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

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

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


                                    FORM 10-Q

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

                 For the quarterly period ended March 31, 2003.

                                       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, 9,619,909 shares issued and outstanding as of May 15, 2003.
================================================================================


<PAGE>


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


                                                                            PAGE
                                                                            ----
PART I   FINANCIAL INFORMATION

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

         Consolidated Balance Sheets as of March 31, 2003
         (unaudited) and December 31, 2002.................................... 3

         Consolidated Statements of Income (unaudited) for
         the Three Months Ended March 31, 2003 and 2002....................... 4

         Consolidated Statements of Cash Flows (unaudited)
         for the Three Months Ended March 31, 2003 and 2002................... 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..............................................27

PART II  OTHER INFORMATION

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

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



                                       2


<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.

                              TAG-IT PACIFIC, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                         March 31,  December 31,
                                                           2003          2002
                                                       -----------   -----------
                      Assets                            (unaudited)
Current Assets:
   Cash and cash equivalents .......................   $   154,561   $   285,464
   Due from factor .................................       656,308       532,672
   Trade accounts receivable, net ..................     6,858,036     5,456,517
   Trade accounts receivable, related parties ......    13,399,559    14,770,466
   Refundable income taxes .........................          --         212,082
   Inventories .....................................    24,632,717    23,105,267
   Prepaid expenses and other current assets .......       883,491       599,543
   Deferred income taxes ...........................        90,928        90,928
                                                       -----------   -----------
      Total current assets .........................    46,675,600    45,052,939

Property and Equipment, net of accumulated
   depreciation and amortization ...................     3,405,563     2,953,701
Tradename ..........................................     4,110,750     4,110,750
Due from related parties ...........................       884,128       870,251
Other assets .......................................     1,239,165     1,314,981
                                                       -----------   -----------
Total assets .......................................   $56,315,206   $54,302,622
                                                       ===========   ===========

    Liabilities, Convertible Redeemable Preferred
         Stock and Stockholders' Equity

Current Liabilities:
   Line of credit ..................................   $15,403,486   $16,182,061
   Accounts payable and accrued expenses ...........    12,796,562    10,401,187
   Deferred income .................................     1,027,984     1,027,984
   Subordinated notes payable to related parties ...       849,971     1,349,971
   Current portion of capital lease obligations ....        72,804        71,928
   Current portion of subordinated note payable ....     1,200,000     1,200,000
                                                       -----------   -----------
      Total current liabilities ....................    31,350,807    30,233,131

Capital lease obligations, less current portion ....        88,447       107,307
Subordinated note payable, less current portion ....     2,300,000     2,600,000
                                                       -----------   -----------
      Total liabilities ............................    33,739,254    32,940,438
                                                       -----------   -----------

Convertible redeemable preferred stock Series C,
   $0.001 par value; 759,494 shares authorized;
   759,494 shares issued and outstanding at
   March 31, 2003 and December 31, 2002
   (stated value $3,000,000) .......................     2,895,001     2,895,001
Stockholders' equity:
   Preferred stock, Series A $0.001 par value;
     250,000 shares authorized, no shares issued
     or outstanding ................................          --            --
   Convertible preferred stock Series B, $0.001
     par value; 850,000 shares authorized; no
     shares issued or outstanding ..................          --            --
   Common stock, $0.001 par value, 30,000,000
     shares authorized; 9,619,909 shares issued
     and outstanding at March 31, 2003;
     9,319,909 at December 31, 2002 ................         9,621         9,321
   Additional paid-in capital ......................    17,675,712    16,776,012
   Retained earnings ...............................     1,995,618     1,681,850
                                                                     -----------
 Total stockholders' equity ........................    19,680,951    18,467,183
                                                       -----------   -----------
 Total liabilities, convertible redeemable
   preferred stock and stockholders' equity.........   $56,315,206   $54,302,622
                                                       ===========   ===========

          See accompanying notes to consolidated financial statements.


                                       3


<PAGE>


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

                                                    Three Months Ended March 31,
                                                    ----------------------------
                                                        2003             2002
                                                    -----------      -----------

Net sales ....................................      $14,358,833      $ 9,325,056
Cost of goods sold ...........................       10,059,252        6,690,713
                                                    -----------      -----------
     Gross profit ............................        4,299,581        2,634,343

Selling expenses .............................          829,144          394,867
General and administrative expenses ..........        2,698,504        1,905,131
                                                    -----------      -----------
     Total operating expenses ................        3,527,648        2,299,998

Income from operations .......................          771,933          334,345
Interest expense, net ........................          320,848          261,743
                                                    -----------      -----------
Income before income taxes ...................          451,085           72,602
Provision for income taxes ...................           90,217           18,590
                                                    -----------      -----------
     Net income ..............................      $   360,868      $    54,012
                                                    ===========      ===========
Less:  Preferred stock dividends .............           47,100           45,000
                                                    -----------      -----------
Net income available to common
   shareholders ..............................      $   313,768      $     9,012
                                                    ===========      ===========
Basic earnings per share .....................      $      0.03      $      0.00
                                                    ===========      ===========
Diluted earnings per share ...................      $      0.03      $      0.00
                                                    ===========      ===========

Weighted average number of common
   shares outstanding:
     Basic ...................................        9,423,242        9,013,511
                                                    ===========      ===========
     Diluted .................................        9,686,457        9,327,641
                                                    ===========      ===========

          See accompanying notes to consolidated financial statements.


