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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 March 31, 2005.

                                       OR

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

         For the transition period from ____________ to _______________.



                         Commission file number 1-13669



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

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


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


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

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

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Exchange Act Rule 12b-2).

                             Yes  [_]          No [X]

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest  practicable  date:  Common Stock, par
value $0.001 per share,  18,241,045  shares issued and outstanding as of May 13,
2005.

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



PART I   FINANCIAL INFORMATION                                              PAGE
                                                                            ----

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

         Consolidated Balance Sheets as of March 31, 2005
         and December 31, 2004 (unaudited).....................................3

         Consolidated Statements of Operations for the Three Months
         Ended March 31, 2005 and 2004 (unaudited).............................4

         Consolidated Statements of Cash Flows for the
         Three Months Ended March 31, 2005 and 2004 (unaudited)................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 6.  Exhibits.............................................................28


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.

                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                   (UNAUDITED)

                                                      March 31,     December 31,
                                                        2005            2004
                                                    ------------   ------------
                     ASSETS
 Current Assets:
    Cash and cash equivalents ...................   $  2,863,254   $  5,460,662
    Trade accounts receivable, net ..............     16,463,294     17,890,044
    Trade accounts receivable, related party ....      4,500,000      4,500,000
    Inventories .................................     11,117,904      9,305,819
    Prepaid expenses and other current assets ...      2,890,810      2,326,245
    Deferred income taxes .......................      1,000,000      1,000,000
                                                    ------------   ------------
      Total current assets ......................     38,835,262     40,482,770

 Property and equipment, net of accumulated
    depreciation and amortization ...............      9,791,606      9,380,026
 Tradename ......................................      4,110,750      4,110,750
 Goodwill .......................................        450,000        450,000
 License rights .................................        229,250        259,875
 Due from related parties .......................        567,341        556,550
 Other assets ...................................      1,076,611      1,207,885
                                                    ------------   ------------
 Total assets ...................................   $ 55,060,820   $ 56,447,856
                                                    ============   ============

     LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Line of credit ..............................   $    598,682   $    614,506
    Accounts payable and accrued expenses .......      8,080,233      7,460,916
    Subordinated notes payable to related parties        664,971        664,971
    Current portion of capital lease obligations         915,069        859,799
    Current portion of notes payable ............        177,868        174,975
    Note payable ................................        800,000      1,400,000
                                                    ------------   ------------
      Total current liabilities .................     11,236,823     11,175,167

 Capital lease obligations, less current portion       1,203,855      1,220,969
 Notes payable, less current portion ............      1,402,289      1,447,855
 Secured convertible promissory notes ...........     12,416,513     12,408,623
                                                    ------------   ------------
      Total liabilities .........................     26,259,480     26,252,614
                                                    ------------   ------------

 Stockholders' equity:
    Preferred stock, Series A $0.001 par value;
      250,000 shares authorized, no shares issued
      or outstanding ............................           --             --
    Common stock, $0.001 par value, 30,000,000
      shares authorized; 18,241,045 shares issued
      and outstanding at March 31, 2005;
      18,171,301 at December 31, 2004 ...........         18,243         18,173
    Additional paid-in capital ..................     51,327,873     51,073,402
    Accumulated deficit .........................    (22,544,776)   (20,896,333)
                                                    ------------   ------------
 Total stockholders' equity .....................     28,801,340     30,195,242
                                                    ------------   ------------
 Total liabilities and stockholders' equity .....   $ 55,060,820   $ 56,447,856
                                                    ============   ============


          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>


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

                                                   Three Months Ended March 31,
                                                  -----------------------------
                                                      2005             2004
                                                  ------------     ------------

Net sales ....................................    $ 13,055,277     $ 10,160,298
Cost of goods sold ...........................       9,803,454        7,168,248
                                                  ------------     ------------
     Gross profit ............................       3,251,823        2,992,050

Selling expenses .............................         742,334          772,116
General and administrative expenses ..........       3,727,260        2,442,465
Restructuring charges ........................            --            414,675
                                                  ------------     ------------
     Total operating expenses ................       4,469,594        3,629,256

Loss from operations .........................      (1,217,771)        (637,206)
Interest expense, net ........................         268,655          186,719
                                                  ------------     ------------
Loss before income taxes .....................      (1,486,426)        (823,925)
Provision (benefit) for income taxes .........         162,017         (271,895)
                                                  ------------     ------------
     Net loss ................................    $ (1,648,443)    $   (552,030)
                                                  ============     ============
Less:  Preferred stock dividends .............            --             30,505
                                                  ------------     ------------
Net loss available to common shareholders ....    $ (1,648,443)    $   (582,535)
                                                  ============     ============

Basic loss per share .........................    $      (0.09)    $      (0.04)
                                                  ============     ============
Diluted loss per share .......................    $      (0.09)    $      (0.04)
                                                  ============     ============

Weighted average number of common
   shares outstanding:
     Basic ...................................      18,179,426       14,921,591
                                                  ============     ============
     Diluted .................................      18,179,426       14,921,591
                                                  ============     ============


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


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

<CAPTION>
                                                           Three Months Ended March 31,
                                                           ----------------------------
                                                               2005            2004
                                                           ------------    ------------
<S>                                                        <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net loss ...........................................   $ (1,648,443)   $   (552,030)
Adjustments to reconcile net loss to net cash used
  by operating activities:
   Depreciation and amortization .......................        555,148         377,580
   Increase in allowance for doubtful accounts .........         74,941          75,000
   Stock issued for services ...........................           --            74,825
Changes in operating assets and liabilities:
      Receivables, including related party .............      1,351,809      (2,048,590)
      Inventories ......................................     (1,812,085)     (1,703,582)
      Other assets .....................................          1,581           3,162
      Prepaid expenses and other current assets ........       (504,565)        930,637
      Accounts payable and accrued expenses ............        468,930      (1,308,107)
      Income taxes payable .............................        139,596        (433,738)
                                                           ------------    ------------
Net cash used by operating activities ..................     (1,373,088)     (4,584,843)
                                                           ------------    ------------

