  management's  estimate  of the net  realizable  value of
                  certain inventories;

         o        Recorded   additional  reserves  of  $1,523,000  to  primarily
                  reflect an increase in legal accruals,  charges related to the
                  Company's  Pro-Fit  litigation  and  a  reduction  in  certain
                  assets; and

         o        Reduced the carrying  value of the  Company's net deferred tax
                  asset to zero from $1,000,000 at December 31, 2004.


                                       11
<PAGE>


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

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

         This  discussion  summarizes  the  significant  factors  affecting  the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It Pacific,  Inc. for the three months and six months ended June 30, 2005
and 2004.  Except for  historical  information,  the matters  discussed  in this
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations are forward looking  statements that involve risks and  uncertainties
and are based upon  judgments  concerning  various  factors  that are beyond our
control.

OVERVIEW

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

         We have developed,  and are now  implementing,  what we refer to as our
TALON franchise  strategy,  whereby we appoint suitable  distributors in various
geographic  international  regions  to finish and sell  zippers  under the TALON
brand name. Our designated  franchisees  purchase and install locally  equipment
for dying and producing  finished  zippers,  thus minimizing our capital outlay.
The  franchisee  will  then  purchase  from us large  zipper  rolls  with  other
materials such as sliders and produce  finished  zippers  locally,  according to
their  customers'  specifications,  in markets  around the  world,  becoming  in
essence a local marketer and  distributor  of the TALON brand.  This strategy is
expected to expand the geographic footprint of our TALON division.

         We have  received  purchase  orders  from two  franchisees  and minimum
royalty payments from three  franchisees.  We continue to work with our existing
franchisees to help them develop and grow their businesses. In keeping with this
strategy  of  maintaining  a  strong,  committed  franchise  base,  we  recently
terminated  one  franchisee  who was not  meeting  the  terms  of the  franchise
agreement. We are continuing our efforts to sign agreements with new franchisees
and expand our global coverage.

          We  currently  have five TALON  franchisees  located in the  following
regions:

                                Agreement
Region                          Date  *                     Term
-----------------------         ---------------             ---------

South East Asia                 March 1, 2005               42 Months
Asia                            March 1 , 2005              42 Months
South East Asia                 July 1, 2005                42 Months
Middle East and Africa          June 30, 2005               42 Months
Central Asia                    March 31, 2005              39 Months
----------
         * Certain dates  previously  reported  have changed to reflect  revised
agreements.

         As  described  more  fully  elsewhere  in this  report,  we  remain  in
litigation with Pro-Fit Holdings  Limited  relating to our exclusively  licensed
rights to sell or sublicense  stretch  waistbands  manufactured


                                       12
<PAGE>


under Pro-Fit's patented technology.  We supply Levi with waistbands in reliance
on our agreement with Pro-Fit. As we derive a significant amount of revenue from
the  sale of  products  incorporating  the  stretch  waistband  technology,  our
business,  results of  operations  and financial  condition  could be materially
adversely  affected  if our  dispute  with  Pro-Fit is not  resolved in a manner
favorable to us.  Additionally,  we have incurred significant legal fees in this
litigation, and unless the case is settled, we will continue to incur additional
legal fees in increasing amounts as the case accelerates to trial.

RESTRUCTURING

         In an effort to better  align our  organizational  and cost  structures
with our future  growth  opportunities,  in August  2005 our Board of  Directors
adopted a restructuring plan for our company that we expect will be completed in
December  2005.  The  plan  includes  restructuring  our  global  operations  by
eliminating  redundancies  in our Hong Kong  operation,  reducing the  functions
performed at our Mexico  facilities,  converting  our Guatemala  facility from a
manufacturing   site  to  a   distributor,   and  closing  our  North   Carolina
manufacturing facility.  Upon completion of this restructuring,  we will operate
with  fewer  employees  and  significantly   reduce  associated   operating  and
manufacturing expenses. As a result of the restructuring,  we expect to record a
restructuring  charge  during  the third  quarter  of 2005 of  between $4 and $5
million.

         As a result of the  restructuring,  we expect  to  reduce  our  current
operating  costs  by  approximately  25%  to  30%,  or $5 to $6  million,  on an
annualized  basis.  We also intend to focus our sales  efforts on higher  margin
products,  which may  result in lower net  sales  over the next  twelve  months.
However,  by focusing on higher margin products and  eliminating  overhead costs
from costs of goods sold, we believe our overall  profits  margins will improve.
Higher  gross  profit,  combined  with a decrease in general and  administrative
costs,  should improve our operating  results and cash flows. The  restructuring
also is expected  to reduce the amount of capital  invested  in  facilities  and
equipment, which will reduce our capital requirements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  On an on-going basis,  we evaluate our estimates,  including those
related to our  valuation  of  inventory  and our  allowance  for  uncollectable
accounts  receivable.  We base our  estimates on  historical  experience  and on
various  other  assumptions  that  are  believed  to  be  reasonable  under  the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions or conditions.

         We believe the following critical  accounting  policies affect our more
significant  judgments and estimates used in the preparation of our consolidated
financial statements:

         o        Inventory  is  evaluated  on a  continual  basis  and  reserve
                  adjustments are made based on management's  estimate of future
                  sales  value,  if any, of specific  inventory  items.  Reserve
                  adjustments  are made for the  difference  between the cost of
                  the inventory and the estimated  market value,  if lower,  and
                  charged  to  operations  in the period in which the facts that
                  give rise to the  adjustments  become known.  A portion of our
                  total inventories is subject to buyback  arrangements with our
                  customers. The buyback arrangements