                                       4


<PAGE>


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

                                                    Three Months Ended March 31,
                                                     --------------------------
                                                         2003           2002
                                                     -----------    -----------
Increase  (decrease)  in cash and cash
  equivalents
Cash flows  from  operating activities:
    Net income ...................................   $   360,868    $    54,012
Adjustments to reconcile net income to net
  cash provided (used) by operating activities:
    Depreciation and amortization ................       308,364        274,505
    Increase in allowance for doubtful accounts ..        94,965           --
Changes in operating assets and liabilities:
      Receivables, including related parties .....      (249,213)      (513,240)
      Inventories ................................    (1,527,450)    (1,201,336)
      Other assets ...............................        (2,592)        (9,323)
      Prepaid expenses and other current assets ..      (283,948)       (35,826)
      Accounts payable and accrued expenses ......     2,247,601        874,186
      Accrued restructuring charges ..............          --         (114,554)
      Income taxes payable .......................       298,879         18,782
                                                     -----------    -----------
Net cash provided (used) by operating activities .     1,247,474       (652,794)
                                                     -----------    -----------

Cash flows from investing activities:
    Acquisition of property and equipment ........      (681,818)       (49,129)
                                                     -----------    -----------

Cash flows from financing activities:
    Repayment of bank line of credit, net ........      (778,575)       (31,840)
    Proceeds from private placement transactions .       900,000      1,029,996
    Proceeds from exercise of stock options ......          --            8,450
    Repayment of capital leases ..................       (17,984)       (86,291)
    Repayment of notes payable ...................      (800,000)      (200,000)
                                                     -----------    -----------
Net cash (used) provided by financing activities .      (696,559)       720,315
                                                     -----------    -----------

Net (decrease) increase in cash ..................      (130,903)        18,392
Cash at beginning of period ......................       285,464         46,948
                                                     -----------    -----------
Cash at end of period ............................   $   154,561    $    65,340
                                                     ===========    ===========

Supplemental  disclosures of cash flow
  information:
Cash received (paid) during the period for:
      Interest paid ..............................   $  (314,009)   $  (221,834)
      Income taxes paid ..........................   $    (2,566)   $      (439)
      Income taxes received ......................   $   212,082    $      --


          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, 2002.

2.       EARNINGS PER SHARE

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

                                                                           PER
THREE MONTHS ENDED MARCH 31, 2003:            INCOME         SHARES       SHARE
---------------------------------            ---------      ---------     ------
Basic earnings per share:
Income available to common stockholders      $ 313,768      9,423,242      $0.03

Effect of Dilutive Securities:
Options ...............................                       210,718
Warrants ..............................                        52,497
                                             ---------      ---------      -----
Income available to common stockholders      $ 313,768      9,686,457      $0.03
                                             =========      =========      =====

THREE MONTHS ENDED MARCH 31, 2002:
---------------------------------
Basic earnings per share:
Income available to common stockholders      $   9,012      9,013,511      $0.00

Effect of Dilutive Securities:
Options ...............................                       260,253
Warrants ..............................                        53,877
                                             ---------      ---------      -----
Income available to common stockholders      $   9,012      9,327,641      $0.00
                                             =========      =========      =====


         Warrants to purchase  683,332  shares of common stock at between  $3.65
and $6.00,  options to purchase  925,000 shares of common stock at between $3.75
and  $4.63,  convertible  debt of  $500,000  convertible  at $4.50 per share and
759,494 shares of preferred  Series C stock  convertible at $4.94 per share were
outstanding  for the three months ended March 31, 2003, but were not included in
the  computation  of diluted  earnings per share because  exercise or conversion
would have an antidilutive effect on earnings per share.


                                       6


<PAGE>


         Warrants to purchase  523,332  shares of common stock at between  $4.34
and $6.00,  options to purchase  646,000 shares of common stock at between $4.00
and  $4.63,  convertible  debt of  $500,000  convertible  at $4.50 per share and
759,494 shares of preferred  Series C stock  convertible at $4.94 per share were
outstanding  for the three months ended March 31, 2002, but were not included in
the  computation  of diluted  earnings per share because  exercise or conversion
would have an antidilutive effect on earnings per share.

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, 2003 and 2002.  If  compensation  cost for
stock-based  compensation  had been determined based on the fair market value of
the stock  options  on their  dates of grant in  accordance  with SFAS 123,  the
Company's net income and earnings per share for the three months ended March 31,
2003 and 2002 would have amounted to the pro forma amounts presented below:

                                                    Three Months Ended March 31,
                                                          2003          2002
                                                      -----------    ----------
Net income, as reported ...........................   $   360,868    $   54,012

Add:  Stock-based employee compensation expense ...          --            --
     included in reported net income, net of
     related tax effects

Deduct:  Total stock-based employee
     compensation expense determined under fair
     value based method for all awards, net of
     related tax effects ..........................        (5,282)      (30,268)
                                                      -----------    ----------


Pro forma net income ..............................   $   355,586    $   23,744
                                                      ===========    ==========

Earnings per share:

