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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934

For the fiscal year ended December 31, 2003

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission file number 1-13669

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

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

21900 Burbank Blvd., Suite 270
Woodland Hills, California 91367
(Address of Principal Executive Offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $.001 par value American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 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 past 90 days.

Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]

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

At June 30, 2003 the aggregate market value of the voting and
non-voting common stock held by non-affiliates of the registrant was
$46,426,706. At March 23, 2004 the issuer had 18,035,316 shares of Common Stock,
$.001 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the issuer's proxy statement with respect to its 2004
annual meeting of stockholders are incorporated by reference into Part III of
this report.

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

PART I Page

Item 1. Business.................................................. 1

Item 2. Properties................................................ 7

Item 3. Legal Proceedings......................................... 7

Item 4. Submission of Matters to a Vote of Security Holders....... 7

PART II

Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity...... 7

Item 6. Selected Financial Data................................... 11

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12

Item 7A. Quantitative and Qualitative Disclosures about
Market Risk ............................................ 29

Item 8. Financial Statements and Supplementary Data:

Report of Independent Certified Public Accountants........ 32

Consolidated Balance Sheets............................... 33

Consolidated Statements of Operations..................... 34

Consolidated Statements of Stockholders' Equity and
Convertible Redeemable Preferred Stock.................. 35

Consolidated Statements of Cash Flows..................... 36

Notes to Consolidated Financial Statements................ 37

Independent Certified Public Accountants' Report
on Schedule II.......................................... 63

Schedule II - Valuation and Qualifying Accounts
and Reserves............................................ 64

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 65

Item 9A. Controls and Procedures................................... 65

PART III

Item 10. Directors and Executive Officers of the Registrant........ 65

Item 11. Executive Compensation.................................... 65

Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters......... 65

Item 13. Certain Relationships and Related Transactions............ 65

Item 14. Principal Accountant Fees and Services.................... 66

PART IV

Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................... 66

PART I

This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We use words
such as "believes", "intends", "expects", "anticipates", "plans", "may", "will"
and similar expressions to identify forward-looking statements. Discussions
containing forward-looking statements may be found in the material set forth
under "Business," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in other sections of the report. All
forward-looking statements, including, but not limited to, projections or
estimates concerning our business, including demand for our products and
services, mix of revenue streams, ability to control and/or reduce operating
expenses, anticipated gross margins and operating results, cost savings, product
development efforts, general outlook of our business and industry, international
businesses, competitive position, adequate liquidity to fund our operations and
meet our other cash requirements, are inherently uncertain as they are based on
our expectations and assumptions concerning future events. These forward-looking
statements are subject to numerous known and unknown risks and uncertainties.
You should not place undue reliance on these forward-looking statements. Our
actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including the success of our
product offerings, our ability to expand our customer base, and all other risks
described below in the section entitled "Cautionary Statements and Risk Factors"
appearing in "Management's Discussion and Analysis of Financial Condition and
Risk of Operations" and elsewhere in this report. All forward-looking statements
in this document are made as of the date hereof, based on information available
to us as of the date hereof, and we assume no obligation to update any
forward-looking statement.

ITEM 1. BUSINESS

GENERAL

Tag-It Pacific, Inc. is an apparel company that specializes in the
distribution of a full range of trim items to manufacturers of fashion apparel,
specialty retailers and mass merchandisers. We act as a full service outsourced
trim management department for manufacturers of fashion apparel such as
Abercrombie & Fitch, Tarrant Apparel Group, Kentucky Apparel 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, Levi Strauss & Co., Express, The Limited, Lerner and Miller's Outpost,
among others. In addition, we distribute zippers under our TALON brand name to
manufacturers for apparel brands and retailers such as Levi Strauss & Co.,
Wal-Mart, JC Penny 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 were incorporated in Delaware in September 1997. We were formed to
serve as the parent holding company of Tag-It, Inc., a California corporation,
Tag-It Printing & Packaging Ltd., which changed its name in 1999 to Tag-It
Pacific (HK) LTD, a BVI corporation, Tagit de Mexico, S.A. de C.V., A.G.S.
Stationery, Inc., a California corporation, and Pacific Trim & Belt, Inc., a
California corporation. All of these companies were consolidated under a parent
limited liability company in October 1997. These companies became our wholly
owned subsidiaries immediately prior to the effective date of our initial public
offering in January 1998. In 2000, we formed two wholly owned subsidiaries of
Tag-It Pacific, Inc: Tag-It Pacific Limited, a Hong Kong corporation, and Talon
International, Inc., a Delaware corporation. Our website is
www.tagitpacific.com.

BUSINESS SUMMARY

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, stretch waistbands, 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,
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 manufacturer 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 to
eliminate the added infrastructure, trim inventory positions, overhead costs and
inefficiencies created by in-house trim departments that deal with a large
number of vendors for the procurement of trim items. We also seek to leverage
our position as a single source supplier of trim items as well as our extensive
expertise in the field of trim distribution and procurement to more efficiently
manage the trim assembly process resulting in faster delivery times and fewer
production delays for our manufacturing customers. Our MANAGED TRIM SOLUTION
also helps to eliminate a manufacturer's need to maintain a trim purchasing and
logistics department.

We distribute zippers under our TALON trademark and trade names to
apparel brands and manufacturers. TALON is a 100-year-old brand, which is well
known for quality and product innovation. 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. We have introduced a
completely revised high quality line of zippers, broadened distribution to Asia,
Mexico and Central America, negotiated with new distributors and initiated a new
sales and marketing effort for this brand. TALON is promoted both within our
trim packages, as well as a stand-alone product line. TALON enjoys tremendous
brand recognition and brand equity in the apparel industry worldwide.

We also serve as a specified supplier for a variety of major retail
brand and private label oriented companies. A specified supplier is a supplier
that has been approved for quality and service by a major retail brand or
private label company. Contractors manufacturing for the major retail brand or
private label company must purchase their trim requirements from a supplier that
has been specified. 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. Becoming a specified supplier to
brand customers gives us an opportunity to become the preferred or sole vendor
of trim items for all manufacturers of apparel under that brand name.

We have assembled a team of sales representatives, program managers,
creative design personnel and global production and distribution coordinators at
our facilities located in the United States, Mexico, Hong Kong and the
Caribbean. We plan to continue to expand operations in Hong Kong, Central
America and the Caribbean to take advantage of the large apparel manufacturing
markets in these regions. We believe our marketing strategy and international
distribution operations will enable us to take advantage of and address the
increasingly complicated requirements of the large and expanding demand for
complete trim packages.

A significant portion of a typical trim package is comprised of zippers
and thread. In order to secure a stable high-quality source of supply for thread
products, we entered into a supply and co-marketing agreement with Coats
America, an affiliate of Coats, plc, which is a leading thread company in the
apparel industry and operates in more than 65 countries worldwide. The supply
and co-marketing agreement was accompanied by an equity investment by Coats
North America Consolidated, Inc., also an affiliate of Coats, plc, in the amount
of $3 million. Pursuant to the supply and co-marketing agreement, we have agreed
to exclusively promote Coats brand thread in our trim packages.

PRODUCTS

COMPLETE TRIM PACKAGES. We market and supply our customers with
complete trim packages on a per-garment basis which we assemble on behalf of our
customers. Each trim package includes all items of trim that a customer will
need in the manufacture of a particular item of apparel. Our complete trim
packages include a variety of trim items including thread, zippers, labels,
buttons, rivets, polybags, packing cartons and hangers. We also provide in our
complete trim packages printed marketing materials including hang tags,
bar-coded hang tags, pocket flashers, waistband tickets and size stickers that
are attached to products to identify and promote the products, permit automated
data collection, provide brand identification and communicate consumer
information such as a product's retail price, size, fabric content and care
instructions.

We consider a high level of customer service essential to our success.
We combine our high level of customer service with our MANAGED TRIM SOLUTION to
offer our customers a complete trim service product. We believe this
full-service product gives us a competitive edge over companies that only offer
selected trim components because our MANAGED TRIM SOLUTION saves our customers
time and employee work hours in ordering and managing trim orders from several
different suppliers. Our MANAGED TRIM SOLUTION is a business-to-business
e-commerce system that allows us to provide our customers with a customized,
comprehensive system for the management of various aspects of their trim
programs. Our MANAGED TRIM SOLUTION is an Internet-based supply-chain management
system which provides customers with assistance in their ordering, production,
inventory management and just-in-time distribution of their trim and packaging
requirements.

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

SEPARATE TRIM COMPONENTS. Separate from our marketing of complete trim
packages, we also provide individual items of trim to certain of our customers
who only need to source a portion of their trim requirements from us. Further,
for selected customers, we also produce customized woven, leather, synthetic,
embroidered and novelty labels and tapes, which can be printed on or woven into
a wide range of fabrics and other materials using various types of high-speed
equipment. As an additional service, we lease to our customers the machinery
used to attach the buttons, rivets and snaps we distribute.

TALON BRAND ZIPPERS. We offer a full line of metal and synthetic
zippers bearing the TALON brand name. TALON zippers are used primarily by
manufacturers in the apparel industry and are distributed through our
distribution facilities in the United States, Mexico and Hong Kong. In addition,
we are negotiating with distributors that service local apparel manufacturing
regions in the United States and overseas. We offer manufacturers
technologically advanced equipment for efficiently handling TALON zippers and
applying them into garments. The branded apparel zipper market is dominated by
one company; YKK (R). We are positioning TALON to be a viable alternative to YKK
(R), and to capture an increased market share position. We also plan to leverage
the brand equity in the TALON name by branding other products in our line with
the TALON name.

TEKFIT. We have entered into an Exclusive License and Intellectual
Property Rights agreement with Pro-Fit Holdings Limited. The agreement gives us
the exclusive rights to sell or sublicense stretch waistbands manufactured under
the patented technology developed by Pro-Fit for garments manufactured anywhere
in the world for the U.S. market and all U.S. brands, for the life of the patent
and related know-how. We now offer apparel manufacturers advanced, patented
fabric technologies to utilize in their garments under the TEKFIT name. This
revolutionary technology allows fabrics to be altered through the addition of
stretch characteristics resulting in greatly improved fit and comfort.
Currently, we are supplying Levi Strauss & Co. with TEKFIT waistbands for their
Dockers(R) programs. Our exclusive supply arrangement with Levi Strauss & Co. is
for twill type pants only. This new technology allows pant manufacturers to
build in a stretch factor into standard waistbands that does not alter the
appearance of the garment, but will allow the waist to stretch out and back by
as much as two waist sizes. We are actively working with other large apparel
manufacturers to develop and release the TEKFIT technology in other types of
garments.

DESIGN AND DEVELOPMENT

We have assembled an in-house creative team to produce products with
innovative technology and designs that we believe distinguish our products from
those of our competitors. We support our skills and expertise in material
procurement and product-manufacturing coordination with product technology and
designs intended to meet fashion demands, as well as functional and cost
parameters. Many specialty design companies with which we compete have limited
sourcing or manufacturing experience. These companies create designs that often
cannot be implemented due to difficulties in the manufacturing process, the
expenses of required materials, or a lack of functionality in the resulting
product. We attempt to design products to function within the limitations
imposed by the applicable manufacturing framework. Using our manufacturing and
sourcing experience, we attempt to minimize the time-consuming delays that often
arise in coordinating the efforts of independent design houses and manufacturing
facilities. By supporting our material procurement and product manufacturing
services with design services, we believe that we reduce development and
production costs and deliver products to our customers sooner than many of our
competitors. Our development costs are low, most of which are borne by our
customers. Our design teams are based out of our California and Hong Kong
facilities, including our design team related to our TEKFIT division.

CUSTOMERS

We have more than 300 customers. Our customers include well-known
apparel manufacturers, such as Levi Strauss & Co., Abercrombie & Fitch, The
Limited Group, Tarrant Apparel Group, Kentucky Apparel, Azteca Production
International, VF Corporation and Tropical Sportswear, among others. Our
customers also include contractors for specialty retailers such as Miller's
Outpost and mass merchant retailers such as Wal-Mart.

In July 2002, we entered into an exclusive supply contract with Levi
Strauss & Co. Under the terms of the supply agreement, Levi Strauss & Co. has
agreed to purchase a minimum of $10 million of stretch waistbands, various other
trim products, garment components and services over the two-year term of the
agreement. Levi Strauss & Co. also appointed TALON as an approved zipper
supplier.

SALES AND MARKETING

We sell our principal products through our own sales force based in Los
Angeles, various other cities in the United States, Hong Kong and Mexico. We
also employ customer service representatives who are assigned to key customers
and provide in-house customer service support. Our senior executives have
developed relationships with our major customers at senior levels. These
executives actively participate in marketing and sales functions and the
development of our overall marketing and sales strategies. When we become the
outsourcing vendor for a customer's packaging or trim requirements, we position
ourselves as if we are an in-house department of the customer's trim procurement
operation.

A significant portion of our sales is to customers based in the United
States. For the year ended December 31, 2003, sales to United States based
customers for shipments to production facilities in Mexico, Asia and the
Dominican Republic accounted for 44.7%, 19.1% and 23.9%, of our revenues,
respectively. We also market our products to customers in Mexico, Asia, the
Caribbean basin and Central America.

SOURCING AND ASSEMBLY

We have developed expertise in identifying the best materials, prices
and vendors for particular products and raw materials. This expertise enables us
to produce a broad range of packaging and trim products at various price points.
The majority of products that we procure and distribute are purchased on a
finished good basis. Raw materials, including paper products and metals used to
manufacture zippers, used in the assembly of our trim kits are available from
numerous sources and are in adequate supply. We purchase products from several
qualified material suppliers, including Coats North America and its affiliates
which accounted for 19.3% of our purchases in 2003.

We are able to create most product artwork and any necessary films,
dies and molds used to design and manufacture our products. All other products
that we design and sell are produced by third party vendors. We are confident in
our ability to secure high quality alternative manufacturing sources. We intend
to continue to outsource production to qualified vendors, particularly with
respect to manufacturing activities that require substantial investment in
capital equipment.

Through our Hong Kong facility, we distribute TALON zippers, trim items
and apparel packaging and coordinate the manufacture and distribution of the
full range of our products. Our Hong Kong facility supplies several significant
packaging programs, services customers located in Asia and the Pacific Rim and
sources products for our Los Angeles and Mexico based operations.

INTELLECTUAL PROPERTY RIGHTS AND LICENSES

We have trademarks as well as copyrights, software copyrights and trade
names for which we rely on common law protection, including the TALON trademark.
Several of our other trademarks are the subject of applications for federal
trademark protection through registration with the United States Patent and
Trademark Office, including "Tag-It", "Managed Trim Solution" and "TekFit". We
also rely on our Exclusive License and Intellectual Property Rights agreement
with Pro-Fit Holdings Limited to sell our TEKFIT Stretch waistbands. The
agreement gives us the exclusive rights to sell or sublicense stretch waistbands
manufactured under the patented technology developed by Pro-Fit for garments
manufactured anywhere in the world for the U.S. market and all U.S. brands, for
an indefinite term that extends for the duration of the patent and trade secrets
licensed under the agreement.

SEASONALITY

We typically experience 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. The apparel industry typically experiences higher
sales volume in the second quarter in preparation for back-to-school purchases,
and the third quarter in preparation for year-end holiday purchases.

INVENTORIES

In order to meet the rapid delivery requirements of our MANAGED TRIM
SOLUTION customers, we are required to carry a substantial amount of inventory
on their behalf. Included in inventories at December 31, 2003 are inventories
that are subject to buyback arrangements with these 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.

COMPETITION

We compete in highly competitive and fragmented industries that include
numerous local and regional companies that provide some or all of the products
we offer. We also compete with United States and international design companies,
distributors and manufacturers of tags, trim, packaging products and zippers.
Some of our competitors, including Paxar Corporation, YKK (R), Universal Button,
Inc., Avery Denison Corporation and Scovill Fasteners, Inc. have greater name
recognition, longer operating histories and, in many cases, substantially
greater financial and other resources.

Because of our integrated materials procurement and assembly
capabilities and our full service MANAGED TRIM SOLUTION, we believe that we are
able to effectively compete for our customers' business, particularly where our
customers require coordination of separately sourced production functions. We
believe that to successfully compete in our industry we must offer superior
product pricing, quality, customer service, design capabilities, delivery lead
times and complete supply-chain management. We also believe the TALON brand name
and the quality of our TALON brand zippers will allow us to gain market share in
the zipper industry. The unique stretch quality of our TEKFIT waistbands will
also allow us to compete effectively in the market for waistband components.

SEGMENT INFORMATION

We operate primarily in one industry segment, the distribution of a
full range of apparel trim products to manufacturers of fashion apparel,
specialty retailers and mass merchandisers. For information regarding the
revenues and assets associated with our geographic segments, see Note 15 of the
Notes to the Consolidated Financial Statements included in Item 8 of this
Report, which is incorporated herein by reference.

INTERNATIONAL

We sell the majority of our products to U.S. based brands, retailers
and manufacturers. The majority of these customers produce their products or
contract out the production of their products in manufacturing facilities
located outside of the U.S., primarily in Mexico, Asia, the Dominican Republic
and Central America.

A summary of our domestic and international net revenue and long-lived
assets is set forth in Note 15 of the Notes to the Consolidated Financial
Statements in Item 8 of this Report, which is incorporated herein by reference.
Approximately 88% of our overall net revenue came from sales to U.S. based or
contract manufacturers' facilities located outside of the United States during
the year ended December 31, 2003.

For a discussion of risks attendant to our foreign operations, see "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.", under Cautionary
Statements and Risk Factors, in Item 7 of this Report, "Quantitative and
Qualitative Disclosure about Market Risk" in Item 7A of this Report and Note 15
of the Notes to the Consolidated Financial Statements in Item 8, which are
incorporated herein by reference.

EMPLOYEES

As of December 31, 2003, we had approximately 188 full-time employees,
with approximately 45 employees in Los Angeles, 9 employees in North Carolina,
10 employees in various other cities, 30 employees in Hong Kong, 8 employees in
the Dominican Republic and 86 employees in Tlaxcala, Mexico. Our labor forces in
the United States and Hong Kong are non-union. The employees at our Mexico
facility are represented by a collective bargaining unit, the Federacion De
Trabajadores Del Estado de Tlaxcala. We believe that we have satisfactory
employee and labor relations.

