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

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

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2004.

                                       OR

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

         For the transition period from ____________ to _______________.

                         Commission file number 1-13669

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

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


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

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

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

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

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest  practicable  date:  Common Stock, par
value $0.001 per share,  18,085,116  shares issued and  outstanding as of August
16, 2004.

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<PAGE>


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



PART I      FINANCIAL INFORMATION                                           PAGE
                                                                            ----
Item 1.     Consolidated Financial Statements..................................3

            Consolidated Balance Sheets as of June 30, 2004 (unaudited)
            and December 31, 2003..............................................3

            Consolidated Statements of Operations (unaudited)
            for the Three and Six Months
            Ended June 30, 2004 and 2003.......................................4

            Consolidated Statements of Cash Flows (unaudited)
            for the Six Months Ended June 30, 2004 and 2003....................5

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

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

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

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

PART II     OTHER INFORMATION

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

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

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


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.

                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                     June 30,       December 31,
                                                       2004            2003
                                                   ------------    ------------
                    Assets                         (unaudited)
Current Assets:
   Cash and cash equivalents ...................   $  5,353,375    $ 14,442,769
   Due from factor .............................          8,297           9,743
   Trade accounts receivable, net ..............     20,396,222       7,531,079
   Trade accounts receivable, related parties ..      5,488,123      11,721,465
   Inventories .................................     19,004,055      17,096,879
   Prepaid expenses and other current assets ...      1,194,951       2,124,366
   Deferred income taxes .......................      2,800,000       2,800,000
                                                   ------------    ------------
     Total current assets ......................     54,245,023      55,726,301

Property and equipment, net of accumulated
   depreciation and amortization ...............      6,047,142       6,144,863
Tradename ......................................      4,110,750       4,110,750
Goodwill .......................................        450,000         450,000
License rights .................................        336,875         375,375
Due from related parties .......................        788,758         762,076
Other assets ...................................        430,372         200,949
                                                   ------------    ------------
Total assets ...................................   $ 66,408,920    $ 67,770,314
                                                   ============    ============

 Liabilities, Convertible Redeemable Preferred
        Stock and Stockholders' Equity
Current Liabilities:
   Line of credit ..............................   $  5,935,362    $  7,095,514
   Accounts payable and accrued expenses .......      9,394,972       9,552,196
   Subordinated notes payable to related
      parties ..................................        849,971         849,971
   Current portion of capital lease
      obligations ..............................        570,980         562,742
   Current portion of subordinated note
      payable ..................................      1,800,000       1,200,000
                                                   ------------    ------------
     Total current liabilities .................     18,551,285      19,260,423
Capital lease obligations, less current
   portion .....................................        592,994         651,191
Subordinated note payable, less current
   portion .....................................        200,000       1,400,000
                                                   ------------    ------------
    Total liabilities ..........................     19,344,279      21,311,614
                                                   ------------    ------------
Convertible redeemable preferred stock Series
   C, $0.001 par value; 759,494 authorized; no
   shares issued and outstanding at June 30,
   2004; 759,494 shares issued and outstanding
   at December 31, 2003 (stated value
   $3,000,000) .................................           --         2,895,001
Stockholders' equity:
   Preferred stock, Series A $0.001 par value;
   250,000 shares authorized, no shares issued
   or outstanding ..............................           --              --
   Convertible preferred stock Series D,
     $0.001 par value; 572,818 shares
     authorized; no shares issued or
     outstanding at June 30, 2004; 572,818
     shares issued and outstanding at December
     31, 2003 ..................................           --        22,918,693
   Common stock, $0.001 par value, 30,000,000
     shares authorized; 18,085,116 shares
     issued and outstanding at June 30, 2004;
     11,508,201 at December 31, 2003 ...........         18,087          11,510
   Additional paid-in capital ..................     50,715,629      23,890,356
   Accumulated deficit .........................     (3,669,075)     (3,256,860)
                                                   ------------    ------------
Total stockholders' equity .....................     47,064,641      43,563,699
                                                   ------------    ------------
Total liabilities, convertible redeemable
   preferred stock and stockholders' equity ....   $ 66,408,920    $ 67,770,314
                                                   ============    ============

         See accompanying notes to consolidated financial statements.


                                       3
<PAGE>


<TABLE>
                              TAG-IT PACIFIC, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<CAPTION>
                                       Three Months Ended June 30,     Six Months Ended June 30,
                                       ---------------------------   ----------------------------
                                           2004           2003           2004            2003
                                       ------------   ------------   ------------    ------------
<S>                                    <C>            <C>            <C>             <C>
Net sales ..........................   $ 14,923,121   $ 20,731,573   $ 25,083,419    $ 35,090,407
Cost of goods sold .................     11,030,867     15,267,058     18,199,115      25,326,310
                                       ------------   ------------   ------------    ------------
   Gross profit ....................      3,892,254      5,464,515      6,884,304       9,764,097

Selling expenses ...................        702,482      1,245,769      1,474,598       2,074,913
General and administrative expenses       2,791,209      2,939,927      5,648,349       5,638,432
                                       ------------   ------------   ------------    ------------
   Total operating expenses ........      3,493,691      4,185,696      7,122,947       7,713,345

Income (loss) from operations ......        398,563      1,278,819       (238,643)      2,050,752
Interest expense, net ..............        144,355        342,989        331,074         663,837
                                       ------------   ------------   ------------    ------------
Income (loss) before income taxes ..        254,208        935,830       (569,717)      1,386,915
Provision (benefit) for income taxes         83,889        187,166       (188,007)        277,383
                                       ------------   ------------   ------------    ------------
   Net income (loss) ...............   $    170,319   $    748,664   $   (381,710)   $  1,109,532
                                       ============   ============   ============    ============
Less:  Preferred stock dividends ...           --           47,100         30,505          94,200
                                       ------------   ------------   ------------    ------------
Net income (loss) to common
   shareholders ....................   $    170,319   $    701,564   $   (412,215)      1,015,332
                                       ============   ============   ============    ============

Basic earnings (loss) per share ....   $       0.01   $       0.07   $      (0.02)   $       0.10
                                       ============   ============   ============    ============
Diluted earnings (loss) per share ..   $       0.01   $       0.07   $      (0.02)   $       0.10
                                       ============   ============   ============    ============

