================================================================================


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q


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

               For the quarterly period ended September 30, 2002.

                                       OR

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



         For the transition period from ____________ to _______________.


                         Commission file number 1-13669


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

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


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


                                 (818) 444-4100
                           (Issuer's Telephone Number)

     Indicate by check whether the issuer:  (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the  preceding 12 months
(or for such  shorter  period  that the  registrant  was  required  to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.

                                Yes /X/    No / /

     State the number of shares  outstanding of each of the issuer's  classes of
common stock, as of the latest  practicable date: Common Stock, par value $0.001
per share, 9,319,909 shares issued and outstanding as of November 14, 2002.

================================================================================


<PAGE>


                              TAG-IT PACIFIC, INC.

                               INDEX TO FORM 10-Q



PART I FINANCIAL INFORMATION                                               PAGE
                                                                           ----



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

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

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

         Consolidated Statements of Cash Flows (unaudited)
         for the Nine months Ended September 30, 2002 and 2001................5

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

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

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

Item 4.  Controls and Procedures.............................................27



PART II OTHER INFORMATION



Item 1.  Legal Proceedings...................................................28

Item 6.  Exhibits and Reports on Form 8-K....................................28


                                       2


<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.
                              TAG-IT PACIFIC, INC.
                           Consolidated Balance Sheets

                                                      September     December 31,
                                                      30, 2002          2001
                                                     -----------     -----------
     Assets                                          (unaudited)
Current Assets:
Cash and cash equivalents ......................     $   241,995     $    46,948
Due from factor ................................         775,014         105,749
Trade accounts receivable, net .................       4,750,361       3,037,034
Trade accounts receivable, related parties .....      15,898,500       7,914,838
Refundable income taxes ........................         259,605         259,605
Due from related parties .......................         855,889         814,219
Inventories ....................................      24,329,857      20,450,740
Prepaid expenses and other current assets ......         568,628         408,146
Deferred income taxes ..........................         107,599         107,599
                                                     -----------     -----------
       Total current assets ....................      47,787,448      33,144,878

Property and Equipment, net of accumulated
  depreciation and amortization ................       2,365,805       2,592,965
Tradename ......................................       4,110,750       4,110,750
Other assets ...................................       1,384,488         944,912
                                                     -----------     -----------
Total assets ...................................     $55,648,491     $40,793,505
                                                     ===========     ===========

     Liabilities, Convertible Redeemable
     Preferred Stock and Stockholders'
     Equity
Current Liabilities:
   Line of credit ..............................     $16,039,467     $ 9,660,581
   Accounts payable and accrued expenses .......      11,746,446       6,785,814
   Deferred Revenue ............................       1,250,000            --
   Note payable ................................          25,200          25,200
   Subordinated notes payable to related
     parties ...................................         849,971         849,971
   Current portion of capital lease
     obligations ...............................          71,121         180,142
   Current portion of subordinated note
     payable ...................................       1,300,000       1,100,000
                                                     -----------     -----------
         Total current liabilities .............      31,282,205      18,601,708

Capital lease obligations, less current
   portion .....................................         121,741          69,030
Subordinated note payable, less current
   portion .....................................       2,900,000       3,800,000
                                                     -----------     -----------
         Total liabilities .....................      34,303,946      22,470,738
                                                     -----------     -----------

Convertible redeemable preferred stock
   Series C, $0.001 par value; 759,494
   shares authorized; 759,494 shares
   issued and outstanding at September 30,
   2002 and December 31, 2001 (stated
   value $3,000,000) ...........................       2,895,001       2,895,001

Stockholders' equity:
   Preferred stock, Series A $0.001 par
       value; 250,000 shares authorized,
       no shares issued or outstanding .........            --              --
   Convertible preferred stock Series B,
       $0.001 par value; 850,000 shares
       authorized; no shares issued or
       outstanding .............................            --              --
   Common stock, $0.001 par value,
       30,000,000 shares authorized;
       9,314,409 shares issued and
       outstanding at September 30, 2002;
       8,769,910 at December 31, 2001 ..........           9,315           8,771
   Additional paid-in capital ..................      16,763,060      15,048,971
   Retained earnings ...........................       1,677,169         370,024
                                                     -----------     -----------
Total  stockholders' equity ....................      18,449,544      15,427,766
                                                     -----------     -----------
Total liabilities, convertible redeemable
   preferred stock and stockholders' equity ....     $55,648,491     $40,793,505
                                                     ===========     ===========

           See accompanying notes to consolidated financial statements


                                       3




<PAGE>


                              TAG-IT PACIFIC, INC.

                      Consolidated Statements of Operations
                                   (unaudited)



                               Three Months Ended         Nine Months Ended
                                  September 30,             September 30,
                            ------------------------   ------------------------
                                2002         2001          2002        2001
                            -----------  -----------   -----------  -----------

Net sales ................. $16,349,906  $11,039,211   $45,468,306  $35,796,926
Cost of goods sold ........  12,424,257    8,173,816    33,931,051   26,084,269
                            -----------  -----------   -----------  -----------
   Gross profit ...........   3,925,649    2,865,395    11,537,255    9,712,657

Selling expenses ..........     472,680      367,266     1,445,598    1,248,390
General and administrative
   expenses ...............   2,649,188    2,439,587     7,246,100    6,847,656
Restructuring Charges
   (Note 3) ...............        --           --            --      1,257,598
                            -----------  -----------   -----------  -----------
   Total operating expenses   3,121,868    2,806,853     8,691,698    9,353,644

Income from operations ....     803,781       58,542     2,845,557      359,013
Interest expense, net .....     344,585      308,426       912,856    1,147,875
                            -----------  -----------   -----------  -----------
Income (loss) before income
    taxes .................     459,196     (249,884)    1,932,701     (788,862)