       Basic - as reported ........................   $      0.03    $     0.00

       Basic - pro forma ..........................   $      0.03    $     0.00


       Diluted - as reported ......................   $      0.03    $     0.00

       Diluted - pro forma ........................   $      0.03    $     0.00


                                       7


<PAGE>


4.       PRIVATE PLACEMENTS

         In a series of sales on December 28, 2001,  January 7, 2002 and January
8, 2002, the Company  entered into Stock and Warrant  Purchase  Agreements  with
three  private  investors,  including  Mark Dyne,  the chairman of the Company's
board of directors.  Pursuant to the Stock and Warrant Purchase Agreements,  the
Company  issued an  aggregate  of 516,665  shares of common stock at a price per
share of $3.00 for  aggregate  proceeds  of  $1,549,995.  The Stock and  Warrant
Purchase  Agreements  also included a commitment  by one of the two  non-related
investors to purchase an  additional  400,000  shares of common stock at a price
per share of $3.00 at a second  closing  (subject of certain  conditions)  on or
prior to March 1, 2003,  as amended,  for  additional  proceeds  of  $1,200,000.
Pursuant  to the Stock and  Warrant  purchase  agreements,  258,332  warrants to
purchase common stock were issued at the first closing of the  transactions  and
200,000  warrants  were  issued  at  the  second  closings.   The  warrants  are
exercisable  immediately after closing,  one half of the warrants at an exercise
price of 110% and the  second  half at an  exercise  price of 120% of the market
value of the Company's  common stock on the date of closing.  The exercise price
for the warrants shall be adjusted upward by 25% of the amount, if any, that the
market  price of our common  stock on the  exercise  date  exceeds  the  initial
exercise  price (as  adjusted)  up to a  maximum  exercise  price of $5.25.  The
warrants have a term of four years. The shares contain  restrictions  related to
the sale or transfer of the shares, registration and voting rights.

         In March  2002 and  February  2003,  one of the  non-related  investors
purchased an  additional  100,000 and 300,000  shares,  respectively,  of common
stock at a price per share of $3.00 pursuant to the second closing provisions of
the related  agreement for total proceeds of $1,200,000.  Pursuant to the second
closing  provisions  of the Stock and  Warrant  Purchase  Agreement,  50,000 and
150,000  warrants  were issued to the investor in March 2002 and February  2003,
respectively. There are no remaining commitments due under the stock and warrant
purchase agreements.


5.       GUARANTEES AND CONTINGENCIES

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

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

         The Company enters into indemnification provisions under its agreements
with  investors  and its  agreements  with other parties in the normal course of
business,  typically  with  suppliers,  customers  and  landlords.  Under  these
provisions, the Company generally indemnifies and holds harmless the indemnified
party for losses  suffered or incurred by the  indemnified  party as a result of
the  Company's  activities  or, in some  cases,  as a result of the  indemnified
party's activities under the agreement.  These indemnification  provisions often
include  indemnifications  relating to representations  made by the Company with
regard  to  intellectual  property  rights.  These  indemnification   provisions
generally survive termination of the underlying agreement. The maximum potential
amount of future  payments  the


                                       8


<PAGE>


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.


         As of March 31, 2003, we indirectly  guaranteed the indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment  totaling $3.3 million.  Financing costs due to the
related party amounted to approximately  $328,000.  The letters of credit expire
on various dates thru July 2003.

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

6.       SUBSEQUENT EVENT

         On April 3, 2003,  the Company  entered into a financing  agreement for
the purchase and implementation of computer equipment and software.  The capital
lease obligation bears interest at 6% and expires in March 2006.  Future minimum
annual payments under the capital lease obligation are as follows:

Years ending December 31,                                              Amount
-------------------------                                           -----------

2003 ....................................................           $   423,660
2004 ....................................................               564,880
2005 ....................................................               466,756
2006 ....................................................               152,117
                                                                    -----------

Total payments ..........................................             1,607,413

Less amount representing interest .......................              (133,360)
                                                                    -----------

Balance at April 3, 2003 ................................             1,474,053

Less current portion ....................................               376,287
                                                                    -----------

Long-term portion .......................................           $ 1,097,766
                                                                    ===========


7.       NEW ACCOUNTING PRONOUNCEMENTS

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

         In  April  2002,  the FASB  issued  SFAS No.  145,  Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections.  This statement  eliminates the current  requirement that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance with the current GAAP criteria for


                                       9


<PAGE>


extraordinary classification.  In addition, SFAS 145 eliminates an inconsistency
in lease  accounting  by requiring  that  modifications  of capital  leases that
result in  reclassification as operating leases be accounted for consistent with
sale-leaseback   accounting   rules.   The   statement   also   contains   other
nonsubstantive  corrections to authoritative accounting literature.  The changes
related to debt  extinguishment  will be effective  for fiscal  years  beginning
after  May 15,  2002,  and the  changes  related  to  lease  accounting  will be
effective  for  transactions  occurring  after May 15,  2002.  Adoption  of this
standard  will not have  any  immediate  effect  on the  Company's  consolidated
financial statements.

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

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
Consolidation of Variable  Interest  Entities,  an  interpretation of Accounting
Research Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46").
FIN 46  clarifies  the  application  of ARB No. 51 to certain  entities in which
equity  investors do not have the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The Company does not believe the adoption of FIN 46 will have a material  impact
on its financial position and results of operations.


                                       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, 2003 and 2002.
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.