Weighted average number of common
shares outstanding:
   Basic ...........................     18,061,778     10,209,195     16,491,684       9,818,390
                                       ============   ============   ============    ============
   Diluted .........................     18,779,239     10,737,427     16,491,684      10,169,168
                                       ============   ============   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


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

<CAPTION>
                                                                Six Months Ended June 30,
                                                              -----------------------------
                                                                   2004            2003
                                                              -------------   -------------
<S>                                                           <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net (loss) income .....................................   $   (381,710)   $  1,109,532
Adjustments to reconcile net (loss) income to net cash used
  by operating activities:
    Depreciation and amortization .........................        730,153         617,925
    Increase in allowance for doubtful accounts ...........        147,282         163,489
    Common stock issued for services ......................         74,825            --
Changes in operating assets and liabilities:
      Receivables, including related parties ..............     (6,777,637)     (4,660,629)
      Inventories .........................................     (1,907,176)     (1,481,065)
      Other assets ........................................       (236,854)         (5,663)
      Prepaid expenses and other current assets ...........        929,415        (957,730)
      Accounts payable and accrued expenses ...............        739,019       2,035,362
      Income taxes payable ................................       (434,901)        479,479
                                                              ------------    ------------
Net cash used by operating activities .....................     (7,117,584)     (2,699,300)
                                                              ------------    ------------
Cash flows from investing activities:
    Acquisition of property and equipment .................       (337,082)       (980,046)
                                                              ------------    ------------
Cash flows from financing activities:
    Repayment of bank line of credit, net .................     (1,160,152)       (536,162)
    Proceeds from private placement transactions ..........           --         6,395,300
    Proceeds from exercise of stock options and warrants ..        424,801         182,000
    Repayment of capital leases ...........................       (299,377)       (170,364)
    Repayment of notes payable ............................       (600,000)     (1,100,000)
                                                              ------------    ------------
Net cash used (provided) by financing activities ..........     (1,634,728)      4,770,774
                                                              ------------    ------------

Net (decrease) increase in cash ...........................     (9,089,394)      1,091,428
Cash at beginning of period ...............................     14,442,769         285,464
                                                              ------------    ------------
Cash at end of period .....................................   $  5,353,375    $  1,376,892
                                                              ============    ============
Supplemental disclosures of cash flow information:
    Cash received (paid) during the period for:
      Interest paid .......................................   $   (324,292)   $   (637,930)
      Income taxes paid ...................................   $   (255,067)   $     (9,131)
      Income taxes received ...............................   $       --      $    212,082
Non-cash financing activities:
    Preferred Series D stock converted to common stock ....   $ 22,918,693    $       --
    Preferred Series C stock converted to common stock ....   $  2,895,001    $       --
    Accrued dividends converted to common stock ...........   $    458,707    $       --
    Capital lease obligation ..............................   $    249,418    $  1,474,053
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


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

1.       PRESENTATION OF INTERIM INFORMATION

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not  include  all  of the  information  and  footnotes  required  by  accounting
principles  generally  accepted  in the  United  States for  complete  financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments  that, in the opinion of the management of Tag-It Pacific,  Inc.
and Subsidiaries  (collectively,  the "Company"), are considered necessary for a
fair  presentation of the financial  position,  results of operations,  and cash
flows for the periods presented.  The results of operations for such periods are
not necessarily  indicative of the results  expected for the full fiscal year or
for any future period. The accompanying  financial  statements should be read in
conjunction with the audited  consolidated  financial  statements of the Company
included in the Company's Form 10-K for the year ended December 31, 2003.

2.       EARNINGS PER SHARE

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

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

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

THREE MONTHS ENDED JUNE 30, 2003:
Basic earnings per share:
Income available to common stockholders   $  701,564   10,209,195   $     0.07

Effect of Dilutive Securities:
Options                                         --        482,937          --
Warrants                                        --         45,295          --
                                          ----------   ----------   ----------
Income available to common stockholders   $  701,564   10,737,427   $     0.07
                                          ==========   ==========   ==========


                                       6
<PAGE>


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

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

SIX MONTHS ENDED JUNE 30, 2003:
Basic earnings per share:
Income available to common stockholders   $1,015,332    9,818,390   $     0.10

Effect of Dilutive Securities:
Options                                         --         33,488          --
Warrants                                        --        317,290          --
                                          ----------   ----------   ----------
Income available to common stockholders   $1,015,332   10,169,168   $     0.10
                                          ==========   ==========   ==========

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

         Warrants to purchase  1,236,219 shares of common stock at between $0.71
and $5.06, options to purchase 1,875,200 shares of common stock at between $1.30
and $4.63 and convertible  debt of $500,000  convertible at $4.50 per share were
outstanding for the six months ended June 30, 2004, but were not included in the
computation of diluted  earnings per share because  exercise or conversion would
have an antidilutive effect on earnings per share.

         Warrants to purchase  426,666  shares of common stock at between  $4.57
and  $5.06,  options  to  purchase  105,000  shares  of  common  stock at $4.63,
convertible  debt of $500,000  convertible at $4.50 per share and 759,494 shares
of preferred Series C stock  convertible at $4.94 per share were outstanding for
the three months ended June 30, 2003,  but were not included in the  computation
of diluted  earnings  per share  because  exercise or  conversion  would have an
antidilutive effect on earnings per share.

         Warrants to purchase  655,832  shares of common stock at between  $4.34
and $5.06,  options to purchase  568,000 shares of common stock at between $4.25
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 six months ended June 30, 2003, but were not included in the
computation of diluted  earnings per share because  exercise or conversion would
have an antidilutive effect on earnings per share.