                                       13
<PAGE>


                  contain  provisions  related to the  inventory we purchase and
                  warehouse on behalf of our  customers,  and require that these
                  customers  purchase the inventories from us in accordance with
                  the  applicable   buyback   arrangements.   If  the  financial
                  condition of a customer were to  deteriorate,  resulting in an
                  impairment  of  its  ability  to  purchase   inventories,   an
                  additional   adjustment   may  be  required.   These   buyback
                  arrangements are considered in management's estimate of future
                  market value of inventories.  See further  discussion below of
                  reserve  for  inventory  obsolescence  recorded  in the second
                  quarter of 2005.

         o        Accounts  receivable  balances  are  evaluated  on a continual
                  basis   and   allowances   are   provided   for    potentially
                  uncollectible  accounts based on management's  estimate of the
                  collectibility   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. See further discussion below
                  of  allowance  for  doubtful  accounts  recorded in the second
                  quarter of 2005.

         o        We record  valuation  allowances  to reduce our  deferred  tax
                  assets to an amount that we believe is more likely than not to
                  be realized.  We consider  estimated future taxable income and
                  ongoing  prudent  and  feasible  tax  planning  strategies  in
                  assessing the need for a valuation allowance.  If we determine
                  that we may not realize all or part of our deferred tax assets
                  in the  future,  we will make an  adjustment  to the  carrying
                  value of the deferred  tax asset,  which would be reflected as
                  an income tax expense.  Conversely,  if we  determine  that we
                  will  realize a deferred  tax  asset,  which  currently  has a
                  valuation  allowance,  we would be  required  to  reverse  the
                  valuation allowance, which would be reflected as an income tax
                  benefit. As discussed below, during the second quarter of 2005
                  we reduced the carrying value of our net deferred tax asset by
                  an additional  $1,000,000,  reducing the asset to zero at June
                  30, 2005.

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

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

SIGNIFICANT SECOND QUARTER ADJUSTMENTS

         During  the  second   quarter  of  2005,   we  evaluated  our  accounts
receivable,  inventory,  certain other assets and our net deferred tax asset and
recorded  the  following  significant  adjustments,  resulting in a total charge
against earnings of $9,454,000 and an increase in our provision for income taxes
of $1,000,000.

         ALLOWANCE FOR DOUBTFUL ACCOUNTS. Our allowance for doubtful accounts as
of June 30, 2005 includes a reserve of $6,381,000 recorded in the second quarter
of 2005 based upon management's


                                       14
<PAGE>


estimate of the collectibility of accounts  receivable related to two customers.
This increase in the reserve increased our general and  administrative  expenses
by $6,381,000.

         RESERVE FOR INVENTORY  OBSOLESCENCE.  In the second quarter of 2005, we
recorded an additional reserve for inventory  obsolescence  totaling  $1,550,000
based  upon  management's  estimate  of the  net  realizable  value  of  certain
inventories.  This  increase in the reserve  increased our cost of goods sold by
$1,550,000.

         MISCELLANEOUS  ADJUSTMENTS.  In the second quarter of 2005, we recorded
additional  reserves of $1,523,000 to primarily reflect an increase in our legal
accruals,  charges related to our Pro-Fit  litigation and a reduction in certain
assets.  These  charges  are  reflected  in cost of goods sold and  general  and
administrative expenses.

         NET  DEFERRED  TAX  ASSET.  During  the  first six  months of 2005,  we
incurred  additional net operating losses and therefore  increased our valuation
allowance to $9,900,000 from $8,900,000  which reduced the carrying value of our
net  deferred  tax asset to zero from  $1,000,000  at  December  31,  2004.  The
increase in the valuation  allowance  resulted in a charge of $1,000,000 against
the provision for income taxes in the second quarter of 2005.

         BALANCE  SHEET  ADJUSTMENT.  During 2004,  we  segregated  inventory in
anticipation  of returning it to a vendor for  modification.  This resulted in a
reduction in inventory and accounts payable of approximately  $2,655,000. In the
second quarter of 2005, since the vendor was unable to process this inventory in
a timely  manner,  we  reversed  this  transaction  resulting  in an increase in
inventory  and accounts  payable.  The  inventory  was recorded at its estimated
realizable value requiring  additional reserves of $1,200,000 which are included
in RESERVE FOR INVENTORY OBSOLESCENCE above.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                    JUNE 30,                      JUNE 30,
                                            -------------------------     ------------------------
                                              2005           2004           2005           2004
                                            ---------      ----------     ----------     ---------
<S>                                            <C>             <C>            <C>           <C>
Net sales..............................        100.0 %         100.0 %        100.0 %       100.0 %
Cost of goods sold.....................         89.3            73.9           83.4          72.6
                                            ---------      ----------     ----------     ---------
Gross profit...........................         10.7            26.1           16.6          27.4
Selling expenses.......................          3.5             4.7            4.4           5.9
General and administrative expenses....         59.7            18.7           46.8          22.5
                                            ---------      ----------     ----------     ---------
Operating (loss) income ...............        (52.5)%           2.7 %        (34.6)%        (1.0)%
                                            =========      ==========     ==========     =========
</TABLE>


                                       15
<PAGE>


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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                    JUNE 30,                       JUNE 30,
                                            -------------------------     ------------------------
                                              2005           2004           2005           2004
                                            ---------      ----------     ----------     ---------
<S>                                            <C>             <C>            <C>           <C>
United States..........................         13.7 %           7.7 %          9.9 %         8.2 %
Asia                                            32.7            24.3           32.8          24.1
Mexico.................................         39.4            39.1           37.7          37.1
Dominican Republic.....................          9.1            19.7           12.4          19.7
Central and South America..............          4.1             8.7            6.2          10.5
Other..................................          1.0             0.5            1.0           0.4
                                            ---------      ----------     ----------     ---------
                                               100.0 %         100.0 %        100.0 %       100.0 %
                                            =========      ==========     ==========     =========
</TABLE>

         Net sales increased approximately  $3,550,000, or 23.8%, to $18,473,000
for the three months ended June 30, 2005 from  $14,923,000  for the three months
ended June 30,  2004.  The increase in net sales for the three months ended June
30, 2005 was due  primarily  to an  increase in sales from our TRIMNET  programs
related to major U.S.  retailers and an increase in zipper sales under our TALON
brand name in Asia.