Provision (benefit) for
    income taxes ..........     115,265      (51,240)      488,455     (154,607)
                            -----------  -----------   -----------  -----------
   Net income (loss) ...... $   343,931  $  (198,644)  $ 1,444,246  $  (634,255)
                            ===========  ===========   ===========  ===========
Less:  Preferred stock
   dividends ..............      47,100        4,950       137,100        4,950
                            -----------  -----------   -----------  -----------
Net income (loss) to common
   shareholders ........... $   296,831  $  (203,594)  $ 1,307,146  $  (639,205)
                            ===========  ===========   ===========  ===========

Basic earnings (loss) per
   share .................. $      0.03  $     (0.03)  $      0.14  $     (0.08)
                            ===========  ===========   ===========  ===========
Diluted earnings (loss)
   per share .............. $      0.03  $     (0.03)  $      0.14  $     (0.08)
                            ===========  ===========   ===========  ===========

Weighted average number
   of common shares
   outstanding:
   Basic ..................   9,310,099    8,003,244     9,203,078    8,000,570
                            ===========  ===========   ===========  ===========
   Diluted ................   9,615,355    8,003,244     9,499,855    8,000,570
                            ===========  ===========   ===========  ===========


          See accompanying notes to consolidated financial statements.


                                       4


<PAGE>


                              TAG-IT PACIFIC, INC.

                      Consolidated Statements of Cash Flows

                                   (unaudited)

                                                         Nine Months Ended
                                                           September 30,
                                                    ---------------------------
                                                        2002           2001
                                                    ------------   ------------

Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net income (loss) ............................  $  1,444,246   $   (634,255)
Adjustments to reconcile net income (loss) to
  net cash used in operating activities:
   Depreciation and amortization .................       869,586      1,126,766
   Increase in allowance for doubtful accounts ...        72,096        291,518
   Loss on sale of assets ........................          --          312,418
   Warrants issued for services ..................          --            5,170
Changes in operating assets and liabilities:
      Receivables, including related parties .....   (10,438,350)    (1,560,999)
      Inventories ................................    (3,879,117)      (581,411)
      Other assets ...............................       (66,680)      (462,431)
      Prepaid expenses and other current assets ..      (160,481)        97,940
      Accounts payable and accrued expenses ......     4,347,340       (975,685)
      Accrued restructuring charges ..............          --          335,000
      Deferred revenue ...........................     1,250,000           --
      Income taxes payable .......................       483,807       (168,887)
                                                    ------------   ------------
Net cash used in operating activities ............    (6,077,553)    (2,214,856)
                                                    ------------   ------------

Cash flows from investing activities:
    Additional loans to related parties ..........          --         (251,921)
    Acquisition of property and equipment ........      (437,823)      (397,821)
    Proceeds from sale of fixed assets ...........          --          118,880
                                                    ------------   ------------
Net cash used in investing activities ............      (437,823)      (530,862)
                                                    ------------   ------------

Cash flows from financing activities:
    Bank overdraft ...............................          --         (584,831)
    Proceeds from bank line of credit, net .......     6,378,886        453,149
    Proceeds from private placement transactions .     1,029,997           --
    Proceeds from preferred stock issuance .......          --        2,895,001
    Proceeds from exercise of stock options ......        57,850         19,500
    Proceeds from capital leases .................          --          207,240
    Repayment of capital leases ..................       (56,310)      (234,415)
    Proceeds from notes payable ..................          --          180,000
    Repayment of notes payable ...................      (700,000)      (179,346)
                                                    ------------   ------------
Net cash provided by financing activities ........     6,710,423      2,756,298
                                                    ------------   ------------

Net increase in cash .............................       195,047         10,580
Cash at beginning of period ......................        46,948        128,093
                                                    ------------   ------------
Cash at end of period ............................  $    241,995   $    138,673
                                                    ============   ============

Supplemental disclosures of cash flow
  information:
    Cash paid during the period for:
      Interest ...................................  $    829,725   $  1,110,794
      Income taxes ...............................  $      5,280   $      2,430
    Non-cash financing activity:
      Common stock issued in acquisition of
         assets ..................................  $       --     $    500,000
      Common stock issued in acquisition of
         license rights ..........................  $    577,500   $       --


          See accompanying notes to consolidated financial statements.


                                       5




<PAGE>


                              TAG-IT PACIFIC, INC.

                 Notes to the Consolidated Financial Statements

                                   (unaudited)



1.   PRESENTATION OF INTERIM INFORMATION

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes  required by generally accepted
accounting  principles in the United States for complete  financial  statements.
The  accompanying   unaudited  consolidated  financial  statements  reflect  all
adjustments  that, in the opinion of the management of Tag-It Pacific,  Inc. and
Subsidiaries (collectively,  the "Company"), are considered necessary for a fair
presentation of the financial  position,  results of operations,  and cash flows
for the periods  presented.  The results of operations  for such periods are not
necessarily  indicative of the results  expected for the full fiscal year or for
any future  period.  The  accompanying  financial  statements  should be read in
conjunction with the audited  consolidated  financial  statements of the Company
included  in the  Company's  Form 10-K for the year  ended  December  31,  2001.
Certain  reclassifications  have  been  made  to  the  prior  periods  financial
statements to conform with the 2002 presentation.



2.   EARNINGS PER SHARE

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

                                             INCOME                      PER
THREE MONTHS ENDED SEPTEMBER 30, 2002:       (LOSS)        SHARES       SHARE
--------------------------------------      ---------     ---------    --------
Basic earnings per share:
Income available to common stockholders     $ 296,831     9,310,099    $   0.03

Effect of Dilutive Securities:
Options ................................                    250,271
Warrants ...............................                     54,985
                                            ---------     ---------    --------
Income available to common stockholders     $ 296,831     9,615,355    $   0.03
                                            =========     =========    ========


THREE MONTHS ENDED SEPTEMBER 30, 2001:
--------------------------------------
Basic loss per share:
Loss available to common stockholders ..    $(203,594)    8,003,244    $  (0.03)

Effect of Dilutive Securities:
Options ................................                       --
Warrants ...............................                       --
                                            ---------     ---------    --------
Loss available to common stockholders ..    $(203,594)    8,003,244    $  (0.03)
                                            =========     =========    ========