                                       7
<PAGE>


3.       STOCK BASED COMPENSATION

         All stock options  issued to employees  had an exercise  price not less
than the fair market value of the  Company's  Common Stock on the date of grant,
and in accounting for such options utilizing the intrinsic value method there is
no related  compensation  expense recorded in the Company's financial statements
for the three and six months ended June 30, 2004 and 2003. If compensation  cost
for stock-based  compensation had been determined based on the fair market value
of the stock  options on their dates of grant in  accordance  with SFAS 123, the
Company's net income (loss) and earnings  (loss) per share for the three and six
months ended June 30, 2004 and 2003 would have amounted to the pro forma amounts
presented below:

<TABLE>
<CAPTION>
                                                            Three Months                     Six Months
                                                           Ended June 30,                  Ended June 30,
                                                      ---------------------------    --------------------------
                                                        2004             2003           2004            2003
                                                      -----------     -----------    -----------    -----------

<S>                                                   <C>             <C>            <C>            <C>
Net income, as reported........................       $   170,319     $   748,664    $  (381,710)   $ 1,109,532
Add:  Stock-based employee compensation expense
     included in reported net income, net of
     related tax effects ......................              --             --             --             --

Deduct: Total stock-based employee compensation
     expense determined under fair value based
     method for all awards, net of related tax
     effects ..................................            (5,224)        (44,838)       (44,780)       (50,120)
                                                      -----------     -----------    -----------    -----------

Pro forma net income...........................       $   165,095     $   703,826    $  (426,490)   $ 1,059,412
                                                      ===========     ===========    ===========    ===========

Earnings per share:
     Basic - as reported.......................       $      0.01     $      0.07    $     (0.02)   $      0.10
     Basic - pro forma.........................       $      0.01     $      0.06    $     (0.03)   $      0.10
     Diluted - as reported.....................       $      0.01     $      0.07    $     (0.02)   $      0.10
     Diluted - pro forma.......................       $      0.01     $      0.06    $     (0.03)   $      0.10
</TABLE>

4.       SERIES D PREFERRED STOCK

         On December 18, 2003,  the Company sold an aggregate of 572,818  shares
of non-voting  Series D Convertible  Preferred  Stock,  at a price of $44.00 per
share,  to  institutional  investors and  individual  accredited  investors in a
private placement transaction.  The Company received net proceeds of $23,083,693
after  commissions  and  other  offering  expenses.  The  Series  D  Convertible
Preferred  Stock  was  convertible  after  approval  at  a  special  meeting  of
stockholders  at a  rate  of 10  common  shares  for  each  share  of  Series  D
Convertible Preferred Stock. Except as required by law, the Preferred Shares had
no voting rights. The Preferred Shares would have accrued dividends,  commencing
on June 1, 2004,  at an annual rate of 5% of the initial  stated value of $44.00
per share,  payable  quarterly.  In the event of a  liquidation,  dissolution or
winding-up of the Company,  the holders of the Preferred  Shares would have been
entitled  to  receive,  prior  to  any  distribution  on  the  common  stock,  a
distribution  equal to the initial stated value of the Preferred Shares plus all
accrued and unpaid dividends.

         At a special  meeting of  stockholders  held on February 11, 2004,  the
stockholders of the Company  approved the issuance of 5,728,180 shares of common
stock upon conversion of the Series D Preferred


                                       8
<PAGE>


Stock.  At the  conclusion  of the  meeting,  all of the  shares of the Series D
Convertible Preferred Stock automatically converted into common shares.

         The Company has registered the common shares issued upon  conversion of
the Series D  Convertible  Preferred  Stock  with the  Securities  and  Exchange
Commission  for  resale  by the  investors.  In  conjunction  with  the  private
placement  transaction,  the Company issued a warrant to purchase 572,818 common
shares to the placement  agent.  The warrant is  exercisable  beginning June 18,
2004 through  December 18, 2008.  The fair value of the warrant was estimated at
approximately $165,000 utilizing the Black-Scholes option-pricing model.

5.       SERIES C PREFERRED STOCK

         On February  25,  2004,  the  holders of the Series C  Preferred  Stock
converted  all 759,494  shares of Series C  Preferred  Stock,  plus  $458,707 of
accrued dividends, into 700,144 shares of common stock.

6.       SUBSEQUENT EVENT

         On July 16, 2004, we amended our exclusive  supply  agreement with Levi
Strauss & Co. to provide for an additional  two-year term through November 2006.
In accordance  with the supply  agreement,  Levi is to purchase  waistbands  for
specific product categories over the term of the agreement.  Certain proprietary
products,  equipment and  technological  know-how will be supplied to Levi on an
exclusive basis for specific product categories during the extended period.

7.       GUARANTEES AND CONTINGENCIES

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

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

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


                                       9
<PAGE>


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

8.       NEW ACCOUNTING PRONOUNCEMENTS

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

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

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


                                       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 six months ended June 30, 2004 and 2003. Except
for  historical   information,   the  matters  discussed  in  this  Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  are
forward looking  statements that involve risks and  uncertainties  and are based
upon judgments concerning various factors that are beyond our control.

OVERVIEW

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

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

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

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

         The launch of TRIMNET, our Oracle based e-sourcing system will allow us
to seamlessly  supply  complete trim packages to apparel  brands,  retailers and
manufacturers  around the world,  greatly expanding upon our success in offering
complete  trim  packages to  customers  in Mexico over the past  several  years.
TRIMNET is an upgrade of our MANAGED TRIM SOLUTION software and will allow us to
provide additional services to customers on a global platform.


                                       11
<PAGE>


         On July 16, 2004, we amended our exclusive  supply  agreement with Levi
Strauss & Co. to provide for an additional  two-year term through November 2006.
In accordance  with the supply  agreement,  Levi is to purchase  waistbands  for
specific product categories over the term of the agreement.  Certain proprietary
products,  equipment and  technological  know-how will be supplied to Levi on an
exclusive basis for specific product categories during the extended period.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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


                                       12
<PAGE>


                  allowance,  we would be  required  to  reverse  the  valuation
                  allowance, which would be reflected as an income tax benefit.