         Net sales increased approximately  $6,446,000, or 25.7%, to $31,529,000
for the six months ended June 30, 2005 from $25,083,000 for the six months ended
June 30, 2004.  The increase in net sales for the six months ended June 30, 2005
was due primarily to an increase in sales from our TRIMNET  programs  related to
major U.S.  retailers and an increase in zipper sales under our TALON brand name
in Asia. During the fourth quarter of 2003, we implemented a plan to restructure
certain  business  operations,  including  the  reduction of our reliance on two
significant  customers  in  Mexico  and  reported  a  decrease  in net  sales of
approximately  $10.0  million  for the six month  period  ended June 30, 2004 as
compared  to the six month  period  ended  June 30,  2003.  We have been able to
replace substantially all of the lost revenue from our Tlaxcala, Mexico facility
with new customers primarily in Mexico and Asia.

         Gross profit decreased approximately $1,920,000, or 49.3% to $1,972,000
for the three  months ended June 30, 2005 from  $3,892,000  for the three months
ended June 30,  2004.  Gross profit as a  percentage  of net sales  decreased to
approximately  10.7% for the three  months  ended June 30,  2005 as  compared to
26.1% for the three months ended June 30, 2004.  The decrease in gross profit as
a percentage of net sales for the three months ended June 30, 2005 was due to an
increase in our inventory obsolescence reserve of $1,550,000, additional charges
associated with unrealized  charge backs to vendors and customers and unabsorbed
overhead  costs  incurred  in our new  TALON  manufacturing  facility  in  North
Carolina.

         Gross profit decreased approximately $1,660,000, or 24.1% to $5,224,000
for the six months ended June 30, 2005 from  $6,884,000 for the six months ended
June  30,  2004.  Gross  profit  as a  percentage  of  net  sales  decreased  to
approximately  16.6% for the six months ended June 30, 2005 as compared to 27.4%
for the six months  ended  June 30,  2004.  The  decrease  in gross  profit as a
percentage of net sales for the six months ended June 30, 2005 was due primarily
to the  various  charges  discussed  above.  Also,  gross  profit was  adversely
affected by credits we issued to a customer during the first quarter of 2005 for
defective products received from Pro-Fit Holdings.

         Selling expenses  decreased  approximately  $47,000 as a result of cost
containment  efforts to $655,000  for the three  months ended June 30, 2005 from
$702,000 for the three months ended June 30,


                                       16
<PAGE>


2004.  Selling  expense as a percentage  of net sales  decreased to 3.5% for the
three  months ended June 30, 2005 as compared to 4.7% for the three months ended
June 30, 2004.  For the six month period ended June 30, 2005,  selling  expenses
decreased approximately $77,000 to $1,398,000 from $1,475,000 for the six months
ended June 30, 2004 since employee costs  increased at a slower rate than sales.
Selling  expense  as a  percentage  of net sales  decreased  to 4.4% for the six
months ended June 30, 2005 as compared to 5.9% for the six months ended June 30,
2004.

         General and administrative expenses increased approximately  $8,217,000
to $11,008,000  for the three months ended June 30, 2005 from $2,791,000 for the
three  months ended June 30,  2004.  The increase in general and  administrative
expenses  was due  primarily  to an  increase of  $6,381,000  in the reserve for
doubtful  accounts  recorded  in the second  quarter,  the hiring of  additional
employees for the expansion of our Asian  operation and  additional  legal costs
related to our litigation  with Pro-Fit  Holdings  Limited.  Unless this case is
settled,  we will continue to incur additional legal fees in increasing  amounts
as the case accelerates to trial.

         General and administrative expenses increased approximately  $9,088,000
to  $14,736,000  for the six months ended June 30, 2005 from  $5,648,000 for the
six months ended June 30, 2004 due to the same factors discussed above.

         Net interest expense  increased  approximately  $124,000,  or 86.1%, to
$268,000 for the three  months  ended June 30, 2005 from  $144,000 for the three
months ended June 30, 2004. The interest  expense  increase was primarily due to
higher debt levels.  Borrowings under our UPS Capital credit facility  decreased
during the period ended June 30, 2004 due to proceeds  received from our private
placement transactions in May and December 2003 in which we raised approximately
$29 million from the sale of common and convertible preferred stock. In November
2004,  we raised  $12.5  million from the sale of 6% secured  convertible  notes
payable.

         Net interest expense  increased  approximately  $206,000,  or 62.2%, to
$537,000 for the six months ended June 30, 2005 from $331,000 for the six months
ended June 30, 2004.  Borrowings under our UPS Capital credit facility decreased
during the period ended June 30, 2004 due to proceeds  received from our private
placement transactions in May and December 2003 in which we raised approximately
$29 million from the sale of common and convertible preferred stock. In November
2004,  we raised  $12.5  million from the sale of 6% secured  convertible  notes
payable.

         The provision for income taxes for the three months ended June 30, 2005
amounted to  approximately  $1,301,000  compared to $84,000 for the three months
ended June 30, 2004.  The  provision  for income taxes  increased  for the three
months  ended June 30, 2005  primarily  due to an increase in our  deferred  tax
asset valuation allowance and to taxes provided for earned income in our foreign
subsidiary.  Based on our net operating losses, there is not sufficient evidence
to determine that it is more likely than not that we will be able to utilize our
net operating loss carry forwards to offset future taxable income.