                                       6


<PAGE>


                                             INCOME                      PER
THREE MONTHS ENDED SEPTEMBER 30, 2002:       (LOSS)        SHARES       SHARE
--------------------------------------      ---------     ---------    --------
BASIC EARNINGS PER SHARE:
Income available to common stockholders     $1,307,146    9,203,078    $   0.14

EFFECT OF DILUTIVE SECURITIES:
Options ................................                    242,252
Warrants ...............................                     54,525
                                            ----------    ---------    --------
Income available to common stockholders     $1,307,146    9,499,855    $   0.14
                                            ==========    =========    ========


NINE MONTHS ENDED SEPTEMBER 30, 2001:
-------------------------------------
BASIC LOSS PER SHARE:
Loss available to common stockholders ..    $ (639,205)   8,000,570    $  (0.08)

EFFECT OF DILUTIVE SECURITIES:
Options ................................                       --
Warrants ...............................                       --
                                            ----------    ---------    --------
Loss available to common stockholders ..    $ (639,205)   8,000,570    $  (0.08)
                                            ==========    =========    ========


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

     Warrants to purchase  299,790  shares of common stock at between  $0.71 and
$6.00, options to purchase 1,384,500 shares of common stock at between $1.30 and
$4.63,  convertible debt of $500,000  convertible at $4.50 per share and 759,494
shares  of  preferred  Series  C stock  convertible  at  $4.94  per  share  were
outstanding for the three and nine months ended September 30, 2001, but were not
included in the  computation of diluted  earnings per share because  exercise or
conversion would have an antidilutive  effect on earnings per share.  During the
three and nine months  ended  September  30, 2001,  850,000  shares of preferred
Series B stock convertible when the average trading price of the Company's stock
for a 30-day consecutive period is equal to or greater than $8.00 per share were
outstanding,  but were not included in the  computation of diluted  earnings per
share because the conversion  contingency  related to these preferred shares was
not met.



3.   RESTRUCTURING CHARGES

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


                                       7


<PAGE>


4.   PRIVATE PLACEMENTS

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

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

     On October 1, 2002, the second  closing  provisions of one of the Stock and
Warrant Purchase Agreements were amended to provide for an extension to exercise
the  purchase of the  remaining  commitment  due under the  agreement of 300,000
shares for total aggregate proceeds of $900,000 until March 1, 2003.



5.   EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT

     On April 2,  2002,  the  Company  entered  into an  Exclusive  License  and
Intellectual  Property Rights Agreement (the  "Agreement") with Pro-Fit Holdings
Limited  ("Pro-Fit").  The Agreement  gives the Company the exclusive  rights to
sell or sublicense  waistbands  manufactured under patented technology developed
by Pro-Fit for garments manufactured anywhere in the world for the United States
market and all United States  brands.  In  accordance  with the  Agreement,  the
Company  issued  150,000  shares of its common stock which were  recorded at the
market  value of the  stock on the date of the  Agreement.  The  shares  contain
restrictions  related to the transfer of the shares and registration rights. The
Agreement  has an  indefinite  term that  extends for the  duration of the trade
secrets  licensed  under the  Agreement.  The Company has recorded an intangible
asset  amounting to $577,500  and is  amortizing  this asset on a  straight-line
basis over its estimated useful life of five years.


                                       8


<PAGE>


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



     Years ending December 31,                                      Amount
     -------------------------                                     --------
     2002 (three months) ..............................            $ 50,000
     2003 .............................................              75,000
     2004 .............................................             200,000
     2005 .............................................             400,000
     2006 .............................................             225,000
                                                                   --------
     Total minimum royalties ..........................            $950,000
                                                                   ========


6.   EXCLUSIVE SUPPLY AGREEMENT

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

     The  Company  recognizes  revenue at the time goods are  shipped,  at which
point title transfers to the customer, and collection is reasonably assured. The
Company  received  its first  quarterly  minimum  payment  due under the  supply
agreement of $1.25 million from Levi in July 2002.


7.   SUBSEQUENT EVENT

     On October 4, 2002, the Company entered into a note payable  agreement with
a related party in the amount of $500,000. The note payable is unsecured, due on
demand, bears interest at 4% and is subordinated to UPS Capital.


8.   CONTINGENCIES

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


9.   NEW ACCOUNTING PRONOUNCEMENTS

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

     SFAS 142 requires,  among other things,  that companies no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires that the Company  identify  reporting units for the
purposes of assessing  potential  future  impairments of goodwill,  reassess the
useful


                                       9


<PAGE>


lives of other existing recognized  intangible assets, and cease amortization of
intangible  assets with an indefinite  useful life. An intangible  asset with an
indefinite  useful life should be tested for  impairment in accordance  with the
guidance in SFAS 142.

     The Company has adopted  SFAS 141 and 142  effective  January 1, 2002.  The
Company's  previous business  combinations were accounted for using the purchase
method  and there are no  intangible  assets  acquired  in  connection  with the
business  combinations  that  are  required  to be  recognized  separately  from
goodwill. The Company ceased amortization of goodwill effective as of January 1,
2002.  As provided by SFAS 142,  the initial  testing of goodwill  for  possible
impairment was completed and no impairment was  identified.  As of September 30,
2002, the net carrying amount of goodwill is $450,000.

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

     In accordance  with SFAS 142, prior period  amounts were not restated.  The
September  30, 2001 net loss  adjusted  for the  exclusion  of  amortization  of
goodwill would have been $37,500 less than reported and there would have been no
difference in basic or diluted earnings per share.

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

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

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


                                       10


<PAGE>


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

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

     This   discussion   summarizes  the  significant   factors   affecting  the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It  Pacific,  Inc. for the three and nine months ended September 30, 2002
and 2001.  Except for  historical  information,  the matters  discussed  in this
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations are forward looking  statements that involve risks and  uncertainties
and are based upon  judgments  concerning  various  factors  that are beyond our
control.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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


                                       11


<PAGE>


          income tax expense. Conversely, if we determine that we will realize a
          deferred tax asset,  which  currently  has a valuation  allowance,  we
          would be required to reverse the valuation  allowance,  which would be
          reflected as an income tax benefit.