Cash flows from investing activities:
    Acquisition of property and equipment ..............       (587,923)       (247,564)
                                                           ------------    ------------

Cash flows from financing activities:
    Repayment of bank line of credit, net ..............        (15,824)     (2,409,053)
    Proceeds from exercise of stock options and warrants        254,541         348,241
    Repayment of capital leases ........................       (232,441)       (143,420)
    Repayment of notes payable .........................       (642,673)       (300,000)
                                                           ------------    ------------
Net cash used by financing activities ..................       (636,397)     (2,504,232)
                                                           ------------    ------------

Net decrease in cash ...................................     (2,597,408)     (7,336,639)
Cash at beginning of period ............................      5,460,662      14,442,769
                                                           ------------    ------------
Cash at end of period ..................................   $  2,863,254    $  7,106,130
                                                           ============    ============

Supplemental  disclosures of cash flow information:
Cash received (paid) during the period for:
      Interest paid ....................................   $   (358,887)   $   (189,949)
      Income taxes paid ................................   $    (32,071)   $   (170,016)
      Interest received ................................   $     14,009    $       --
Non-cash financing activities:
    Capital lease obligation ...........................   $    270,597    $       --
    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
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>


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

1.       PRESENTATION OF INTERIM INFORMATION

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

2.       EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                LOSS          SHARES       PER SHARE
                                             (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                             -----------    -----------   -----------
<S>                                          <C>             <C>          <C>
THREE MONTHS ENDED MARCH 31, 2005:
Basic loss per share:
Loss available to common stockholders        $(1,648,443)    18,179,426   $     (0.09)

Effect of Dilutive Securities:
Options .......................                     --             --            --
Warrants ......................                     --             --            --
                                             -----------    -----------   -----------
Loss available to common stockholders        $(1,648,443)    18,179,426   $     (0.09)
                                             ===========    ===========   ===========

THREE MONTHS ENDED MARCH 31, 2004:
Basic loss per share:
Loss available to common stockholders        $  (582,535)    14,921,591   $     (0.04)

Effect of Dilutive Securities:
Options .......................                     --             --            --
Warrants ......................                     --             --            --
                                             -----------    -----------   -----------
Loss available to common stockholders        $  (582,535)    14,921,591   $     (0.04)
                                             ===========    ===========   ===========
</TABLE>

         Warrants to purchase  1,510,479 shares of common stock at between $3.50
and $5.06, options to purchase 1,872,000 shares of common stock at between $1.30
and $5.23 and convertible  debt of $500,000  convertible at $4.50 per share were
outstanding  for the three months ended March 31, 2005, but were not included in
the computation of diluted  earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.


                                       6
<PAGE>


         Warrants to purchase  1,236,219 shares of common stock at between $0.71
and $5.06, options to purchase 1,927,000 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 three months ended March 31, 2004, but were not included in
the computation of diluted  earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

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 months  ended March 31, 2005 and 2004.  If  compensation  cost for
stock-based  compensation  had been determined based on the fair market value of
the stock  options  on their  dates of grant in  accordance  with SFAS 123,  the
Company's  net loss and loss per share for the three months ended March 31, 2005
and 2004 would have amounted to the pro forma amounts presented below:

<TABLE>
<CAPTION>
                                                            Three Months Ended March 31,
                                                          --------------------------------
                                                              2005                 2004
                                                          ------------         -----------
<S>                                                       <C>                  <C>
Net loss, as reported..................................   $ (1,648,443)        $  (552,030)
Add:  Stock-based employee compensation expense
     included in reported net loss, net of related tax
     effects ..........................................             --                 --

Deduct:  Total stock-based employee compensation
     expense determined under fair value based method
     for all awards ...................................        (11,730)            (39,556)
                                                          ------------         -----------
Pro forma net loss.....................................   $ (1,660,173)        $  (591,586)
                                                          ============         ===========

Loss per share:
     Basic - as reported...............................   $      (0.09)        $     (0.04)
     Basic - pro forma.................................   $      (0.09)        $     (0.04)

     Diluted - as reported.............................   $      (0.09)        $     (0.04)
     Diluted - pro forma...............................   $      (0.09)        $     (0.04)
</TABLE>

4.       GUARANTEES AND CONTINGENCIES

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

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


                                       7
<PAGE>


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

         The Company has filed suit against Pro-Fit Holdings Limited in the U.S.
District Court for the Central District of California -- TAG-IT PACIFIC, INC. V.
PRO-FIT HOLDINGS  LIMITED,  CV 04-2694 LGB (RCx) - based on various  contractual
and tort claims  relating to the Company's  exclusive  license and  intellectual
property agreement,  seeking declaratory relief,  injunctive relief and damages.
The  agreement  with  Pro-Fit  gives the  Company  exclusive  rights in  certain
geographic areas to Pro-Fit's  stretch and rigid waistband  technology.  Pro-Fit
filed an answer  denying the material  allegations  of the complaint and filed a
counterclaim  alleging  various  contractual and tort claims seeking  injunctive
relief and damages.  The Company filed a reply denying the material  allegations
of Pro-Fit's  pleading.  Pro-Fit has since  purported to terminate the exclusive
license and intellectual  property  agreement based on the same alleged breaches
of the agreement that are the subject of the parties'  existing  litigation,  as
well as on an  additional  basis  unsupported  by fact.  In February  2005,  the
Company amended its pleadings in the litigation to assert additional breaches by
Pro-Fit of its  obligations to the Company under the agreement and under certain
additional  letter  agreements,  and for a declaratory  judgment that  Pro-Fit's
patent No.  5,987,721 is invalid and not infringed by the Company.  Discovery in
this case has commenced.  There have been ongoing  negotiations  with Pro-Fit to
attempt to resolve  these  disputes.  The  Company  intends to proceed  with the
lawsuit if these negotiations are not concluded in a manner  satisfactory to it.
As we  derive  a  significant  amount  of  revenue  from  the  sale of  products
incorporating  the  stretch  waistband  technology,  our  business,  results  of
operations and financial condition could be materially adversely affected if our
dispute with Pro-Fit is not resolved in a manner favorable to us.  Additionally,
we have incurred significant legal fees in this litigation,  and unless the case
is  settled,  we will  continue  to incur  additional  legal fees in  increasing
amounts as the case accelerates to trial.