         The  provision  for income taxes for the six months ended June 30, 2005
amounted  to  approximately  $1,463,000  compared  to an income  tax  benefit of
$188,000 for the six months ended June 30, 2004.  Income taxes increased for the
six months  ended June 30,  2005 due to an increase  in our  deferred  tax asset
valuation  allowance  and to taxes  provided  for earned  income in our  foreign
subsidiary.  Based on our net operating losses, there is not sufficient evidence
to determine that it is more likely than not that we will be able to utilize our
net operating loss carry forwards to offset future taxable income.

         Net loss was approximately  $11,260,000 for the three months ended June
30, 2005 as compared to net income of $170,000  for the three  months ended June
30, 2004. Net loss was  approximately


                                       17
<PAGE>


$12,909,000  for the six months ended June 30, 2005 as compared to a net loss of
$382,000 for the six months ended June 30, 2004.

         Preferred stock dividends  amounted to $31,000 for the six months ended
June 30, 2004.  There were no preferred stock dividends for the six months ended
June 30, 2005. Preferred stock dividends represent earned dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
In February 2004, the holders of the Series C convertible  redeemable  preferred
stock  converted  all  759,494  shares of the  Series C  Preferred  Stock,  plus
$458,707 of accrued dividends, into 700,144 shares of our common stock. Net loss
available  to common  shareholders  amounted to  $12,909,000  for the six months
ended June 30, 2005 compared to $412,000 for the six months ended June 30, 2004.
Basic and  diluted  loss per share was $0.71 for the six  months  ended June 30,
2005 and $0.02 for the six months  ended June 30,  2004.  Net loss  available to
common  shareholders  was  $11,260,000  for the three months ended June 30, 2005
compared to net income  available  to common  shareholders  of $170,000  for the
three months ended June 30, 2004.  Basic and diluted  earnings  (loss) per share
was ($0.62) for the three months  ended June 30, 2005  compared to $0.01 for the
three months ended June 30, 2004.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash equivalents decreased to $2,962,000 at June 30, 2005 from
$5,461,000  at December  31,  2004.  The decrease  resulted  from  approximately
$148,000  of cash  used by  operating  activities,  $1,249,000  of cash  used in
investing activities and $1,102,000 of cash used in financing activities.

         Net cash used in operating  activities was  approximately  $148,000 for
the six months  ended June 30,  2005 and  approximately  $7,118,000  for the six
months ended June 30, 2004. Cash used in operating activities for the six months
ended  June  30,  2005  resulted  primarily  from  the net  loss  and  increased
inventories  and  accounts  receivable  before the  increase  in  allowance  for
doubtful accounts of $6,121,000, partially offset by increased accounts payables
and accrued expenses.  The increase in accounts receivable during the period was
due primarily to increased sales. Cash used in operating  activities for the six
months ended June 30, 2004 resulted primarily from increased accounts receivable
and inventories.

         Net cash used in investing activities was approximately  $1,249,000 and
$337,000 for the six months ended June 30, 2005 and 2004, respectively. Net cash
used in investing  activities  for the six months ended June 30, 2005  consisted
primarily of capital  expenditures  for TALON  zipper  equipment  and  leasehold
improvements related to our new TALON manufacturing  facility in North Carolina.
Net cash used in  investing  activities  for the six months  ended June 30, 2004
consisted  primarily  of capital  expenditures  for computer  equipment  and the
purchase of additional TALON zipper equipment.

         Net cash used in financing activities was approximately  $1,102,000 and
$1,635,000  for the six months ended June 30, 2005 and 2004,  respectively.  Net
cash  used in  financing  activities  for the six  months  ended  June 30,  2005
primarily reflects the repayment of capital lease obligations and notes payable,
offset by funds  raised from the  exercise of stock  options  and  warrants  and
increased borrowings under our factoring arrangement. Net cash used in financing
activities  for the six  months  ended  June 30,  2004  primarily  reflects  the
repayment  of  borrowings  under our  credit  facility  and  subordinated  notes
payable, offset by funds raised from the exercise of stock options and warrants.

         We currently satisfy our working capital requirements primarily through
cash flows  generated  from  collection  of our accounts  receivables,  sales of
equity  securities and borrowings  from  institutional  investors and individual
accredited  investors.  On November  10, 2004,  we paid off our working  capital
credit facility with UPS Capital Global Trade Finance Corporation with a portion
of the proceeds  received  from a private  placement of $12.5 million of Secured
Convertible Promissory Notes. The Secured


                                       18
<PAGE>


Convertible  Promissory  Notes are  convertible  into common stock at a price of
$3.65 per share, bear interest at 6% payable quarterly, are due November 9, 2007
and are secured by the TALON trademarks. The Notes are convertible at the option
of the  holder  at any time  after  closing.  We may repay the Notes at any time
after one year from the closing date with a 15% prepayment penalty. At maturity,
we may repay the Notes in cash or require  conversion if certain  conditions are
met. In connection with the issuance of the Notes, we issued to the Note holders
warrants to purchase up to 171,235  shares of common stock.  The warrants have a
term of five  years,  an  exercise  price of $3.65 per share and  vested 30 days
after closing. We have registered with the SEC, the resale by the holders of the
shares issuable upon conversion of the Notes and exercise of the warrants.

         Amounts borrowed under our foreign  factoring  agreement as of June 30,
2005  amounted  to  approximately  $1,001,000.  At June  30,  2004,  outstanding
borrowings  under our UPS Capital credit  facility,  including  amounts borrowed
under our foreign  factoring  agreement,  amounted to approximately  $5,935,000.
Open  letters of credit under our UPS Capital  credit  facility at June 30, 2004
amounted to $481,000. There were no open letters of credit under our UPS Capital
credit facility at June 30, 2005.

         In 2005,  we entered into a letter of credit  facility with Wells Fargo
Bank.  This  facility  provides  for  letters  of credit up to a maximum of $1.5
million,  expires in  November  2005 and is  secured by cash on hand  managed by
Wells Fargo Bank.  At June 30,  2005,  outstanding  letters of credit  under the
Wells Fargo facility amounted to $50,000.