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

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


                                       11


<PAGE>


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

BUSINESS OVERVIEW AND RECENT DEVELOPMENTS

         Tag-It  Pacific,  Inc. is an apparel  company that  specializes  in the
distribution  of trim items to  manufacturers  of fashion  apparel and  licensed
consumer products,  and specialty retailers and mass merchandisers.  We act as a
full service outsourced trim management  department for manufacturers of fashion
apparel such as Tarrant Apparel Group and Azteca  Production  International.  We
also serve as a specified  supplier of trim items to owners of specific  brands,
brand  licensees and  retailers,  including  Abercrombie  & Fitch,  The Limited,
Express,  Lerner and Miller's Outpost,  among others. We also distribute zippers
under our TALON brand name to owners of apparel brands and apparel manufacturers
such as Levi  Strauss & Co.,  VF  Corporation  and  Tropical  Sportswear,  among
others.  In 2002,  we created a new division  under the TEKFIT brand name.  This
division develops and sells apparel components that utilize the patented Pro-Fit
technology,  including a stretch waistband. We market these products to the same
customers targeted by our MANAGED TRIM SOLUTION and TALON zipper divisions.

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


                                       12


<PAGE>


in faster  delivery  times and fewer  production  delays  for our  manufacturing
customers.   Our  MANAGED   TRIM   SOLUTION(TM)   also  helps  to   eliminate  a
manufacturer's need to maintain a trim purchasing and logistics department.

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

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

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

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

RELATED PARTY SUPPLY AGREEMENTS

         On September  20, 2001,  we entered  into a ten-year  co-marketing  and
supply  agreement with Coats American,  Inc., an affiliate of Coats plc, as well
as a preferred stock purchase  agreement with Coats North America  Consolidated,
Inc.,  also an  affiliate of Coats plc. The  co-marketing  and supply  agreement


                                       13


<PAGE>


provides  for  selected  introductions  into  Coats'  customer  base and has the
potential  to  accelerate  our growth  plans and to  introduce  our MANAGED TRIM
SOLUTION(TM) to apparel  manufacturers on a broader basis. Pursuant to the terms
of the  co-marketing  and supply  agreement,  our trim packages will exclusively
offer thread manufactured by Coats. Coats was selected for its quality, service,
brand recognition and global reach.  Prior to entering into the co-marketing and
supply  agreement,  we were a long-time  customer of Coats,  distributing  their
thread to sewing  operations under our MANAGED TRIM SOLUTION(TM)  program.  This
exclusive  agreement  will allow Coats to offer its customer base of contractors
in Mexico,  Central America and the Caribbean full-service trim management under
our MANAGED TRIM SOLUTION(TM) program.

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

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

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

         Sales under our  exclusive  supply  agreements  with Azteca  Production
International  and Tarrant  Apparel Group  amounted to  approximately  69.7% and
63.0% of our total sales for the years ended  December 2002 and 2001,  and 51.4%
of our total sales for the three months ended March 31, 2003.  We will  continue
to rely on these two  customers  for a  significant  amount of our sales for the
year ended December 2003.  Sales under these  exclusive  supply  agreements as a
percentage of total sales for the year ended December 2003 are anticipated to be
lower than the year ended  December  2002 due to an  increase  in sales to other
customers.  Our results of operations  will depend to a significant  extent upon
the commercial  success of Azteca  Production  International and Tarrant Apparel
Group.  If Azteca  Production  International  and Tarrant  Apparel Group fail to
purchase our trim  products at  anticipated  levels,  or our  relationship  with
Azteca Production International or Tarrant Apparel Group terminates, it may have
an adverse  affect on our  results of  operations.  Included  in trade  accounts
receivable,  related parties at March 31, 2003, is  approximately  $13.4 million
due from Tarrant Apparel Group and Azteca Production International.

         Included  in  inventories   at  March  31,  2003  are   inventories  of
approximately $11 million that are subject to buyback  arrangements with Tarrant
Apparel Group, Azteca Production  International and other customers. The buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is required to purchase the inventories from us under normal


                                       14


<PAGE>


invoice and selling terms. During the three months ended March 31, 2003, we sold
approximately  $688,000  in  inventory  to  Tarrant  Apparel  Group  and  Azteca
Production  International  pursuant  to  these  buyback  arrangements.   If  the
financial condition of Tarrant Apparel Group and Azteca Production International
were to  deteriorate,  resulting in an  impairment  of their ability to purchase
inventories or pay receivables,  it may have an adverse affect on our results of
operations.

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,
                                                           -----------------
                                                            2003        2002
                                                           -----       -----
     Net sales ....................................        100.0%      100.0%
     Cost of goods sold ...........................         70.1        71.7
                                                           -----       -----
     Gross profit .................................         29.9        28.3
     Selling expenses .............................          5.7         4.2
     General and administrative expenses ..........         18.8        20.4
                                                           -----       -----
     Operating income .............................          5.4%        3.7%
                                                           =====       =====

         Net sales increased approximately  $5,034,000, or 54.0%, to $14,359,000
for the three months ended March 31, 2003 from  $9,325,000  for the three months
ended March 31, 2002. The increase in net sales was primarily due to an increase
in sales under our TEKFIT stretch waistband division. In late 2002, we created a
new  division  under the TEKFIT  brand name.  This  division  develops and sells
apparel  components that utilize the patented  Pro-Fit  technology,  including a
stretch  waistband sold under our exclusive supply agreement with Levi Strauss &
Co.  The  increase  in  net  sales  was  also  attributable  to an  increase  in
trim-related  sales from our Tlaxcala,  Mexico operations under our MANAGED TRIM
SOLUTION(TM)  trim  package  program and an  increase in zipper  sales under our
TALON brand name to our MANAGED  TRIM  SOLUTION(TM)  customers in Mexico and our
other Talon  customers in Mexico and Asia. The increase in net sales was further
attributable  to an increase in sales from our Hong Kong subsidiary for programs
related to major U.S. retailers.