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

5.       NEW ACCOUNTING PRONOUNCEMENTS

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


                                       8
<PAGE>


         In November 2004, the FASB issued SFAS No. 151 "Inventory  Costs" (SFAS
151).  This statement  amends the guidance in ARB No. 43, Chapter 4,  "Inventory
Pricing,"  to clarify  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling  costs,  and wasted material  (spoilage).  SFAS 151
requires that those items be recognized as current-period  charges. In addition,
this Statement  requires that allocation of fixed production  overheads to costs
of conversion be based upon the normal  capacity of the  production  facilities.
The  provisions of SFAS 151 are effective for inventory  cost incurred in fiscal
years  beginning  after June 15, 2005. As such, the Company is required to adopt
these  provisions  at the  beginning  of  fiscal  2006.  The  adoption  of  this
pronouncement is not expected to have material effect on the Company's financial
statements.

         In  December  2004,  the  FASB  issued  Statement  Accounting  Standard
("SFAS") No. 153  "Exchanges  of  Nonmonetary  Assets."  This  Statement  amends
Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
Statement are  effective for  nonmonetary  asset  exchanges  occurring in fiscal
periods  beginning  after June 15, 2005.  Earlier  application  is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December
16, 2004. The provisions of this Statement should be applied prospectively.  The
adoption of this  pronouncement  is not expected to have material  effect on the
Company's financial statements.

         In October  2004,  the American  Jobs Creation Act of 2004 (Act) became
effective  in the  U.S.  Two  provisions  of the Act may  impact  the  provision
(benefit)  for  income  taxes in future  periods,  namely  those  related to the
Qualified   Production   Activities   Deduction   (QPA)  and  Foreign   Earnings
Repatriation (FER).

         The QPA  will be  effective  for  the  U.S.  federal  tax  return  year
beginning after December 31, 2004. In summary, the Act provides for a percentage
deduction  of  earnings  from  qualified  production  activities,   as  defined,
commencing  with an initial  deduction  of 3 percent for tax years  beginning in
2005 and increasing to 9 percent for tax years  beginning  after 2009,  with the
result that the statutory federal tax rate currently applicable to our qualified
production  activities of 35 percent could be reduced initially to 33.95 percent
and ultimately to 31.85 percent.  However,  the Act also provides for the phased
elimination of the Extraterritorial  Income Exclusion provisions of the Internal
Revenue  Code,  which have  previously  resulted in tax benefits to both CCN and
IMC. Due to the  interaction  of the law  provisions  noted above as well as the
particulars of the Company's tax position, the ultimate effect of the QPA on the
Company's future provision (benefit) for income taxes has not been determined at
this time.  The FASB issued FASB Staff  Position FAS 109-1,  Application of FASB
Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production  Activities  Provided by the American Jobs Creation Act of 2004, (FSP
109-1) in December 2004. FSP 109-1 requires that tax benefits resulting from the
QPA should be  recognized no earlier than the year in which they are reported in
the  entity's  tax return,  and that there is to be no  revaluation  of recorded
deferred tax assets and liabilities as would be the case had there been a change
in an applicable statutory rate.

         The FER  provision  of the Act  provides  generally  for a one-time  85
percent  dividends  received  deduction for qualifying  repatriations of foreign
earnings to the U.S. Qualified  repatriated funds must be reinvested in the U.S.
in certain  qualifying  activities and  expenditures,  as defined by the Act. In
December  2004,  the FASB issued FASB Staff  Position FAS 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-2 allows additional time
for entities  potentially impacted by the FER provision to determine whether any
foreign earnings will be repatriated  under said  provisions.  At this time, the
Company has not undertaken an evaluation of the application of the FER provision
and any  potential  benefits of effecting  repatriations  under said  provision.
Numerous  factors,  including  previous  actual and


                                       9
<PAGE>


deemed repatriations under federal tax law provisions, are factors impacting the
availability of the FER provision and its potential  benefit to the Company,  if
any.  The  Company  intends to  examine  the issue and will  provide  updates in
subsequent periods.


                                       10
<PAGE>


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

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

         This  discussion  summarizes  the  significant  factors  affecting  the
consolidated operating results, financial condition and liquidity and cash flows
of Tag-It  Pacific,  Inc.  for the three  months  ended March 31, 2005 and 2004.
Except for historical  information,  the matters  discussed in this Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  are
forward looking  statements that involve risks and  uncertainties  and are based
upon judgments concerning various factors that are beyond our control.

OVERVIEW

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

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

         We have entered into seven  franchise  agreements for the sale of TALON
zippers.  The agreements  provide for minimum purchases of TALON zipper products
to be received over the term of the agreements as follows:

Region                          Agreement Date              Term
----------------------          -----------------           ----------
Central Asia                    October 21, 2004            42 Months
South East Asia                 November 10, 2004           42 Months
Southern Hemisphere             December 21, 2004           66 Months
Asia                            December 28, 2004           42 Months
South East Asia                 January 7, 2005             42 Months
Middle East and Africa          February 19, 2005           42 Months
Central Asia                    March 31, 2005              39 Months
----------------------          -----------------           ----------

         During  2004,  we  set  up a  TALON  manufacturing  facility  in  Kings
Mountain,  North Carolina.  This facility  manufactures TALON zippers for use in
the Western  Hemisphere and will reduce our reliance on our current major zipper
supplier. The facility began production in January 2005 and is expected to reach
capacity in the third quarter of 2005.