         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,  2005 and 2004,  the amount  factored  with
recourse and included in trade accounts receivable was approximately  $2,163,000
and  $883,000.  Outstanding  advances as of June 30,  2005 and 2004  amounted to
approximately  $1,001,000  and  $215,000  and are included in the line of credit
balance.

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

         Our  trade  receivables,   net  of  allowance  for  doubtful  accounts,
decreased  to  $13,353,000  at June 30, 2005 from  $20,396,000  at June 30, 2004
primarily due to an increase of $6,381,000 in our allowance for doubtful account
and a net decrease in related party trade  receivables  resulting from decreased
sales to related  parties  during the period and the  write-off  of  outstanding
accounts  receivable  obligations  due  from  United  Apparel  Ventures  and its
affiliate,  Tarrant Apparel Group, during the fourth quarter of 2004.  Following
negotiations  with United Apparel  Ventures and its affiliate,  Tarrant  Apparel
Group, a former major customer of ours, we determined that a significant portion
of the obligations due from this customer were uncollectible. This resulted in a
write-off of $6.9 million of accounts receivable due from Tarrant and UAV in the
fourth quarter of 2004 and a net receivable balance due from UAV of $4.5 million
at December 31, 2004. UAV agreed to pay the $4.5 million receivable balance over
an  eight-month  period  beginning  May 2005. At June 30, 2005,  the  receivable
balance  due  from  Tarrant  and UAV  totaled  $3.4  million.  The  decrease  in
receivables  was offset by a net increase in  non-related  party  receivables of
approximately  $680,000.  This increase in non-related party receivables was due
to increased sales to non-related party customers.


                                       19
<PAGE>


         Our net deferred  tax asset at June 30, 2005 was zero  compared to $2.8
million at June 30, 2004.  The decrease  resulted from increases in our deferred
tax asset  valuation  allowance  as a result of our  conclusion  that it was not
likely we would realize the benefits in the foreseeable  future. The decrease in
the net  deferred  tax asset  resulted in a charge of $1.0  million  against the
provision for income taxes for the second quarter.  At December 31, 2004, we had
Federal  and state net  operating  loss carry  forwards of  approximately  $21.6
million and $12.9  million,  respectively,  available to offset  future  taxable
income.  Our net  operating  losses  may be  limited  in future  periods  if the
ownership of the Company changes by more than 50% within a three-year period. As
of December 31,  2004,  some of our net  operating  losses may be limited by the
Section  382 rules.  The amount of such  limitations,  if any,  has not yet been
determined.

         We have incurred  significant legal fees in our litigation with Pro-Fit
Holdings  Limited.  Unless  the  case is  settled,  we will  continue  to  incur
additional legal fees in increasing amounts as the case accelerates to trial.

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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         During the six months ended June 30, 2005,  future minimum payments due
under operating  lease  agreements  increased by  approximately  $407,000.  This
increase was due to new lease  agreements  entered  into by the Company  related
primarily for leased warehouse space.

         At June 30,  2005 and  2004,  we did not  have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

         Gerard  Guez  and  Todd  Kay,   executive   officers  and   significant
shareholders  of Tarrant Apparel Group,  are  significant  stockholders of ours.
Total sales to Tarrant Apparel Group and its affiliate, United Apparel Ventures,
amounted to approximately $27,000 and $150,000 for the six months ended June 30,
2005 and 2004,  respectively.  As of June 30, 2004,  accounts receivable related
party included approximately  $6,738,000 due from Tarrant and its affiliate.  As
of June 30, 2005, accounts  receivable,  related party included $3.4 million due
from Tarrant's  affiliate,  United  Apparel  Ventures.  United Apparel  Ventures
agreed to pay its remaining  balance over an  eight-month  period  beginning May
2005.


                                       20
<PAGE>


         As of June 30, 2005 and 2004, we had outstanding  related-party debt of
approximately  $665,000 and $850,000,  at interest rates ranging from 7% to 11%,
and additional non-related-party debt of $25,200 at an interest rate of 10%. The
majority of  related-party  debt is due on demand,  with the  remainder  due and
payable on the fifteenth  day  following the date of delivery of written  demand
for payment.

NEW ACCOUNTING PRONOUNCEMENTS

         In December  2004,  the FASB issued  Statement of Financial  Accounting
Standard  ("SFAS") No. 123R "Share Based  Payment." This statement is a revision
of SFAS  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
supersedes APB Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
its related  implementation  guidance.  SFAS 123R  addresses  all forms of share
based  payment  ("SBP")  awards  including  shares issued under  employee  stock
purchase plans, stock options,  restricted stock and stock appreciation  rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards'  grant  date,  based on the  estimated  number of awards that are
expected to vest.  This  statement is effective as of the beginning of the first
annual  reporting  period that begins after June 15, 2005. We have evaluated the
effects of the adoption of this  pronouncement  and have  determined it will not
have a material impact on our financial statements.

         In March, 2005, the Securities and Exchange Commission's ("SEC") Office
of the  Chief  Accountant  and its  Division  of  Corporation  Finance  released
Financial Accounting Bulletin No. 107,  "Share-Based Payment" (SAB 107). SAB 107
provides  interpretive  guidance related to the interaction between Statement of
Financial  Accounting  Standard No. 123R "Shared Based  Payment" (SFAS 123R) and
certain SEC rules and regulations.  SAB 107 provides the staff's views regarding
the valuation of  shared-based  payment  arrangements  for public  companies and
stresses the importance of including appropriate disclosures within SEC filings,
particularly during the transition to SFAS 123R.