ITEM 2. PROPERTIES

Our headquarters is located in Woodland Hills, California, where we
lease approximately 8,800 square feet of administrative and product development
space. In addition to our Woodland Hills facility, we lease 2,500 square feet of
warehouse space in Gardena, California, 2,175 square feet of office space in
Goleta, California, 168 square feet of office space in Columbus, Ohio, 54,000
square feet of warehouse space in Gastonia, North Carolina, 17,000 square feet
of warehouse space in Dallas, North Carolina, 5,900 square feet of office and
warehouse space in Kwun Tong, Hong Kong, 4,100 square feet of warehouse space in
Santiago, Dominican Republic, and 22,000 square feet of warehouse, distribution
and administration space in Tlaxcala, Mexico.

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of security holders during the
fourth quarter of 2003.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

COMMON STOCK

Tag-It Pacific's Common Stock is traded on the American Stock Exchange
under the symbol "TAG". The following table sets forth, for the periods
indicated, the high and low sales prices for the Common Stock as reported by the
American Stock Exchange.

HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 2002
First Quarter...................... $ 3.99 $ 3.50
Second Quarter..................... 4.24 3.45
Third Quarter...................... 4.20 3.60
Fourth Quarter..................... 3.99 3.40

YEAR ENDED DECEMBER 31, 2003
First Quarter...................... $ 3.79 $ 3.50
Second Quarter..................... 5.80 3.50
Third Quarter...................... 6.20 4.15
Fourth Quarter..................... 5.25 4.39

On March 19, 2004, the closing sales price of our Common Stock as
reported on the American Stock Exchange was $5.84 per share. As of March 19,
2004, there were 69 record holders of our Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

CONVERTIBLE PREFERRED STOCK FINANCING

In December 2003, we sold shares of our Series D Convertible Preferred
Stock to the following investors: Apogee Fund, L.P.; Atlas Capital (Q.P.) L.P.;
Atlas Capital Management Master Fund, Ltd.; George L. Ball; Bellfield Capital
Partners, L.P.; Bonanza Master Fund, Ltd; Rodger A. Clemens, Special Retirement
Account; Richard Perlman; B.L. Corley, Jr.; Flyline Holdings, Ltd.; John H.
Gray; Incline Capital, L.P.; Tom and Nancy Juda Living Trust; Richard D. Kinder;
Robert Larry Kinney; Luke J. Drury Non-Exempt Trust; Mark J. Drury Non-Exempt
Trust; Matthew J. Drury Non-Exempt Trust; Michaelyn J. Drury Non-Exempt Trust;
Tanya Drury; John S. Lemak; Ben T. Morris; John I. Mundy; Pequot Navigator
Offshore Fund Inc.; Pequot Navigator Onshore Fund LP; Pequot Scout Fund, LP; The
Pinnacle Fund, L.P.; Precept Capital Master Fund, G.P.; James Price; Portside
Growth and Opportunity Fund; RAM Trading, Ltd.; David May; Nolan Ryan; Brad D.
Sanders; Bret D. Sanders; Christine M. Sanders; Don A. Sanders; Katherine U.
Sanders; Laura K. Sanders; Sanders Opportunity Fund, L.P.; Sanders Opportunity
Fund (Institutional), L.P.; Sandor Capital Master Fund, L.P.; Grant E. Sims and
Patricia Sims; Southwell Partners, L.P.; Susan Sanders Todd; Paul Tate & Laura
M. Tate TIC; Walker Smith Capital Master Fund; Walker Smith International Fund,
Ltd.; Don Weir and Julie Ellen Weir; Eric Glen Weir; Lisa Dawn Weir; Westpark
Capital, L.P.; WS Opportunity Fund International, Ltd.; and WS Opportunity
Master Fund. Pursuant to the terms of the subscription agreements, we sold to
the investors an aggregate of 572,818 shares of our Series D Convertible
Preferred Stock at a price per share of $44.00 for gross proceeds to us of
approximately $25,200,000 before commissions and expenses. Except as required by
law, the preferred shares had no voting rights. Commencing June 1, 2004, each
preferred share would have begun to accrue a quarterly dividend of $0.55 (as
adjusted for stock dividends, combinations, splits or similar events), payable
March 31, June 30, September 30, and December 31 of each year with the first
payment due September 30, 2004. In the event of a liquidation, dissolution or
winding-up of the Company, the preferred shares would have been entitled to
receive, prior to any distribution on the common stock, a distribution equal to
$44.00 per preferred share (as adjusted for stock dividends, combinations,
splits or similar events) plus all accrued and unpaid dividends.

At a special meeting of stockholders on February 11, 2004, our
stockholders approved the issuance of 5,728,180 shares of our common stock upon
conversion of the Series D Convertible Preferred Stock held by the investors. At
the conclusion of this meeting, each preferred share automatically converted
into 10 shares of our common stock, for an aggregate of 5,728,180 shares of
common stock.

Sanders Morris Harris Inc. acted as placement agent in connection with
the December 2003 private placement financing transaction. For their services as
placement agent, we paid Sanders Morris Harris Inc. a fee equal to 7.5%, or
approximately $1,890,000, of our gross proceeds from the financing. We also paid
for the out-of-pocket expenses incurred by Sanders Morris Harris Inc. of
$45,000. In addition, we issued to Sanders Morris Harris Inc. a warrant to
purchase 572,818 shares of our common stock at an exercise price of $4.74 per
share. The warrant has a term of 5 years, and vests and becomes exercisable in
full on June 18, 2004.

Pursuant to the purchase agreements, each of the recipients of the
securities represented, and we reasonably believed, that such recipient (i) was
acquiring the securities for his or its own account with the present intention
of holding such securities for investment purposes only and not with a view to,
or for sale in connection with, any distribution of such securities (other than
a distribution in compliance with all applicable federal and state securities
laws); (ii) was an experienced and sophisticated investor and has such knowledge
and experience in financial and business matters that it is capable of
evaluating the relative merits

and the risks of an investment in the securities and of protecting his or its
own interests in connection with the transaction; (iii) was willing to bear and
was capable of bearing the economic risk of an investment in the securities; and
(iv) was an "accredited investor" as that term is defined under Rule 501(a)(8)
of Regulation D promulgated by the Securities Exchange Commission under the
Securities Act of 1933. Each of the certificates representing the securities
contained a customary legend restricting resale of the securities. The issuance
and sale of these securities was exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 pursuant to Section 4(2) of
the Securities Act of 1933 (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering.

STOCK GRANT AGREEMENTS

Pursuant to Stock Grant Agreements between us and Herman Roup, dated
December 1, 2001, January 1, 2002 and July 17, 2002, we issued to Mr. Roup an
aggregate of 42,000 shares of common stock during the year ended December 31,
2003 and 20,500 shares of common stock in 2004 for services provided to the
Company. Pursuant to the agreements, Mr. Roup represented, and we reasonably
believed, that he (i) was acquiring the securities for his or its own account
with the present intention of holding such securities for investment purposes
only and not with a view to, or for sale in connection with, any distribution of
such securities (other than a distribution in compliance with all applicable
federal and state securities laws); (ii) was an experienced and sophisticated
investor and has such knowledge and experience in financial and business matters
that it is capable of evaluating the relative merits and the risks of an
investment in the securities and of protecting his or its own interests in
connection with the transaction; (iii) was willing to bear and was capable of
bearing the economic risk of an investment in the securities; and (iv) was an
"accredited investor" as that term is defined under Rule 501(a)(8) of Regulation
D promulgated by the Securities Exchange Commission under the Securities Act of
1933. Each of the certificates representing the securities contained a customary
legend restricting resale of the securities. The issuance and sale of these
securities was exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of
1933 (in accordance with Rule 506 of Regulation D) as a transaction not
involving any public offering.

DIVIDENDS

We have never paid dividends on our Common Stock. We intend to retain
any future earnings for use in our business. We are restricted from making cash
dividend payments on our common stock under our senior credit facility with UPS
Capital Global Trade Finance Corporation.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information as of December 31,
2003 regarding equity compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance:

NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE REMAINING AVAILABLE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
----------------------- -------------------- --------------------

Equity compensation plans
approved by security holders..... 1,978,000 $3.55 599,500
Equity compensation plans not
approved by security holders..... 1,277,885 $4.58 -
----------------------- -------------------- --------------------
Total......................... 3,255,885 $3.95 599,500
======================= ==================== ====================

See Note 12 to the Consolidated Financial Statements for information
regarding the material features of the above security holders approved plan.

Warrants issued pursuant to equity compensation plans not approved by
security holders are summarized as follows:

o 20,000 warrants issued for services in 2001, are exercisable
at $5.00 per share and expire in July 2004.

o 5,000 warrants issued for services in 2001, are exercisable at
$4.57 per share and expire in July 2004.

o 10,000 warrants issued for services in 2001, are exercisable
at $3.65 per share and expire in August 2004.

o 39,235 warrants issued for services in 1997, are exercisable
at $0.71 per share and expire in December 2007.

o 172,500 warrants issued for services in 2003, are exercisable
at $5.06 per share and expire in May 2008.

o 572,818 warrants issued for services in 2003, are exercisable
at $4.74 per share and expire in December 2008.

o 229,166 warrant issued in conjunction with private placement
transaction in 2001 and 2002, are exercisable at $4.34 per
share and expire at various date through February 2007.

o 229,166 warrant issued in conjunction with private placement
transaction in 2001 and 2002, are exercisable at $4.73 per
share and expire at various date through February 2007.

Each of the above plans provides that the number of shares with respect
to which options and warrants may be granted, and the number of shares of Common
Stock subject to an outstanding option or warrant, shall be proportionately
adjusted in the event of a subdivisions or consolidation of shares or the
payment of a stock dividend on Common Stock.

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in conjunction
with our consolidated financial statements. The information set forth below is
not necessarily indicative of results of future operations, and should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included in Item 8, "Financial Statements and Supplementary
Data" of this Form 10-K in order to understand fully factors that may affect the
comparability of the financial data presented below.

TAG-IT PACIFIC, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA

FISCAL YEARS ENDED DECEMBER 31,
(In Thousands Except Per Share Information)
1999 2000 2001(1) 2002 2003(2)
-------- -------- -------- -------- --------

OPERATIONS:
- -----------
Total revenue ..................................... $ 32,385 $ 49,362 $ 43,568 $ 60,073 $ 64,443
Income (loss) from operations ..................... $ 2,406 $ 2,547 $ (253) $ 3,044 $ (5,881)
Net income (loss) ................................. $ 1,731 $ 1,539 $ (1,226) $ 1,496 $ (4,745)
Net income (loss) per share - basic ............... $ 0.26 $ 0.23 $ (0.16) $ 0.14 $ (0.46)
Net income (loss) per share - diluted ............. $ 0.23 $ 0.21 $ (0.16) $ 0.14 $ (0.46)
Weighted average shares outstanding - basic ....... 6,734 6,838 8,017 9,232 10,651
Weighted average sharesoutstanding - diluted ...... 7,399 7,283 8,017 9,531 10,651

FINANCIAL POSITION (AT PERIOD END):
- -----------------------------------
Cash, cash equivalents and short-term investments . $ 101 $ 128 $ 47 $ 285 $ 14,443
Total assets ...................................... $ 19,855 $ 39,099 $ 40,794 $ 54,055 $ 67,770
Capital lease obligations and notes payable ....... $ 1,031 $ 3,873 $ 6,024 $ 5,329 $ 4,664
Convertible redeemable preferred stock ............ $ -- $ -- $ 2,895 $ 2,895 $ 2,895
Stockholders' equity .............................. $ 8,861 $ 14,791 $ 15,428 $ 18,467 $ 43,564
Total liabilities and stockholders' equity ........ $ 19,855 $ 39,099 $ 40,794 $ 54,055 $ 67,770
PER SHARE DATA (AT END OF PERIOD):
Net book value per common share ................... $ 1.31 $ 1.88 $ 1.76 $ 1.98 $ 3.79
Common shares outstanding ......................... 6,778 7,863 8,770 9,320 11,508

- ----------
<FN>
(1) We incurred restructuring charges of $1,561,623 during the year ended
December 31, 2001. See Note 18 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Report.

(2) We incurred restructuring charges of $7,700,047 during the year ended
December 31, 2003. See Note 18 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Report.
</FN>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

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 fiscal years ended December 31, 2003, 2002 and
2001. 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-K.

OVERVIEW

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

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

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

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

2003 RESTRUCTURING PLAN

During the fourth quarter of 2003, we implemented a plan to restructure
certain business operations. In accordance with the restructuring plan, we
incurred costs related to the reduction of our Mexico operations, including the
relocation of our Florida operations to North Carolina and the downsizing of our
corporate operations by eliminating certain corporate expenses related to
operations, sales and marketing and general and administrative expenses. The
reduction of our operations in Mexico was in response to the following:

o An anticipated reduction in sales volume from our larger
Mexico customers;

o Our efforts to decrease our reliance on our larger Mexico
customers; and

o Our difficulty obtaining financing in Mexico due to the
location of assets outside the U.S. and customer concentration
and other limits imposed by financial institutions.

The reduction of our operations in Mexico is estimated to reduce our
working capital requirements and improve our cash flow, among other things.

Total restructuring charges for the year ended 2003 amounted to
$7,700,047. Restructuring charges include approximately $4.3 million of
inventory write-downs, $1.6 million of additional reserves for doubtful accounts
receivable, $1 million of costs incurred related to the reduction of operations
in Mexico, including the relocation of inventory and facilities, $500,000 of
benefits paid to terminated employees and $300,000 of other costs. We do not
anticipate any further charges as a result of this restructuring plan. All
restructuring costs were incurred and paid for in the fourth quarter of 2003
and, therefore, there are no liabilities related to restructuring charges
included in the balance sheet at December 31, 2003.

Restructuring charges for the year ended December 31, 2003 related to
the following expense categories included in the Company's statement of
operations are as follows:

Amount
----------

Cost of goods sold ........................................ $4,931,218
Selling expenses .......................................... 143,442
General and administrative expenses ....................... 2,625,387
----------

Total restructuring charges ............................... $7,700,047
==========

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.

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.

2001 RESTRUCTURING PLAN

During the first quarter of 2001, we implemented a plan to restructure
certain of our business operations. In accordance with the restructuring plan,
we closed our Tijuana, Mexico, facilities and relocated our TALON brand
operations to Miami, Florida. In addition, we incurred costs related to the
reduction of our Hong Kong operations, the relocation of our corporate
headquarters from Los Angeles, California, to Woodland Hills, California, and
the downsizing of our corporate operations by eliminating certain corporate
expenses related to sales and marketing, customer service and general and
administrative expenses. Total restructuring charges amounted to $1,561,623 and
were charged to operations primarily in the first quarter of 2001.

RESULTS OF OPERATIONS

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

YEAR ENDED
DECEMBER 31,
--------------------------------
2003 2002 2001
------- ------- -------
Net sales .............................. 100.0% 100.0% 100.0%
Cost of goods sold ..................... 74.3 74.3 72.7
------- ------- -------
Gross profit ........................... 25.7 25.7 27.3
Selling expenses ....................... 5.8 3.5 3.8
General and administrative expenses .... 17.1 17.1 20.5
Restructuring charges .................. 11.9 -- 3.6
------- ------- -------
Operating (loss) income ................ (9.1)% 5.1% (0.6)%
======= ======= =======

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

Year Ended December 31,
-------------------------------------
2003 2002 2001
------- ------- -------

United States ................... 12.3% 14.5% 33.3%
Asia ............................ 19.1 9.0 4.5
Mexico .......................... 44.7 73.4 62.2
Dominican Republic .............. 23.9 3.1 --
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======

Net sales increased approximately $4,370,000 (or 7.3%) to $64,443,000
for the year ended December 31, 2003 from $60,073,000 for the year ended
December 31, 2002. The increase in net sales was primarily due to the addition
of 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 sales from
our Hong Kong subsidiary for programs related to major U.S. retailers 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 offset by a decrease in trim-related sales
from our Tlaxcala, Mexico operations under our MANAGED TRIM SOLUTION(TM) trim
package program. This decrease is due in part to our efforts to decrease our
reliance on certain customers and to further diversify our customer base.

Net sales increased approximately $16,505,000 (or 37.9%) to $60,073,000
for the year ended December 31, 2002 from $43,568,000 for the year ended
December 31, 2001. The increase in net sales was primarily due to an increase in
trim-related sales from our Tlaxcala, Mexico operations under our MANAGED TRIM
SOLUTION(TM) trim package program. The increase in net sales was also
attributable to an increase in zipper sales under our TALON brand name to our
MANAGED TRIM SOLUTION(TM) customers in Mexico and our other Talon customers in
Mexico and Asia. TALON has been successful in becoming an approved zipper vendor
for major brands and retailers which has allowed us to increase our sales to
these customers. Our purchase of the TALON brand name and trademarks in December
2001 has enabled us to better control our product offerings, selling prices and
profit margins.

Gross profit increased approximately $1,113,000 (or 7.2%) to
$16,553,000 for the year ended December 31, 2003 from $15,440,000 for the year
ended December 31, 2002. Gross margin as a percentage of net sales remained
consistent at approximately 25.7% for the years ended December 31, 2003 and
2002. The increase in gross profit for the year ended December 31, 2003 resulted
from an increase in net sales during the year.

Gross profit increased approximately $3,551,000 (or 29.9%) to
$15,440,000 for the year ended December 31, 2002 from $11,889,000 for the year
ended December 31, 2001. Gross margin as a percentage of net sales decreased to
approximately 25.7% for the year ended December 31, 2002 as compared to 27.3%
for the year ended December 31, 2001. The decrease in gross profit as a
percentage of net sales for the year ended December 31, 2002 was primarily due
to an increase in zipper sales under our TALON brand name to our MANAGED TRIM
SOLUTION(TM) customers in Mexico during the year. Talon products have a lower
gross margin than other products included within the complete trim packages we
offer to our customers through our MANAGED TRIM SOLUTION(TM). The decrease in
gross margin as a percentage of net sales for the year ended December 31, 2002
was offset by a further reduction of manufacturing and facility costs which was
a direct result of the implementation of our restructuring plan in the first
quarter of 2001.