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

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

RESULTS OF OPERATIONS

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


                                       THREE MONTHS ENDED      SIX MONTHS ENDED
                                            JUNE 30,               JUNE 30,
                                        ----------------      -----------------
                                         2004       2003       2004        2003
                                        -----      -----      -----       -----

Net sales .........................     100.0%     100.0%     100.0%      100.0%
Cost of goods sold ................      73.9       73.6       72.6        72.2
                                        -----      -----      -----       -----
Gross profit ......................      26.1       26.4       27.4        27.8
Selling expenses ..................       4.7        6.0        5.9         5.9
General and administrative
   expenses .......................      18.7       14.2       22.5        16.1
                                        -----      -----      -----       -----
Operating Income (loss) ...........       2.7%       6.2%      (1.0)%       5.8%
                                        =====      =====      =====       =====


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

                                        THREE MONTHS ENDED     SIX MONTHS ENDED
                                             JUNE 30,               JUNE 30,
                                         ----------------      ----------------
                                          2004       2003       2004       2003
                                         -----      -----      -----      -----
United States ......................       7.7%      16.6%       8.2%      16.3%
Asia ...............................      24.3       13.8       24.1       12.3
Mexico .............................      39.1       38.6       37.1       42.6
Dominican Republic .................      19.7       23.0       19.7       22.7
Central and South America ..........       8.7        5.5       10.5        4.5
Other ..............................       0.5        2.5        0.4        1.6
                                         -----      -----      -----      -----
                                         100.0%     100.0%     100.0%     100.0%
                                         =====      =====      =====      =====



                                       13
<PAGE>


         Net sales decreased approximately  $5,809,000, or 28.0%, to $14,923,000
for the three months ended June 30, 2004 from  $20,732,000  for the three months
ended June 30,  2003.  The decrease in net sales for the three months ended June
30, 2004 was primarily due to a decrease in trim-related  sales of approximately
$8.3  million  from our  Tlaxcala,  Mexico,  operations  under our MANAGED  TRIM
SOLUTION(TM)  trim  package  program.  During  the fourth  quarter  of 2003,  we
implemented a plan to restructure  certain  business  operations,  including the
reduction  of our  reliance  on two  significant  customers  in Mexico,  Tarrant
Apparel   Group  and  Azteca   Production   International,   which   contributed
approximately  $8.9 million or 43.2% of revenues in the second  quarter of 2003.
These customers  contributed  approximately  $600,000 or 3.9% of revenues in the
second quarter of 2004.  This plan was  accelerated  when Tarrant  Apparel Group
unexpectedly exited its Mexico operations. We were able to replace approximately
22% of the lost  revenue  during  the three  months  ended  June 30,  2004.  The
reduction  of our  operations  in Mexico was also in  response to our efforts to
decrease  our  reliance  on our  larger  Mexico  customers,  and our  difficulty
obtaining  financing  in Mexico  due to the  location  of  assets in Mexico  and
customer  concentration  and other  limits  imposed by  financial  institutions.
Fiscal 2004 continues to be a transitional  year as we experience the effects of
diversifying  our customer  base.  We are no longer  reliant on Tarrant  Apparel
Group and  Azteca  Production  International  for a  significant  portion of our
sales.  The  decrease  in net sales was also offset by an increase in sales from
our Hong Kong subsidiary for TRIMNET  programs  related to major U.S.  retailers
and an increase in zipper sales under our TALON brand name in Asia.

         Net sales decreased approximately $10,007,000, or 28.5%, to $25,083,000
for the six months ended June 30, 2004 from $35,090,000 for the six months ended
June 30, 2003.  The decrease in net sales for the six months ended June 30, 2004
was primarily due to a decrease in  trim-related  sales of  approximately  $15.4
million from our Tlaxcala,  Mexico operations,  as discussed above. Our previous
reliance on two  significant  customers  in Mexico,  Tarrant  Apparel  Group and
Azteca  Production  International,  during  the six months  ended June 30,  2003
contributed  approximately  $16.6  million  or 47.3%  of  revenues  compared  to
approximately $1.2 million or 4.8% of revenues for the six months ended June 30,
2004. We were able to replace  approximately  29% of lost revenue during the six
months  ended June 30,  2004.  The  decrease  in net sales was also offset by an
increase in sales from our Hong Kong subsidiary for TRIMNET  programs related to
major U.S.  retailers and an increase in zipper sales under our TALON brand name
in Asia.

         Gross  profit  decreased   approximately   $1,573,000,   or  28.8%,  to
$3,892,000  for the three  months  ended June 30, 2004 from  $5,465,000  for the
three  months ended June 30,  2003.  Gross  margin as a percentage  of net sales
decreased  to  approximately  26.1% for the three  months ended June 30, 2004 as
compared to 26.4% for the three  months  ended June 30,  2003.  The  decrease in
gross  profit as a  percentage  of net sales for the three months ended June 30,
2004 was due to a change in our product mix during the current quarter.

         Gross  profit  decreased   approximately   $2,880,000,   or  29.5%,  to
$6,884,000  for the six months ended June 30, 2004 from  $9,764,000  for the six
months ended June 30, 2003.  Gross margin as a percentage of net sales decreased
to  approximately  27.4% for the six months  ended June 30,  2004 as compared to
27.8% for the six months ended June 30, 2003.  The decrease in gross profit as a
percentage  of net sales for the six  months  ended  June 30,  2004 was due to a
change in our product mix during the current period.

         Selling  expenses  decreased   approximately  $544,000,  or  43.7%,  to
$702,000 for the three months ended June 30, 2004 from  $1,246,000 for the three
months  ended  June 30,  2003.  As a  percentage  of net sales,  these  expenses
decreased to 4.7% for the three months ended June 30, 2004  compared to 6.0% for
the three months ended June 30, 2003.  The decrease in selling  expenses  during
the period  was due in part to a decrease  in the  royalty  rate  related to our
exclusive  license and  intellectual  property  rights  agreement  with  Pro-Fit
Holdings   Limited.   We  incurred   royalties  related  to  this  agreement  of
approximately


                                       14
<PAGE>


$110,000 for the three  months ended June 30, 2004  compared to $346,000 for the
three  months  ended  June  30,  2003.  Over the  life of the  contract,  we pay
royalties of 6% on related sales of up to $10 million,  4% of related sales from
$10-20  million  and 3% on  related  sales in  excess  of $20  million.  Selling
expenses also decreased due to the  implementation of our restructuring  plan in
the fourth quarter of 2003.

