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

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

FORM 10-Q

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

For the quarterly period ended March 31, 2005.

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

For the transition period from ____________ to _______________.

Commission file number 1-13669

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

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

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

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

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

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

Yes [_] No [X]

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

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

PART I FINANCIAL INFORMATION PAGE
----

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

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

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

Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 (unaudited)................5

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

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

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

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

PART II OTHER INFORMATION

Item 6. Exhibits.............................................................28

PART I
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

TAG-IT PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

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

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

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

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

See accompanying notes to consolidated financial statements.

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

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

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

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

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

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

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

See accompanying notes to consolidated financial statements.

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

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

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

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

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

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

Supplemental disclosures of cash flow information:
Cash received (paid) during the period for:
Interest paid .................................... $ (358,887) $ (189,949)
Income taxes paid ................................ $ (32,071) $ (170,016)
Interest received ................................ $ 14,009 $ --
Non-cash financing activities:
Capital lease obligation ........................... $ 270,597 $ --
Preferred Series D stock converted to common stock . $ -- $ 22,918,693
Preferred Series C stock converted to common stock . $ -- $ 2,895,001
Accrued dividends converted to common stock ........ $ -- $ 458,707

See accompanying notes to consolidated financial statements.

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

1. PRESENTATION OF INTERIM INFORMATION

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

2. EARNINGS PER SHARE

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

LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------

THREE MONTHS ENDED MARCH 31, 2005:
Basic loss per share:
Loss available to common stockholders $(1,648,443) 18,179,426 $ (0.09)

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

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

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

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

Warrants to purchase 1,236,219 shares of common stock at between $0.71
and $5.06, options to purchase 1,927,000 shares of common stock at between $1.30
and $4.63 and convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the three months ended March 31, 2004, but were not included in
the computation of diluted earnings per share because the effect of exercise or
conversion would have an antidilutive effect on earnings per share.

3. STOCK BASED COMPENSATION

All stock options issued to employees had an exercise price not less
than the fair market value of the Company's Common Stock on the date of grant,
and in accounting for such options utilizing the intrinsic value method there is
no related compensation expense recorded in the Company's financial statements
for the three months ended March 31, 2005 and 2004. If compensation cost for
stock-based compensation had been determined based on the fair market value of
the stock options on their dates of grant in accordance with SFAS 123, the
Company's net loss and loss per share for the three months ended March 31, 2005
and 2004 would have amounted to the pro forma amounts presented below:

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

Net loss, as reported.................................. $ (1,648,443) $ (552,030)
Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects .......................................... -- --

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

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

Diluted - as reported............................. $ (0.09) $ (0.04)
Diluted - pro forma............................... $ (0.09) $ (0.04)

4. GUARANTEES AND CONTINGENCIES

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

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

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

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

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

5. NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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

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

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

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

OVERVIEW

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

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

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

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

o We record valuation allowances to reduce our deferred tax
assets to an amount that we believe is more likely than not to
be realized. We consider estimated future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for

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

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

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

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

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

RESULTS OF OPERATIONS

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

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

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

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

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

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

Selling expenses decreased approximately $30,000, or 3.9%, to $742,000
for the three months ended March 31, 2005 from $772,000 for the three months
ended March 31, 2004. As a percentage of net sales, these expenses decreased to
5.7% for the three months ended March 31, 2005 compared to 7.6% for the three
months ended March 31, 2004 since employee costs increased at a slower rate than
sales. The decrease in selling expenses during the period was due primarily to a
decrease in the royalty rate related to our exclusive license and intellectual
property rights agreement with Pro-Fit Holdings Limited. We incurred royalties
related to this agreement of approximately $97,000 for the three months ended
March 31, 2005 compared to $115,000 for the three months ended March 31, 2004.
We pay royalties of 6% on related sales of up to $10 million, 4% of related
sales from $10-20 million and 3% on related sales in excess of $20 million.

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

strategy. Additional travel expenses associated with our Asian expansion were
incurred during the current period. We also incurred additional legal costs
related to our litigation with Pro-Fit Holdings Limited during the quarter.
Unless this case is settled, we will continue to incur additional legal fees in
increasing amounts as the case accelerates to trial. In the first quarter of
2004, we incurred additional restructuring charges of $414,675 related to the
final residual costs associated with our restructuring plan implemented in the
fourth quarter of 2003. This one-time charge was offset by a decrease in
salaries and related benefits and other costs as a result of the implementation
of our restructuring plan in the fourth quarter of 2003. As a percentage of net
sales, these expenses increased to 28.5% for the three months ended March 31,
2005 compared to 24.0% for the three months ended March 31, 2004, due to the
factors described above.

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

Pursuant to the terms of a factoring agreement for our Hong Kong
subsidiary, Tag-It Pacific Limited, the factor purchases our eligible accounts
receivable and assumes the credit risk with respect to those accounts for which
the factor has given its prior approval. If the factor does not assume the
credit risk for a receivable, the collection risk associated with the receivable
remains with us. We pay a fixed commission rate and may borrow up to 80% of
eligible accounts receivable. Interest is charged at 1.5% over the Hong Kong
Dollar prime rate. As of March 31, 2005 and 2004, the amount factored with
recourse and included in trade accounts receivable was approximately $1,326,000
and $375,000. Outstanding advances as of March 31, 2005 and 2004 amounted to
approximately $599,000 and $164,000 and are included in the line of credit
balance.

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

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

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

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

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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

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

RELATED PARTY TRANSACTIONS

We had a supply agreement with Tarrant Apparel Group and had been
supplying Tarrant with all of its trim requirements under our MANAGED TRIM
SOLUTION(TM) system since 1998. Pricing and terms were consistent with
competitive vendors. At the time we entered into this supply agreement, we sold
2,390,000 shares of our common stock to KG Investment, LLC, an entity then owned
by Gerard Guez and Todd Kay, executive officers and significant shareholders of
Tarrant Apparel Group. KG Investment, LLC subsequently transferred its shares to
Gerard Guez and Todd Kay. As of April 18, 2005, Todd Kay owned 5.5% of our
common stock or 1,003,500 shares. We terminated our supply relationship with
Tarrant and, in December 2004, we wrote-off the remaining obligations due from
Tarrant.

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

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

CAUTIONARY STATEMENTS AND RISK FACTORS

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

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

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

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

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

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

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

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

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

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

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

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

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.

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 currently do not have
any plans to pursue any potential acquisitions.

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

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

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

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

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

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

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

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

PART II
OTHER INFORMATION

ITEM 6. EXHIBITS

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

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

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

SIGNATURES

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

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

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