                                       11
<PAGE>


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

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

         o        Inventory  is  evaluated  on a  continual  basis  and  reserve
                  adjustments are made based on management's  estimate of future
                  sales  value,  if any, of specific  inventory  items.  Reserve
                  adjustments  are made for the  difference  between the cost of
                  the inventory and the estimated  market value,  if lower,  and
                  charged  to  operations  in the period in which the facts that
                  give rise to the  adjustments  become known.  A portion of our
                  total inventories is subject to buyback  arrangements with our
                  customers. The buyback arrangements contain provisions related
                  to the  inventory we purchase  and  warehouse on behalf of our
                  customers,  and  require  that these  customers  purchase  the
                  inventories from us in accordance with the applicable  buyback
                  arrangements. If the financial condition of a customer were to
                  deteriorate,  resulting  in an  impairment  of its  ability to
                  purchase   inventories,   an  additional   adjustment  may  be
                  required.   These  buyback   arrangements  are  considered  in
                  management's  estimate of future market value of  inventories.
                  See further  discussion of inventory  write-downs  recorded in
                  the fourth quarter of 2004 below.

         o        Accounts  receivable  balances  are  evaluated  on a continual
                  basis   and   allowances   are   provided   for    potentially
                  uncollectible  accounts based on management's  estimate of the
                  collectibility   of  customer   accounts.   If  the  financial
                  condition of a customer were to  deteriorate,  resulting in an
                  impairment  of its  ability to make  payments,  an  additional
                  allowance may be required.  Allowance  adjustments are charged
                  to  operations in the period in which the facts that give rise
                  to the  adjustments  become known.  See further  discussion of
                  accounts   receivable  reserves  recorded  during  the  fourth
                  quarter of 2004 below.

         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


                                       12
<PAGE>


                  a valuation allowance. If we determine that we may not realize
                  all or part of our deferred tax assets in the future,  we will
                  make an adjustment  to the carrying  value of the deferred tax
                  asset,  which  would be  reflected  as an income tax  expense.
                  Conversely,  if we  determine  that we will realize a deferred
                  tax asset, which currently has a valuation allowance, we would
                  be required to reverse the valuation allowance, which would be
                  reflected as an income tax benefit.

         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.

2004  WRITE-OFF  OF ACCOUNTS  RECEIVABLE  AND  INVENTORIES  FROM A FORMER  MAJOR
CUSTOMER

         Following  negotiations with United Apparel Ventures and its affiliate,
Tarrant  Apparel Group,  a former major  customer of ours, we determined  that a
significant portion of the obligations due from this customer, primarily related
to accounts  receivable and  inventories,  was  uncollectable.  As a result,  we
wrote-off a net of $4.3 million of obligations  due from this  customer,  with a
remaining  receivable balance due from UAV of $4.5 million.  Included in general
and administrative  expenses for the year ended December 31, 2004 are $4,289,436
of expenses  related to the write-off of  obligations  due from UAV and Tarrant.
UAV agreed to pay the $4.5 million receivable balance over an eight-month period
beginning May 2005.  There were no further charges as a result of this write-off
in the first quarter of 2005.

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
                                                             MARCH 31,
                                                  -----------------------------
                                                     2005              2004
                                                  -----------       -----------
Net sales........................................      100.0 %           100.0 %
Cost of goods sold...............................       75.1              70.6
                                                  -----------       -----------
Gross profit.....................................       24.9              29.4
Selling expenses.................................        5.7               7.6
General and administrative expenses..............       28.5              24.0
Restructuring charges............................          -               4.1
                                                  -----------       -----------
Operating loss...................................       (9.3)%            (6.3)%
                                                  ===========       ===========


                                       13
<PAGE>


         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
                                                             MARCH 31,
                                                  ------------------------------
                                                     2005              2004
                                                  -----------       -----------
         United States..........................         4.5 %             8.2 %
         Asia                                           32.9              20.3
         Mexico.................................        35.4              36.0
         Dominican Republic.....................        17.0              21.3
         Central and South America..............         9.1              14.0
         Other..................................         1.1               0.2
                                                  -----------       -----------
                                                       100.0 %           100.0 %
                                                  ===========       ===========

         Net sales increased approximately  $2,895,000, or 28.5%, to $13,055,000
for the three months ended March 31, 2005 from  $10,160,000 for the three months
ended March 31, 2004. The increase in net sales was due primarily to an increase
in sales from our TRIMNET programs  related to major U.S.  retailers in our Hong
Kong and Mexico facilities and an increase in zipper sales under our TALON brand
name in Asia.  During  the  fourth  quarter of 2003,  we  implemented  a plan to
restructure certain business operations, including the reduction of our reliance
on two  significant  customers in Mexico and reported a decrease in net sales of
approximately $4.2 million for the three months ended March 31, 2004 as compared
to net sales of approximately $14.4 million for the three months ended March 31,
2003.  We have been able to replace  substantially  all of the lost revenue from
our Tlaxcala, Mexico operations during the quarter ended March 31, 2005 with new
customers primarily in Mexico and Asia.

         Gross profit increased  approximately  $260,000, or 8.7%, to $3,252,000
for the three months ended March 31, 2005 from  $2,992,000  for the three months
ended March 31, 2004.  Gross margin as a  percentage  of net sales  decreased to
approximately  24.9% for the three  months  ended  March 31, 2005 as compared to
29.4% for the three months ended March 31, 2004. The decrease in gross profit as
a  percentage  of net sales for the three months ended March 31, 2005 was due to
overhead  costs  incurred  in our new  TALON  manufacturing  facility  in  North
Carolina.  This  facility  began  production  in January 2005 and is expected to
reach  capacity in the third  quarter of 2005.  Gross profit was also  adversely
affected by credits we issued to a customer during the first quarter of 2005 for
defective products received from Pro-Fit Holdings. The decrease in gross profit
as a  percentage  of net sales for the  quarter  was also due to a change in our
product mix.

         Selling expenses decreased  approximately $30,000, or 3.9%, to $742,000
for the three  months  ended March 31, 2005 from  $772,000  for the three months
ended March 31, 2004. As a percentage of net sales,  these expenses decreased to
5.7% for the three  months  ended March 31, 2005  compared to 7.6% for the three
months ended March 31, 2004 since employee costs increased at a slower rate than
sales. The decrease in selling expenses during the period was due primarily 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  $97,000 for the three months ended
March 31, 2005  compared to $115,000  for the three months ended March 31, 2004.
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.