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



OVERVIEW

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

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

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

     On July 12, 2002, we entered into an exclusive  supply  agreement with Levi
Strauss & Co. In  accordance  with the supply  agreement,  Levi is to purchase a
minimum of $10 million of various trim products, garment components and services
over  the  next  two  years.   Certain  proprietary   products,


                                       12


<PAGE>


equipment  and  technological  know-how will be supplied to Levi on an exclusive
basis during this period.  The supply  agreement  also  appoints  Talon(R) as an
approved zipper supplier to Levi.

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

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



RELATED PARTY SUPPLY AGREEMENTS

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

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

     We have entered into an exclusive supply  agreement with Azteca  Production
International,  Inc., AZT  International SA D RL and Commerce  Investment Group,
LLC. Pursuant to this supply agreement, we provide all trim-related products for
certain programs manufactured by Azteca Production International.  The agreement
provides  for a minimum  aggregate  total of $10 million in annual  purchases by
Azteca  Production  International  and its  affiliates  during  each year of the
three-year term of the agreement,  if and to the extent,  we are able to provide
trim  products  on a basis that is  competitive  in terms


                                       13


<PAGE>


of price and quality.  Azteca  Production  International  has been a significant
customer of ours for many years.  This  agreement is structured in a manner that
has allowed us to utilize our MANAGED TRIM SOLUTION(TM)  system to supply Azteca
Production  International  with all of its trim  program  requirements.  We have
expanded  our  facilities  in Tlaxcala,  Mexico,  to service  Azteca  Production
International's trim requirements.

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

     Sales  under  our  exclusive  supply   agreements  with  Azteca  Production
International  and Tarrant  Apparel Group amounted to  approximately  63% of our
total sales for the year ended  December 2001. We will continue to rely on these
two customers for a significant  amount of our sales for the year ended December
2002.  Sales under these  exclusive  supply  agreements as a percentage of total
sales for the year ended  December 2002 are  anticipated  to be slightly  higher
than the year ended December  2001.  Our results of operations  will depend to a
significant   extent   upon  the   commercial   success  of  Azteca   Production
International and Tarrant Apparel Group. If Azteca Production  International and
Tarrant Apparel Group fail to purchase our trim products at anticipated  levels,
or our  relationship  with Azteca  Production  International  or Tarrant Apparel
Group  terminates,  it may have an adverse  affect on our results of operations.
Included in trade accounts receivable, related parties at September 30, 2002, is
$15,899,000 due from Tarrant Apparel Group and Azteca Production International.

     Included in  inventories  at September  30, 2002 are  inventories  that are
subject to buyback arrangements with Tarrant Apparel Group and Azteca Production
International.  The  buyback  arrangements  contain  provisions  related  to the
inventory purchased on behalf of these customers.  In the event that inventories
remain  with us in excess of six to nine  months  from our  receipt of the goods
from our  vendors  or the  termination  of  production  of a product  line,  the
customer is required to purchase the  inventories  from us under normal  invoice
and selling  terms.  During the twelve months ended  September 30, 2002, we sold
approximately  $1.8  million in inventory  to Tarrant  Apparel  Group and Azteca
Production  International  pursuant  to  these  buyback  arrangements.   If  the
financial condition of Tarrant Apparel Group and Azteca Production International
were to  deteriorate,  resulting in an  impairment  of their ability to purchase
inventories, it may have an adverse affect on our results of operations.



RESTRUCTURING PLAN

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


                                       14


<PAGE>


RESULTS OF OPERATIONS

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


                                         THREE MONTHS ENDED   NINE MONTHS ENDED
                                             SEPTEMBER 30,      SEPTEMBER 30,
                                          -----------------   -----------------
                                            2002      2001     2002      2001
                                          -------   -------   -------   -------
Net sales ............................      100.0%    100.0%    100.0%    100.0%
Cost of goods sold ...................       76.0      74.0      74.6      72.9
                                          -------   -------   -------   -------
Gross profit .........................       24.0      26.0      25.4      27.1
Selling expenses .....................        2.9       3.3       3.2       3.5
General and administrative expenses ..       16.2      22.1      15.9      19.1
Restructuring Charges ................       --        --        --         3.5
                                          -------   -------   -------   -------
Operating Income .....................        4.9%      0.6%      6.3%      1.0%
                                          =======   =======   =======   =======


     Net sales increased approximately  $5,311,000, or 48.1%, to $16,350,000 for
the three months ended September 30, 2002 from  $11,039,000 for the three months
ended  September  30, 2001.  The increase in net sales was  primarily  due to an
increase in trim-related  sales from our Tlaxcala,  Mexico  operations under our
MANAGED TRIM  SOLUTION(TM)  trim package program.  The increase in net sales was
also  attributable  to an increase in zipper sales under our TALON brand name to
our MANAGED TRIM SOLUTION(TM)  customers in Mexico and our other Talon customers
in Mexico and Asia.  TALON has been  successful  in becoming an approved  zipper
vendor for major brands and retailers which has allowed us to increase our sales
to these  customers.  Our  purchase  of the TALON brand name and  trademarks  in
December 2001 has enabled us to better  control our product  offerings,  selling
prices and profit margins.

     Net sales increased approximately  $9,671,000, or 27.0%, to $45,468,000 for
the nine months ended  September 30, 2002 from  $35,797,000  for the nine months
ended  September  30, 2001.  The increase in net sales was  primarily  due to an
increase in trim-related  sales from our Tlaxcala,  Mexico  operations under our
MANAGED TRIM  SOLUTION(TM)  trim package program.  The increase in net sales was
also  attributable,  for the reasons  discussed  above, to an increase in zipper
sales under our TALON brand name to our MANAGED TRIM  SOLUTION(TM)  customers in
Mexico and our other Talon customers in Mexico and Asia.