         In May 2005,  the FASB  issued SFAS No.  154,  "Accounting  Changes and
Error  Corrections - A Replacement  of APB Opinion No. 20 and FASB Statement No.
3" ("SFAS  154").  SFAS 154  replaces APB Opinion No. 20,  "Accounting  Changes"
("APB 20") and FASB Statement No. 3,  "Reporting  Accounting  Changes in Interim
Financial  Statements,"  and changes the requirements for the accounting for and
reporting of a change in accounting  principle.  APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative  effect of changing to the new
accounting  principle.  SFAS 154  requires  retrospective  application  to prior
periods'  financial  statements for voluntary  changes in accounting  principle.
SFAS 154 is effective for accounting  changes and  corrections of errors made in
fiscal years  beginning  after  December  15, 2005.  The impact of SFAS 154 will
depend on the accounting change, if any, in a future period.

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.

         OUR  GROWTH  AND  OPERATING  RESULTS  COULD  BE  MATERIALLY,  ADVERSELY
EFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING
OUR RIGHTS  UNDER OUR  EXCLUSIVE  LICENSE AND  INTELLECTUAL  PROPERTY  AGREEMENT
("AGREEMENT")  WITH PRO-FIT  HOLDINGS.  Pursuant to our  Agreement  with Pro-Fit
Holdings  Limited,  we have  exclusive  rights in  certain  geographic  areas to
Pro-Fit's stretch and rigid waistband technology. By letter dated April 6, 2004,
Pro-Fit alleged various breaches of the Agreement


                                       21
<PAGE>


which we  dispute.  To  prevent  Pro-Fit  in the  future  from  terminating  the
Agreement  based on alleged  breaches that we do not regard as  meritorious,  we
filed a lawsuit  against  Pro-Fit  in the U.S.  District  Court for the  Central
District of  California,  based on various  contractual  and tort claims seeking
declaratory  relief,  injunctive  relief and  damages.  Pro-Fit  filed an answer
denying the  material  allegations  of the  complaint  and filed a  counterclaim
alleging  various  contractual  and tort claims  seeking  injunctive  relief and
damages.  We  filed  a reply  denying  the  material  allegations  of  Pro-Fit's
pleading.  Pro-Fit has since  purported to terminate our  exclusive  license and
intellectual  property  agreement  based on the  same  alleged  breaches  of the
agreement  that are the  subject of our  existing  litigation,  as well as on an
additional basis unsupported by fact. In February 2005, we amended our pleadings
in the litigation to assert additional breaches by Pro-Fit of its obligations to
us under our agreement and under certain additional letter agreements, and for a
declaratory  judgment  that  Pro-Fit's  patent No.  5,987,721 is invalid and not
infringed by us.  Thereafter,  Pro-Fit filed an amended answer and  counterclaim
denying the material  allegations of the amended  complaint and alleging various
contractual  and tort claims  seeking  injunctive  relief and  damages.  Pro-Fit
further  asserted that we infringed its United States Patent Nos.  5,987,721 and
6,566,285. We filed a reply denying the substantive allegations of the reply. At
our request,  the Court  bifurcated the contract issues for trial to commence on
January 10,  2006.  The  remaining  issues  will be tried at a later date.  Fact
discovery has been completed and expert discovery is ongoing.

         We derive a  significant  amount of revenues  from the sale of products
incorporating  the  stretch  waistband  technology.  Our  business,  results  of
operations and financial condition could be materially  adversely affected if we
are unable to conclude our present negotiations in a manner acceptable to us and
ensuing litigation is not resolved in a manner favorable to us. Additionally, we
have incurred significant legal fees in this litigation,  and unless the case is
settled,  we will continue to incur additional legal fees in increasing  amounts
as the case accelerates to trial.



         FAILURE  TO  MANAGE  OUR  CORPORATE   RESTRUCTURING  COULD  IMPAIR  OUR
BUSINESS.  In an effort to better align our  organizational  and cost structures
with our future  growth  opportunities,  in August  2005 our Board of  Directors
adopted a restructuring plan for our company that we expect will be completed in
December  2005.  The  plan  includes   reorganizing  our  global  operations  by
eliminating  redundancies  in our Hong Kong  operation,  reducing the  functions
performed at our Mexico  facilities,  converting  our Guatemala  facility from a
manufacturing   site  to  a   distributor,   and  closing  our  North   Carolina
manufacturing  facility.  While we expect that the restructuring  will result in
reduced operating costs and improved operating results and cash flows, there can
be no assurance that these results will be achieved.  In addition,  we expect to
record a restructuring charge during the third quarter of 2005 of between $4 and
$5  million.  We face many  challenges  related to our  decision  implement  the
restructuring  plan,  including  that  we  may  not  execute  the  restructuring
effectively,  and our expectation that we will benefit from greater efficiencies
may not be  realized.  Any  failure  on our part to  successfully  manage  these
challenges or other  unanticipated  consequences may result in loss of customers
and sales,  which could cause our results to differ materially from management's
current expectations. The challenges we face include:

         o        Our ability to execute  successfully  through  business cycles
                  while we continue to implement the restructuring plan and cost
                  reductions;

         o        Our  ability  to  meet  and   achieve  the   benefits  of  our
                  cost-reduction goals and otherwise successfully adapt our cost
                  structures to continuing changes in business conditions;

         o        The risk that our  cost-cutting  initiatives  will  impair our
                  ability to develop  products  and  remain  competitive  and to
                  operate effectively;

         o        We may  experience  delays in  implementation  of  anticipated
                  workforce  reductions in highly regulated locations outside of
                  the United States;


                                       22
<PAGE>


         o        We may experience decreases in employee morale; and

         o        We may  experience  unanticipated  expenses  in  winding  down
                  manufacturing  operations,  including  labor costs,  which may
                  adversely affect our results of operations in the short term.