         General and administrative expenses increased approximately $1,285,000,
or  52.6%,  to  $3,727,000  for the  three  months  ended  March  31,  2005 from
$2,442,000  for the three months  ended March 31, 2004.  The increase in general
and  administrative  expenses  was  partially  due to the  hiring of  additional
employees related to the expansion of our Asian operations,  including our TALON
franchising


                                       14
<PAGE>


strategy.  Additional  travel expenses  associated with our Asian expansion were
incurred  during the current  period.  We also incurred  additional  legal costs
related to our  litigation  with Pro-Fit  Holdings  Limited  during the quarter.
Unless this case is settled,  we will continue to incur additional legal fees in
increasing  amounts as the case  accelerates  to trial.  In the first quarter of
2004, we incurred  additional  restructuring  charges of $414,675 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 28.5% for the three months ended March 31,
2005  compared to 24.0% for the three months  ended March 31,  2004,  due to the
factors described above.

         Interest expense increased approximately $82,000, or 43.9%, to $269,000
for the three  months  ended March 31, 2005 from  $187,000  for the three months
ended March 31, 2004. The interest  expense increase was primarily due to higher
debt levels.  Borrowings under our UPS Capital credit facility  decreased during
the period  ended  March 31,  2004 due to  proceeds  received  from our  private
placement transactions in May and December 2003 in which we raised approximately
$29 million from the sale of common and convertible preferred stock. In November
2004,  we raised  $12.5  million from the sale of 6% secured  convertible  notes
payable.

         The  provision  for income  taxes for the three  months ended March 31,
2005  amounted to  approximately  $162,000  compared to an income tax benefit of
$272,000 for the three months ended March 31, 2004.  Income taxes  increased for
the three months ended March 31, 2005 due to taxes provided for earned income in
our  foreign  subsidiary.  Based  on our  net  operating  losses,  there  is not
sufficient evidence to determine that it is more likely than not that we will be
able to utilize our net operating  loss  carryforwards  to offset future taxable
income.  As a result,  we have not  recorded a benefit for income  taxes for the
three months ended March 31, 2005.

         Net loss was approximately  $1,648,000 for the three months ended March
31, 2005 as compared to $552,000 for the three months ended March 31, 2004,  due
primarily to an increase in general and  administrative  expenses and a decrease
in gross profit, as discussed above.

         Preferred  stock  dividends  amounted to $31,000  for the three  months
ended March 31, 2004.  There were no dividends  for the three months ended March
31, 2005.  Preferred stock  dividends  represent  earned  dividends at 6% of the
stated value per annum of the Series C convertible  redeemable  preferred stock.
In February 2004, the holders of the Series C convertible  redeemable  preferred
stock  converted  all  759,494  shares of the  Series C  Preferred  Stock,  plus
$458,707 of accrued dividends, into 700,144 shares of our common stock. Net loss
available to common  shareholders  amounted to  $1,648,000  for the three months
ended March 31, 2005  compared to $583,000  for the three months ended March 31,
2004. Basic and diluted loss per share were $0.09 and $0.04 for the three months
ended March 31, 2005 and 2004.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         Cash and cash  equivalents  decreased to  $2,863,000  at March 31, 2005
from $5,461,000 at December 31, 2004. The decrease  resulted from  approximately
$1,373,000  of cash  used by  operating  activities,  $588,000  of cash  used in
investing activities and $636,000 of cash used in financing activities.

         Net cash used in operating activities was approximately  $1,373,000 and
$4,585,000  for the three  months  ended March 31,  2005 and 2004.  Cash used in
operating  activities  for the  three  months  ended  March  31,  2005  resulted
primarily from the net loss, increased inventories and prepaid expenses,  offset
by decreased accounts receivable.  The increase in inventories during the period
was due primarily to increased customer orders for future sales. The decrease in
accounts receivable during the period was due


                                       15
<PAGE>


primarily to increased customer  collections.  Cash used in operating activities
for the three  months ended March 31, 2004  resulted  primarily  from  increased
accounts  receivable and inventories and decreased  accounts payable and accrued
expenses.

         Net cash used in investing  activities was  approximately  $588,000 and
$248,000 for the three months ended March 31, 2005 and 2004,  respectively.  Net
cash used in  investing  activities  for the three  months  ended March 31, 2005
consisted  primarily  of capital  expenditures  for TALON zipper  equipment  and
leasehold  improvements related to our new TALON manufacturing facility in North
Carolina. Net cash used in investing activities for the three months ended March
31, 2004 consisted primarily of capital  expenditures for computer equipment and
the purchase of additional TALON zipper equipment.

         Net cash used in financing  activities was  approximately  $636,000 and
$2,504,000 for the three months ended March 31, 2005 and 2004, respectively. Net
cash used in  financing  activities  for the three  months  ended March 31, 2005
primarily reflects the repayment of capital lease obligations and notes payable,
offset by funds raised from the exercise of stock options and warrants. Net cash
used in financing activities for the three months ended March 31, 2004 primarily
reflects the repayment of borrowings  under our credit facility and subordinated
notes  payable,  offset by funds raised from the  exercise of stock  options and
warrants.

         We currently satisfy our working capital requirements primarily through
cash flows generated from operations,  sales of equity securities and borrowings
from institutional  investors and individual accredited  investors.  On November
10,  2004,  we paid off our working  capital  credit  facility  with UPS Capital
Global Trade Finance  Corporation with a portion of the proceeds received from a
private placement of $12.5 million of Secured Convertible  Promissory Notes. The
Secured  Convertible  Promissory  Notes are  convertible  into common stock at a
price of $3.65  per  share,  bear  interest  at 6%  payable  quarterly,  are due
November  9,  2007 and are  secured  by the  TALON  trademarks.  The  Notes  are
convertible at the option of the holder at any time after closing.  We may repay
the Notes at any time after one year from the closing date with a 15% prepayment
penalty.  At maturity,  we may repay the Notes in cash or require  conversion if
certain  conditions  are met. In connection  with the issuance of the Notes,  we
issued to the Note holders  warrants to purchase up to 171,235  shares of common
stock.  The warrants have a term of five years,  an exercise  price of $3.65 per
share and vested 30 days after  closing.  We have  registered  with the SEC, the
resale by the holders of the shares  issuable  upon  conversion of the Notes and
exercise of the warrants.