         Selling  expenses  decreased   approximately  $600,000,  or  28.9%,  to
$1,475,000  for the six months ended June 30, 2004 from  $2,075,000  for the six
months  ended  June 30,  2003.  As a  percentage  of net sales,  these  expenses
remained  consistent  at 5.9% for the six months ended June 30, 2004 and the six
months ended June 30, 2003. The decrease in selling  expenses  during the period
was due in part to a decrease  in the  royalty  rate  related  to our  exclusive
license  and  intellectual  property  rights  agreement  with  Pro-Fit  Holdings
Limited.  We  incurred  royalties  related to this  agreement  of  approximately
$225,000 for the six months ended June 30, 2004 compared to $501,000 for the six
months  ended  June  30,  2003.  Selling  expenses  also  decreased  due  to the
implementation of our restructuring plan in the fourth quarter of 2003.

         General and administrative  expenses decreased  approximately $149,000,
or 5.1%, to $2,791,000 for the three months ended June 30, 2004 from  $2,940,000
for the three months ended June 30, 2003. The decrease in these expenses was due
primarily  to a reduction  in  salaries  and  related  benefits  and other costs
associated  with our  restructuring  plan  implemented  in the fourth quarter of
2003. As a percentage of net sales,  these  expenses  increased to 18.7% for the
three  months  ended June 30, 2004  compared to 14.2% for the three months ended
June 30, 2003, due to the decrease in net sales.

         General and administrative expenses increased approximately $10,000, or
0.2%, to $5,648,000  for the six months ended June 30, 2004 from  $5,638,000 for
the six months  ended June 30,  2003.  The  increase in these  expenses  was due
primarily to a one-time charge of approximately $400,000 in the first quarter of
2004 related to the final residual costs associated with our restructuring  plan
implemented in the fourth quarter of 2003.  This one-time charge was offset by a
decrease in salaries  and  related  benefits  and other costs as a result of the
implementation  of our  restructuring  plan in the fourth  quarter of 2003. As a
percentage of net sales,  these  expenses  increased to 22.5% for the six months
ended June 30, 2004  compared to 16.1% for the six months  ended June 30,  2003,
due to the decrease in net sales.

         Interest  expense  decreased   approximately  $199,000,  or  58.0%,  to
$144,000 for the three  months  ended June 30, 2004 from  $343,000 for the three
months ended June 30, 2003.  Borrowings  under our UPS Capital  credit  facility
decreased  during the period ended June 30, 2004 due to proceeds  received  from
our private  placement  transactions in May and December 2003 in which we raised
approximately  $29  million  from the sale of common and  convertible  preferred
stock.

         Interest  expense  decreased   approximately  $333,000,  or  50.2%,  to
$331,000 for the six months ended June 30, 2004 from $664,000 for the six months
ended June 30, 2003.  Borrowings under our UPS Capital credit facility decreased
during the period ended June 30, 2004 due to proceeds  received from our private
placement transactions in May and December 2003 in which we raised approximately
$29 million from the sale of common and convertible preferred stock.

         The provision for income taxes for the three months ended June 30, 2004
amounted to  approximately  $84,000  compared to $187,000  for the three  months
ended June 30, 2003.  Income taxes decreased for the three months ended June 30,
2004 primarily due to decreased taxable income.

         The income tax benefit for the six months ended June 30, 2004  amounted
to approximately  $188,000  compared to a provision for income taxes of $277,000
for the six months  ended June 30,  2003.  Income  taxes  decreased  for the six
months ended June 30, 2004 primarily due to decreased taxable income.


                                       15
<PAGE>


         Net income was  approximately  $170,000 for the three months ended June
30, 2004 as compared to $749,000 for the three  months ended June 30, 2003,  due
primarily to a decrease in net sales offset by decreases in selling, general and
administrative and interest expenses, as discussed above.

         Net loss was  approximately  $382,000 for the six months ended June 30,
2004 as compared to net income of  $1,110,000  for the six months ended June 30,
2003,  due  primarily  to a decrease in net sales offset by decreases in selling
and interest expenses, as discussed above.

         There were no preferred stock dividends for the three months ended June
30,  2004 as  compared  to $47,000  for the three  months  ended June 30,  2003.
Preferred stock dividends  represent  earned dividends at 6% of the stated value
per annum of the Series C convertible  redeemable  preferred  stock. In February
2004,  the  holders  of the  Series C  convertible  redeemable  preferred  stock
converted all 759,494 shares of the Series C Preferred  Stock,  plus $458,707 of
accrued dividends, into 700,144 shares of our common stock. Net income available
to common shareholders  amounted to $170,000 for the three months ended June 30,
2004  compared to $702,000 for the three  months ended June 30, 2003.  Basic and
diluted  earnings  per share were $0.01 for the three months ended June 30, 2004
and $0.07 for the three months ended June 30, 2003.

         Preferred stock dividends  amounted to $31,000 for the six months ended
June 30, 2004 as compared  to $94,000  for the six months  ended June 30,  2003.
Preferred stock dividends  represent  earned dividends at 6% of the stated value
per annum of the Series C convertible  redeemable  preferred  stock. In February
2004,  the  holders  of the  Series C  convertible  redeemable  preferred  stock
converted all 759,494 shares of the Series C Preferred  Stock,  plus $458,707 of
accrued  dividends,  into 700,144 shares of our common stock. Net loss available
to common  shareholders  amounted to $412,000  for the six months ended June 30,
2004 compared to net income  available to common  shareholders of $1,015,000 for
the six months ended June 30,  2003.  Basic and diluted loss per share was $0.02
for the six months ended June 30, 2004 and basic and diluted  earnings per share
was $0.10 for the six months ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         Cash and cash equivalents decreased to $5,353,000 at June 30, 2004 from
$14,443,000  at December 31,  2003.  The decrease  resulted  from  approximately
$7,118,000  of cash  used by  operating  activities,  $337,000  of cash  used in
investing activities and $1,635,000 of cash used in financing activities.

         Net cash used in operating activities was approximately  $7,118,000 for
the six months  ended June 30,  2004 and  approximately  $2,699,000  for the six
months ended June 30, 2003. Cash used in operating activities for the six months
ended June 30, 2004 resulted  primarily from increased  accounts  receivable and
inventories.  The increase in inventories during the period was due primarily to
increased customer orders for future sales. The increase in accounts  receivable
during  the  period  was  due  primarily  to  slower  customer   collections  of
non-related party receivables  during the months of May and June 2004. Cash used
in  operating  activities  for the six  months  ended  June  30,  2003  resulted
primarily  from increases in inventories  and  receivables,  which was partially
offset by increases in accounts payable and accrued expenses and net income.