Selling expense increased approximately $1,580,000 (or 74.3%) to
$3,706,000 for the year ended December 31, 2003 from $2,126,000 for the year
ended December 31, 2002. As a percentage of net sales, these expenses increased
to 5.8% for the year ended December 31, 2003 compared to 3.5% for the year ended
December 31, 2002. The increase in selling expenses during the year was due
primarily to royalty and other expenses related to our exclusive license and
intellectual property rights agreement with Pro-Fit Holdings Limited incurred
during the year, the addition of sales personnel in our Hong Kong facility and
increased marketing efforts to promote our updated Oracle-based MANAGED TRIM
SOLUTION(TM) system. We are in the process of completing an update of our
MANAGED TRIM SOLUTION(TM) system which will enable us to further sell complete
trim packages to new locations on a global basis. Royalty expense related to our
exclusive license and intellectual property rights agreement with Pro-Fit
Holdings Limited amounted to approximately $780,000 for the year ended December
31, 2003. We pay royalties of 6% on related sales of up to $10 million, 4% of
related sales from $10-20 million and 3% on related sales in excess of $20
million. Royalties incurred for the year ended December 31, 2002 amounted to
approximately $110,000.

Selling expense increased approximately $487,000 (or 29.7%) to
$2,126,000 for the year ended December 31, 2002 from $1,639,000 for the year
ended December 31, 2001. As a percentage of net sales, these expenses decreased
to 3.5% for the year ended December 31, 2002 compared to 3.8% for the year ended
December 31, 2001. 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 new sales and marketing plan for the TALON brand. In
addition, we hired additional personnel to support the exclusive waistband
license agreement we entered into in April 2002. The increase in these selling
expenses was partially offset by a reduction of our sales force under our
MANAGED TRIM SOLUTION(TM) program, which was part of our restructuring plan that
we implemented in the first quarter of 2001. For the year ended December 31,
2002, selling expenses increased at a slower rate than the increase in net
sales, resulting in a decrease in selling expenses as a percentage of net sales.

General and administrative expenses increased approximately $758,000
(or 7.4%) to $11,028,000 for the year ended December 31, 2003 from $10,270,000
for the year ended December 31, 2002. The increase in these expenses was due
primarily to expenses incurred related to our exclusive waistband license
agreement and the amortization of intangible assets incurred as a result of the
exclusive waistband technology license rights we acquired in April 2002. As a
percentage of net sales, these expenses remained consistent at 17.1% for the
years ended December 31, 2003 and 2002, because the rate of increase in net
sales did not exceed that of general and administrative expenses.

General and administrative expenses increased approximately $1,329,000
(or 14.9%) to $10,270,000 for the year ended December 31, 2002 from $8,941,000
for the year ended December 31, 2001. The increase in these expenses was due
primarily to additional staffing and other expenses incurred related to our
Tlaxcala, Mexico operations, the amortization of intangible assets incurred as a
result of the exclusive waistband technology license rights we acquired in April
2002 and additional adjustments for bad debts of approximately $633,000 recorded
during the year. As a percentage of net sales, these expenses decreased to 17.1%
for the year ended December 31, 2002 compared to 20.5% for the year ended
December 31, 2001, as the rate of increase in net sales exceeded that of general
and administrative expenses.

Interest expense decreased approximately $73,000 (or 5.8%) to
$1,196,000 for the year ended December 31, 2003 from $1,269,000 for the year
ended December 31, 2002. Borrowings under our UPS Capital credit facility
decreased during the year ended December 31, 2003 due to proceeds received from
our private placement transactions in May and December 2003 in which we raised
approximately $29 million from the sale of common and preferred stock. The
decrease in borrowings under our UPS Capital credit facility was offset by
increased borrowings due to expanded operations in Asia and the Dominican
Republic.

Interest expense decreased approximately $128,000 (or 9.2%) to
$1,269,000 for the year ended December 31, 2002 from $1,397,000 for the year
ended December 31, 2001. On May 30, 2001, we replaced our credit facility with a
new facility with UPS Capital Global Trade Finance Corporation, which provided
for increased borrowing availability and a more favorable interest rate of prime
plus 2%. We incurred financing charges of approximately $570,000, including
legal, consulting and closing costs, in the first two quarters of 2001 related
to our efforts to replace our prior credit facility. Our borrowings under the
new UPS Capital credit facility increased during the year ended December 31,
2002 due to increased sales and expanded operations in Mexico and Asia. The
increase in interest expense due to increased borrowings during the year was
offset by decreases in the prime rate from prior periods.

The benefit for income taxes amounted to approximately $2,333,000 for
the year ended December 31, 2003 as compared to a provision for income taxes of
$279,000 for the year ended December 31, 2002. Income taxes decreased for the
year ended December 31, 2003 primarily due to the decreased taxable income as a
result of the net loss incurred for the year ended December 31, 2003.

The provision for income taxes amounted to approximately $279,000 for
the year ended December 31, 2002 as compared to a benefit for income taxes of
$423,000 for the year ended December 31, 2001. Income taxes increased for the
year ended December 31, 2003 primarily due to the increased taxable income as a
result of the net loss incurred for the year ended December 31, 2001.

Net loss was $4,745,000 for the year ended December 31, 2003 as
compared to net income of $1,496,000 for the year ended December 31, 2002, due
primarily to the restructuring charges incurred during 2003 of $7.7 million and
increases in selling and general and administrative expenses, offset by an
increase in net sales of $4.4 million, as discussed above.

Net income was $1,496,000 for the year ended December 31, 2002 as
compared to a net loss of $1,226,000 for the year ended December 31, 2001, due
primarily to an increase in net sales, offset by increases in selling and
general and administrative expenses and a decrease in gross margin, as discussed
above.

Preferred stock dividends amounted to approximately $194,000 for the
year ended December 31, 2003 as compared to $184,000 for the year ended December
31, 2002. Preferred stock dividends represent earned dividends at 6% of the
stated value per annum of the Series C convertible redeemable preferred stock.
In February 2004, the holders of the Series C convertible redeemable preferred
stock converted all 759,494 shares of the Series C Preferred Stock, plus
$458,707 of accrued dividends, into 700,144 shares of our common stock. Net loss
available to common stockholders amounted to $4,939,000 for the year ended
December 31, 2003 compared to net income available to common stockholders of
$1,312,000 for the year ended December 31, 2002. Basic and diluted loss per
share was $0.46 for the year ended December 31, 2003. Basic and diluted earnings
per share was $0.14 for the year ended December 31, 2002.

Preferred stock dividends amounted to approximately $184,000 for the
year ended December 31, 2002 as compared to $50,000 for the year ended December
31, 2001. 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 stockholders amounted to $1,312,000 for the year
ended December 31, 2002 compared to net loss available to common stockholders of
$1,276,000 for the year ended December 31, 2001. Basic and diluted earnings per
share was $0.14 for the year ended December 31, 2002. Basic and diluted loss per
share was $0.16 for the year ended December 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased to $14,443,000 at December 31, 2003
from $285,000 at December 31, 2002. The increase resulted from $18,759,000 of
cash provided by financing activities, offset by $2,086,000 and $2,516,000 of
cash used in operating and investing activities, respectively.

Net cash used in operating activities was approximately $2,086,000,
$5,440,000 and $2,100,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Cash used by operating activities for the year ended December 31,
2003 resulted primarily from a net loss of approximately $4,745,000, offset by
depreciation and amortization expense of approximately $1,280,000, a write-down
in inventory of approximately $4,266,000 and an increase in allowance for
doubtful accounts of approximately $1,642,000, both related to our corporate
restructuring. Cash used by operating activities further resulted from the
realization of deferred income of approximately $1,028,000 due to advances made
by a customer in 2002, an increase in deferred income taxes of approximately
$2,709,000 due primarily to current year losses, and a reduction in accounts
payable and accrued expenses of approximately $1,139,000, offset by a further
decrease in inventory of $1,742,000. Cash used in operating activities for the
year ended December 31, 2002 resulted primarily from increased inventories and
receivables, which was partially offset by increases in accounts payable and
accrued expenses and net income. Cash used in operations for the year ended
December 31, 2001 resulted primarily from increased inventories, other assets
and net losses, and decreased accounts payable and accrued expenses.

Net cash used in investing activities was approximately $2,516,000,
$1,268,000 and $667,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Net cash used in investing activities for the year ended December
31, 2003 consisted primarily of capital expenditures for equipment related to
the exclusive supply agreement we entered into with Levi Strauss & Co. and the
purchase of additional TALON zipper equipment. During the period, we also
purchased computer equipment and software for the implementation of a new
Oracle-based computer system. This purchase was treated as a non-cash capital
lease obligation. Net cash used in investing activities for the year ended
December 31, 2002 consisted primarily of capital expenditures for machinery and
equipment. Net cash used in investing activities for the year ended December 31,
2001 consisted primarily of capital expenditures for computer equipment and
upgrades and additional loans to related parties.

Net cash provided by financing activities was approximately
$18,759,000, $6,947,000 and $2,687,000 for the years ended December 31, 2003,
2002 and 2001, respectively. Net cash provided by financing activities for the
year ended December 31, 2003 primarily reflects funds raised from private
placement transactions of approximately $29.4 million, offset by decreased
borrowings under our credit facility and the repayment of notes payable. Net
cash provided by financing activities for the year ended December 31, 2002
primarily reflects increased borrowings under our credit facility and funds
raised from private placement transactions, offset by the repayment of notes
payable. Net cash provided by financing activities for the year ended December
31, 2001 primarily reflects funds raised from private placement transactions and
proceeds from the issuance of Series C Convertible Redeemable preferred stock,
offset by the repayment of a bank overdraft.

We currently satisfy our working capital requirements primarily through
cash flows generated from operations, sales of equity securities and borrowings
under our credit facility with UPS Capital. Our maximum availability under the
credit facility is $13 million. At December 31, 2003 and 2002, outstanding
borrowings under our UPS Capital credit facility, including amounts borrowed
under the term loan and foreign factoring agreement, amounted to approximately
$7,096,000 and $15,934,000, respectively. There were no open letters of credit
under our UPS Capital credit facility at December 31, 2003. Open letters of
credit amounted to approximately $1,5370,000 at December 31, 2002.

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

The credit facility requires that we comply with certain financial
covenants including net worth, fixed charge ratio and capital expenditures. We
were in compliance with all financial covenants at December 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 $4,192,000 to
$18,829,000 from January 1, 2003 to December 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 with a particular customer in excess of the
percentages allowed under our agreement with UPS Capital. In addition, we have
typically experienced seasonal fluctuations in sales volume. These seasonal
fluctuations result in sales volume decreases in the first and fourth quarters
of each year due to the seasonal fluctuations experienced by the majority of our
customers. During these quarters, borrowing availability under our credit
facility may decrease as a result of decreases in eligible accounts receivables
generated from our sales. 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 stock or other securities; guarantying third party obligations;
repaying subordinated debt; and making changes in our corporate structure.

Pursuant to the terms of a foreign factoring agreement under our UPS
Capital credit facility, UPS Capital purchases our eligible accounts receivable
and assumes the credit risk with respect to those foreign accounts for which UPS
Capital has given its prior approval. If UPS Capital does not assume the credit
risk for a receivable, the collection risk associated with the receivable
remains with us. We pay a fixed commission rate and may borrow up to 85% of
eligible accounts receivable under our credit facility. Included in due from
factor as of December 31, 2003 and 2002 are trade accounts receivable factored
without recourse of approximately $65,000 and $292,000. Included in due from
factor are outstanding advances due to UPS Capital under this factoring
arrangement amounting to approximately $55,000 and $248,000 at December 31, 2003
and 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 December 31, 2003 and 2002, the amount factored with
recourse and included in trade accounts receivable was approximately $316,000
and $241,000. Outstanding advances as of December 31, 2003 amounted to
approximately $411,000 and are included in the line of credit balance. There
were no outstanding advances as of December 31, 2002.

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

On December 18, 2003, we sold an aggregate of 572,818 shares of
non-voting Series D Convertible Preferred Stock, at a price of $44.00 per share,
to institutional investors and individual accredited investors in a private
placement transaction. We received net proceeds of $23,083,693 after commissions
and other offering expenses. As of December 31, 2003, we have applied
approximately $9.2 million of the proceeds against our credit facility with UPS
Capital and vendor payables. Each share of Series D Convertible Preferred Stock
was automatically converted into 10 shares of common stock, for an aggregate of
5,728,180 shares of common stock, following approval of the conversion by our
stockholders at a special meeting held on February 11, 2004. We have registered
the common shares issued upon conversion of the Series D Convertible Preferred
Stock with the Securities and Exchange Commission for resale by the investors.
In conjunction with the private placement transaction, we issued 572,818
warrants to the placement agent. The warrants are exercisable beginning June 18,
2004 through December 18, 2008 and have a per share exercise price of $4.74.

On May 30, 2003, we raised approximately $6,037,500 in a private
placement transaction with five institutional investors. Pursuant to a
securities purchase agreement with these institutional investors, we sold
1,725,000 shares of our common stock at a price per share of $3.50. After
commissions and expenses, we received net proceeds of approximately $5.5
million. We have applied the proceeds against vendor payables, equipment
purchases and other working capital requirements. We have registered the shares
issued in the private placement with the Securities and Exchange Commission for
resale by the investors. In conjunction with the private placement transaction,
we issued 172,500 warrants to the placement agent. The warrants are exercisable
beginning August 30, 2003 through May 30, 2008 and have a per share exercise
price of $5.06.

Our trade receivables decreased to $19,253,000 at December 31, 2003
from $20,468,000 at December 31, 2002. This decrease was due primarily to
decreased related party trade receivables of approximately $3.0 million
resulting from decreased sales to related parties during the year. The decrease
in related party receivables was offset by an increase in non-related party
receivables of approximately $1.8 million due to increased sales to non-related
party customers, offset by increased collections from non-related party
customers.

During the year ended 2003, we increased our net deferred tax asset to
$2,800,000 from $91,000 at December 31, 2002. The increase in our net deferred
tax asset results primarily from current year losses. At December 31, 2003, we
had Federal and state net operating loss carryforwards of approximately $9.2
million and $5.1 million, respectively, available to offset future taxable
income.

We believe that our existing cash and cash equivalents and anticipated
cash flows from our operating activities and available financing will be
sufficient to fund our minimum working capital and capital expenditure needs for
at least the next twelve months. We expect to receive quarterly cash payments of
a minimum of $1.25 million under our supply agreement with Levi Strauss & Co.
through August 2004. The extent of our future capital requirements will depend
on many factors, including our results of operations, future demand for our
products, the size and timing of future acquisitions, our borrowing base
availability limitations related to eligible accounts receivable and inventories
and our expansion into foreign markets. Our need for additional long-term
financing includes the integration and expansion of our operations to exploit
our rights under our TALON trade name, the expansion of our operations in the
Asian, Central American and Caribbean markets and the further development of our
waistband technology. If our cash from operations is less than anticipated or
our working capital requirements and capital expenditures are greater than we
expect, we may need to raise additional debt or equity financing in order to
provide for our operations. We are continually evaluating various financing
strategies to be used to expand our business and fund future growth or
acquisitions. There can be no assurance that additional debt or equity financing
will be available on acceptable terms or at all. If we are unable to secure
additional financing, we may not be able to execute our plans for expansion,
including expansion into foreign markets to promote our TALON brand tradename,
and we may need to implement additional cost savings initiatives.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

Payments Due by Period
-----------------------------------------------------------
Less than 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
- ----------------------------- ---------- ---------- ---------- ------- --------

Subordinated note payable ... $2,600,000 $1,200,000 $1,400,000 $ -- $ --
Capital lease obligations ... $1,213,933 $ 562,742 $ 651,191 $ -- $ --
Subordinated notes payable to
related parties (1) ......... $ 849,971 $ 849,971 $ -- $ -- $ --
Operating leases ............ $1,660,855 $ 721,211 $ 939,644 $ -- $ --
Line of credit .............. $7,095,514 $7,095,514 $ -- $ -- $ --
Note payable ................ $ 25,200 $ 25,200 $ -- $ -- $ --
Royalty Payments ............ $ 369,315 $ -- $ 369,315 $ -- $ --

- ----------
<FN>
(1) The majority of subordinated notes payable to related parties are due
on demand with the remainder due and payable on the fifteenth day
following the date of delivery of written demand for payment.
</FN>

On December 31, 2002, 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 $1.5 million. Financing costs due to the
related party amounted to approximately $15,000. The letters of credit expired
on March 27, 2003 and June 26, 2003. There were no outstanding letters of credit
at December 31, 2003.

At December 31, 2003 and 2002, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

On September 20, 2001, we entered into a ten-year co-marketing and
supply agreement with Coats American, Inc., an affiliate of Coats plc, as well
as a preferred stock purchase agreement with Coats North America Consolidated,
Inc., also an affiliate of Coats plc. The co-marketing and supply agreement
provides for selected introductions into Coats' customer base and has the
potential to accelerate our growth plans and to introduce our MANAGED TRIM
SOLUTION(TM) to apparel manufacturers on a broader basis. Pursuant to the terms
of the co-marketing and supply agreement, our trim packages will exclusively
offer thread manufactured by Coats. 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. In February 2004, Coats converted all 759,494 shares
of Series C Preferred Stock, plus $458,707 of accrued dividends, into 700,144
shares of our common stock.

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. In accordance with the supply agreement, we
issued 1,000,000 shares of our common stock to Commerce Investment Group, LLC.

We also have a 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. Pricing and terms are consistent
with competitive vendors. At the time we entered into this supply agreement, we
also sold 2,390,000 shares of our common stock to KG Investment, LLC, an entity
then owned by Gerard Guez and Todd Kay, executive officers and significant
shareholders of Tarrant Apparel Group.