         Gross  profit  increased   approximately   $1,666,000,   or  63.2%,  to
$4,300,000  for the three  months ended March 31, 2003 from  $2,634,000  for the
three  months ended March 31,  2002.  Gross margin as a percentage  of net sales
increased  to  approximately  29.9% for the three months ended March 31, 2003 as
compared to 28.3% for the three  months  ended March 31,  2002.  The increase in
gross profit as a  percentage  of net sales for the three months ended March 31,
2003 was due to a change in our product mix during the current quarter.

         Selling  expenses  increased  approximately  $434,000,  or  109.9%,  to
$829,000 for the three  months ended March 31, 2003 from  $395,000 for the three
months  ended March 31,  2002.  As a  percentage  of net sales,  these  expenses
increased to 5.7% for the three months ended March 31, 2003 compared to 4.2% for
the three months ended March 31, 2002. The increase in selling  expenses was due
to our efforts to obtain  approval  from major brands and retailers of the TALON
brand  zipper and the  implementation  of our sales and  marketing  plan for the
complete  trim  packages we offer to our  customers  through  our  MANAGED  TRIM
SOLUTION.  In  addition,  we hired  additional  sales  personnel  for our TEKFIT
division,  formed  in the  second  half of 2002,  and we also  incurred  royalty
expenses  related to the  exclusive  license and  intellectual  property  rights
agreement with Pro-Fit Holdings Limited during the period.


                                       15


<PAGE>


         General and administrative  expenses increased  approximately $794,000,
or  41.7%,  to  $2,699,000  for the  three  months  ended  March  31,  2003 from
$1,905,000  for the three  months  ended March 31,  2002.  The increase in these
expenses was due primarily to additional  staffing and other  expenses  incurred
related to our  exclusive  waistband  license  agreement,  the  amortization  of
intangible  assets  incurred as a result of the exclusive  waistband  technology
license  rights we  acquired in April 2002 and the  relocation  of our Hong Kong
office during the period. As a percentage of net sales, these expenses decreased
to 18.8% for the three  months  ended March 31,  2003  compared to 20.4% for the
three months  ended March 31, 2002,  because the rate of increase in general and
administrative expenses did not exceed that of net sales.

         Interest expense increased approximately $59,000, or 22.5%, to $321,000
for the three  months  ended March 31, 2003 from  $262,000  for the three months
ended March 31, 2002. Borrowings under our UPS Capital credit facility increased
during the period  ended  March 31,  2003 due to  increased  sales and  expanded
operations in Mexico, the Dominican Republic and Asia.

         The  provision  for income  taxes for the three  months ended March 31,
2003 amounted to approximately  $90,000 compared to $19,000 for the three months
ended March 31, 2002.  Income taxes  increased  for the three months ended March
31, 2003 primarily due to increased taxable income.

         Net income was approximately  $361,000 for the three months ended March
31, 2003 as compared to $54,000 for the three months  ended March 31, 2002,  due
primarily to an increase in net sales and gross  margin,  offset by increases in
selling and general and administrative expenses, as discussed above.

         Preferred  stock  dividends  amounted to $47,000  for the three  months
ended March 31, 2003 as compared to $45,000 for the three months ended March 31,
2002.  Preferred stock dividends  represent earned dividends at 6% of the stated
value per annum of the Series C  convertible  redeemable  preferred  stock.  Net
income  available  to common  shareholders  amounted to  $314,000  for the three
months ended March 31, 2003  compared to $9,000 for the three months ended March
31, 2002 and basic and diluted  earnings  per share were $0.03 and $0.00 for the
three months ended March 31, 2003 and 2002.

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         Cash and cash equivalents  decreased to $155,000 at March 31, 2003 from
$285,000  at  December  31,  2002.  The  decrease  resulted  from  approximately
$1,247,000  of cash  provided by  operating  activities,  offset by $682,000 and
$697,000 of cash used by investing and financing activities.

         Net cash provided by operating activities was approximately  $1,247,000
for the three  months  ended  March  31,  2003 as  compared  to net cash used in
operating activities of approximately  $653,000 for the three months ended March
31, 2002.  The increase in cash provided by operating  activities  for the three
months  ended March 31,  2003  resulted  primarily  from  increases  in accounts
payable  and accrued  expenses,  which were  partially  offset by  increases  in
inventories and receivables.  The increase in inventories  during the period was
due primarily to increased  customer  orders for future  sales.  The increase in
accounts  receivable  during the period was due  primarily  to  increased  sales
during the first quarter of 2003 and slower customer  collections.  Cash used in
operating  activities  for the  three  months  ended  March  31,  2002  resulted
primarily from increases in inventories  and  receivables,  which were offset by
increases in accounts payable and accrued expenses.

         Net cash used in investing  activities was  approximately  $682,000 and
$49,000 for the three  months ended March 31, 2003 and 2002,  respectively.  Net
cash used in  investing  activities  for the three  months  ended March 31, 2003
consisted  primarily  of  capital  expenditures  for  equipment  related  to the
exclusive supply agreement we entered into with Levi Strauss & Co. Net cash used
in investing  activities


                                       16


<PAGE>


for the three  months  ended  March 31,  2002  consisted  primarily  of  capital
expenditures for computer equipment and upgrades.