         Net cash used in investing  activities was  approximately  $337,000 and
$980,000 for the six months ended June 30, 2004 and 2003, respectively. Net cash
used in investing  activities  for the six months ended June 30, 2004  consisted
primarily of capital  expenditures  for computer  equipment  and the purchase of
additional TALON zipper equipment. Net cash used in investing activities for the
six months ended June 30, 2003 consisted  primarily of capital  expenditures for
equipment  related to the exclusive  supply  agreement we entered into with Levi
Strauss  & Co.  We  also  purchased  computer  equipment  and


                                       16
<PAGE>


software for the implementation of a new Oracle-based computer system during the
six months ended June 30, 2003. This purchase was treated as a non-cash  capital
lease obligation.

         Net cash used in financing activities was approximately  $1,635,000 for
the six months  ended June 30, 2004  compared to net cash  provided by financing
activities of $4,771,000  for the six months ended June 30, 2003.  Net cash used
in  financing  activities  for the six  months  ended  June 30,  2004  primarily
reflects the repayment of borrowings  under our credit facility and subordinated
notes  payable,  offset by funds raised from the  exercise of stock  options and
warrants.  Net cash  provided by financing  activities  for the six months ended
June  30,  2003  primarily   reflects   funds  raised  from  private   placement
transactions,  offset by the repayment of notes payable and decreased borrowings
under our credit facility.

         We currently satisfy our working capital requirements primarily through
cash flows generated from operations,  sales of equity securities and borrowings
under our credit facility with UPS Capital.  Our maximum  availability under the
credit facility is $7 million. At June 30, 2004 and 2003, outstanding borrowings
under our UPS Capital  credit  facility,  including  amounts  borrowed under our
foreign   factoring   agreement,   amounted  to  approximately   $5,935,000  and
$15,495,000,  respectively.  Open letters of credit under our UPS Capital credit
facility amounted to approximately $481,000 at June 30, 2004. There were no open
letters of credit at June 30, 2003.

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

         The credit  facility  requires  that we comply with  certain  financial
covenants including net worth, fixed charge ratio and capital  expenditures.  We
were not in compliance with one of the financial covenants at June 30, 2004. The
non-compliance  was  subsequently  waived by the bank.  The amount we can borrow
under the  credit  facility  is  determined  based on a defined  borrowing  base
formula related to eligible accounts  receivable and inventories.  Our borrowing
base  availability  ranged from  approximately  $3,434,000  to  $6,442,000  from
January 1, 2004 to June 30, 2004. A  significant  decrease in eligible  accounts
receivable and inventories due to customer concentration levels and the aging of
inventories,  among other  factors,  can have an adverse effect on our borrowing
capabilities under our credit facility, which thereafter, may not be adequate to
satisfy our working  capital  requirements.  Eligible  accounts  receivable  are
reduced if our accounts  receivable  customer  balances are concentrated  with a
particular  customer in excess of the  percentages  allowed  under our agreement
with  UPS  Capital.  In  addition,   we  have  typically   experienced  seasonal
fluctuations in sales volume. These seasonal fluctuations result in sales volume
decreases  in the first and  fourth  quarters  of each year due to the  seasonal
fluctuations  experienced  by  the  majority  of  our  customers.  During  these
quarters,  borrowing  availability  under our credit  facility may decrease as a
result of decreases in eligible accounts  receivables  generated from our sales.
If our business becomes  dependent on one or a limited number of customers or if
we  experience  future  significant  seasonal  reductions  in  receivables,  our
availability  under the UPS Capital  credit  facility  would be  correspondingly
reduced.  If this  were to  occur,  we  would  be  required  to seek  additional
financing which may not be available on attractive  terms and, if such financing
is unavailable, we may be unable to meet our working capital requirements.


                                       17
<PAGE>


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

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible  accounts  receivable under our credit  facility.  Included in due from
factor  as of June 30,  2004 and 2003 are  trade  accounts  receivable  factored
without  recourse of  approximately  $55,000 and $177,000.  Included in due from
factor  are  outstanding  advances  due  to UPS  Capital  under  this  factoring
arrangement amounting to approximately $47,000 and $150,000 at June 30, 2004 and
2003.

         Pursuant  to the  terms of a  factoring  agreement  for our  Hong  Kong
subsidiary,  Tag-It Pacific Limited,  the factor purchases our eligible accounts
receivable  and assumes the credit risk with respect to those accounts for which
the  factor  has given its prior  approval.  If the  factor  does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 80% of
eligible  accounts  receivable.  Interest  is charged at 1.5% over the Hong Kong
Dollar  prime  rate.  As of June 30,  2004 and 2003,  the amount  factored  with
recourse and included in trade accounts  receivable was  approximately  $883,000
and  $542,000.  Outstanding  advances as of June 30,  2004 and 2003  amounted to
approximately  $215,000  and  $332,000  and are  included  in the line of credit
balance.

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

         Our trade  receivables  increased to  $25,884,000 at June 30, 2004 from
$25,080,000  at June 30,  2003.  This  increase  was due  primarily to increased
non-related  party  receivables of  approximately  $9.1 million due to increased
sales to non-related party customers and slower collections in the months of May
and June 2004.  Non-related party trade  receivables  increased by an additional
$3.3 million due to the inclusion of receivables that were previously classified
as related party trade receivables.  As a result of the sale of its ownership in
our common stock,  Azteca  Production  International  is no longer  considered a
related party customer. The increase in non-related party receivables was offset
by a decrease in related party trade  receivables of approximately  $8.3 million
resulting from decreased sales to related  parties during the period,  offset by
slower collections.

         Our net deferred tax asset  increased  to  $2,800,000  at June 30, 2004
from  $91,000 at June 30,  2003.  The  increase  in our net  deferred  tax asset
results  primarily  from 2003 losses.  At December 31, 2003,  we had Federal and
state net operating loss  carryforwards of  approximately  $9.2 million and $5.1
million, respectively, available to offset future taxable income.