Sales under our supply agreements with Azteca Production International
and Tarrant Apparel Group, and their affiliates, amounted to approximately 40.2%
and 69.7% of our total sales for the years ended December 2003 and 2002,
respectively. Sales under these supply agreements as a percentage of total sales
for the year ending December 2004 are anticipated to be lower than the year
ended December 2003. This decrease is due in part to our efforts to decrease our
reliance on these customers and to further diversify our customer base. Our
results of operations will depend to an 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
December 31, 2003, is approximately $11.7 million due from Tarrant Apparel Group
and Azteca Production International, and their affiliates.

Included in inventories at December 31, 2003 are inventories of
approximately $6.5 million that are subject to buyback arrangements with Tarrant
Apparel Group and Azteca Production International. The buyback arrangements
contain provisions related to the inventory purchased on behalf of these
customers. In the event that inventories remain with us in excess of six to nine
months from our receipt of the goods from our vendors or the termination of
production of a customer's product line related to the inventories, the customer
is required to purchase the inventories from us under normal invoice and selling
terms. During the year ended December 31, 2003, we sold approximately $4.6
million in inventory to Tarrant Apparel Group and Azteca Production
International pursuant to these buyback arrangements. If the financial condition
of Tarrant Apparel Group and Azteca Production International were to
deteriorate, resulting in an impairment of their ability to purchase inventories
or pay receivables, it may have an adverse affect on our results of operations.

As of December 31, 2003 and 2002, we had outstanding related-party debt
of approximately $850,000 and $1,350,000, respectively, at interest rates
ranging from 7% to 11%, and additional non-related-party debt of $25,200 at an
interest rate of 10%. The majority of related-party debt is due on demand, with
the remainder due and payable on the fifteenth day following the date of
delivery of written demand for payment. 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.

NEW ACCOUNTING PRONOUNCEMENTS

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

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

In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS No. 149"). FAS No.
149 amends and clarifies the accounting guidance on derivative instruments
(including certain derivative instruments embedded in other contracts) and
hedging activities that fall within the scope of FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS No. 149 also amends certain
other existing pronouncements, which will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. We do not have any
contracts that are derivatives or that contain embedded derivatives.

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 adoption of FIN 46 did not have a material impact on our financial position
and results of operations.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -- TRANSITION AND
DISCLOSURE ("FAS 148"), which amends Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of FAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
adoption of FAS 148 did not have a material impact on our consolidated balance
sheet or results of operations as we intend to continue to account for our
equity based compensation plans using the intrinsic value method. We have
provided the interim disclosures required by FAS 148 beginning in the first
quarter of 2003.

In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 31, 2002. We adopted this
Statement as of January 1, 2003 and it had no material impact on our financial
statements.

In June 2002, the FASB issued FAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which addresses accounting for
restructuring and similar costs. FAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. We
have adopted the provisions of SFAS No. 146 for restructuring activities
initiated after December 31, 2002. FAS 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. FAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, FAS No. 146 affects the timing of recognizing current
and future restructuring costs as well as the amount recognized.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

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

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

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

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

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

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

CONCENTRATION OF RECEIVABLES FROM OUR 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 Levi Strauss
& Co., Tarrant Apparel Group and its affiliate, United Apparel Ventures, LLC and
Azteca Production International Inc. and its affiliates. This concentration of
our business reduces the amount we can borrow from our lenders under receivables
based financing agreements. Under our credit agreement with UPS Capital, for
instance, if accounts receivable due us from a particular customer exceed a
specified percentage of the total eligible accounts receivable against which we
can borrower, UPS Capital will not lend against the receivables that exceed the
specified

percentage. Gerard Guez, the founder, Chairman and Chief Executive Officer, and
a significant stockholder of Tarrant Apparel Group and Hubert Guez, the founder,
Chief Executive Officer and President, and a significant stockholder of Azteca
Production International, are brothers. In addition, Tarrant Apparel Group and
Azteca Production International combined own United Apparel Ventures, LLC. This
relationship between our customers further concentrates our receivables risk
significantly among this family group. Further, if we are unable to collect any
large receivables due us, our cash flow would be severely impacted.

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

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

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

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

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

o The timing and magnitude of customers' marketing campaigns;

o The loss or addition of a major customer;

o The availability and pricing of materials for our products;

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

o Currency fluctuations;

o Delays caused by third parties; and

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

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

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

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

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

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

o Foreign trade disruptions;

o Import restrictions;

o Labor disruptions;

o Embargoes;

o Government intervention; and

o Natural disasters.

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

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.

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.

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 March 1, 2004, our officers and directors and their affiliates beneficially
owned approximately 19.1% of the outstanding shares of our common stock. The
Dyne family, which includes Mark Dyne, Colin Dyne, Larry Dyne, Jonathan Burstein
and the estate of Harold Dyne, beneficially owned approximately 21.2% of the
outstanding shares of our common stock at March 1, 2004. 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 3.3% of the outstanding shares of common stock at March 1, 2004.
Gerard Guez and Todd Kay, significant stockholders of Tarrant Apparel Group, own
approximately 5.6% of the outstanding shares of our common stock at March 1,
2004. As a result, our officers and directors, the Dyne family, Gerard Guez and
Todd Kay are able to exert considerable influence over the outcome of any
matters submitted to a vote of the holders of our common stock, including the
election of our Board of Directors. The voting power of these stockholders could
also discourage others from seeking to acquire control of us through the
purchase of our common stock, which might depress the price of our common stock.

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

ITEM 7A. 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 December 31 2003, we had approximately $10.5 million
of indebtedness subject to interest rate fluctuations. These fluctuations may
increase our interest expense and decrease our cash flows from time to time. For
example, based on average bank borrowings of $10 million during a three-month
period, if the interest rate indices on which our bank borrowing rates are based
were to increase 100 basis points in the three-month period, interest incurred
would increase and cash flows would decrease by $25,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS
PAGE

Report of Independent Certified Public Accountants................... 32
Consolidated Balance Sheets.......................................... 33
Consolidated Statements of Operations................................ 34
Consolidated Statements of Stockholders' Equity and Convertible
Redeemable Preferred Stock........................................ 35
Consolidated Statements of Cash Flows................................ 36
Notes to Consolidated Financial Statements........................... 37
Independent Certified Public Accountants' Report on Schedule II...... 63
Schedule II - Valuation and Qualifying Accounts and Reserves......... 64

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Tag-It Pacific, Inc.
Los Angeles, California

We have audited the accompanying consolidated balance sheets of Tag-It
Pacific, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and convertible
redeemable preferred stock and cash flows for each of the three years in the
period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tag-It
Pacific, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.

/s/ BDO Seidman, LLP

Los Angeles, California
March 8, 2004

TAG-IT PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS

December 31, December 31,
2003 2002
----------- -----------
Assets
Current assets:
Cash and cash equivalents ...................... $14,442,769 $ 285,464
Due from factor ................................ 9,743 43,730
Trade accounts receivable, net ................. 7,531,079 5,697,655
Trade accounts receivable, related parties, net 11,721,465 14,770,466
Refundable income taxes ........................ -- 212,082
Inventories, net ............................... 17,096,879 23,105,267
Prepaid expenses and other current assets ...... 2,124,366 599,543
Deferred income taxes .......................... 2,800,000 90,928
----------- -----------
Total current assets .............................. 55,726,301 44,805,135

Property and equipment, net of accumulated
depreciation and amortization .................. 6,144,863 2,953,701
Tradename ......................................... 4,110,750 4,110,750
Goodwill .......................................... 450,000 450,000
License Rights .................................... 375,375 490,875
Due from related parties .......................... 762,076 870,251
Other assets ...................................... 200,949 374,106
----------- -----------
Total assets ...................................... $67,770,314 $54,054,818
=========== ===========

Liabilities, Convertible Redeemable Preferred
Stock and Stockholders' Equity
Current liabilities:
Line of credit .................................. $ 7,095,514 $15,934,257
Accounts payable and accrued expenses ........... 9,552,196 10,401,187
Deferred income ................................. -- 1,027,984
Subordinated demand notes payable to
related parties ............................... 849,971 1,349,971
Current portion of capital lease obligations .... 562,742 71,928
Current portion of subordinated note payable .... 1,200,000 1,200,000
----------- -----------
Total current liabilities ......................... 19,260,423 29,985,327

Capital lease obligations, less current portion ... 651,191 107,307
Subordinated note payable, less current portion ... 1,400,000 2,600,000
----------- -----------
Total liabilities ................................. 21,311,614 32,692,634
----------- -----------

Commitments and contingencies (Note 14)

Convertible redeemable preferred stock
Series C, $0.001 par value; 759,494
shares authorized; 759,494 shares issued
and outstanding at December 31, 2003
and 2002 (stated value $3,000,001) .............. 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 ................. -- --
Convertible preferred stock Series D, $0.001
par value; 572,818 shares authorized;
572,818 shares issued and outstanding at
December 31, 2003 ............................ 22,918,693 --

Common stock, $0.001 par value, 30,000,000
shares authorized; 11,508,201 shares
issued and outstanding at December 31, 2003;
9,319,909 at December 31, 2002 ............... 11,510 9,321
Additional paid-in capital ...................... 23,890,356 16,776,012
(Accumulated deficit) retained earnings ......... (3,256,860) 1,681,850
----------- -----------
Total stockholders' equity ........................ 43,563,699 18,467,183
----------- -----------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity ........ $67,770,314 $54,054,818
=========== ===========

See accompanying notes to consolidated financial statements.

TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------

Net sales to unrelated parties ...... $ 38,560,045 $ 18,179,970 $ 16,114,039
Net sales to related parties ........ 25,882,770 41,893,200 27,453,591
------------ ------------ ------------
Total net sales ..................... 64,442,815 60,073,170 43,567,630
Cost of goods sold .................. 47,889,762 44,633,195 31,678,663
------------ ------------ ------------
Gross profit ........................ 16,553,053 15,439,975 11,888,967
Selling expenses .................... 3,706,143 2,126,227 1,639,263
General and administrative expenses . 11,028,291 10,269,672 8,940,593
Restructuring charges (Note 18) ..... 7,700,047 -- 1,561,623
------------ ------------ ------------
Total operating expenses ............ 22,434,481 12,395,899 12,141,479

(Loss) income from operations ....... (5,881,428) 3,044,076 (252,512)
Interest expense, net ............... 1,196,110 1,269,365 1,396,612
------------ ------------ ------------

(Loss) income before income taxes ... (7,077,538) 1,774,711 (1,649,124)
(Benefit) provision for income taxes (2,332,880) 278,685 (423,373)
------------ ------------ ------------
Net (loss) income ................... $ (4,744,658) $ 1,496,026 $ (1,225,751)
============ ============ ============

Less: Preferred stock dividends ..... (194,052) (184,200) (49,950)
------------ ------------ ------------
Net (loss) income available to common
shareholders ..................... $ (4,938,710) $ 1,311,826 $ (1,275,701)
============ ============ ============

Basic (loss) earnings per share ..... $ (0.46) $ 0.14 $ (0.16)
============ ============ ============
Diluted (loss) earnings per share ... $ (0.46) $ 0.14 $ (0.16)
============ ============ ============

Basic weighted average shares
outstanding ...................... 10,650,684 9,232,405 8,017,134
============ ============ ============

Diluted weighted average shares
outstanding ...................... 10,650,684 9,531,301 8,017,134
============ ============ ============

See accompanying notes to consolidated financial statements.

TAG-IT PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
CONVERTIBLE REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

Preferred Stock Preferred Stock Preferred Stock
Common Stock Series A Series B Series D
----------------------- ------------------- ----------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------- -------- -------- -------- -------- ----------- ------- ------------

BALANCE, JANUARY 1, 2001 ..... 7,863,244 $ 7,864 -- $ -- 850,000 $ 1,400,000 -- $ --
Preferred stock issued
for equity investment ... -- -- -- -- -- -- -- --
Common stock issued upon
exercise of options ..... 15,000 15 -- -- -- -- -- --
Issuance of warrants ...... -- -- -- -- -- -- -- --
Common stock issued in
acquisition of assets ... 125,000 125 -- -- -- -- -- --
Acquisition of trademarks . 500,000 500 -- -- (850,000) (1,400,000) -- --
Common stock issued in
private placement
transactions ............ 266,666 267 -- -- -- -- -- --
Tax benefit from exercise
of stock options ........ -- -- -- -- -- -- -- --
Preferred stock dividends . -- -- -- -- -- --
Net loss .................. -- -- -- -- -- -- -- --
----------- -------- -------- -------- -------- ----------- ------- ------------
BALANCE, DECEMBER 31, 2001 ... 8,769,910 8,771 -- -- -- -- -- --
Common stock issued upon
exercise of options ..... 50,000 50 -- --
Acquisition of license
rights .................. 150,000 150 -- -- -- -- -- --
Common stock issued in
private placement
transactions ............ 349,999 350 -- -- -- -- -- --
Tax benefit from exercise
of stock options ........ -- -- -- -- -- -- -- --
Preferred stock dividends . -- -- -- -- -- -- --
Net income ................ -- -- -- -- -- -- -- --
----------- -------- -------- -------- -------- ----------- ------- ------------
BALANCE, DECEMBER 31, 2002 ... 9,319,909 9,321 -- -- -- -- -- --
Preferred stock issued in . -- -- -- -- -- -- 572,818 22,918,693
private placement
transaction
Common stock cancelled in
settlement agreement .... (5,208) (5) -- -- -- -- -- --
Common stock issued upon
exercise of options ..... 126,500 127 -- -- -- -- -- --
Common stock issued in
private placement
transactions ............ 2,025,000 2,025 -- -- -- -- -- --
Common stock issued for
services ................ 42,000 42 -- -- -- -- -- --
Tax benefit from exercise
of stock options ........ -- -- -- -- -- -- -- --
Preferred stock dividends . -- -- -- -- -- -- --
Net loss .................. -- -- -- -- -- -- --
----------- -------- -------- -------- -------- ----------- ------- ------------
BALANCE, DECEMBER 31, 2003 ... 11,508,201 $ 11,510 -- $ -- -- $ -- 572,818 $ 22,918,693
- ------------------------------ =========== ======== ======== ======== ======== =========== ======= ============

Preferred Stock
Additional Retained Series C
Paid-In Earnings --------------------
Capital (Deficit) Total Shares Amount
------------ ----------- ------------ ------- ----------

BALANCE, JANUARY 1, 2001 ..... $ 11,737,810 $ 1,645,725 $ 14,791,399 -- $ --
Preferred stock issued
for equity investment ... -- -- -- 759,494 2,895,001
Common stock issued upon
exercise of options ..... 19,485 -- 19,500 -- --
Issuance of warrants ...... 5,170 -- 5,170 -- --
Common stock issued in
acquisition of assets ... 499,875 -- 500,000 -- --
Acquisition of trademarks . 1,969,500 -- 570,000 -- --
Common stock issued in
private placement
transactions ............ 799,731 -- 799,998 -- --
Tax benefit from exercise
of stock options ........ 17,400 -- 17,400 -- --
Preferred stock dividends . -- (49,950) (49,950) -- --
Net loss .................. -- (1,225,75) (1,225,75) -- --
------------ ----------- ------------ ------- ----------
BALANCE, DECEMBER 31, 2001 ... 15,048,971 370,024 15,427,766 759,494 2,895,001
Common stock issued upon
exercise of options ..... 64,948 -- 64,998 -- --
Acquisition of license
rights ................. 577,350 -- 577,500 -- --
Common stock issued in
private placement
transactions ............ 1,029,647 -- 1,029,997 -- --
Tax benefit from exercise
of stock options ........ 55,096 -- 55,096 -- --
Preferred stock dividends . -- (184,200) (184,200) -- --
Net income ................ -- 1,496,026 1,496,026 -- --
------------ ----------- ------------ ------- ----------
BALANCE, DECEMBER 31, 2002 ... 16,776,012 1,681,850 18,467,183 759,494 2,895,001
Preferred stock issued in . 165,000 -- 23,083,693 -- --
private placement
transaction
Common stock cancelled in
settlement agreement .... (31,712) -- (31,717) -- --
Common stock issued upon
exercise of options ..... 317,823 -- 317,950 -- --
Common stock issued in
private placement
transactions ............ 6,333,475 -- 6,335,500 -- --
Common stock issued for
services ................ 166,698 -- 166,740 -- --
Tax benefit from exercise
of stock options ........ 163,060 -- 163,060 -- --
Preferred stock dividends . -- (194,052) (194,052) -- --
Net loss .................. -- (4,744,65) (4,744,65) -- --
------------ ----------- ------------ ------- ----------
BALANCE, DECEMBER 31, 2003 ... $ 23,890,356 $(3,256,860) 43,563,699 759,494 $2,895,001
- ------------------------------ ============ =========== ============ ======= ==========

See accompanying notes to consolidated financial statements.