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

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

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

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

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

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

         WE MAY NOT BE ABLE TO ENFORCE THE  MINIMUM  PURCHASE  REQUIREMENTS  AND
OTHER  OBLIGATIONS  OF OUR TALON  DISTRIBUTORS.  Expansion  of our TALON  zipper
business  depends  in a large  part on what we refer to as our  TALON  franchise
strategy. We appoint distributors in various geographic international regions to
finish and sell zippers  under the TALON brand name. In return for the exclusive
right to finish  and sell  zippers in  selected  territories,  each  distributor
agrees to purchase a minimum quantity of zipper components from us over the term
of our agreement.  These  distributors are foreign entities located primarily in
emerging markets in Asia, Latin America,  the Middle East and Africa.  Despite a
distributor's  contractual  commitments  to us, we may be unable to enforce  the
distributor's  minimum  purchase  guarantee  or recover  damages or other relief
following a default, which could result in lower than projected revenues for our
TALON division.

         CONCENTRATION OF RECEIVABLES FROM OUR LARGER CUSTOMERS MAKES RECEIVABLE
BASED  FINANCING  DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGER  CUSTOMERS
FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY  AFFECTED.  Our business  relies
heavily on a relatively  small number of customers.  This  concentration  of our
business  reduces the amount we can borrow from our  lenders  under  receivables
based  financing  agreements.  Under a  borrowing  base  credit  agreement,  for
instance,  if accounts  receivable  due us from a particular  customer  exceed a
specified  percentage of the total eligible accounts receivable against which we
can borrower,  the lender will not lend against the receivables  that exceed the
specified percentage.  If we are unable to collect any large receivables due us,
our cash flow would be severely impacted.

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


                                       23
<PAGE>


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

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

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

         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.


                                       24
<PAGE>


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

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

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

         THE LOSS OF KEY MANAGEMENT AND SALES PERSONNEL  COULD ADVERSELY  AFFECT
OUR BUSINESS,  INCLUDING OUR ABILITY TO OBTAIN AND SECURE  ACCOUNTS AND GENERATE
SALES. Our success has and will continue to depend to a significant  extent upon
key management and sales personnel,  many of whom would be difficult to replace,
particularly Colin Dyne, our Chief Executive Officer. Colin Dyne is not bound by
an employment agreement.  The loss of the services of Colin Dyne or the services
of other key  employees  could have a material  adverse  effect on our business,
including our ability to establish and maintain client relationships. Our future
success  will  depend in large  part upon our  ability  to  attract  and  retain
personnel with a variety of sales, operating and managerial skills.

         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.


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<PAGE>


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

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

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

         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


                                       26
<PAGE>


suppliers.  In order  to do so or to fund our  other  activities,  we may  issue
additional  equity   securities  that  could  dilute  our  stockholders'   stock
ownership.  We may also  assume  additional  debt and  incur  impairment  losses
related to goodwill and other tangible  assets if we acquire another company and
this could negatively impact our results of operations.

         WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS.
We may consider strategic  acquisitions as opportunities  arise,  subject to the
obtaining of any  necessary  financing.  Acquisitions  involve  numerous  risks,
including  diversion  of our  management's  attention  away  from our  operating
activities.  We  cannot  assure  our  stockholders  that we will  not  encounter
unanticipated problems or liabilities relating to the integration of an acquired
company's  operations,  nor can we assure our stockholders  that we will realize
the anticipated  benefits of any future  acquisitions.  We currently do not have
any plans to pursue any potential 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 August 1, 2005, our officers and directors and their affiliates  beneficially
owned  approximately  15.1% of the outstanding  shares of our common stock.  The
Dyne family, which includes Mark Dyne, Colin Dyne, Larry Dyne, Jonathan Burstein
and the estate of Harold Dyne,  beneficially  owned  approximately  17.9% of the
outstanding  shares of our  common  stock at August 1,  2005.  As a result,  our
officers  and  directors  and the Dyne  family  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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         All of our  sales  are  denominated  in United  States  dollars  or the
currency  of the  country in which our  products  originate.  We are  exposed to
market risk for fluctuations in the foreign currency  exchange rates for certain
product  purchases  that are  denominated  in British  Pounds.  During 2004,  we
purchased forward exchange contracts for British Pounds to hedge the payments of
product  purchases.  We intend to  purchase  additional  contracts  to hedge the
British Pound exposure for future product purchases. There


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<PAGE>


were no hedging contracts outstanding as of June 30, 2005. Currency fluctuations
can increase the price of our products to foreign  customers which can adversely
impact the level of our export sales from time to time. The majority of our cash
equivalents  are held in United  States bank  accounts  and we do not believe we
have significant market risk exposure with regard to our investments.

         We are also  exposed  to the  impact of  interest  rate  changes on our
outstanding  borrowings.  At June 30, 2005, we had approximately $1.2 million of
indebtedness  subject to interest  rate  fluctuations.  These  fluctuations  may
increase our interest expense and decrease our cash flows from time to time. For
example,  based on average bank  borrowings of $10 million  during a three-month
period, if the interest rate indices on which our bank borrowing rates are based
were to increase 100 basis points in the three-month  period,  interest incurred
would increase and cash flows would decrease by $25,000.

ITEM 4.  CONTROLS AND PROCEDURES.

EVALUATION OF CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures,  which we have designed
to ensure that  information  required to be disclosed  in our reports  under the
Securities Exchange Act of 1934 is recorded, processed,  summarized and reported
within the time periods  specified  in the SEC's rules and forms,  and that such
information is accumulated and  communicated to management,  including our Chief
Executive  Officer  and  Chief  Financial  Officer,  to allow  timely  decisions
regarding   disclosure.   In  response  to  recent   legislation   and  proposed
regulations,  we reviewed  our internal  control  structure  and our  disclosure
controls and procedures.

         In the course of conducting its review of our financial  statements for
the fiscal quarter ended June 30, 2005, our independent  auditors,  BDO Seidman,
LLP informed  members of our senior  management  and the Audit  Committee of our
Board of Directors  that they had  discovered  significant  deficiencies  in our
internal  control  over  financial  reporting  that  alone and in the  aggregate
constituted a "material weakness," which is defined under standards  established
by the Public  Company  Accounting  Oversight  Board as a deficiency  that could
result in more than a remote  likelihood  that a  material  misstatement  of the
annual or interim financial statements will not be prevented or detected.