         We believe that our existing cash and cash  equivalents and anticipated
cash  flows  from our  operating  activities  and  available  financing  will be
sufficient to fund our minimum working capital and capital expenditure needs for
at least the next twelve months. We expect to receive quarterly cash payments of
a minimum of $1.25  million under our supply  agreement  with Levi Strauss & Co.
through August 2004. The extent of our future capital  requirements  will depend
on many  factors,  including  our


                                       18
<PAGE>


results of  operations,  future demand for our products,  the size and timing of
future  acquisitions,  our borrowing base  availability  limitations  related to
eligible  accounts  receivable  and  inventories  and our expansion into foreign
markets.  Our need for additional  long-term  financing includes the integration
and  expansion  of our  operations  to exploit our rights  under our TALON trade
name,  the expansion of our  operations in the Asian,  Central  American,  South
America  and  Caribbean  markets and the further  development  of our  waistband
technology.  If our cash from operations is less than anticipated or our working
capital requirements and capital expenditures are greater than we expect, we may
need to raise  additional  debt or equity  financing in order to provide for our
operations.  We are continually  evaluating  various financing  strategies to be
used to expand our business and fund future growth or acquisitions. There can be
no  assurance  that  additional  debt or equity  financing  will be available on
acceptable terms or at all. If we are unable to secure additional financing,  we
may not be able to execute our plans for  expansion,  including  expansion  into
foreign  markets  to  promote  our  TALON  brand  tradename,  and we may need to
implement additional cost savings initiatives.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS


         The following  summarizes our contractual  obligations at June 30, 2004
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:

<TABLE>
<CAPTION>
                                                  Payments Due by Period
                             --------------------------------------------------------------
                                           Less than      1-3           4-5        After
  Contractual Obligations      Total        1 Year       Years         Years      5 Years
--------------------------   ----------   ----------   ----------   ----------   ----------
<S>                          <C>          <C>          <C>          <C>          <C>
Subordinated note payable    $2,000,000   $1,800,000   $  200,000   $     --     $     --
Capital lease obligations    $1,163,974   $  570,980   $  592,994   $     --     $     --
Subordinated notes payable
   to related parties (1)    $  849,971   $  849,971   $     --     $     --     $     --
Operating leases .........   $1,339,022   $  685,006   $  649,293   $    4,723   $     --
Line of credit ...........   $5,935,362   $5,935,362   $     --     $     --     $     --
Notes payable ............   $   25,200   $   25,200   $     --     $     --     $     --
Royalty payments .........   $  369,315   $     --     $  369,315   $     --     $     --
----------
<FN>
(1)      The majority of  subordinated  notes payable to related parties are due
         on demand  with the  remainder  due and  payable on the  fifteenth  day
         following the date of delivery of written demand for payment.
</FN>
</TABLE>

         As of June 30, 2003, we indirectly  guaranteed the  indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase  goods and  equipment  totaling  $528,000.  Financing  costs due to the
related party amounted to approximately  $43,000.  The letters of credit expired
on various dates through July 2003. There were no outstanding  letters of credit
at June 30, 2004.

         At June 30,  2004 and  2003,  we did not  have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

         We 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. The supply agreement with
Tarrant Apparel Group has an indefinite  term.  Pricing and terms are consistent
with competitive vendors. At the time we entered into this supply agreement,  we
also sold


                                       19
<PAGE>


2,390,000 shares of our common stock to KG Investment, LLC, an entity then owned
by Gerard Guez and Todd Kay, executive officers and significant  shareholders of
Tarrant Apparel Group.

         Sales under our supply agreements with Tarrant Apparel Group and Azteca
Production  International  (a  former  related  party),  and  their  affiliates,
amounted to approximately 40.2% and 69.7% of our total sales for the years ended
December 2003 and 2002, respectively,  and 4.8% and 47.3% of our total sales for
the six months ended June 30, 2004 and 2003. Sales under these supply agreements
as a percentage of total sales for the year ending December 2004 are anticipated
to be  significantly  lower than the year ended December 2003.  This decrease is
due in part to our efforts to decrease  our reliance on these  customers  and to
further diversify our customer base. Our results of operations will depend, to a
lesser  extent  than in prior  periods,  upon the  commercial  success of Azteca
Production  International  and Tarrant Apparel Group. If our  relationship  with
Azteca Production International or Tarrant Apparel Group terminates, it may have
an adverse  affect on our  results of  operations.  Included  in trade  accounts
receivable  at June 30, 2004 and 2003 and December 31,  2003,  is  approximately
$8.8,  $17.0  and $11.7  million  due from  Tarrant  Apparel  Group  and  Azteca
Production International, and their affiliates.

         Included in  inventories  at June 30, 2004 and 2003 are  inventories of
approximately  $6.6 and $8.0  million  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 customer's  product line  related to the  inventories,  the
customer is required to purchase the  inventories  from us under normal  invoice
and selling  terms.  During the six months ended June 30, 2004 and 2003, we sold
approximately  $130,000 and $1,300,000 in inventory to Tarrant Apparel Group and
Azteca Production  International pursuant to these buyback arrangements.  If the
financial condition of Tarrant Apparel Group and Azteca Production International
were to  deteriorate,  resulting in an  impairment  of their ability to purchase
inventories or pay receivables,  it may have an adverse affect on our results of
operations.

         As of June 30, 2004 and 2003, we had outstanding  related-party debt of
approximately $850,000, at interest rates ranging from 7% to 11%, and additional
non-related-party  debt of $25,200 at an interest  rate of 10%.  The majority of
related-party  debt is due on demand,  with the remainder due and payable on the
fifteenth day following the date of delivery of written demand for payment.

NEW ACCOUNTING PRONOUNCEMENTS

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

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


                                       20
<PAGE>


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

CAUTIONARY STATEMENTS AND RISK FACTORS

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

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

         o        We will lose a primary  source of revenue  if these  customers
                  choose not to purchase our products or services;
         o        We  may  not  be  able  to  reduce  fixed  costs  incurred  in
                  developing the  relationship  with these customers in a timely
                  manner;
         o        We may not be able to recoup setup and inventory costs;
         o        We may be left holding  inventory that cannot be sold to other
                  customers; and
         o        We may not be able to collect our receivables from them.