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

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------

Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net (loss) income ............................................ $ (4,744,658) $ 1,496,026 $ (1,225,751)
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization .............................. 1,280,380 1,169,247 1,478,055
(Increase) decrease in deferred income taxes ............... (2,709,072) 16,671 (220,934)
Loss on sale of assets ..................................... -- 20,804 684,391
Stock and warrants issued for services ..................... 135,023 -- 5,170
Increase (decrease) in allowance for doubtful accounts ..... 1,642,086 (167,140) (80,599)
Changes in operating assets and liabilities:
Receivables, including related parties ..................... (392,522) (9,534,894) 788,022
Inventories ................................................ 6,008,388 (2,654,527) (2,497,580)
Prepaid expenses and other current assets .................. (1,524,823) (191,396) 330,588
Other assets ............................................... (24,976) (75,580) (447,618)
Accounts payable and accrued expenses ...................... (1,138,946) 3,197,895 (604,798)
Deferred income ............................................ (1,027,984) 1,027,984 --
Income taxes payable ....................................... 411,420 254,663 (309,147)
------------ ------------ ------------
Net cash used in operating activities ........................... (2,085,684) (5,440,247) (2,100,201)
------------ ------------ ------------
Cash flows from investing activities:
Decrease (increase) in loans to related parties .............. 167,801 -- (251,489)
Acquisition of property and equipment ........................ (2,683,857) (1,290,087) (534,873)
Proceeds from sale of equipment .............................. -- 22,312 118,880
------------ ------------ ------------
Net cash used in investing activities ........................... (2,516,056) (1,267,775) (667,482)
------------ ------------ ------------
Cash flows from financing activities:
Bank overdraft ............................................... -- -- (584,831)
Proceeds from preferred stock issuance ....................... 23,083,693 -- 2,895,001
Proceeds from common stock issuance .......................... 6,335,500 1,029,997 799,998
Proceeds from exercise of stock options and warrants ......... 317,950 64,998 19,500
(Repayment) proceeds from bank line of credit, net ........... (8,838,743) 6,521,480 (295,855)
Proceeds from capital lease obligations ...................... -- 125,000 207,240
Payment of capital lease obligations ......................... (439,355) (194,937) (321,516)
Proceeds from notes payable .................................. -- 500,000 180,000
Repayment of notes payable ................................... (1,700,000) (1,100,000) (212,999)
------------ ------------ ------------
Net cash provided by financing activities ....................... 18,759,045 6,946,538 2,686,538
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ............ 14,157,305 238,516 (81,145)
Cash and cash equivalents, beginning of year .................... 285,464 46,948 128,093
------------ ------------ ------------
Cash and cash equivalents, end of year .......................... $ 14,442,769 $ 285,464 $ 46,948
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest paid .............................................. $ 1,149,357 $ 1,203,663 $ 1,312,805
Interest received .......................................... $ (179) (180) (2,430)
Income taxes paid .......................................... $ 177,455 $ 7,984 $ 22,780
Income taxes received ...................................... $ (212,082) $ -- $ (10,389)
Non-cash financing activity:
Common stock issued in acquisition of assets ............... $ -- $ -- $ 500,000
Common stock issued in acquisition of license rights ....... $ -- $ 577,500 $ --
Capital lease obligation ................................... $ 1,474,053 $ -- $ --
Acquisition of trademarks:
Common stock issued ................................... $ -- $ -- $ 1,970,000
Preferred stock cancelled ............................. $ -- $ -- $ 1,400,000
Net assets acquired ................................... $ -- $ -- $ 670,000
Cash paid ............................................. $ -- $ -- $ 100,000

See accompanying notes to consolidated financial statements.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

Tag-It Pacific, Inc. (the "Company") is the parent holding company of
Tag-It, Inc., a California corporation, Tag-It Pacific (HK) Ltd., a BVI
corporation, Tag-It de Mexico, S.A. de C.V., A.G.S. Stationery, Inc., a
California corporation and Pacific Trim & Belt, Inc., a California corporation
(collectively, the "Subsidiaries"), all of which were consolidated under a
parent limited liability company on October 17, 1997 and became wholly-owned
subsidiaries of the Company immediately prior to the effective date of the
Company's initial public offering in January 1998. Immediately prior to the
initial public offering, the outstanding membership units of Tag-It Pacific LLC
were converted to 2,470,001 shares of Common Stock of the Company. In November
1998, the Company formed a wholly-owned subsidiary, Pacific Trim, SA de CV
located in Tlaxcala, Mexico (now included in "Subsidiaries"). All the activities
of this company were merged into Tag-It de Mexico, SA de CV, in 1999. In January
2000, the Company formed Tag-It Pacific Limited, a Hong Kong corporation, in
April 2000, the Company formed Talon International, Inc., a Delaware
corporation. All newly formed corporations are 100% wholly-owned Subsidiaries of
Tag-It Pacific, Inc. Pacific Trim & Belt, Inc. was dissolved during 2000.

All significant intercompany accounts and transactions have been
eliminated in consolidation. Assets and liabilities of foreign subsidiaries are
translated at rates of exchange in effect at the close of the period. Revenues
and expenses are translated at the weighted average of exchange rates in effect
during the year. The resulting translation gains and losses are deferred and are
shown as a separate component of stockholders' equity and transaction gains and
losses are recorded in the consolidated statement of income in the period
incurred. During 2003, 2002 and 2001, foreign currency translation and
transaction gains and losses were not material.

NATURE OF BUSINESS

The Company specializes in the distribution of a full range of trim
items to manufacturers of fashion apparel, specialty retailers and mass
merchandisers. The Company acts as a full service outsourced trim management
department for manufacturers of fashion apparel such as Abercrombie & Fitch,
Tarrant Apparel Group, Kentucky Apparel and Azteca Production International. The
Company also serves as a specified supplier of trim items to specific brands,
brand licensees and retailers, including Abercrombie & Fitch, Express, Levi
Strauss & Co., The Limited, Lerner and Miller's Outpost, among others. In
addition, the Company distributes zippers under the TALON brand name to
manufacturers for apparel brands and retailers such as Levi Strauss & Co.,
Wall-Mart, JC Penny and Tropical Sportswear, among others. In 2002, the Company
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. These products are sold to the same customers that are
targeted by the Company's MANAGED TRIM SOLUTION and TALON zipper divisions.

REVENUE RECOGNITION

The Company generates revenue primarily from two sources:

o Trim product sales, including zippers and waistbands, and

o Complete trim package sales under our MANAGED TRIM SOLUTION.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Trim product and trim package sales are recorded at the time of
shipment, at which point title transfers to the customer, and when collection is
reasonably assured.

COMPREHENSIVE INCOME

The Company has adopted Statement of Financial Standard No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), issued by the FASB and effective
for financial statements with fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. There
were no additional comprehensive income items for the years ended December 31,
2003, 2002 and 2001.

CLASSIFICATION OF EXPENSES

COST OF SALES - Cost of good sold includes expenses primarily related
to inventory purchases, customs, duty, freight and overhead expenses. Overhead
expenses primarily consist of warehouse and operations salaries, and warehouse
expenses.

SELLING EXPENSE - Selling expenses primarily include royalty expense,
selling salaries, commissions, marketing and other selling expenses, including
travel and entertainment.

GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative
expenses primarily include administrative salaries, employee benefits,
professional service fees, facility expenses, information technology, investor
relations, travel and entertainment, depreciation, bad debts and other general
corporate expenses.

SHIPPING AND HANDLING COSTS

In accordance with Emerging Issues Task Force (EITF) 00-10, Accounting
for Shipping and Handling Fees and Costs, the Company records shipping and
handling costs billed to customers as a component of revenue, and shipping and
handling costs incurred by the Company for inbound and outbound freight are
recorded as a component of cost of sales.

SEGMENTS OF AN ENTERPRISE

The Company has adopted Statement of Financial Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), issued by the FASB and effective for financial statements with fiscal
years beginning after December 15, 1997. SFAS 131 requires that public companies
report certain information about operating segments, products, services and
geographical areas in which they operate and their major customers. The Company
believes that it operates within one segment as there is not enough difference
between the types of products developed and distributed by the Company to
justify segmented reporting by product type. Management decisions regarding the
allocation of resources and the assessment of performance are made on a
company-wide basis and are not specific to the type of product. Adoption of SFAS
131 resulted in expanded disclosures regarding geographical regions (Note 15).

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Upon retirement or other disposition of property
and equipment, applicable cost and accumulated depreciation and amortization are
removed from the accounts and any gains or losses are included in results of
operations. The Company capitalizes the cost of films, dies, molds and art
designs. The costs capitalized include direct material and direct labor costs.

Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives as follows:

Furniture and fixtures 5 years

Machinery and equipment 5 to 10 years

Computer equipment 5 years

Leasehold improvements Term of the lease or the
estimated life of the related
improvements, whichever is
shorter.

Films, dies, molds and art designs 3 to 5 years

IMPAIRMENT OF LONG-LIVED ASSETS

On January 1, 2002, the Company adopted SFAS 142 which requires, among
other things, that the Company no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS 142 requires that
the Company identify reporting units for the purposes of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets with
an indefinite useful life. The Company's previous business combinations were
accounted for using the purchase method. As of December 31, 2003, the net
carrying amount of goodwill is $450,000, tradename is $4,110,750 and other
intangible assets is $375,375. Management has determined that goodwill and
tradename have indefinite lives. Amortization expense related to other
intangibles amounted to $115,500 and $86,625 for the years ended December 31,
2003 and 2002.

RECLASSIFICATION

Certain reclassifications have been made to the prior year financial
statements to conform with 2003 presentation.

INCOME TAXES

The Company uses the asset and liability method of accounting for
income taxes. Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable or benefit for the period and the change
during the year in deferred tax assets and liabilities.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which a
company acquires goods or services from non-employees in exchange for equity
instruments. SFAS 123 also gives the option to account for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock issued to Employees," or SFAS 123. The Company has
chosen to account for stock-based compensation for employees utilizing the
intrinsic value method prescribed in APB 25 and not the fair value method
established by SFAS 123. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the measurement date over the amount an employee must pay to acquire stock.
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 years ended December 31, 2003, 2002 and 2001.

Under SFAS 123, the Company presents in a footnote the effect of
measuring the cost of stock-based employee compensation at the grant date based
on the fair value of the award and recognizes this cost over the service period.
The value of the stock-based award is determined using a pricing model whereby
compensation cost is the fair value of the option as determined by the model at
grant date or other measurement date.

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 years ended December 31, 2003, 2002 and 2001. If compensation cost for
stock-based compensation had been determined based on the fair market value of
the stock options on their dates of grant in accordance with SFAS 123, the
Company's net (loss) income and (loss) income per share for the years ended
December 31, 2003, 2002 and 2001 would have amounted to the pro forma amounts
presented below:

2003 2002 2001
------------- ------------- -------------

Net (loss) income, as reported ................ $ (4,744,658) $ 1,496,026 $ (1,225,751)
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 methods for all awards, net of
related tax effects ...................... (139,796) (121,073) (295,898)
------------- ------------- -------------

Pro forma net (loss) income ................... $ (4,884,454) $ 1,374,953 $ (1,521,649)
============= ============= =============

(Loss) earnings per share:
Basic - as reported ...................... $ (0.46) $ 0.14 $ (0.16)
Basic - pro forma ........................ $ (0.48) $ 0.13 $ (0.20)

Diluted - as reported .................... $ (0.46) $ 0.14 $ (0.16)
Diluted - pro forma ...................... $ (0.48) $ 0.13 $ (0.20)

The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted during 2003, 2002 and 2001; expected
life of option of 1.5 years, expected volatility of 19% for 2003 and 2002 and
17% for 2001,

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

risk free interest rate of 3% for 2003 and 2002 and 5% for 2001 and a 0%
dividend yield. The weighted average fair value at the grant date for such
options is $.37, $.38 and $.37 per option for the years ended December 31, 2003,
2002 and 2001.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INFORMATION

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value. ACCOUNTS RECEIVABLE AND DUE FROM FACTOR: Due to the
short-term nature of the receivables, the fair value approximates the carrying
value. DUE FROM RELATED PARTIES AND NOTES PAYABLE TO RELATED PARTIES: Due to the
short-term nature and current market borrowing rates of the loans and notes, the
fair value approximates the carrying value. LINE OF CREDIT AND NOTES PAYABLE:
Estimated to approximate fair value based upon current market borrowing rates
for loans with similar terms and maturities.

RESTRUCTURING CHARGES

Upon approval of a restructuring plan by management, the Company
records restructuring reserves for certain costs associated with facility
closures and business reorganization activities as they are incurred or when
they become probable and estimable. Such costs are recorded as a current
liability. Restructuring costs associated with initiatives commenced prior to
January 1, 2003 were recorded in compliance with Emerging Issues Task Force No.
94-3 as a current liability.

For initiatives after December 31, 2002, the Company recorded
restructuring reserves in compliance with SFAS 146, resulting in the recognition
of employee severance and related termination benefits for recurring
arrangements when they became probable and estimable and on the accrual basis
for one-time benefit arrangements. The Company records other costs associated
with exit activities as they are incurred. Employee severance and termination
benefits are estimates based on agreements with the relevant union
representatives or plans adopted by the Company that are applicable to employees
not affiliated with unions. These costs are not associated with nor do they
benefit continuing activities. Inherent in the estimation of these costs are
assessments related to the most likely expected outcome of the significant
actions to accomplish the restructuring. Changing business conditions may affect
the assumptions related to the timing and extent of facility closure activities.
The Company reviews the status of restructuring activities on a quarterly basis
and, if appropriate, records changes based on updated estimates.

NEW ACCOUNTING PRONOUNCEMENTS

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS No. 149"). FAS No.
149 amends and clarifies the accounting guidance on derivative instruments
(including certain derivative instruments embedded in other contracts) and
hedging activities that fall within the scope of FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS No. 149 also amends certain
other existing pronouncements, which will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. The Company does
not have any contracts that are derivatives or that contain embedded
derivatives.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -- TRANSITION AND
DISCLOSURE ("FAS 148"), which amends Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of FAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
adoption of FAS 148 did not have a material impact on the Company's consolidated
balance sheet or results of operations as the Company intends to continue to
account for its equity based compensation plans using the intrinsic value
method. The Company provided the interim disclosures required by FAS 148
beginning in the first quarter of 2003.

In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
Company adopted this Statement as of January 1, 2003 and it had no material
impact on its financial statements.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2002, the FASB issued FAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which addresses accounting for
restructuring and similar costs. FAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. The
Company adopted the provisions of SFAS No. 146 for restructuring activities
initiated after December 31, 2002. FAS 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. FAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, FAS No. 146 affects the timing of recognizing current
and future restructuring costs as well as the amount recognized.

NOTE 2--EARNINGS PER SHARE

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

December 31, 2003 December 31, 2002 December 31, 2001
---------------------------------- -------------------------------- ----------------------------------
Years ended: Per Per Per
Loss Shares Share Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ---------- ------ ---------- --------- ------ ----------- --------- ------

Basic earnings per
share:
(Loss) income
to common
stockholders... $(4,938,710) 10,650,684 $(0.46) $1,311,826 9,232,405 $ 0.14 $(1,275,701) 8,017,134 $(0.16)

Effect of dilutive
securities:
Options........ -- -- -- -- 244,706 -- -- -- --
Warrants....... -- -- -- -- 54,191 -- -- -- --

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

(Loss) income
available to common
stockholders....... $(4,938,710) 10,650,684 $(0.46) $1,311,826 9,531,302 $ 0.14 $(1,275,701) 8,017,134 $(0.16)
=========== ========== ====== ========== ========= ====== =========== ========= ======

Warrants to purchase 1,277,885 shares of common stock at between $0.71
and $5.06, options to purchase 1,978,000 shares of common stock at between $1.30
and $4.63, 759,494 shares of preferred Series C stock convertible at $4.94 per
share, and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2003, but were not included in the
computation of diluted earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share. For the year
ended December 31, 2003, 572,818 shares of preferred Series D stock, convertible
into 5,728,180 shares of common stock after shareholder approval on February 11,
2004, were not included in the computation of diluted earnings per share because
the conversion contingency related to the preferred shares was not met.

Warrants to purchase 523,332 shares of common stock at between $4.34
and $6.00, options to purchase 643,000 shares of common stock at between $4.00
and $4.63, 759,494 shares of preferred Series C stock convertible at $4.94 per
share, and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2002, but were not included in the
computation of diluted earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

Warrants to purchase 433,122 shares of common stock at between $0.71
and $6.00, options to purchase 1,546,000 shares of common stock at between $1.30
and $4.63, 759,494 shares of preferred Series C stock convertible at $4.94 per
share, and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2001, but were not included in the
computation of diluted earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3--DUE FROM FACTOR

The Company has entered into a factoring agreement with East Asia
Heller for the purchase of eligible receivables from its Hong Kong subsidiary,
Tag-It Pacific Limited. The Company's factor purchases eligible accounts
receivable and assumes the credit risk with respect to those accounts for which
they have given their prior approval. If the factor does not assume the credit
risk for a receivable, the collection risk associated with the receivable
remains with the Company. The Company pays a fixed commission rate and may
borrow up to 80% of its eligible accounts receivable. Interest is charged at
1.5% over the Hong Kong Dollar prime rate (6.5% and 5% at December 31, 2003 and
2002). As of December 31, 2003 and 2002, the amount factored with recourse and
included in trade accounts receivable was approximately $316,000 and $241,000.
Outstanding advances as of December 31, 2003 amounted to approximately $411,000
and are included in the line of credit balance. There were no outstanding
advances as of December 31, 2002.

The Company also has a factoring agreement with UPS Capital Global
Trade Finance Corporation, whereby UPS Capital purchases 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. The Company pays a fixed commission rate and may
borrow up to 85% of eligible accounts receivable under the credit facility.
Included in due from factor as of December 31, 2003 and 2002 are trade accounts
receivable factored without recourse of approximately $65,000 and $292,000.
Included in due from factor are outstanding advances due to UPS Capital under
this factoring arrangement amounting to approximately $55,000 and $248,000 at
December 31, 2003 and 2002.

The Company measures the value of its retained interest in receivables
factored without recourse based on the fair value of the factored receivable at
the time the sale is initiated. Fair value is determined based on management's
estimate of the expected amount to be collected from the factored receivable.
Adjustments to the fair value of the Company's retained interest in the factored
receivable are made when management becomes aware of factors that could result
in a reduction of the amount paid by the customer. Adjustments are charged to
operations in the period in which the facts that give rise to the adjustments
become known. The Company has not recorded any adjustments to reduce the
carrying amount of its retained interest in factored receivables for the years
ended December 31, 2003 and 2002.

NOTE 4--TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable and trade accounts receivable related parties
are net of allowances for doubtful accounts and subsequent returns. For the
years ended December 31, 2003 and 2002, the total allowance for doubtful
accounts and subsequent returns was $2,043,571 and $401,485.