         The  deficiencies  identified  consisted of our recording  post-closing
adjustments  in our  financial  statements  for the quarter  ended June 30, 2005
related  to  the  allowance  for  doubtful   accounts,   reserve  for  inventory
obsolescence,  and deferred tax asset, which were identified by BDO Seidman, LLP
in connection with its review of the financial statements, indicating a material
weakness in our quarterly financial statement closing process.  BDO Seidman, LLP
identified the same material weakness in our annual financial  statement closing
process in connection with its audit of our financial  statements for the fiscal
year ended  December  31,  2004.  In order to  address  this  material  weakness
identified in the annual financial  statement  closing  process,  we implemented
additional  review  procedures  over the selection and monitoring of appropriate
assumptions and estimates  affecting these accounting  practices.  There were no
post-closing  adjustments  as of March  31,  2005,  the first  quarterly  period
following  implementation  of additional  review  procedures.  The deficiencies,
however,  were again present in the closing process for our financial statements
for the second quarter of 2005.

         Members of management, including the Company's Chief Executive Officer,
Colin Dyne,  and Chief  Financial  Officer,  August  DeLuca,  have evaluated the
effectiveness of the design and operation of the Company's  disclosure  controls
and  procedures  as of June 30,  2005,  the end of the  period  covered  by this
report.  Based upon that evaluation,  because of the material weakness described
above,  Mr.  Dyne and Mr.  Deluca were  unable to  conclude  that the  Company's
disclosure  controls  and  procedures  were  effective  as  of  June  30,  2005.
Management has identified the steps necessary to address the material weaknesses
as


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<PAGE>


described  above, and will continue to implement  remediation  plans. We believe
these  corrective  actions,  taken  as  a  whole,  have  mitigated  the  control
deficiencies  with respect to our preparation of this Quarterly  Report and that
these measures have been effective to ensure that the information required to be
disclosed in this Quarterly Report has been recorded, processed,  summarized and
reported correctly.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

         There  were  no  significant  changes  in our  internal  controls  over
financial reporting that occurred during the second quarter that have materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         As previously reported, including in our Annual Report on Form 10-K for
the fiscal year ended  December  31, 2004,  we have filed suit  against  Pro-Fit
Holdings  Limited  in the  U.S.  District  Court  for the  Central  District  of
California -- Tag-It Pacific,  Inc. v. Pro-Fit Holdings Limited,  CV 04-2694 LGB
(RCx) - based on various  contractual  and tort claims relating to our exclusive
license  and  intellectual  property  agreement,   seeking  declaratory  relief,
injunctive  relief and damages.  The  agreement  with Pro-Fit gives us exclusive
rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid  waistband
technology.  Pro-Fit  filed an answer  denying the material  allegations  of the
complaint and filed a counterclaim  alleging various contractual and tort claims
seeking  injunctive  relief and damages.  We filed a reply  denying the material
allegations of Pro-Fit's pleading.  Pro-Fit has since purported to terminate the
exclusive license and intellectual  property agreement based on the same alleged
breaches  of the  agreement  that  are  the  subject  of the  parties'  existing
litigation,  as well as on an additional basis  unsupported by fact. In February
2005, we amended our pleadings in the litigation to assert  additional  breaches
by  Pro-Fit  of its  obligations  to us under the  agreement  and under  certain
additional  letter  agreements,  and for a declaratory  judgment that  Pro-Fit's
patent No.  5,987,721 is invalid and not  infringed by us.  Thereafter,  Pro-Fit
filed an amended answer and counterclaim denying the material allegations of the
amended  complaint  and alleging  various  contractual  and tort claims  seeking
injunctive  relief and damages.  Pro-Fit further  asserted that we infringed its
United States Patent Nos. 5,987,721 and 6,566,285.  We filed a reply denying the
substantive  allegations of the reply. At our request,  the Court bifurcated the
contract issues for trial to commence on January 10, 2006. The remaining  issues
will be tried at a later date.  Fact  discovery  has been  completed  and expert
discovery is ongoing.

         We  currently  have  pending  a  number  of  other  claims,  suits  and
complaints that arise in the ordinary course of our business. We believe that we
have meritorious defenses to these claims and that the claims are either 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,  2005  our
stockholders (a) elected Jonathan Burstein and Michael Katz to serve as Class II
Directors on our Board of Directors  for three years and until their  respective
successors  have  been  elected.  Jonathan  Burstein  was  elected  by a vote of
13,845,379  shares in favor and  3,249,805  shares were withheld from voting for
the director.  Michael Katz was elected by a vote of 13,900,807  shares in favor
and 3,194,377  shares were withheld from voting for the director.  There were no
broker non-votes at the annual meeting.  Immediately  prior to the meeting,  the
Board of Directors was  comprised of Mark Dyne,  Colin Dyne,  Kevin  Bermeister,
Brent Cohen,  Michael Katz, Jonathan Burstein,  Raymond Musci and Joseph Miller.
Immediately following the


                                       29
<PAGE>


meeting,  the Board of Directors was comprised of Mark Dyne,  Colin Dyne,  Kevin
Bermeister,  Brent Cohen, Michael Katz, Jonathan Burstein, Raymond Musci, Joseph
Miller and Susan White.

ITEM 6.  EXHIBITS.

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

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

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


                                       30
<PAGE>


                                   SIGNATURES

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





Dated:   August 22, 2005                    TAG-IT PACIFIC, INC.

                                            /S/  AUGUST DELUCA
                                            ------------------------------------
                                            By:      August DeLuca
                                            Its:     Chief Financial Officer


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