         At March 31, 2005,  there were no outstanding  borrowings under our UPS
Capital credit facility which was terminated in November 2004.  Amounts borrowed
under  our  foreign  factoring  agreement  as of  March  31,  2005  amounted  to
approximately  $599,000. At March 31, 2004, outstanding borrowings under our UPS
Capital credit facility,  including amounts borrowed under our foreign factoring
agreement,  amounted to approximately  $4,686,000.  Open letters of credit under
our UPS Capital  credit  facility at March 31, 2004 amounted to $110,000.  There
were no open  letters of credit under our UPS Capital  credit  facility at March
31, 2005.

         In 2005,  we entered into a letter of credit  facility with Wells Fargo
Bank.  This  facility  provides  for  letters  of credit up to a maximum of $1.5
million,  expires in  November  2005 and is  secured by cash on hand  managed by
Wells Fargo Bank.  At March 31,  2005,  outstanding  letters of credit under the
Wells Fargo facility amounted to approximately $614,000.

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchased our eligible accounts receivable
and assumed the credit risk with respect to those foreign accounts for which UPS
Capital had given its prior  approval.  If UPS Capital did not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remained with us. We paid a


                                       16
<PAGE>


fixed  commission  rate and borrowed up to 85% of eligible  accounts  receivable
under our credit facility.  Included in due from factor as of March 31, 2004 are
trade accounts  receivable  factored without recourse of approximately  $60,000.
Included in due from factor are  outstanding  advances due to UPS Capital  under
this factoring arrangement amounting to approximately $51,000 at March 31, 2004.
There were no factored accounts receivable or advances from factor under the UPS
credit facility as of March 31, 2005.

         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 March 31,  2005 and 2004,  the amount  factored  with
recourse and included in trade accounts receivable was approximately  $1,326,000
and  $375,000.  Outstanding  advances as of March 31, 2005 and 2004  amounted to
approximately  $599,000  and  $164,000  and are  included  in the line of credit
balance.

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

         Our  trade  receivables,   net  of  allowance  for  doubtful  accounts,
decreased to $20,963,000  at March 31, 2005 from  $21,227,000 at March 31, 2004.
The decrease in  receivables  was due to a net  decrease in related  party trade
receivables of  approximately  $6.4 million  resulting  from decreased  sales to
related  parties  during the period and the  write-off of  outstanding  accounts
receivable  obligations  due from United  Apparel  Ventures  and its  affiliate,
Tarrant Apparel Group, during the fourth quarter of 2004. Following negotiations
with United Apparel Ventures and its affiliate,  Tarrant Apparel Group, a former
major  customer  of  ours,  we  determined  that a  significant  portion  of the
obligations  due from this  customer  were  uncollectable.  This  resulted  in a
write-off of $6.9 million of accounts receivable due from Tarrant and UAV in the
fourth quarter of 2004 and a net receivable balance due from UAV of $4.5 million
at December  31,  2004 and March 31,  2005.  UAV agreed to pay the $4.5  million
receivable  balance over an eight-month  period beginning May 2005. The decrease
in related  party  receivables  was offset by an increase in  non-related  party
receivables of approximately $11.4 million,  less an increase in the reserve for
bad debts of $5.3 million, for a net increase of $6.1 million.  This increase in
non-related  party  receivables was due to increased sales to non-related  party
customers  and slower  collections,  and an  additional  $6.7 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 now considered a non-related party customer.

         Our net deferred  tax asset at March 31, 2005  amounted to $1.0 million
compared to $2.8  million at March 31, 2004.  Our  deferred tax asset  valuation
allowance increased to $9.9 million at March 31, 2005 from $1.8 million at March
31, 2004.  The  decrease in the net  deferred tax asset  resulted in a charge of
$1.8 million  against the  provision  for income taxes in the fourth  quarter of
2004.  At  December  31,  2004,  we had  Federal  and state net  operating  loss
carryforwards  of approximately  $21.6 million and $12.9 million,  respectively,
available to offset  future  taxable  income.  Our net  operating  losses may be
limited in future  periods if the ownership of the Company  changes by more than
50%  within a  three-year  period.  As of  December  31,  2004,  some of our net
operating  losses may be limited by the  Section  382 rules.  The amount of such
limitations, if any, has not yet been determined.


                                       17
<PAGE>


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

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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         During the three months ended March 31, 2005,  future minimum  payments
due under operating lease agreements increased by approximately  $570,000.  This
increase was due to new lease  agreements  entered  into by the Company  related
primarily to leased warehouse space.

         At March 31,  2005 and  2004,  we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

         We had a supply  agreement  with  Tarrant  Apparel  Group  and had been
supplying  Tarrant  with all of its trim  requirements  under our  MANAGED  TRIM
SOLUTION(TM)   system  since  1998.  Pricing  and  terms  were  consistent  with
competitive vendors. At the time we entered into this supply agreement,  we sold
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. KG Investment, LLC subsequently transferred its shares to
Gerard  Guez and Todd Kay.  As of April  18,  2005,  Todd Kay owned  5.5% of our
common stock or 1,003,500  shares.  We terminated our supply  relationship  with
Tarrant and, in December 2004, we wrote-off the remaining  obligations  due from
Tarrant.

         Total sales to Tarrant and its affiliate,  United Apparel Ventures, for
the three months ended March 31, 2004 amounted to approximately  $74,000.  There
were no sales to Tarrant or its  affiliate  for the three months ended March 31,
2005.  As  of  March  31,  2004,  accounts  receivable  related  party  included
approximately  $7,140,000  due from Tarrant and its  affiliate.  As of March 31,
2005,  accounts  receivable,  related  party  included  $4.5  million  due  from
Tarrant's affiliate,  Untied Apparel Ventures. United Apparel Ventures agreed to
pay the $4.5 million  receivable  balance over a nine-month period beginning May
2005.