NOTE 5--INVENTORIES

Inventories consist of the following:

Year Ended December 31,
--------------------------------
2003 2002
----------- -----------

Raw materials ........................ $ 11,210 $ 10,937
Work-in-process ...................... -- 83,105
Finished goods ....................... 17,085,669 23,011,225
----------- -----------

Total inventories .................... $17,096,879 $23,105,267
=========== ===========

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories at December 31, 2003 and 2002 include goods that are
subject to buy back agreements with the Company's customers. The buyback
agreements contain provisions related to the inventory purchased on behalf of
the Company's customers. In the event that inventories remain with the Company
in excess of six to nine months from the Company's receipt of the goods from its
vendors, the customer is required to purchase the inventories from the Company
under normal invoice and selling terms. Included in inventories at December 31,
2003 are inventories of approximately $6.5 million that are subject to buyback
arrangements with Levi Strauss & Co., Tarrant Apparel Group, Azteca Production
International (Note 17) and other customers.

NOTE 6--PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Year Ended December 31,
---------------------------
2003 2002
----------- -----------

Furniture and fixtures ......................... $ 627,826 $ 571,923
Machinery and equipment ........................ 5,032,427 2,752,352
Computer equipment ............................. 2,861,459 1,251,050
Leasehold improvements ......................... 259,789 168,785
Films, dies, molds and art designs ............. 1,958,883 1,838,364
----------- -----------
10,740,384 6,582,474
Accumulated depreciation and amortization ...... 4,595,521 3,628,773
----------- -----------

Net property and equipment ..................... $ 6,144,863 $ 2,953,701
=========== ===========

NOTE 7--GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets consist of goodwill, tradename and exclusive license
and intellectual property rights. In accordance with SFAS No. 142, all of the
Company's intangible assets that have definite lives are being amortized on a
straight-line basis over their estimated useful lives. Goodwill and other
intangible assets with indefinite lives are evaluated to determine if the fair
value of the asset has decreased below its carrying value. At December 31, 2003,
the Company evaluated its goodwill and tradename assets and determined that no
impairment adjustment was necessary. Amortization expense of $50,000 recognized
in 2001, would not have been recognized under SFAS No. 142.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and other intangible assets as of December 31, 2003 and 2002
are as follows:

Year Ended December 31,
------------------------------
2003 2002
----------- -----------

Goodwill ................................... $ 500,000 $ 500,000
Accumulated amortization ................... (50,000) (50,000)
----------- -----------
Goodwill, net .............................. 450,000 450,000
----------- -----------
Tradename .................................. 4,110,750 4,110,750
Accumulated amortization ................... -- --
----------- -----------
Tradename, net ............................. 4,110,750 4,110,750
----------- -----------
Exclusive license and intellectual
property rights ......................... 577,500 577,500
Accumulated amortization ................... (202,125) (86,625)
----------- -----------
Exclusive license and intellectual
property rights, net .................... 375,375 490,875
----------- -----------
Intangible assets, net ..................... $ 4,936,125 $ 5,051,625
=========== ===========

There were no changes in the net carrying amounts of goodwill and
tradename for the years ended December 31, 2003 and 2002.

Amortization expense consists of the following:

Year Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------

Goodwill ................................ $ -- $ -- $ 50,000
Tradename ............................... -- -- --
Exclusive license and intellectual
property rights ...................... 115,500 86,625 --
Other intangible assets ................. -- -- 128,333
-------- -------- --------
$115,500 $ 86,625 $178,333
======== ======== ========

The weighted average amortization period for intangible assets with
definite lives is five years. The following table shows the estimated
amortization expense for these assets for each of the succeeding years:

YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- --------

2004 ...................................................... $115,500
2005 ...................................................... 115,500
2006 ...................................................... 115,500
2007 ...................................................... 28,875
--------
Total amortization expense ................................ $375,375
========

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Had SFAS No. 142 been in effect prior to January 1, 2002, the
Company's reported net (loss) income and net (loss) income per share would have
been as follows:

Year Ended December 31,
----------------------------------------------
2003 2002 2001
------------- ------------- -------------

Net (loss) income:
Reported ............................... $ (4,744,658) $ 1,496,026 $ (1,225,751)
Goodwill amortization .................. -- -- 50,000
------------- ------------- -------------
Adjusted ............................... $ (4,744,658) $ 1,496,026 $ (1,175,751)
============= ============= =============

Basic net (loss) income per common share:
Reported ............................... $ (0.46) $ 0.14 $ (0.16)
Effect of goodwill amortization ........ -- -- 0.01
------------- ------------- -------------
Adjusted ............................... $ (0.46) $ 0.14 $ (0.15)
============= ============= =============

Diluted net (loss) income per common share:
Reported ............................... $ (0.46) $ 0.14 $ (0.16)
Effect of goodwill amortization ........ -- -- 0.01
------------- ------------- -------------
Adjusted ............................... $ (0.46) $ 0.14 $ (0.15)
============= ============= =============

NOTE 8--LINE OF CREDIT

On May 30, 2001, the Company entered into a loan and security agreement
with UPS Capital Global Trade Finance Corporation, providing for a working
capital credit facility with a maximum available amount of $13 million. On
November 17, 2003, the credit facility was amended to provide for a term loan of
$6 million in addition to the revolving credit facility with a maximum
availability of $7 million. The term loan provides for monthly payments
beginning December 15, 2003 through March 1, 2004. The initial term of the
Agreement is three years and the facility is secured by all assets of the
Company. The interest rate for the credit facility is at the prime rate plus 2%
(6% at December 31, 2003) on advances and the prime rate plus 4% (8.25% at
December 31, 2003) on the term loan. The credit facility requires the compliance
with certain financial covenants including net worth, fixed charge coverage
ratio and capital expenditures. At December 31, 2003, the Company was in
compliance with its financial covenants. Availability under the UPS Capital
credit facility is determined based on a defined formula related to eligible
accounts receivable and inventory. There were no open letters of credit at
December 31, 2003. There were $1,537,416 of open letters of credit at December
31, 2002.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9--SUBORDINATED DEMAND NOTES PAYABLE TO RELATED PARTIES

Subordinated notes payable to related parties consist of the following:

Year Ended December 31,
------------------------
2003 2002
---------- ----------

Sixnotes payable issued in 1996, four notes
payable issued in 1997, and two notes
payable issued in 1998 to officers and
directors of the Company with no monthly
payments and interest rates ranging from
7.5% to 10% annually, due and payable on
the fifteenth day following delivery of
written demand for payment ...................... $ 85,176 $ 85,176

Convertible secured note payable to the
Company's Chairman bears interest at
11%, payable quarterly, is due on demand
and convertible into common stock at the
election of the holder at a rate of $4.50
per share, the market value of the Company's
common stock on the date of approval by the
Company's Board of Directors. The note is
secured by substantially all of the Company's
assets .......................................... 500,000 500,000

Unsecured notes payable to shareholders,
directors and officers of the Company accrue
interest at 7%, 7.5% and 8.5% per annum,
principal and interest due on demand and
fifteen days from demand ........................ 264,795 764,795
---------- ----------

$ 849,971 $1,349,971
========== ==========

The notes are subordinate to UPS Capital Global Trade Finance
Corporation under the Company's line of credit facility. Interest expense
related to the subordinated notes payable to related parties for the years ended
December 31, 2003, 2002 and 2001 amounted to $88,102, $88,102 and $88,103.
Included in accrued expenses at December 31, 2003 and 2002 was $373,530 and
$285,428 of accrued interest related to these notes. There was no interest paid
on the subordinated notes for the years ended December 31, 2003 and 2002.

On February 28, 2003, the Company re-paid an unsecured note payable to
a shareholder in the amount of $500,000.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10--CAPITAL LEASE OBLIGATIONS

The Company financed equipment purchases through various capital lease
obligations expiring through June 2006. These obligations bear interest at
various rates ranging from 8% to 15% per annum. Future minimum annual payments
under these capital lease obligations are as follows:

YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- -----------

2004 .................................................... $ 632,285
2005 .................................................... 511,545
2006 .................................................... 175,567
-----------
Total payments .......................................... 1,319,397
Less amount representing interest ....................... (105,464)
-----------
Balance at December 31, 2003 ............................ 1,213,933
Less current portion .................................... 562,742
-----------

Long-term portion ....................................... $ 651,191
===========

At December 31, 2003, total equipment, included in property and
equipment (Note 6), under capital lease obligations and related accumulated
depreciation amounted to $2,198,390 and $650,878. At December 31, 2002, total
equipment, included in property and equipment, under capital lease obligations
and related accumulated depreciation amounted to $729,342 and $482,414.

NOTE 11--STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK

PREFERRED STOCK

SERIES D PREFERRED STOCK PRIVATE PLACEMENT TRANSACTION

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

At a special meeting of stockholders held on February 11, 2004, the
stockholders of the Company approved the issuance of 5,728,180 shares of common
stock upon conversion of the Series D Preferred Stock. At the conclusion of the
meeting, all of the shares of the Series D Convertible Preferred Stock
automatically converted into common shares.

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

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SERIES C PREFERRED STOCK PURCHASE AGREEMENT AND CO-MARKETING AND SUPPLY
AGREEMENT

In accordance with the Series C Preferred Stock Purchase Agreement
entered into by the Company and Coats North America Consolidated, Inc. ("Coats")
on September 20, 2001, the Company issued 759,494 shares of Series C Convertible
Redeemable Preferred Stock (the "Shares") to Coats North America Consolidated,
Inc. in exchange for an equity investment from Coats of $3,000,001 cash. The
Shares are convertible at the option of the holder after one year at the rate of
the closing price multiplied by 125% of the ten-day average closing price prior
to closing. The Shares are redeemable at the option of the holder after four
years. If the holders elect to redeem the Shares, the Company has the option to
redeem for cash at the stated value of $3,000,001 or in the form of the
Company's common stock at 85% of the market price of the Company's common stock
on the date of redemption. If the market price of the Company's common stock on
the date of redemption is less than $2.75 per share, the Company must redeem for
cash at the stated value of the Shares. The Company can elect to redeem the
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 the Company's common stock. The dividends are
payable at the earlier of the declaration of the Board, conversion or
redemption. Each Preferred Share has the right to vote for each of the Company's
common shares that the Shares could then be converted into on the record date.
Total legal and other costs associated with this transaction of $105,000 were
netted against the $3,000,001 proceeds received from Coats. Dividends accrued
but unpaid at December 31, 2003 and 2002 amounted to $428,202 and $234,150.

In connection with the Series C Preferred Stock Purchase Agreement, the
Company also entered into a 10-year Co-Marketing and Supply Agreement with
Coats. The Co-Marketing and Supply Agreement provides for selected introductions
into Coats' customer base and the Company's trim packages will exclusively offer
thread manufactured by Coats.

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

SERIES B PREFERRED STOCK PURCHASE AGREEMENT, DISTRIBUTION AGREEMENT AND
TRADENAME PURCHASE AGREEMENT

On April 3, 2000, the Company entered into a ten-year exclusive license
and distribution agreement with Talon, Inc. and its parent company, Grupo
Industrial Cierres Ideal, S.A. de C.V. ("GICISA"). Under this agreement, Tag-It
Pacific, Inc. was the exclusive sales, marketing, distribution and e-commerce
arm for "Talon" products for all customers in the United States, Mexico-based
maquiladores, Canada and the Pacific Rim and had the exclusive license to market
trim products under the "Talon" brand name. In exchange for these exclusive
distribution rights, the Company issued 850,000 shares of Series B Convertible
Preferred stock to GICISA. After a period of 30 months, the shares were
convertible into the Company's common stock once the average price per share of
the Company's common stock reached or exceeded $8.00 for a 30-day consecutive
period. The preferred stock was automatically convertible into shares of the
Company's common stock based on a rate of one minus the fraction of $2.50 over
the average per share closing price of the Company's common stock for the 30-day
period preceding the conversion.

The Series B Convertible Preferred stock had a liquidation preference
of $.001 per share, and was entitled to receive non-cumulative dividends on an
as converted basis, if and when, such dividends were declared on the Company's
common stock and was redeemable by the Company under certain conditions as
outlined in the agreement.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The estimated fair value of the Series B Convertible Preferred stock on
April 3, 2000 was $1,400,000. The Company recorded the value of the license and
distribution rights as a long-term asset, which was being amortized over the
ten-year period of the agreement. The unamortized balance of the long-term asset
at December 21, 2001 was $1,166,667.

On September 30, 2000, the Company purchased inventory from GICISA in
exchange for an unsecured note payable in the amount of $2,830,024. The note
payable was non-interest bearing and was due April 1, 2002. The Company imputed
interest for the holding period of the note amounting to $272,000. The note was
subordinate to the obligations due under the credit facility with UPS Capital.
The note payable balance at December 21, 2001 was $2,767,182, net of imputed
interest of $62,842.

On December 21, 2001, the Company entered into an Asset Purchase
Agreement with Talon, Inc. and GICISA. Pursuant to the Asset Purchase Agreement,
the Company acquired from Talon, Inc. and GICISA: (1) certain inventory and
equipment, (2) all patent rights held by Talon, Inc. and (3) all of Talon's
rights to its trade names and trademarks bearing the TALON (R) name. In
addition, the Asset Purchase Agreement terminated the exclusive 10-year license
and distribution agreement, dated as of April 3, 2000 by and among the Company,
GICISA and Talon, Inc.

Under the Asset Purchase Agreement, the Company issued to Talon, Inc.
500,000 shares of common stock, par value $0.001 per share, a promissory note in
the amount of $4,900,000 and $100,000 in cash held in escrow. The Asset Purchase
Agreement required Talon, Inc. to place 50,000 shares of the Company's common
stock and $100,000 in escrow for a period of 12 months to satisfy any
indemnification claims the Company may have under the Asset Purchase Agreement.
The common stock was valued at the market value of the Company's stock on the
date of closing. The promissory note is unsecured, bears interest at prime plus
2% (6.25% at December 31, 2003) and is subordinated to the Company's obligations
under its senior credit facility with UPS Capital Global Trade Finance
Corporation. In connection with the Asset Purchase Agreement, the Company also
entered into a mutual release with Talon, Inc. and GICISA pursuant to which
Talon, Inc. and GICISA released the Company from its obligations under the
unsecured note payable of $2,830,024 dated September 30, 2000 and other current
liabilities under the Exclusive License and Distribution Agreement. Further,
850,000 shares of the Company's series B convertible preferred stock held by
GICISA were cancelled at the closing of the Asset Purchase Agreement.

Future minimum annual payments under the subordinated note payable are
as follows:

YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ----------

2004 ..................................................... $1,200,000
2005 ..................................................... 1,400,000
----------
Balance at December 31, 2003 ............................. 2,600,000
Less current portion ..................................... 1,200,000
----------

Long-term portion ........................................ $1,400,000
==========

COMMON STOCK

2003 PRIVATE PLACEMENT

On May 30, 2003, the Company raised approximately $6,037,500 in a
private placement transaction with five institutional investors. Pursuant to a
securities purchase agreement with these institutional investors, the Company
sold 1,725,000 shares of its common stock at a price per share of $3.50. After
commissions and expenses, the Company received net proceeds of approximately
$5.5 million. The Company has registered the shares issued in the private
placement with the Securities and Exchange Commission for resale by the
investors. In conjunction with the private placement transaction, the Company

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

issued warrants to purchase 172,500 shares of common stock to the placement
agent. The warrants are exercisable beginning August 30, 2003 through May 30,
2008 and have a per share exercise price of $5.06.

STOCK GRANT AGREEMENTS

Pursuant to Stock Grant Agreements between the Company and Herman Roup,
dated December 1, 2001, January 1, 2002 and July 17, 2002, the Company issued to
Mr. Roup an aggregate of 42,000 shares of common stock during the year ended
December 31, 2003 and 20,500 shares of common stock in 2004 for services
provided to the Company valued at $166,740 and $74,825 in 2003 and 2004,
respectively.

EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT

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

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

YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- --------

2004 ..................................................... $ --
2005 ..................................................... 144,315
2006 ..................................................... 225,000
--------

Total minimum royalties .................................. $369,315
========

2002 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 are to be issued at the second closing. 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.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

NOTE 12--STOCK OPTION INCENTIVE PLAN AND WARRANTS

STOCK OPTION INCENTIVE PLAN

On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan
("the 1997 Plan"), which authorized the granting of a variety of stock-based
incentive awards. A total of 562,500 shares of Common Stock were reserved for
issuance under the 1997 Plan. The 1997 Plan is administered by the Board of
Directors, or a committee appointed by the Board of Directors, which determine
the recipients and terms of the awards granted. In 1997 and 1998, the Company
granted options to purchase 195,000 and 65,000 shares of Common Stock,
respectively, at an exercise price of $3.20 per share, the estimated fair value
of the Common Stock on the grant date. The options vested over four years and
are exercisable through their expiration dates in 2007 and 2008.

Effective October 10, 1998, the Company's Board of Directors approved
an option exchange program. Under the program, holders of options to purchase
189,500 shares of Common Stock at an exercise price of $3.20 per share (which
represented all of the options outstanding on the date the program was approved)
could exchange these options for new options to purchase shares of Common Stock
at an exercise price of $1.30 per share, which exercise price was above the
$1.1875 closing sales price of a share of Common Stock on the American Stock
Exchange on October 9, 1998. Upon the exchange, the existing options were
canceled and became available for future grant under the 1997 Plan. Each new
option was for the same or fewer number of shares and/or had a longer vesting
schedule than did the option for which it was exchanged. The new options are
exercisable through their expiration dates in 2007 and 2008, which expiration
dates correspond to the expiration dates of the options for which they were
exchanged. At October 10, 1998, options to purchase 70,500 shares of Common
Stock previously granted under the 1997 Plan had been canceled in accordance
with the terms of the respective option agreements.

Effective October 10, 1998, the Company granted options to purchase
392,000 shares of Common Stock at an exercise price of $1.30 per share, which
exercise price was above the $1.1875 closing sales price of a share of Common
Stock on the American Stock Exchange on October 9, 1998. The options have
vesting schedules from immediate to four years and are exercisable through their
expiration in 2008.

In 1999, the Company's Board of Directors further amended its 1997
Stock Incentive Plan to provide for a total of 1,177,500 shares of common stock
to be reserved for issuance under the Plan. On October 20, 1999, the Company
granted 393,000 options to purchase common stock at an exercise price of $4.31
per share, the closing sales price of a share of the Company's common stock on
that date.