         Net cash used in financing  activities was  approximately  $697,000 for
the three  months  ended  March 31,  2003 as  compared  to net cash  provided by
financing activities of approximately  $720,000 for the three months ended March
31, 2002. Net cash used in financing activities for the three months ended March
31,  2003  primarily  reflects  the  repayment  of  borrowings  under our credit
facility and subordinated notes payable of approximately  $1,579,000,  offset by
funds raised from a private placement  transaction of 900,000. Net cash provided
by financing  activities  for the three  months  ended March 31, 2002  primarily
reflects  funds  raised from private  placement  transactions  of  approximately
$1,030,000, offset by the repayment of subordinated notes payable of $200,000.

         We currently satisfy our working capital requirements primarily through
cash flows  generated from  operations and borrowings  under our credit facility
with UPS  Capital.  Our maximum  availability  under the credit  facility is $20
million.  At March  31,  2003 and  2002,  outstanding  borrowings  under our UPS
Capital credit facility  amounted to  approximately  $15,403,000 and $9,629,000,
respectively.  Open  letters of credit  amounted to  approximately  $500,000 and
$50,000 at March 31, 2003 and 2002, respectively.

         The initial term of our  agreement  with UPS Capital is three years and
the facility is secured by substantially all of our assets. The interest rate of
the credit facility is at the prime rate plus 2%. The credit  facility  requires
that we comply with  certain  financial  covenants  including  net worth,  fixed
charge  ratio  and  capital  expenditures.  At March  31,  2003,  we were not in
compliance  with our capital  expenditure  covenant due to additional  equipment
requirements  for our  exclusive  supply  agreement  with Levi Strauss & Co. UPS
Capital  waived the  noncompliance  as of March 31, 2003.  We were in compliance
with all other  financial  covenants at March 31, 2003. The amount we can borrow
under the  credit  facility  is  determined  based on a defined  borrowing  base
formula related to eligible accounts  receivable and inventories.  Our borrowing
base  availability  ranged from  approximately  $10,768,000 to $18,829,000  from
April 1, 2002 to March 31, 2003.  A  significant  decrease in eligible  accounts
receivable and inventories due to customer concentration levels and the aging of
inventories,  among other  factors,  can have an adverse effect on our borrowing
capabilities under our credit facility, which thereafter, may not be adequate to
satisfy our working  capital  requirements.  Eligible  accounts  receivable  are
reduced if our accounts  receivable customer balances are concentrated in excess
of the percentages allowed under our agreement with UPS Capital. In addition, we
have typically experienced seasonal fluctuations in sales volume. These seasonal
fluctuations  result in sales volume  decreases in the first and fourth quarters
of each year due to the seasonal fluctuations experienced by the majority of our
customers.  During  these  quarters,  borrowing  availability  under our  credit
facility may decrease as a result of decreases in eligible accounts  receivables
generated  from our sales.  As a result of our  concentration  of business  with
Tarrant  Apparel  Group  and  Azteca  Production  International,   our  eligible
receivables have been limited under the UPS Capital facility over the past year.
If  our  business  becomes  further  dependant  on one or a  limited  number  of
customers  or  if  we  experience  future  significant  seasonal  reductions  in
receivables,  our  availability  under the UPS Capital credit  facility would be
correspondingly  reduced.  If this were to occur,  we would be  required to seek
additional financing which may not be available on attractive terms and, if such
financing  is  unavailable,  we  may be  unable  to  meet  our  working  capital
requirements.

         The  UPS  Capital  credit   facility   contains   customary   covenants
restricting  our  activities  as well as  those of our  subsidiaries,  including
limitations  on  certain  transactions  related  to the  disposition  of assets;
mergers;  entering  into  operating  leases or  capital  leases;  entering  into
transactions  involving subsidiaries and related parties outside of the ordinary
course of business; incurring indebtedness or granting liens or negative pledges
on  our  assets;  making  loans  or  other  investments;   paying  dividends  or
repurchasing


                                       17


<PAGE>


stock  or  other  securities;  guarantying  third  party  obligations;  repaying
subordinated debt; and making changes in our corporate structure.

         Pursuant to the terms of a foreign  factoring  agreement  under our UPS
Capital credit facility,  UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval.  If UPS Capital does not assume the credit
risk for a  receivable,  the  collection  risk  associated  with the  receivable
remains  with us.  We pay a fixed  commission  rate and may  borrow up to 85% of
eligible  accounts  receivable under our credit facility.  As of March 31, 2003,
the amount factored without recourse was approximately  $399,000.  There were no
receivables factored with UPS Capital at March 31, 2002.

         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, 2003 and 2002,  the amount  factored  without
recourse was approximately $257,000 and $134,000.

         In a series of sales on December 28, 2001,  January 7, 2002 and January
8,  2002,  we entered  into stock and  warrant  purchase  agreements  with three
private investors,  including Mark Dyne, the chairman of our board of directors.
Pursuant to the stock and warrant purchase agreements, we issued an aggregate of
516,665  shares  of common  stock at a price  per  share of $3.00 for  aggregate
proceeds of $1,549,995.  The stock and warrant purchase agreements also included
a commitment by one of the private  investors to purchase an additional  400,000
shares of common  stock at a price per share of $3.00 at second  closings  on or
prior to March 1, 2003, as amended,  for additional  proceeds of $1,200,000.  In
March 2002 and  February  2003,  this  private  investor  purchased  100,000 and
300,000  shares,  respectively,  of  common  stock at a price per share of $3.00
pursuant to the second  closing  provisions  of the stock and  warrant  purchase
agreement  for total  proceeds of  $1,200,000.  Pursuant  to the second  closing
provisions  of the stock and  warrant  purchase  agreement,  50,000 and  150,000
warrants  were  issued  to  the  investor  in  March  2002  and  February  2003,
respectively. There are no remaining commitments due under the stock and warrant
purchase agreements.