                                       18
<PAGE>


         As of March 31, 2005 and 2004, we had outstanding related-party debt of
approximately  $665,000 and $850,000,  at interest rates ranging from 7% to 11%,
and additional non-related-party debt of $25,200 at an interest rate of 10%. The
majority of  related-party  debt is due on demand,  with the  remainder  due and
payable on the fifteenth  day  following the date of delivery of written  demand
for payment.

NEW ACCOUNTING PRONOUNCEMENTS

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

         In November 2004, the FASB issued SFAS No. 151 "Inventory  Costs" (SFAS
151).  This statement  amends the guidance in ARB No. 43, Chapter 4,  "Inventory
Pricing,"  to clarify  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling  costs,  and wasted material  (spoilage).  SFAS 151
requires that those items be recognized as current-period  charges. In addition,
this Statement  requires that allocation of fixed production  overheads to costs
of conversion be based upon the normal  capacity of the  production  facilities.
The  provisions of SFAS 151 are effective for inventory  cost incurred in fiscal
years  beginning  after June 15, 2005.  As such,  we are required to adopt these
provisions at the beginning of fiscal 2006.  The adoption of this  pronouncement
is not expected to have material effect on our financial statements.

         In  December  2004,  the  FASB  issued  Statement  Accounting  Standard
("SFAS") No. 153  "Exchanges  of  Nonmonetary  Assets."  This  Statement  amends
Opinion 29 to  eliminate  the  exception  for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
Statement are  effective for  nonmonetary  asset  exchanges  occurring in fiscal
periods  beginning  after June 15, 2005.  Earlier  application  is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December
16, 2004. The provisions of this Statement should be applied prospectively.  The
adoption of this  pronouncement  is not expected to have material  effect on our
financial statements.

         In October  2004,  the American  Jobs Creation Act of 2004 (Act) became
effective  in the  U.S.  Two  provisions  of the Act may  impact  the  provision
(benefit)  for  income  taxes in future  periods,  namely  those  related to the
Qualified   Production   Activities   Deduction   (QPA)  and  Foreign   Earnings
Repatriation (FER).

         The QPA  will be  effective  for  our  U.S.  federal  tax  return  year
beginning after December 31, 2004. In summary, the Act provides for a percentage
deduction  of  earnings  from  qualified  production  activities,   as  defined,
commencing  with an initial  deduction  of 3 percent for tax years  beginning in
2005 and increasing to 9 percent for tax years  beginning  after 2009,  with the
result that the Statutory federal tax rate currently applicable to our qualified
production  activities of 35 percent could be reduced initially to 33.95 percent
and ultimately to 31.85 percent.  However,  the Act also provides for the phased
elimination of the Extraterritorial  Income Exclusion provisions of the Internal
Revenue Code, which have previously


                                       19
<PAGE>


resulted in tax benefits to both CCN and IMC. Due to the  interaction of the law
provisions  noted  above as well as the  particulars  of our tax  position,  the
ultimate  effect of the QPA on our future  provision  (benefit) for income taxes
has not been  determined at this time.  The FASB issued FASB Staff  Position FAS
109-1, Application of FASB Statement No.109, Accounting for Income Taxes, to the
Tax Deduction on Qualified  Production  Activities Provided by the American Jobs
Creation Act of 2004,  (FSP 109-1) in December 2004. FSP 109-1 requires that tax
benefits resulting from the QPA should be recognized no earlier than the year in
which they are reported in the  entity's tax return,  and that there is to be no
revaluation of recorded deferred tax assets and liabilities as would be the case
had there been a change in an applicable statutory rate.

         The FER  provision  of the Act  provides  generally  for a one-time  85
percent  dividends  received  deduction for qualifying  repatriations of foreign
earnings to the U.S. Qualified  repatriated funds must be reinvested in the U.S.
in certain  qualifying  activities and  expenditures,  as defined by the Act. In
December  2004,  the FASB issued FASB Staff  Position FAS 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-2 allows additional time
for entities  potentially impacted by the FER provision to determine whether any
foreign  earnings will be repatriated  under said  provisions.  At this time, we
have not  undertaken an evaluation of the  application  of the FER provision and
any potential benefits of effecting repatriations under said provision. Numerous
factors,  including previous actual and deemed  repatriations  under federal tax
law provisions,  are factors impacting the availability of the FER provision and
its  potential  benefit to us, if any.  We intend to examine  the issue and will
provide updates in subsequent periods.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

         OUR  GROWTH  AND  OPERATING  RESULTS  COULD  BE  MATERIALLY,  ADVERSELY
EFFECTED IF WE ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING
OUR RIGHTS  UNDER OUR  EXCLUSIVE  LICENSE AND  INTELLECTUAL  PROPERTY  AGREEMENT
("AGREEMENT")  WITH PRO-FIT  HOLDINGS.  Pursuant to our  Agreement  with Pro-Fit
Holdings  Limited,  we have  exclusive  rights in  certain  geographic  areas to
Pro-Fit's stretch and rigid waistband technology. By letter dated April 6, 2004,
Pro-Fit alleged various  breaches of the Agreement which we dispute.  To prevent
Pro-Fit in the future from  terminating the Agreement based on alleged  breaches
that we do not regard as meritorious,  we filed a lawsuit against Pro-Fit in the
U.S.  District Court for the Central  District of  California,  based on various
contractual and tort claims seeking  declaratory  relief,  injunctive relief and
damages.  Pro-Fit  filed an  answer  denying  the  material  allegations  of the
complaint and filed a counterclaim  alleging various contractual and tort claims
seeking  injunctive  relief and damages.  We filed a reply  denying the material
allegations of Pro-Fit's pleading.  Pro-Fit has since purported to terminate our
exclusive license and intellectual  property agreement based on the same alleged
breaches of the agreement  that are the subject of our existing  litigation,  as
well as on an additional basis unsupported by fact. In February 2005, we amended
our pleadings in the litigation to assert additional  breaches by Pro-Fit of its
obligations  to us under our  agreement  and  under  certain  additional  letter
agreements,  and for a declaratory  judgment that Pro-Fit's patent No. 5,987,721
is invalid and not infringed by us. Discovery in this case has commenced.  There
have been  ongoing  negotiations  with  Pro-Fit  to  attempt  to  resolve  these
disputes.  We intend to proceed with the lawsuit if these  negotiations  are not
concluded in a manner satisfactory to us.