In 2000, the Company's Board of Directors further amended its 1997
Stock Incentive Plan to provide for a total of 1,777,500 shares of common stock
to be reserved for issuance under the Plan. During the year ended December 31,
2000, the Company granted 401,500 options to purchase common stock at exercise
prices ranging between $3.75 and $4.625 per share, the closing price of the
Company's common stock on the date of grants.

In 2001, the Company's Board of Directors further amended its 1997
Stock Incentive Plan to provide for a total of 2,077,500 shares of common stock
to be reserved for issuance under the Plan. During the year ended December 31,
2001, the Company granted 485,000 options to purchase common stock at

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

exercise prices ranging between $3.64 and $4.32 per share, the closing price of
the Company's common stock on the date of grants.

In 2002, the Company's Board of Directors further amended its 1997
Stock Incentive Plan to provide for a total of 2,277,500 shares of common stock
to be reserved for issuance under the Plan. During the year ended December 31,
2002, the Company granted 270,000 options to purchase common stock at an
exercise price of $3.63 per share, the closing price of the Company's common
stock on the date of grant.

In 2003, the Company's Board of Directors further amended its 1997
Stock Incentive Plan to provide for a total of 2,577,500 shares of common stock
to be reserved for issuance under the Plan. During the year ended December 31,
2003, the Company granted 510,000 options to purchase common stock at exercise
prices of $3.50 and $3.70 per share, the closing price of the Company's common
stock on the date of grants.

The following table summarizes the activity in the 1997 Plan:

Weighted
Average
Number of Exercise
Shares Price
---------- --------

Options outstanding - January 1, 2001 ......... 1,160,500 $ 3.37
Granted .................................. 485,000 3.82
Exercised ................................ (15,000) 1.30
Canceled ................................. (84,500) 4.24
---------- --------

Options outstanding - December 31, 2001 ....... 1,546,000 3.39
Granted .................................. 270,000 3.63
Exercised ................................ (50,000) 1.30
Canceled ................................. (32,500) 3.40
---------- --------

Options outstanding - December 31, 2002 ....... 1,733,500 3.48
Granted .................................. 510,000 3.59
Exercised ................................ (126,500) 2.51
Canceled ................................. (139,000) 3.84
---------- --------

Options outstanding - December 31, 2003 ....... 1,978,000 $ 3.55
========== ========

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additional information relating to stock options and warrants
outstanding and exercisable at December 31, 2003, summarized by exercise price
is as follows:

Outstanding Weighted Average Exercisable
Weighted Average
------------------------------ -------------------
Exercise Life Exercise Exercise
Price Per Share Shares (years) Price Shares Price
- ------------------ --------- ------- -------- --------- --------
$ 0.71 (warrants) 39,235 4.0 $ 0.71 39,235 $ 0.71
$ 1.30 255,000 4.5 $ 1.30 255,000 $ 1.30
$ 4.31 317,000 6.0 $ 4.31 317,000 $ 4.31
$ 4.63 105,000 6.0 $ 4.63 105,000 $ 4.63
$ 3.78 126,000 7.5 $ 3.78 126,000 $ 3.78
$ 4.25 130,000 6.5 $ 4.25 127,188 $ 4.25
$ 4.50 15,000 6.5 $ 4.50 13,125 $ 4.50
$ 3.75 149,000 7.0 $ 3.75 149,000 $ 3.75
$ 3.63 230,000 9.0 $ 3.63 207,500 $ 3.63
$ 3.64 146,000 8.0 $ 3.64 146,000 $ 3.64
$ 3.50 285,000 9.3 $ 3.50 263,750 $ 3.50
$ 3.70 220,000 9.3 $ 3.70 120,750 $ 3.70
$ 3.65 (warrants) 10,000 0.6 $ 3.65 10,000 $ 3.65
$ 5.00 (warrants) 20,000 0.5 $ 5.00 20,000 $ 5.00
$ 4.57 (warrants) 5,000 0.5 $ 4.57 5,000 $ 4.57
$ 4.34 (warrants) (1) 229,166 2.3 $ 4.34 229,166 $ 4.34
$ 4.73 (warrants) (1) 229,166 2.3 $ 4.73 229,166 $ 4.73
$ 4.74 (warrants) 572,818 5.0 $ 4.74 - $ 4.74
$ 5.06 (warrants) 172,500 4.5 $ 5.06 172,500 $ 5.06
--------- ---------
3,255,885 6.0 $ 3.95 2,535,380 $ 3.79
========= =========
- ----------
(1) The exercise price of these warrants includes an upward adjustment of 25% of
the amount, if any, that the market price of the Company's common stock on the
exercise date exceeds the stated exercise price, up to a maximum of $5.25.

NOTE 13--INCOME TAXES

The components of the (benefit) provision for income taxes included in
the consolidated statements of operations are as follows:

Year Ended December 31,
-----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Current:
Federal ............. $ 360,000 $ 222,713 $ (172,073)
State ............... 16,193 39,301 (30,366)
----------- ----------- -----------
376,193 262,014 (202,439)
Deferred:
Federal ............. (2,302,711) 14,170 (187,794)
State ............... (406,362) 2,501 (33,140)
----------- ----------- -----------
(2,709,073) 16,671 (220,934)
----------- ----------- -----------
$(2,332,880) $ 278,685 $ (423,373)
=========== =========== ===========

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax rate is as follows:

Year Ended December 31,
--------------------------
2003 2002 2001
------ ------ ------
Current:
Federal statutory rate ..................... (34.0)% 34.0% (34.0)%
State taxes net of Federal benefit ......... (6.0) 6.0 (6.0)
Income earned from foreign subsidiaries .... 6.4 (18.2) 1.2
Utilization of NOL benefit ................. -- -- 15.7
Exercise of stock options .................. 2.3 (3.1) 1.1
Other ...................................... (1.7) (3.0) (3.7)
------ ------ ------
(33.0)% 15.7% (25.7)%
====== ====== ======

(Loss) income before income taxes are as follows:

Year Ended December 31,
-------------------------------------------------
2003 2002 2001
----------- ----------- -----------

Domestic .............. $(9,303,639) $ 428,473 $(1,400,553)
Foreign ............... 2,226,101 1,346,238 (248,571)
----------- ----------- -----------
$(7,077,538) $ 1,774,711 $(1,649,124)
=========== =========== ===========

The primary components of temporary differences which give rise to the
Company's deferred tax assets and deferred tax liabilities are as follows:

Year Ended December 31,
----------------------------
2003 2002
----------- -----------
Net deferred tax asset:
Net operating loss carryforwards ........ $ 3,447,744 $ 334,292
Dies, film and art library .............. (22,959) (37,766)
Depreciation and amortization ........... 199,629 42,951
Intangible assets ....................... (347,240) (173,620)
Bad debt reserve ........................ 584,481 (75,737)
Related Party Interest .................. 72,165 --
Other ................................... (14,820) 808
----------- -----------
3,919,000 90,928
Less: Valuation Allowance .............. (1,119,000) --
----------- -----------
$ 2,800,000 $ 90,928
=========== ===========

At December 31, 2003, Tag-It Pacific, Inc. had Federal and state NOL
carryforwards of approximately $9,243,000 and $5,084,000, respectively. The
Federal NOL is available to offset future taxable income through 2023, and the
state NOL expires in 2013. The Company's ability to utilize NOL carryforwards
are dependent upon the Company's ability to generate taxable income in the
future.

Deferred tax assets are initially recognized for differences between
the financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible amounts and operating loss
and tax credit carryforwards. A valuation allowance is then established to
reduce that deferred tax asset to the level at which it is "more likely than
not" that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss or credit carryforwards
depends on having

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
difference, and (iii) future taxable income generated by future operations.
Based on an evaluation of the realizability of the deferred tax asset,
management has determined that it is more likely than not that the Company will
realize this tax benefit.

NOTE 14--COMMITMENTS AND CONTINGENCIES

EXCLUSIVE SUPPLY AGREEMENT

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

The Company recognizes revenue at the time goods are shipped, at which
point title transfers to the customer, and collection is reasonably assured.
Total deferred income at December 31, 2002 amounted to $1,027,984 and was fully
recognized into revenue in 2003.

LEASES

The Company is a party to a number of non-cancelable operating lease
agreements involving buildings and equipment which expire at various dates
through December 2007. The Company accounts for its leases in accordance with
SFAS No. 13, whereby step provisions, escalation clauses, tenant improvement
allowances, increases based on an existing index or rate, and other lease
concessions are accounted for in the minimum lease payments and are charged to
the income statement on a straight line basis over the related lease term.

The future minimum lease commitments as of December 31, 2003 are as
follows:

YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ----------
2004 .................................................... $ 721,211
2005 .................................................... 601,039
2006 .................................................... 324,845
2007 .................................................... 13,760
----------
Total minimum payments ............................... $1,660,855
==========

Total rental expense for the years ended December 31, 2003, 2002 and
2001 aggregated $966,867, $820,194 and $766,962, respectively.

PROFIT SHARING PLAN

In October 1999, the Company established a 401(k) profit-sharing plan
for the benefit of qualified employees. The Company may make annual
contributions to the plan as determined by the Board of Directors. There were no
contributions made during the years ended December 31, 2003, 2002 and 2001.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONTINGENCIES

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

On December 31, 2002, the Company indirectly guaranteed the
indebtedness of two of its suppliers through the issuance by a related party of
letters of credit to purchase goods and equipment totaling $1.5 million.
Financing costs due to this related party amounted to approximately $15,000. The
letters of credit expired on March 27, 2003 and June 26, 2003. There were no
letters of credit outstanding as of December 31, 2003.

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

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

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

NOTE 15--GEOGRAPHIC INFORMATION

The Company specializes in the distribution of a full range of trim
items to manufacturers of fashion apparel, specialty retailers and mass
merchandisers. There is not enough difference between the types of products
developed and distributed by the Company to account for these products
separately or to justify segmented reporting by product type.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company distributes its products internationally and has reporting
requirements based on geographic regions. Revenues and long-lived assets are
attributed to countries based on the location of the customer as follows:

Year Ended December 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Sales:
United States ............. $ 7,899,890 $ 8,709,833 $14,494,035
Asia ...................... 12,308,093 5,436,927 1,984,103
Mexico .................... 28,811,197 44,087,714 27,089,492
Dominican Republic ........ 15,423,635 1,838,696 --
----------- ----------- -----------
$64,442,815 $60,073,170 $43,567,630
=========== =========== ===========
Long-lived Assets:
United States ............. $ 8,594,804 $ 6,998,595 $ 6,610,522
Asia ...................... 1,243,388 117,534 199,064
Mexico .................... 267,704 308,671 344,129
Dominican Republic ........ 975,092 580,526 --
----------- ----------- -----------
$11,080,988 $ 8,005,326 $ 7,153,715
=========== =========== ===========

NOTE 16--MAJOR CUSTOMERS & VENDORS

Three major customers, two of which are related parties, accounted for
approximately 64.1% of the Company's net sales on a consolidated basis for the
year ended December 31, 2003. Two major customers, both related parties,
accounted for approximately 69.7% and 63.0% of the Company's net sales on a
consolidated basis for the years ended December 31, 2002 and 2001. Included in
trade accounts receivable and accounts receivable related parties at December
31, 2003 is $1,524,211 and $11,721,465 due from these customers. Included in
trade accounts receivable related parties at December 31, 2002 is $14,770,466
due from these customers. Terms are net 30 and 60 days. The Company holds
inventories of approximately $6.5 million at December 31, 2003 that are subject
to buyback arrangements with its customers. The Company's results of operations
will depend to a significant extent upon the commercial success of these
customers. If these customers fail to purchase trim products at anticipated
levels, or the relationship terminates, it may have an adverse affect on the
Company's results of operations. If the financial condition of these customers
were to deteriorate, resulting in an impairment of their ability to purchase
inventories or repay receivables, it may also have an adverse affect on the
Company's results of operations.

Two major vendors, one a related party, accounted for approximately
43.2% of the Company's purchases for the year ended December 31, 2003. One major
vendor, a related party, accounted for approximately 30.6% and 57.6% of the
Company's purchases for the years ended December 31, 2002 and 2001. Included in
accounts payable and accrued expenses at December 31, 2003 and 2002 is $607,179
and $3,684,660 due to these vendors. Terms are sight and 60 days.

NOTE 17--RELATED PARTY TRANSACTIONS

The estate of the former President and Director of the Company is the
general partner of D.P.S. Associates, a general partnership, which is the lessor
of the Company's former executive offices in Los Angeles, California, pursuant
to a lease agreement with the Company. The lease provided for base rent of
$9,072 on a month-to-month basis. The Company relocated its executive offices to
Woodland Hills, California in May 2001 and terminated its lease agreement with
D.P.S. Associates.

A former Director of the Company controls a financial advisory firm,
Averil Associates, Inc. ("Averil Associates"), which has performed various
services for the Company including investigation of strategic financing and
other corporate growth initiatives. As consideration for such services, AGS
Stationery paid

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Averil Associates the aggregate amount of $26,123, plus out of pocket expenses.
As additional compensation for such services, in 1997, AGS Stationery granted to
Chloe Holdings, Inc., an affiliate of Averil Associates, warrants to purchase up
to 135 shares of Common Stock of AGS Stationery. Effective upon the Conversion,
the Chloe Warrants became exercisable for 22,841 shares of the Common Stock of
the Company at $0.76 per share and the Company also paid Averil Associates an
additional $175,000 upon consummation of the Company's initial public offering
for services rendered in connection therewith. The Chloe warrants were exercised
in November 1999. On September 10, 2001, the Company issued an additional 20,000
warrants to Chloe Holdings, Inc. for consulting services provided to the
Company. The warrants are exercisable at $5.00 per share and expire on July 18,
2004. Consulting fees paid to Averil Associates for the years ended December 31,
2003, 2002 and 2001 amounted to $0, $0 and $366,000.

In October 1998, the Company sold 2,390,000 shares of Common Stock at a
purchase price per share of $1.125 to KG Investment, LLC. The Company used the
$2,688,750 raised in the private placement to fund a portion of its business
growth plans and operations. KG Investment is owned by Gerard Guez and Todd Kay,
executive officers and significant shareholders of Tarrant Apparel Group
("Tarrant"). KG Investment agreed that it would not seek to dispose of its
shares prior to October 16, 2000, except to certain affiliated parties, without
the Company's prior written consent. KG Investment also agreed to certain
additional restrictions on the transfer and voting of the shares it purchased
and has been granted piggyback registration rights.

Commencing in December 1998, the Company began to provide trim products
to Tarrant for its operations in Mexico. In connection therewith, the Company
purchased $2.25 million of Tarrant's existing inventory in December 1998 for
resale to Tarrant. Commencing in December 2000, the Company began to provide
trim products to Azteca Production International, Inc. for its operations in
Mexico. In connection therewith, the Company purchased $4.0 million of Azteca's
existing inventory in December 2000 for resale to Azteca.

Total sales to Tarrant and Azteca and their affiliates for the years
ended December 31, 2003, 2002 and 2001 amounted to approximately $25,883,000,
$41,893,000 and $27,454,000. As of December 31, 2003 and 2002, accounts
receivable related parties included approximately $11,721,000 and $14,770,000
due from Tarrant and Azteca and their affiliates. Terms are net 60 days.

Transportation fees paid to a company that has common ownership with
Azteca for the years ended December 31, 2003, 2002 and 2001 amounted to
$210,000, $225,000 and $15,000.

Included in due from related parties at December 31, 2003 and 2002 is
$762,076 and $870,251, respectively, of unsecured notes and advances to
officers, members of the Board of Directors and stockholders of the Company. The
notes and advances bear interest at 7.5%, 8.5% and prime and are due on demand.

In August 1999, Mark Dyne, Chairman of the Board of Directors, loaned
the Company $160,000. This indebtedness is evidenced by an unsecured promissory
note dated August 17, 1999. The principal, which bears an interest rate at 7%
per annum, and interest are due and payable on demand. The Company repaid
$95,205 of the principal balance during the year ended December 31, 2001.

Transportation fees paid to a company that has common ownership with
Mark Dyne, Chairman of the Board of Directors, for the year ended December 31,
2003 amounted to $20,000.

Consulting fees paid to Diversified Investments, a company owned by a
member of the Board of Directors of the Company, amounted to $137,000, $150,000
and $150,000 for the years ended December 31, 2003, 2002 and 2001.

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consulting fees paid for services provided by a member of the Board of
Directors amounted to $41,300, $70,800 and $64,900 for the years ended December
31, 2003, 2002 and 2001.

On February 1, 2001, options to purchase 15,000 shares of the Company's
common stock held by a former director of the Company were exercised.

In October 1998, the Company adopted a stockholder's rights plan. Under
the rights plan the Company distributed one preferred share purchase right for
each outstanding share of Common Stock outstanding on November 6, 1998. Upon the
occurrence of certain triggering events related to an unsolicited takeover
attempt of the Company, each purchase right not owned by the party or parties
making the unsolicited takeover attempt will entitle its holder to purchase
shares of the Company's Series A Preferred Stock at a value below the then
market value of the Series A Preferred Stock. The rights of holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
holders of the share purchase rights, the Series A Preferred Stock and any other
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the Company's outstanding voting stock.

NOTE 18 -RESTRUCTURING CHARGES

2003 RESTRUCTURING PLAN

During the fourth quarter of 2003, the Company implemented a plan to
restructure certain business operations. In accordance with the restructuring
plan, the Company incurred costs related to the reduction of its Mexico
operations, including the relocation of its Florida operations to North Carolina
and the downsizing of its corporate operations by eliminating certain corporate
expenses related to operations, sales and marketing and general and
administrative expenses. The reduction of operations in Mexico was in response
to the following:

o An anticipated reduction in sales volume from the Company's
larger Mexico customers;

o The Company's efforts to decrease its reliance on its larger
Mexico customers;

o The difficulty in obtaining financing in Mexico due to the
location of assets outside the U.S. and customer concentration
and other limits imposed by financial institutions.

The reduction of operations in Mexico is estimated to reduce the
Company's working capital requirements and improve its cash flow, among other
things.