     Gross profit increased  approximately  $1,061,000,  or 37.0%, to $3,926,000
for the three  months ended  September  30, 2002 from  $2,865,000  for the three
months  ended  September  30, 2001.  Gross  margin as a percentage  of net sales
decreased to  approximately  24.0% for the three months ended September 30, 2002
as compared to 26.0% for the three months ended September 30, 2001. The decrease
in gross  profit  as a  percentage  of net  sales  for the  three  months  ended
September  30, 2002 was  primarily  due to an increase in zipper sales under our
TALON brand name to our MANAGED TRIM SOLUTION(TM) customers in Mexico during the
quarter.  Talon products have a lower gross margin than other products  included
within the complete trim packages we offer to our customers  through our MANAGED
TRIM SOLUTION(TM).

     Gross profit increased approximately  $1,824,000,  or 18.8%, to $11,537,000
for the nine months ended September 30, 2002 from $9,713,000 for the nine months
ended September 30, 2001. Gross margin as a percentage of net sales decreased to
approximately  25.4% for the nine months ended September 30, 2002 as compared to
27.1% for the nine months ended September 30, 2001. The decrease in gross profit
as a percentage  of net sales for the nine months ended  September  30, 2002 was
primarily


                                       15


<PAGE>


due to an  increase  in zipper  sales  under our TALON brand name to our MANAGED
TRIM SOLUTION(TM)  customers in Mexico during the period.  Talon products have a
lower  gross  margin  than other  products  included  within the  complete  trim
packages we offer to our customers  through our MANAGED TRIM  SOLUTION(TM).  The
decrease in gross margin as a percentage  of net sales for the nine months ended
September  30,  2002 was  offset by a further  reduction  of  manufacturing  and
facility  costs  which  was  a  direct  result  of  the  implementation  of  our
restructuring plan in the first quarter of 2001.

     Selling expenses increased  approximately  $106,000,  or 28.9%, to $473,000
for the three months ended September 30, 2002 from $367,000 for the three months
ended September 30, 2001. As a percentage of net sales, these expenses decreased
to 2.9% for the three months ended  September  30, 2002 compared to 3.3% for the
three months ended  September 30, 2001.  This increase was due to our efforts to
obtain  approval  from major brands and  retailers of the TALON brand zipper and
the  implementation  of our new sales and marketing plan for the TALON brand. In
addition,  we hired  additional  personnel  to support the  exclusive  waistband
license  agreement  we  entered  into in April  2002.  For the  period,  selling
expenses increased at a slower rate than the increase in net sales, resulting in
a decrease in selling expenses as a percentage of net sales.

     Selling expenses increased  approximately $198,000, or 15.9%, to $1,446,000
for the nine months ended September 30, 2002 from $1,248,000 for the nine months
ended September 30, 2001. As a percentage of net sales, these expenses decreased
to 3.2% for the nine months ended  September  30, 2002  compared to 3.5% for the
nine months ended  September 30, 2001. The increase in selling  expenses  during
the  period  was due to our  efforts to obtain  approval  from major  brands and
retailers of the TALON brand zipper and the  implementation of our new sales and
marketing plan for the TALON brand.  The increase in these selling  expenses was
partially  offset by a  reduction  of our sales  force  under our  MANAGED  TRIM
SOLUTION(TM)  program,  which  was  part  of  our  restructuring  plan  that  we
implemented  in the first  quarter of 2001.  For the  period,  selling  expenses
increased  at a slower  rate than the  increase  in net  sales,  resulting  in a
decrease in selling expenses as a percentage of net sales.

     General and administrative  expenses increased  approximately  $209,000, or
8.6%,  to  $2,649,000  for the  three  months  ended  September  30,  2002  from
$2,440,000 for the three months ended  September 30, 2001. The increase in these
expenses was due primarily to additional  staffing and other  expenses  incurred
related to our Tlaxcala,  Mexico  operations and the  amortization of intangible
assets acquired under the exclusive  waistband license agreement we entered into
in April 2002. As a percentage of net sales,  these expenses  decreased to 16.2%
for the three months ended  September  30, 2002  compared to 22.1% for the three
months  ended  September  30,  2001,  because  the rate of increase in net sales
exceeded that of general and administrative expenses.

     General and administrative  expenses increased  approximately  $398,000, or
5.8%, to $7,246,000 for the nine months ended September 30, 2002 from $6,848,000
for the nine months ended September 30, 2001. The increase in these expenses was
due primarily to additional  staffing and other expenses incurred related to our
Tlaxcala,  Mexico  operations and the amortization of intangible assets acquired
under the exclusive  waistband  license agreement we entered into in April 2002.
As a percentage  of net sales,  these  expenses  decreased to 15.9% for the nine
months  ended  September  30, 2002  compared to 19.1% for the nine months  ended
September 30, 2001,  because the rate of increase in net sales  exceeded that of
general and administrative expenses.

     Interest expense increased approximately $37,000, or 12.0%, to $345,000 for
the three months  ended  September  30, 2002 from  $308,000 for the three months
ended  September 30, 2001. On May 30, 2001, we replaced our credit facility with
a new facility with UPS Capital Global Trade Finance Corporation, which provides
for increased  borrowing  availability of up to $20,000,000 and a more favorable
interest rate of prime plus 2%. We incurred  financing  charges of approximately
$570,000,  including  legal,  consulting  and  closing  costs,  in the first two
quarters of 2001 related to our efforts to replace our existing credit facility.
Our borrowings  under the new UPS Capital credit facility  increased


                                       16


<PAGE>


during the third quarter of 2002 due to increased sales and expanded  operations
in Mexico and Asia. The increase in interest expense due to increased borrowings
during the quarter was offset by decreases in the prime rate from prior periods.

     Interest expense decreased  approximately  $235,000,  or 20.5%, to $913,000
for the nine months ended September 30, 2002 from $1,148,000 for the nine months
ended September 30, 2001. As discussed above, we incurred  financing charges and
were charged less favorable interest rates during the first two quarters of 2001
under our former credit facility.

     The  provision  for income taxes for the three months ended  September  30,
2002  amounted to  approximately  $115,000  compared to an income tax benefit of
$51,000 for the three months ended  September 30, 2001.  Income taxes  increased
for the three months ended September 30, 2002 primarily due to increased taxable
income.