                                       20
<PAGE>


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

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

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

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

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

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

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

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

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

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


                                       21
<PAGE>


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

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

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

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

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

         o        The timing and magnitude of customers' marketing campaigns;

         o        The loss or addition of a major customer;

         o        The availability and pricing of materials for our products;

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

         o        Currency fluctuations;

         o        Delays caused by third parties; and

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


                                       22
<PAGE>


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

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

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

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

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

         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention; and

         o        Natural disasters.

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


                                       23
<PAGE>


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

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

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

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

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

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

         o        Interest rates;

         o        Changes in accounting principles;

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

         o        Announcements of key developments by our competitors; and

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

         IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH,  OUR STOCKHOLDERS'  OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY  IMPACTED.  Our business strategy may
include expansion through internal growth, by acquiring complementary businesses
or  by  establishing   strategic   relationships  with  targeted  customers  and


                                       24
<PAGE>


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

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

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

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of April 18, 2005, our officers and directors and their affiliates  beneficially
owned  approximately  15.0% 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  17.8% of the
outstanding  shares of our  common  stock at April 18,  2005.  As a result,  our
officers  and  directors  and the Dyne  family  are  able to exert  considerable
influence over the outcome of any matters  submitted to a vote of the holders of
our common stock,  including the election of our Board of Directors.  The voting
power of these stockholders could also discourage others from seeking to acquire
control of us through the purchase of our common stock,  which might depress the
price of our common stock.

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


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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.  During 2004,  we
purchased forward exchange contracts for British Pounds to hedge the payments of
product  purchases.  We intend to  purchase  additional  contracts  to hedge the
British  Pound  exposure  for future  product  purchases.  There were no hedging
contracts  outstanding as of March 31, 2005. Currency  fluctuations can increase
the price of our products to foreign  customers  which can adversely  impact the
level  of our  export  sales  from  time  to  time.  The  majority  of our  cash
equivalents  are held in United  States bank  accounts  and we do not believe we
have significant market risk exposure with regard to our investments.

         We are also  exposed  to the  impact of  interest  rate  changes on our
outstanding  borrowings.  At March 31 2005, we had approximately $1.4 million of
indebtedness  subject to interest  rate  fluctuations.  These  fluctuations  may
increase our interest expense and decrease our cash flows from time to time. For
example,  based on average bank  borrowings of $10 million  during a three-month
period, if the interest rate indices on which our bank borrowing rates are based
were to increase 100 basis points in the three-month  period,  interest incurred
would increase and cash flows would decrease by $25,000.

ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

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

         In the course of conducting  its audit of our financial  statements for
the fiscal year ended December 31, 2004, our independent auditors,  BDO Seidman,
LLP informed  members of our senior  management  and the Audit  Committee of our
Board of Directors  that they had  discovered  significant  deficiencies  in our
internal  control  over  financial  reporting  that  alone and in the  aggregate
constituted a "material weakness," which is defined under standards  established
by the Public  Company  Accounting  Oversight  Board as a deficiency  that could
result in more than a remote  likelihood  that a  material  misstatement  of the
annual or interim  financial  statements will not be prevented or detected.  The
deficiencies identified consisted of the following:

         o        A  deficiency  related to the  identification  of and physical
                  controls  over  approximately  $1.0  million of our  inventory
                  located in a third party  warehouse.  We have taken steps, and
                  will  continue  to  take  additional  steps,  to  remedy  this
                  deficiency and believe that this deficiency was limited to the
                  third party warehouse at which the inventory was located.

         o        We  recorded   post-closing   adjustments   in  our  financial
                  statements for the year ended December 31, 2004 related to the
                  allowance for doubtful accounts and deferred tax asset,  which
                  were  identified by BDO Seidman,  LLP in connection with their
                  audit  of the  financial  statements,  indicating  a  material
                  weakness  in our  quarterly  and  annual  financial  statement
                  closing process.  In order to address this material  weakness,
                  we implemented additional review procedures over the selection
                  and monitoring of appropriate assumptions and


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<PAGE>


                  estimates affecting these accounting practices.  There were no
                  post-closing  adjustments as of March 31, 2005, the end of the
                  period covered by this report.

         Members of management, including the Company's Chief Executive Officer,
Colin Dyne,  and Chief  Financial  Officer,  August  DeLuca,  have evaluated the
effectiveness of the design and operation of the Company's  disclosure  controls
and  procedures  as of March 31,  2005,  the end of the  period  covered by this
report. Based upon that evaluation,  Mr. Dyne and Mr. DeLuca have concluded that
the Company's  disclosure controls and procedures were effective as of March 31,
2005.  Management  has  identified  the steps  necessary to address the material
weaknesses as described above, and has implemented remediation plans. We believe
these  corrective  actions,  taken  as  a  whole,  have  mitigated  the  control
deficiencies  with respect to our preparation of this Quarterly  Report and that
these measures have been effective to ensure that the information required to be
disclosed in this Quarterly Report has been recorded, processed,  summarized and
reported correctly.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

         There  were  no  significant  changes  in our  internal  controls  over
financial  reporting that occurred during the first quarter that have materially
affected,  or are reasonably likely to materially  affect,  our internal control
over  financial  reporting,  other than the changes we  implemented as discussed
above to address the material weaknesses.


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<PAGE>


                                     PART II
                                OTHER INFORMATION

ITEM 6.  EXHIBITS

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

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

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


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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:   May 16, 2005                        TAG-IT PACIFIC, INC.

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


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