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

         OUR  GROWTH  AND  OPERATING  RESULTS  COULD  BE  MATERIALLY,  ADVERSELY
EFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING
OUR RIGHTS  UNDER OUR  EXCLUSIVE  LICENSE AND  INTELLECTUAL  PROPERTY  AGREEMENT
("AGREEMENT")  WITH PRO-FIT  HOLDINGS.  Pursuant to our  Agreement  with Pro-Fit
Holdings  Limited,  we have  exclusive  rights in  certain  geographic  areas to
Pro-Fit's stretch and rigid waistband technology. By letter dated April 6, 2004,
Pro-Fit alleged various  breaches of the Agreement which we dispute.  To prevent
Pro-Fit in the future from  terminating the Agreement based on alleged  breaches
that we do not regard as meritorious,  we filed a lawsuit against Pro-Fit in the
U.S.  District Court for the Central  District of  California,  based on various
contractual and tort claims seeking declaratory


                                       21
<PAGE>


relief,  injunctive  relief  and  damages.  There  has been no  activity  in the
litigation pending the outcome of ongoing  negotiations with Pro-Fit.  We intend
to proceed with the lawsuit if these  negotiations are not concluded in a manner
satisfactory to us.

         We derive a  significant  amount of revenues  from the sale of products
incorporating  the  stretch  waistband  technology.  Our  business,  results  of
operations and financial condition could be materially  adversely affected if we
are unable to conclude our present negotiations in a manner acceptable to us and
ensuing litigation is not resolved in a manner favorable to us.

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

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

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

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

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


                                       22
<PAGE>


         o        The volume and timing of customer  orders  received during the
                  quarter;
         o        The timing and magnitude of customers' marketing campaigns;
         o        The loss or addition of a major customer;
         o        The availability and pricing of materials for our products;
         o        The  increased   expenses  incurred  in  connection  with  the
                  introduction of new products;
         o        Currency fluctuations;
         o        Delays caused by third parties; and
         o        Changes in our product mix or in the relative  contribution to
                  sales of our subsidiaries.

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

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

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

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

         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.


                                       23
<PAGE>


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

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

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

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

         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.


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<PAGE>


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

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

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

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of August 1, 2004, our officers and directors and their affiliates  beneficially
owned  approximately  16.0% 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  18.2% of the
outstanding  shares of our common stock at August 1, 2004.  Gerard Guez and Todd
Kay,  significant  stockholders of Tarrant Apparel Group, own approximately 5.6%
of the  outstanding  shares of our common stock at August 1, 2004.  As a result,
our officers and directors,  the Dyne family,  Gerard Guez and Todd Kay are able
to exert  considerable  influence over the outcome of any matters submitted to a
vote of the holders of our common stock,  including the election of our Board of
Directors.  The voting power of these  stockholders could also discourage others
from seeking to acquire  control of us through the purchase of our common stock,
which might depress the price of our common stock.

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


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<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         All of our  sales  are  denominated  in United  States  dollars  or the
currency  of the  country in which our  products  originate.  We are  exposed to
market risk for fluctuations in the foreign currency  exchange rates for certain
product  purchases that are denominated in British Pounds.  At June 30, 2004, we
purchased forward exchange contracts for British Pounds to hedge the payments of
product  purchases  through  September  2004.  These contracts have an aggregate
notional amount of $360,000.  The market value of these  contracts  approximated
their  carrying  value  at June  30,  2004.  The  Company  intends  to  purchase
additional  contracts to hedge the British  Pound  exposure  for future  product
purchases.  Currency  fluctuations  can  increase  the price of our  products to
foreign  customers which can adversely impact the level of our export sales from
time to time.  The majority of our cash  equivalents  are held in United  States
bank  accounts and we do not believe we have  significant  market risk  exposure
with regard to our investments.

         We are also  exposed  to the  impact of  interest  rate  changes on our
outstanding  borrowings.  At June 30 2004, we had approximately  $7.9 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.

         Members of the Company's  management,  including  the  Company's  Chief
Executive Officer, Colin Dyne, and Chief Financial Officer, Ronda Ferguson, have
evaluated  the  effectiveness  of the  design  and  operation  of the  Company's
disclosure  controls and  procedures as of June 30, 2004,  the end of the period
covered by this report.  Based upon that  evaluation,  Mr. Dyne and Ms. Ferguson
concluded that the Company's disclosure controls and procedures are effective in
causing material information to be recorded, processed,  summarized and reported
by  management  of the Company on a timely  basis and to ensure that the quality
and  timeliness  of the  Company's  public  disclosures  complies  with  its SEC
disclosure obligations.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

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


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<PAGE>


                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

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

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

         At our  Annual  Meeting  of  Stockholders  held  on May  12,  2004  our
stockholders  (a) elected Kevin  Bermeister  and Brent Cohen to serve as Class I
Directors on our Board of Directors  for three years and until their  respective
successors  have been  elected,  and (b) approved an amendment to our 1997 Stock
Plan to increase  from  2,577,500 to 3,077,500  the maximum  number of shares of
common stock that may be issued  pursuant to awards granted under the 1997 Stock
Plan.  Kevin  Bermeister  was elected by a vote of  15,193,784  shares in favor,
67,800  shares voted  against,  and no shares were  withheld from voting for the
directors.  Brent  Cohen was  elected by a vote of  15,160,184  shares in favor,
101,400  shares voted  against,  and no shares were withheld from voting for the
directors.  At the annual  meeting,  10,299,282  shares  were voted in favor of,
326,863 shares were voted against,  and 228,870 shares were withheld from voting
on the amendment to our 1997 Stock Plan.  There were 4,406,569  broker non-votes
at the annual meeting. Immediately prior to and following the meeting, the Board
of Directors was comprised of Mark Dyne,  Colin Dyne,  G. Maxwell  Perks,  Kevin
Bermeister, Brent Cohen, Michael Katz and Jonathan Burstein.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits:

         10.1     Tag-It Pacific, Inc. Amended and Restated 1997 Stock Plan

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

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

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

    (b)  Reports on Form 8-K:

         Current Report on Form 8-K,  reporting items 7 and 12, filed on May 18,
         2004.


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<PAGE>


                                   SIGNATURES

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





Dated:   August 16, 2004                        TAG-IT PACIFIC, INC.

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


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