     The provision for income taxes for the nine months ended September 30, 2002
amounted to approximately $488,000 compared to an income tax benefit of $155,000
for the nine months ended  September  30, 2001.  Income taxes  increased for the
nine months ended September 30, 2002 primarily due to increased taxable income.

     Net income was approximately  $344,000 for the three months ended September
30,  2002 as  compared  to a net loss of  $199,000  for the three  months  ended
September 30, 2001, due primarily to increased net sales during the quarter.

     Net income was approximately $1,444,000 for the nine months ended September
30,  2002 as  compared  to a net  loss of  $634,000  for the nine  months  ended
September  30, 2001,  due primarily to increased net sales during the period and
restructuring charges incurred during the first quarter of 2001 of approximately
$1.3 million.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

     Cash and cash equivalents  increased to $242,000 at September 30, 2002 from
$47,000 at December 31, 2001.  The increase  resulted  from  $6,710,000  of cash
provided by financing activities, offset by $6,078,000 and $438,000 of cash used
in operating and investing activities, respectively.

     Net cash used in operating  activities  was  approximately  $6,078,000  and
$2,215,000 for the nine months ended September 30, 2002 and 2001,  respectively.
The  increase in cash used by  operating  activities  for the nine months  ended
September  30,  2002  resulted  primarily  from  increases  in  inventories  and
receivables,  which was  partially  offset by increases in accounts  payable and
accrued expenses,  deferred revenue and net income.  The increase in inventories
during the period was due  primarily  to  increased  customer  orders for future
sales. The increase in accounts  receivable  during the period was due primarily
to  increased  sales and slower  customer  collections.  Cash used in  operating
activities for the nine months ended September 30, 2001 resulted  primarily from
increased  accounts  receivable,  inventories,  other assets and net losses, and
decreased accounts payable and accrued expenses.

     Net cash  used in  investing  activities  was  approximately  $438,000  and
$531,000 for the nine months ended  September  30, 2002 and 2001,  respectively.
Net cash used in investing  activities  for the nine months ended  September 30,
2002 consisted  primarily of capital  expenditures  for machinery and equipment.
Net cash used in investing  activities  for the nine months ended  September 30,
2001  consisted  primarily of capital  expenditures  for computer  equipment and
upgrades and additional loans to related parties.

     Net cash provided by financing activities was approximately  $6,710,000 and
$2,756,000 for the nine months ended September 30, 2002 and 2001,  respectively.
Net cash provided by financing  activities  for the nine months ended  September
30, 2002 primarily reflects  increased  borrowings under our credit facility and
funds raised from private  placement  transactions,  offset by the  repayment of
notes payable.  The increase in borrowings  under our credit facility during the
period was due primarily to working


                                       17


<PAGE>


capital   requirements   related  to  increases  in  accounts   receivable   and
inventories. Net cash provided by financing activities for the nine months ended
September 30, 2001  primarily  reflects  increased  borrowings  under our credit
facility  and  proceeds  from the  issuance of Series C  Convertible  Redeemable
preferred stock, offset by the repayment of a bank overdraft.

     We currently  satisfy our working capital  requirements  primarily  through
cash flows  generated from  operations and borrowings  under our credit facility
with UPS  Capital.  Our maximum  availability  under the credit  facility is $20
million.  At September 30, 2002 and 2001,  outstanding  borrowings under our UPS
Capital credit facility  amounted to approximately  $16,039,000 and $10,410,000,
respectively.  Open letters of credit  amounted to  approximately  $1,080,000 at
September 30, 2002. There were no open letters of credit at September 30, 2001.

     The initial term of our  agreement  with UPS Capital is three years and the
facility is secured by substantially all of our assets. The interest rate of the
credit facility is at the prime rate plus 2%. The credit facility  requires that
we comply with certain  financial  covenants  including net worth,  fixed charge
ratio and capital  expenditures.  At September  30, 2002,  we were in compliance
with all  applicable  financial  covenants.  The amount we can borrow  under the
credit facility is determined based on a defined  borrowing base formula related
to eligible accounts receivable and inventories. Our borrowing base availability
ranged from  approximately  $9,921,000  to  $18,126,000  from October 1, 2001 to
September 30, 2002. A significant  decrease in eligible accounts  receivable and
inventories due to customer  concentration  levels and the aging of inventories,
among other factors,  can have an adverse  effect on our borrowing  capabilities
under our credit facility, which thereafter,  may not be adequate to satisfy our
working capital  requirements.  Eligible accounts  receivable are reduced if our
accounts  receivable  customer  balances  are  concentrated  in  excess  of  the
percentages allowed under our agreement with UPS Capital.  In addition,  we have
typically  experienced  seasonal  fluctuations  in sales volume.  These seasonal
fluctuations  result in sales volume  decreases in the first and fourth quarters
of each year due to the seasonal fluctuations experienced by the majority of our
customers.  During  these  quarters,  borrowing  availability  under our  credit
facility may decrease as a result of decreases in eligible accounts  receivables
generated  from our sales.  As a result of our  concentration  of business  with
Tarrant  Apparel  Group  and  Azteca  Production  International,   our  eligible
receivables  have been limited under the UPS Capital facility to various degrees
over the prior nine months.  If our business becomes further dependant on one or
a limited number of customers or if we experience  future  significant  seasonal
reductions  in  receivables,  our  availability  under  the UPS  Capital  credit
facility would be  correspondingly  reduced.  If this were to occur, we would be
required to seek  additional  financing which may not be available on attractive
terms  and,  if such  financing  is  unavailable,  we may be  unable to meet our
working capital requirements.

     Pursuant  to the  terms of a  foreign  factoring  agreement  under  our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible  accounts  receivable  under our credit  facility.  As of September 30,
2002, the amount factored without  recourse was  approximately  $552,000.  There
were no receivables factored with UPS Capital at September 30, 2001.