Total restructuring charges for the year ended 2003 amounted to
$7,700,047. Restructuring charges include approximately $4.3 million of
inventory write-downs, $1.6 million of additional reserves for doubtful accounts
receivable, $1 million of costs incurred related to the reduction of operations
in Mexico, including the relocation of inventory and facilities, $500,000 of
benefits paid to terminated employees and $300,000 of other costs. The Company
does not anticipate any further charges as a result of this restructuring plan.
All restructuring costs were incurred and paid for in the fourth quarter of 2003
and, therefore, there are no liabilities related to restructuring charges
included in the balance sheet at December 31, 2003.

Restructuring charges for the year ended December 31, 2003 related to
the following expense categories included in the Company's statement of
operations are as follows:

TAG-IT PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amount
----------

2001 RESTRUCTURING PLAN

During the first quarter of 2001, the Company implemented a plan to
restructure certain business operations. In accordance with the restructuring
plan, the Company closed its Tijuana, Mexico, facilities and relocated its TALON
brand operations to Miami, Florida. In addition, the Company incurred costs
related to the reduction of its Hong Kong operations, the relocation of its
corporate headquarters from Los Angeles, California, to Woodland Hills,
California, and the downsizing of its corporate operations by eliminating
certain corporate expenses related to sales and marketing, customer service and
general and administrative expenses. A total of 221 employees were terminated or
resigned as part of the Company's restructuring plan. Total restructuring
charges for the year ended 2001 amounted to $1,561,623, including $355,769 of
benefits paid to terminated employees. Included in accrued expenses at December
31, 2001 was $114,554 of accrued restructuring charges consisting of future
payments to former employees.

NOTE 19 - QUARTERLY RESULTS (UNAUDITED)

Quarterly results for the years ended December 31, 2003 and 2002 are
reflected below:

FOURTH(1) THIRD SECOND FIRST
- ----------------------------------------------------------------------------------------------

2003
- ----
Revenue ......................... $ 12,884,512 $ 16,467,896 $ 20,731,573 $ 14,358,834
Operating (loss) income ......... $ (8,363,491) $ 431,311 $ 1,278,819 $ 771,933
Net (loss) income ............... $ (5,949,360) $ 95,170 $ 748,664 $ 360,868
Basic (loss) earnings per share . $ (0.52) $ 0.00 $ 0.07 $ 0.03
Diluted (loss) earnings per share $ (0.52) $ 0.00 $ 0.07 $ 0.03

2002
- ----
Revenue ......................... $ 14,604,864 $ 16,349,906 $ 19,793,344 $ 9,325,056
Operating income ................ $ 198,519 $ 803,781 $ 1,707,431 $ 334,345
Net income ...................... $ 51,780 $ 343,931 $ 1,046,303 $ 54,012
Basic earnings per share ........ $ 0.00 $ 0.03 $ 0.11 $ 0.00
Diluted earnings per share ...... $ 0.00 $ 0.03 $ 0.10 $ 0.00

- ----------
<FN>
(1) The Company recorded a Restructuring Charge of $7.7 million during
the fourth quarter of 2003.
</FN>

Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with the per share amounts for the year.

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON SCHEDULE II

To the Board of Directors
Tag-It Pacific, Inc.
Los Angeles, California

The audits referred to in our report, dated March 8, 2004, included the related
financial statement schedule as of December 31, 2003, and for each of the three
years in the period ended December 31, 2003, included in the annual report on
Form 10-K of Tag-It Pacific, Inc. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule presents fairly, in all material
respects, the information set forth therein.

BDO Seidman, LLP

Los Angeles, California
March 8, 2004

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Balance at Balance at
Beginning End of
DESCRIPTION of year Additions Deductions Year
----------- ---------- --------- ---------- ----------

2003
- ----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet... ........... $ 401,485 $1,822,116 $ 180,030 $2,043,571
Reserve for obsolescence
deducted from inventories on
the balance sheet.................. 155,500 4,665,000 4,820,500 -
---------- ---------- ---------- ----------
$ 556,985 $6,487,116 $5,000,530 $2,043,571
========== ========== ========== ==========
2002
- ----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet............... $ 568,625 743,113 $ 910,253 $ 401,485
Reserve for obsolescence
deducted from inventories on
the balance sheet.................. - 155,500 - 155,500
---------- ---------- ---------- ----------
$ 568,625 $ 898,613 $ 910,253 $ 556,985
========== ========== ========== ==========
2001
- ----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet............... $ 299,224 $ 600,200 $ 330,799 $ 568,625

Reserve for obsolescence
deducted from inventories on
the balance sheet.................. - 1,058,016 1,058,016 -
---------- ---------- ---------- ----------
$ 299,224 $1,658,216 $1,388,815 $ 568,625
========== ========== ========== ==========

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 9A. 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 Ferguson, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
Based upon that evaluation, Mr. Dyne and Ms. Ferguson concluded that the
Company's disclosure controls and procedures are effective in causing material
information to be recorded, processed, summarized and reported by management of
the Company on a timely basis and to ensure that the quality and timeliness of
the Company's public disclosures complies with its SEC disclosure obligations.

CHANGES IN 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 III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item 10 will appear in the proxy statement
for the 2004 Annual Meeting of Stockholders, and is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION.

Information regarding executive compensation will appear in the proxy
statement for the 2004 Annual Meeting of Stockholders, and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

Information regarding security ownership of certain beneficial owners
and management and related stockholder matters will appear in the proxy
statement for the 2004 Annual Meeting of Stockholders, and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information regarding certain relationships and related transactions
will appear in the proxy statement for the 2004 Annual Meeting of Stockholders,
and is incorporated by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information regarding principal accountant fees and services will
appear in the proxy statement for the 2004 Annual Meeting of Stockholders, and
is incorporated by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) FINANCIAL STATEMENTS - See Item 8 of this Form 10-K annual
report.

(b) Reports on Form 8-K:

Current Report on Form 8-K, reporting item 7 and 12, as filed
on November 14, 2003.

Current Report on Form 8-K, reporting item 5 and 7, as filed
on December 22, 2003.

See Exhibit Index attached to this Form 10-K annual report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

TAG-IT PACIFIC, INC.

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

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints
Colin Dyne and Ronda Ferguson, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/S/ MARK DYNE Chairman of the Board March 30, 2004
- --------------------------- of Directors
Mark Dyne

/S/ COLIN DYNE Chief Executive Officer March 30, 2004
- --------------------------- and Director
Colin Dyne

/S/ RONDA FERGUSON Chief Financial Officer March 30, 2004
- ---------------------------
Ronda Ferguson

Director
- ---------------------------
Kevin Bermeister

/S/MICHAEL KATZ Director March 30, 2004
- ---------------------------
Michael Katz

/S/JONATHAN BURSTEIN Director and Vice President March 30, 2004
- --------------------------- of Operations
Jonathan Burstein

Director
- ---------------------------
Brent Cohen

/S/ G. MAXWELL PERKS Director March 30, 2004
- ---------------------------
G. Maxwell Perks

EXHIBIT INDEX

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------

3.1 Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Form SB-2 filed on October 21, 1997,
and the amendments thereto.

3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to
Form SB-2 filed on October 21, 1997, and the amendments thereto.

3.3 Certificate of Designation of Rights, Preferences and Privileges
of Series A Preferred Stock. Incorporated by reference to Exhibit
A to the Rights Agreement filed as Exhibit 4.1 to Current Report
on Form 8-K filed as of November 4, 1998.

3.4 Certificate of Amendment of Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.4 to Annual
Report on Form 10-KSB, filed March 28, 2000.

3.5 Certificate of Designation of Series C Convertible Redeemable
Preferred Stock. Incorporated by reference to Exhibit 99.5 to
Form 8-K filed on October 15, 2001.

3.6 Certificate of Designation of Series D Convertible Preferred
Stock. Incorporated by reference to Exhibit 4.1 to Form 8-K filed
on December 18, 2003.

4.1 Specimen Stock Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1to Form SB-2 filed on
October 21, 1997, and the amendments thereto.

4.2 Rights Agreement, dated as of November 4, 1998, between
Registrant and American Stock Transfer and Trust Company as
Rights Agent. Incorporated by reference to Exhibit 4.1 to Current
Report on Form 8-K filed as of November 4, 1998.

4.3 Form of Rights Certificate. Incorporated by reference to Exhibit
B to the Rights Agreement filed as Exhibit 4.1 to Current Report
on Form 8-K filed as of November 4, 1998.

10.1 Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.1to Form SB-2 filed on October 21, 1997, and the
amendments thereto.

10.2 Promissory Note, dated September 30, 1996, provided by Tag-It,
Inc. to Harold Dyne. Incorporated by reference to Exhibit 10.21
to Form SB-2 filed on October 21, 1997, and the amendments
thereto.

10.3 Promissory Note, dated June 30, 1991, provided by Tag-It, Inc. to
Harold Dyne. Incorporated by reference to Exhibit 10.23 to Form
SB-2 filed on October 21, 1997, and the amendments thereto.

10.4 Promissory Note, dated January 31, 1997, provided by Tag-It Inc.
to Mark Dyne. Incorporated by reference to Exhibit 10.24 to Form
SB-2 filed on October 21, 1997, and the amendments thereto.

10.5 Promissory Note, dated February 29, 1996, provided by A.G.S.
Stationary, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.25o Form SB-2 filed on October 21, 1997,
and the amendments thereto.

10.6 Promissory Note, dated January 19, 1995, provided by Pacific Trim
& Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.26 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------

10.7 Registrant's 1997 Stock Incentive Plan, as amended.

10.8 Form of Non-statutory Stock Option Agreement. Incorporated by
reference to Exhibit 10.30 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.9 Promissory Note, dated August 31, 1997, provided by Harold Dyne
to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
10.32 to Form SB-2 filed on October 21, 1997, and the amendments
thereto.

10.10 Promissory Note, dated October 15, 1997, provided by Harold Dyne
to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
10.34 to Form SB-2 filed on October 21, 1997, and the amendments
thereto.

10.11 Warrant Agreement, dated June 1, 1994, between Jonathan Markiles
and Tag-It, Inc. Incorporated by reference to Exhibit 10.39 to
Form SB-2 filed on October 21, 1997, and the amendments thereto.

10.12 Contract for Manufacturing Services between USA and Mexico,
between Tag-It, Inc. and Tagit de Mexico, S.A. de C.V.
Incorporated by reference to Exhibit 10.44 to Form SB-2 filed on
October 21, 1997, and the amendments thereto.

10.13 Promissory Note, dated October 15, 1997, provided by A.G.S.
Stationary Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.48 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.14 Promissory Note, dated November 4, 1997, provided by Pacific Trim
& Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.49 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.15 Binding Letter of Understanding, dated October 14, 1998.
Incorporated by reference to Exhibit 99.3 to Current Report on
Form 8-K filed as of October 29, 1998.

10.16 Side Letter Agreement, dated October 14, 1998. Incorporated by
reference to Exhibit 99.4 to Current Report Form 8-K filed as of
October 29, 1998.

10.17 Guaranty, dated as of October 4, 2000, by A.G.S. Stationery, Inc.
in favor or Mark I. Dyne. Incorporated by reference to Exhibit
10.40 to Form 10-K filed on April 4, 2001.

10.18 Guaranty, dated as of October 4, 2000, by Tag-It, Inc. in favor
of Mark I. Dyne. Incorporated by reference to Exhibit 10.41 to
Form 10-K filed on April 4, 2001.

10.19 Guaranty, dated as of October 4, 2000, by Talon International,
Inc. in favor of Mark I. Dyne. Incorporated by reference to
Exhibit 10.42 to Form 10-K filed on April 4, 2001.

10.20 Intercreditor Agreement, dated as of October 4, 2000, by and
among Mark I. Dyne, Sanwa Bank California, the Registrant,
Tag-It, Inc., Talon International, Inc. and A.G.S. Stationery,
Inc. Incorporated by reference to Exhibit 10.43 to Form 10-K
filed on April 4, 2001.

10.21 Security Agreement, dated as of October 4, 2000, between A.G.S.
Stationery, Inc. and Mark I. Dyne. Incorporated by reference to
Exhibit 10.44 to Form 10-K filed on April 4, 2001. Incorporated
by reference to Exhibit 10.44 to Form 10-K filed on April 4,
2001.

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------

10.22 Security Agreement, dated as of October 4, 2000, between Tag-It,
Inc. and Mark I. Dyne. Incorporated by reference to Exhibit 10.45
to Form 10-K filed on April 4, 2001.

10.23 Security Agreement, dated as of October 4, 2000, between Talon
International Inc. and Mark I. Dyne. Incorporated by reference to
Exhibit 10.46 to Form 10-K filed on April 4, 2001.

10.24 Security Agreement, dated as of October 4, 2000, between Tag-It
Pacific, Inc. and Mark I. Dyne. Incorporated by reference to
Exhibit 10.47 to Form 10-K filed on April 4, 2001.

10.25 Convertible Secured Subordinated Promissory Note, dated October
4, 2000, provided by Mark I. Dyne to the Registrant. Incorporated
by reference to Exhibit 10.48 to Form 10-K filed on April 4,
2001.

10.26 Trim Handling Agreement, dated as of December 29, 1999, among the
Registrant, Tarrant Apparel Group, Inc. & Tagmex and Tag-It de
Mexico S.A. Incorporated by reference to Exhibit 10.51 to Form
10-K filed on April 4, 2001.

10.27 Supply Agreement entered into on December 22, 2000, by and
between the Company, Hubert Guez, Paul Guez and Azteca Production
International, Inc., AZT International SA D RL, and Commerce
Investment Group, LLC.* Incorporated by reference to Exhibit
10.53 to Form 10-K filed on April 4, 2001.

10.28 Investor Rights Agreement entered into on December 22, 2000, by
and between the Company and Commerce Investment Group, LLC.
Incorporated by reference to Exhibit 10.54 to Form 10-K filed on
April 4, 2001.

10.29 Voting Agreement entered into on December 22, 2000, by and
between the Company, Hubert Guez, Paul Guez and Azteca Production
International, Inc., AZT International SA D RL, Commerce
Investment Group, LLC, and Colin Dyne. Incorporated by reference
to Exhibit 10.55 to Form 10-K filed on April 4, 2001.

10.30 Right of First Refusal and Sale Agreement entered into on
December 22, 2000, by and between the Company, Hubert Guez, Paul
Guez and Azteca Production International, Inc., AZT International
SA D RL, Commerce Investment Group, LLC, and Colin Dyne.
Incorporated by reference to Exhibit 10.56 to Form 10-K filed on
April 4, 2001.

10.31 Co-Marketing and Supply Agreement, dated as of September 20,
2001, between Tag-It Pacific, Inc. and Coats America, Inc.
Incorporated by reference to Exhibit 99.3 to Form 8-K filed on
October 15, 2001.

10.32 Purchase Money Security Agreement, dated as of September 20,
2001, between Tag-It Pacific, Inc. and Coats America, Inc.
Incorporated by reference to Exhibit 99.4 to Form 8-K filed on
October 15, 2001.

10.33 Promissory Note, dated as of December 21, 2001, by Tag-It
Pacific, Inc. for the benefit of Talon, Inc. Incorporated by
reference to Exhibit 99.2 to Form 8-K filed on January 7, 2002.

10.34 Form of Warrant to Purchase Common Stock Agreements dated
December 28, 2001. Incorporated by reference to Exhibit 99.2 to
Form 8-K filed on January 23, 2002.

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------

10.35 Form of Stockholders Agreements dated December 28, 2001.
Incorporated by reference to Exhibit 99.3 to Form 8-K filed on
January 23, 2002.

10.36 Form of Investor Rights Agreements dated December 28, 2001.
Incorporated by reference to Exhibit 99.4 to Form 8-K filed on
January 23, 2002.

10.37 Form of Exclusive Supply Agreement dated July 12, 2002, among
Tag-It Pacific, Inc. and Levi Strauss & Co.* Incorporated by
reference to Exhibit 10.68 to Form 10-Q filed on November 15,
2002.

10.38 Intellectual Property Rights Agreement, dated April 2, 2002,
between the Company and Pro-Fit Holdings, Ltd.* Incorporated by
reference to Exhibit 10.69 to Form 10-K/A filed on October 1,
2003.

10.39 Amendment to Exclusive Supply Agreement, dated July 12, 2002,
between Tag-It Pacific, Inc. and Levi Strauss & Co.* Incorporated
by reference to Exhibit 10.70 to Form 10-K filed on May 28, 2003.

10.40 Securities Purchase Agreement dated May 23, 2003, by and among
the Company and the Purchasers identified on the signature pages
thereto. Incorporated by reference to Exhibit 99.2 to Form 8-K
filed on June 4, 2003.

10.41 Registration Rights Agreement dated May 23, 2003, by and among
the Company and the Purchasers identified on the signature pages
thereto. Incorporated by reference to Exhibit 99.3 to Form 8-K
filed on June 4, 2003.

10.42 Common Stock Purchase Warrant dated May 30, 2003 between the
Company and Roth Capital Partners LLC. Incorporated by reference
to Exhibit 10.15 to Form S-3 Registration Statement filed on June
25, 2003.

10.43 Form of Subscription Agreement between the Company and the
Purchaser to be identified therein dated December 18, 2003.
Incorporated by reference to Exhibit 99.1 to Form 8-K filed on
December 22, 2003.

10.44 Form of Registration Rights Agreement dated December 18, 2003
among the Company and the Purchasers identified therein.
Incorporated by reference to Exhibit 99.2 to Form 8-K filed on
December 22, 2003.

10.45 Placement Agent Agreement dated December 18, 2003 between the
Company and Sanders Morris Harris Inc. Incorporated by reference
to Exhibit 99.3 to Form 8-K filed on December 22, 2003.

10.46 Common Stock Purchase Warrant dated December 18, 2003 between the
Company and Sanders Morris Harris Inc. Incorporated by reference
to Exhibit 99.4 to Form 8-K filed on December 22, 2003.

14.1 Code of Ethics.

21.1 Subsidiaries.

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------

23.1 Consent of BDO Seidman, LLP.

24.1 Power of Attorney (included on signature page).

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

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

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

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