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

         As of March 31, 2003 and 2002, we had outstanding related-party debt of
approximately  $850,000 at interest rates ranging from 7% to 11%, and additional
non-related-party  debt of $25,200 at an


                                       18


<PAGE>


interest rate of 10%. The majority of related-party debt is due on demand,  with
the  remainder  due and  payable  on the  fifteenth  day  following  the date of
delivery of written  demand for payment.  On October 4, 2002,  we entered into a
note payable  agreement  with a related  party in the amount of $500,000 to fund
additional working capital requirements.  The note payable was unsecured, due on
demand,  accrued interest at 4% and was  subordinated to UPS Capital.  This note
was re-paid on February 28, 2003.

         Our  receivables  increased  to  $20,258,000  at March  31,  2003  from
$11,437,000  at March 31, 2002.  This  increase  was due  primarily to increased
related-party  trade  receivables of approximately  $5.2 million  resulting from
increased  related  party  sales  during the period and an  increase in the days
outstanding. The increase in receivables also resulted from an increase in sales
to non-related parties during the period.

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

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

         Included  in  inventories   at  March  31,  2003  are   inventories  of
approximately $11 million that are subject to buyback  arrangements with Tarrant
Apparel Group, Azteca Production  International and other customers. The buyback
arrangements  contain provisions related to the inventory purchased on behalf of
these customers.  In the event that inventories  remain with us in excess of six
to nine months from our receipt of the goods from our vendors or the termination
of  production  of a customer's  product line  related to the  inventories,  the
customer is required to purchase the  inventories  from us under normal  invoice
and  selling  terms.  During the three  months  ended  March 31,  2003,  we sold
approximately  $688,000  in  inventory  to  Tarrant  Apparel  Group  and  Azteca
Production  International  pursuant  to  these  buyback  arrangements.   If  the
financial condition of Tarrant Apparel Group and Azteca Production International
were to  deteriorate,  resulting in an  impairment  of their ability to purchase
inventories or pay receivables,  it may have an adverse affect on our results of
operations.

         We believe that our existing cash and cash  equivalents and anticipated
cash  flows  from our  operating  activities  and  available  financing  will be
sufficient to fund our minimum working capital and capital expenditure needs for
the next  twelve  months.  In  addition,  we expect to  receive  quarterly  cash
payments  of a minimum of $1.25  million  under our supply  agreement  with Levi
Strauss & Co. through August 2004. We also received additional funds of $900,000
in  February  2003  pursuant  to the  remaining  commitment  due under the stock
warrant and purchase agreement we entered into with a private investor.  We used
a portion of these funds to repay a subordinated note payable to a related party
of $500,000 in February 2003. 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,  our borrowing  base
availability limitations related to eligible accounts receivable and inventories
and our expansion into foreign markets. If our cash from operations is less than
anticipated or our working capital  requirements  and capital  expenditures  are
greater  than  we  expect,  we will  need to  raise  additional  debt or  equity
financing in order to provide for our operations.  We are continually evaluating
various  financing


                                       19


<PAGE>


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.

         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 and Caribbean markets and the
further development of our waistband technology.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following summarizes our contractual  obligations at March 31, 2003
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:

                                         Payments Due by Period
                     -----------------------------------------------------------
                                                                          After
Contractual                         Less than       1-3          4-5        5
Obligations             Total        1 Year        Years        Years     Years
------------------   -----------   -----------   ----------   ---------   ------
Subordinated note
payable ..........   $ 3,500,000   $ 1,200,000   $2,300,000   $    --     $ --

Capital lease
obligations ......   $ 1,768,664   $   496,464   $1,272,200   $    --     $ --

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

Operating leases .   $ 1,532,472   $   634,699   $  890,835   $   6,938   $ --

Line of credit ...   $15,403,486   $15,403,486   $     --     $    --     $ --

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

Royalty payments .   $   725,000   $      --     $  725,000   $    --     $ --
----------
       (1)  The majority of  subordinated  notes payable to related  parties are
            due on demand with the  remainder  due and payable on the  fifteenth
            day following the date of delivery of written demand for payment.

         As of March 31, 2003, we indirectly  guaranteed the indebtedness of two
of our suppliers through the issuance by a related party of letters of credit to
purchase goods and equipment  totaling $3.3 million.  Financing costs due to the
related party amounted to approximately  $328,000.  The letters of credit expire
on various dates thru July 2003.

NEW ACCOUNTING PRONOUNCEMENTS

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

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


                                       20


<PAGE>


accounted for consistent with  sale-leaseback  accounting  rules.  The statement
also contains  other  nonsubstantive  corrections  to  authoritative  accounting
literature.  The changes  related to debt  extinguishment  will be effective for
fiscal  years  beginning  after May 15, 2002,  and the changes  related to lease
accounting  will be effective  for  transactions  occurring  after May 15, 2002.
Adoption of this standard will not have any immediate effect on our consolidated
financial statements.

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

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
Consolidation of Variable  Interest  Entities,  an  interpretation of Accounting
Research Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46").
FIN 46  clarifies  the  application  of ARB No. 51 to certain  entities in which
equity  investors do not have the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
We do not  believe  the  adoption  of FIN 46 will have a material  impact on our
financial position and results of operations.