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


                                       18


<PAGE>


     In a series of sales on December 28,  2001,  January 7, 2002 and January 8,
2002, we entered into stock and warrant  purchase  agreements with three private
investors, including Mark Dyne, the chairman of our board of directors. Pursuant
to the stock and warrant purchase agreements,  we issued an aggregate of 516,665
shares of common stock at a price per share of $3.00 for  aggregate  proceeds of
$1,549,995.  The stock and warrant purchase agreements also include a commitment
by one of the private  investors  to purchase an  additional  400,000  shares of
common  stock at a price  per  share of $3.00 at  second  closings  (subject  of
certain  conditions) on or prior to October 1, 2002 for  additional  proceeds of
$1,200,000.  In March 2002, this private  investor  purchased  100,000 shares of
common  stock at a price  per  share of $3.00  pursuant  to the  second  closing
provisions of the stock and warrant  purchase  agreement  for total  proceeds of
$300,000.  The  remaining  commitment  under  the  stock  and  warrant  purchase
agreement  is for an  additional  300,000  shares  with  aggregate  proceeds  of
$900,000.  Pursuant to the second  closing  provisions  of the stock and warrant
purchase agreement,  50,000 warrants were issued to the investor.  On October 1,
2002,  the second  closing  provisions of one of the Stock and Warrant  Purchase
Agreements  were amended to provide for an extension to exercise the purchase of
the remaining  commitment  due under the  agreement of 300,000  shares for total
aggregate proceeds of $900,000 until March 1, 2003.

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

     Pursuant  to  the  terms  of  a  factoring  agreement  for  our  Hong  Kong
subsidiary,  Tag-It Pacific Limited,  the factor purchases our eligible accounts
receivable  and assumes the credit risk with respect to those accounts for which
the  factor  has given its prior  approval.  If the  factor  does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 80% of
eligible  accounts  receivable.  Interest  is charged at 1.5% over the Hong Kong
Dollar  prime  rate.  As of  September  30, 2002 and 2001,  the amount  factored
without recourse was approximately  $223,000 and $30,000 and the amount due from
the  factor and  recorded  as a current  asset was  approximately  $223,000  and
$30,000.  There were no outstanding advances from the factor as of September 30,
2002 and 2001.

     As of  September  30,  2002,  we  had  outstanding  related-party  debt  of
approximately  $850,000  at a  weighted  average  interest  rate of  10.5%,  and
additional  non-related-party  debt of $25,200 at an interest  rate of 10%.  The
majority of  related-party  debt is due on demand,  with the  remainder  due and
payable on the fifteenth  day  following the date of delivery of written  demand
for payment. On October 4, 2002, we entered into a note payable agreement with a
related  party in the amount of  $500,000  to fund  additional  working  capital
requirements. The note payable is unsecured, due on demand, bears interest at 4%
and is subordinated to UPS Capital. As of September 30, 2001, we had outstanding
related-party  debt, of approximately  $3,620,000 at a weighted average interest
rate of between 0% and 11%, and additional  non-related-party debt of $25,200 at
an interest  rate of 10%. The majority of  related-party  debt was


                                       19


<PAGE>


cancelled  in  connection  with the TALON  trademark  purchase  agreement  dated
December 21, 2001,  with the  remainder  due on the  fifteenth day following the
date of delivery of written demand for payment.

     Our  receivables  increased  to  $20,649,000  at  September  30,  2002 from
$13,773,000 at September 30, 2001.  This increase was due primarily to increased
related-party  trade  receivables of approximately  $6.3 million  resulting from
increased related party sales during the nine months ended September 30, 2002.

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

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

     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 the next
twelve months.  In addition,  we expect to receive  quarterly cash payments of a
minimum of $1.25  million  under our supply  agreement  with Levi  Strauss & Co.
through August 2004 and  additional  funds of $900,000 by March 1, 2003 pursuant
to the remaining  commitment due under the stock warrant and purchase  agreement
we entered into with a private  investor.  If our cash from  operations  is less
than anticipated or our working capital  requirements  and capital  expenditures
are  greater  than we expect,  we will need to raise  additional  debt or equity
financing in order to provide for our operations.  We are continually evaluating
various  financing  strategies to be used to expand our business and fund future
growth or  acquisitions.  The extent of our  future  capital  requirements  will
depend,  however, on many factors,  including our results of operations,  future
demand  for our  products,  the size and  timing  of  future  acquisitions,  our
borrowing base availability  limitations related to eligible accounts receivable
and  inventories  and  our  expansion  into  foreign  markets.  There  can be no
assurance  that  additional  debt  or  equity  financing  will be  available  on
acceptable terms or at all. If we are unable to secure additional financing,  we
may not be able to execute our plans for  expansion,  including  expansion  into
foreign  markets  to  promote  our  TALON  brand  tradename,  and we may need to
implement additional cost savings initiatives.

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


                                       20


<PAGE>


CONTRACTUAL OBLIGATIONS

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



                                         PAYMENTS DUE BY PERIOD
                          ------------------------------------------------------
                                        LESS THAN      1-3        4-5     AFTER
CONTRACTUAL OBLIGATIONS      TOTAL       1 YEAR       YEARS      YEARS   5 YEARS
-----------------------   -----------  -----------  ----------   ------  -------

Subordinated notes
   payable ............   $ 4,200,000  $ 1,300,000  $2,900,000   $  --   $  --

Capital lease
   obligations ........   $   192,862  $    71,121  $  121,741   $  --   $  --

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

Operating leases ......   $ 1,708,425  $   644,272  $1,064,153   $  --   $  --

Line of credit ........   $16,039,467  $16,039,467  $     --     $  --   $  --

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

Royalty payments ......   $   950,000  $   100,000  $  850,000   $  --   $  --
--------------------------------------------------------------------------------
     (1) The majority of  subordinated  notes payable to related parties are due
     on demand with the remainder due and payable on the fifteenth day following
     the date of delivery of written demand for payment.