                                       21


<PAGE>


CAUTIONARY STATEMENTS AND RISK FACTORS

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

         IF  WE  LOSE  OUR  LARGEST  CUSTOMERS  OR  THEY  FAIL  TO  PURCHASE  AT
ANTICIPATED  LEVELS, OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.
Our largest customer,  Tarrant Apparel Group,  accounted for approximately 41.5%
and  42.3% of our net  sales,  on a  consolidated  basis,  for the  years  ended
December  31, 2002 and 2001,  and 22.4% of our total sales for the three  months
ended March 31, 2003.  In December  2000,  we entered  into an exclusive  supply
agreement with Azteca Production  International,  AZT International SA D RL, and
Commerce  Investment  Group,  LLC that provides for a minimum of  $10,000,000 in
total annual  purchases by Azteca  Production  International  and its affiliates
during each year of the  three-year  term of the  agreement.  Azteca  Production
International  is required  to  purchase  from us only if we are able to provide
trim products on a competitive basis in terms of price and quality.

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

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

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

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

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

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

         CONCENTRATION   OF  RECEIVABLES   FROM  OUR  LARGEST   CUSTOMERS  MAKES
RECEIVABLE BASED FINANCING  DIFFICULT AND INCREASES THE RISK THAT IF OUR LARGEST
CUSTOMERS FAIL TO PAY US, OUR CASH FLOW WOULD BE SEVERELY AFFECTED. Our business
relies  heavily on a relatively  small number of  customers,  including  Tarrant
Apparel Group and Azteca  Production  International.  This  concentration of our
business  adversely affects our ability to obtain receivable based financing due
to  customer   concentration   limitations   customarily  applied  by  financial
institutions,  including UPS Capital and factors.  Further,  if we are unable to
collect any large receivables due us, our cash flow would be severely impacted.

         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.

         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


                                       22


<PAGE>


increase the risk of extending  credit to such  customers.  Customers  adversely
affected  by  economic  conditions  have also  attempted  to  improve  their own
operating efficiencies by concentrating their purchasing power among a narrowing
group of  vendors.  There can be no  assurance  that we will  remain a preferred
vendor to our existing customers. A decrease in business from or loss of a major
customer  could have a material  adverse  effect on our  results of  operations.
Further, if the economic conditions in the United States worsen or if a wider or
global economic  slowdown occurs, we may experience a material adverse impact on
our business, operating results, and financial condition.

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

         WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO  SIGNIFICANT  FLUCTUATIONS
IN  OPERATING  RESULTS FROM  QUARTER TO QUARTER,  THAT MAY RESULT IN  UNEXPECTED
REDUCTIONS IN REVENUE AND STOCK PRICE VOLATILITY. Factors that may influence our
quarterly operating results include:

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

         o        The timing and magnitude of customers' marketing campaigns;

         o        The loss or addition of a major customer;

         o        The availability and pricing of materials for our products;

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

         o        Currency fluctuations;

         o        Delays caused by third parties; and

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

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

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

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


                                       23


<PAGE>


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

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

         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention; and

         o        Natural disasters.

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

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

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


                                       24


<PAGE>


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

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

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

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

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

         o        Interest rates;

         o        Changes in accounting principles;

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

         o        Announcements of key developments by our competitors; and

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

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

         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.


                                       25


<PAGE>


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

         INSIDERS OWN A  SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD
LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. As
of December 31, 2002,  our officers and  directors  and their  affiliates  owned
approximately  36.2% 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  41.1% of the
outstanding shares of our common stock. The number of shares  beneficially owned
by the Dyne family includes the shares of common stock held by Azteca Production
International, which are voted by Colin Dyne pursuant to a voting agreement. The
Azteca Production  International  shares constitute  approximately  10.7% of the
outstanding  shares of common stock at December  31, 2002.  Gerard Guez and Todd
Kay,  significant  stockholders of Tarrant Apparel Group, each own approximately
12.8% of the  outstanding  shares of our common stock at December 31, 2002. As a
result, our officers and directors, the Dyne family and Messrs. Kay and Guez are
able to exert  considerable  influence over the outcome of any matters submitted
to a vote of the  holders of our common  stock,  including  the  election of our
Board of Directors. The voting power of these stockholders could also discourage
others from seeking to acquire  control of us through the purchase of our common
stock, which might depress the price of our common stock.

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

         We are also  exposed  to the  impact of  interest  rate  changes on our
outstanding borrowings.  At March 31 2003, we had approximately $19.0 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.


                                       26


<PAGE>


ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures,  which we have designed
to ensure that material  information related to Tag-it Pacific,  Inc., including
our consolidated  subsidiaries,  is disclosed in our public filings on a regular
basis. In response to recent legislation and proposed  regulations,  we reviewed
our internal control  structure and our disclosure  controls and procedures.  We
believe our  pre-existing  disclosure  controls and  procedures  are adequate to
enable us to comply with our disclosure obligations.

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

CHANGES IN CONTROLS AND PROCEDURES

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



                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

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

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

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

         (b)      Report on Form 8-K.

                  None.


                                       27


<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 15, 2003                           TAG-IT PACIFIC, INC.

         `                                      /s/  Ronda Sallmen
                                                --------------------------------
                                                By:  Ronda Sallmen
                                                Its: Chief Financial Officer


                                       28


<PAGE>


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

I, Colin Dyne, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:    May 15, 2003

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


                                       29


<PAGE>


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

I, Ronda Sallmen, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:    May 15, 2003

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


                                       30