NEW ACCOUNTING PRONOUNCEMENT

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

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

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


                                       21


<PAGE>


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

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


CAUTIONARY STATEMENTS AND RISK FACTORS

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

     IF WE LOSE OUR LARGEST  CUSTOMERS  OR THEY FAIL TO PURCHASE AT  ANTICIPATED
LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.  Our largest
customer,  Tarrant Apparel Group, accounted for approximately 42.0% and 48.1% of
our net sales,  on a consolidated  basis,  for the years ended December 31, 2001
and 2000, and 32.1% for the nine months ended  September 2002. In December 2000,
we  entered  into  an  exclusive   supply   agreement  with  Azteca   Production
International,  AZT  International SA D RL, and Commerce  Investment  Group, LLC
that provides for a minimum of $10,000,000  in total annual  purchases by Azteca
Production  International  and its affiliates during each year of the three-year
term of the agreement.  Azteca Production  International is required to purchase
from us only if we are able to provide trim products on a  competitive  basis in
terms of price and quality.

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

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

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

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

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

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

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


                                       22


<PAGE>


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

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

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

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

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

     o    The timing and magnitude of customers' marketing campaigns;

     o    The loss or addition of a major customer;

     o    The availability and pricing of materials for our products;

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

     o    Currency fluctuations;

     o    Delays caused by third parties; and

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

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

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


                                       23


<PAGE>


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

     THE LOSS OF KEY MANAGEMENT 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.

     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.

     IF CUSTOMERS DEFAULT ON BUYBACK AGREEMENTS WITH US, WE WILL BE LEFT HOLDING
UNSALABLE  INVENTORY.  Inventories  include  goods  that are  subject to buyback
agreements with our customers. Under these


                                       24


<PAGE>


buyback  agreements,  the customer must purchase the  inventories  from us under
normal  invoice and selling terms,  if any inventory  which we purchase on their
behalf  remains in our hands longer than agreed by the customer from the time we
received the goods from our vendors.  If any customer  defaults on these buyback
provisions,  we may incur a charge in  connection  with our holding  significant
amounts of unsalable inventory.

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

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

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

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

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

     o    Interest rates;

     o    Changes in accounting principles;

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

     o    Announcements of key developments by our competitors; and

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

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


                                       25


<PAGE>


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

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

     INSIDERS OWN A SIGNIFICANT  PORTION OF OUR COMMON STOCK,  WHICH COULD LIMIT
OUR STOCKHOLDERS'  ABILITY TO INFLUENCE THE OUTCOME OF KEY  TRANSACTIONS.  As of
December  31,  2001,  our  officers and  directors  and their  affiliates  owned
approximately  42.4% of the  outstanding  shares of our common  stock.  The Dyne
family,  which includes Mark Dyne, Colin Dyne, Larry Dyne, Jonathan Burstein and
the  estate  of  Harold  Dyne,  beneficially  owned  approximately  40.4% of the
outstanding shares of our common stock. The number of shares  beneficially owned
by the Dyne family includes the shares of common stock held by Azteca Production
International, which are voted by Colin Dyne pursuant to a voting agreement. The
Azteca Production  International  shares constitute  approximately  11.4% of the
outstanding  shares of common stock at December 31, 2001. KG Investment,  LLC, a
significant  stockholder,  owns approximately 27.2% of the outstanding shares of
our common stock at December 31, 2001. As a result,  our officers and directors,
the Dyne family and KG Investment,  LLC are able to exert considerable influence
over the outcome of any matters submitted to a vote of the holders of our common
stock,  including  the election of our Board of  Directors.  The voting power of
these  stockholders could also discourage others from seeking to acquire control
of us through the purchase of our common stock, which might depress the price of
our common stock.

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


                                       26


<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     We  are  also  exposed  to the  impact  of  interest  rate  changes  on our
outstanding  borrowings.  At September  30,  2002,  we had  approximately  $20.2
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 material information related to Tag-it Pacific,  Inc., including our
consolidated  subsidiaries,  is  disclosed  in our  public  filings on a regular
basis. In response to recent legislation and proposed  regulations,  we reviewed
our internal control  structure and our disclosure  controls and procedures.  We
believe our  pre-existing  disclosure  controls and  procedures  are adequate to
enable us to comply with our disclosure obligations.

     Within 90 days prior to the filing of this report, members of the Company's
management,  including the Company's  Chief Executive  Officer,  Colin Dyne, and
Chief  Financial  Officer,  Ronda Sallmen,  evaluated the  effectiveness  of the
design and operation of the Company's disclosure controls and procedures.  Based
upon that  evaluation,  Mr. Dyne and Ms.  Sallmen  concluded  that the Company's
disclosure controls and procedures are effective in causing material information
to be recorded, processed,  summarized and reported by management of the Company
on a timely basis and to ensure that the quality and timeliness of the Company's
public disclosures complies with its SEC disclosure obligations.

CHANGES IN CONTROLS AND PROCEDURES

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


                                       27


<PAGE>


                                     PART II

                                OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits:

               10.68    Exclusive supply agreement, dated July 12, 2002, among
                        Tag-it Pacific, Inc. and Levi Strauss & Co.*

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

               * Certain  portions of this agreement have been omitted and filed
               separately with the Securities and Exchange  Commission  pursuant
               to  a  request  for  an  order  granting  confidential  treatment
               pursuant to Rule 406 of the General Rules and  Regulations  under
               the Securities Act of 1933, as amended.

         (b)   Report on Form 8-K:

               None.


                                       28


<PAGE>


                                   SIGNATURES



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





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



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

                                                Its:     Chief Financial Officer


                                       29


<PAGE>


                        Certification of CEO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Colin Dyne, certify that:

         1. I have reviewed this quarterly report on Form 10-Q of Tag-It
Pacific, Inc.;

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

                  b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

                  c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

                  a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:    November 14, 2002

                                 /s/ Colin Dyne
                                 -----------------------
                                 Colin Dyne
                                 Chief Executive Officer


                                       30


<PAGE>


                        Certification of CFO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Ronda Sallmen, certify that:

         1. I have reviewed this quarterly report on Form 10-Q of Tag-It
Pacific, Inc.;

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

                  b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

                  c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

                  a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:    November 14, 2002

                                       /s/ Ronda Sallmen
                                       -----------------------
                                       Ronda Sallmen
                                       Chief Financial Officer


                                       31